The Money Mustache Community
Learning, Sharing, and Teaching => Ask a Mustachian => Topic started by: P938LVR on July 30, 2014, 01:33:06 PM

My DH and I are far from retiring (early or otherwise). I am wondering just how you figure out how much it will take for you to retire and live comfortably if you make a small income rather than some of the substantial $100K plus incomes I have seen on MMM? We might make somewhere around $75K together a year but some of that goes into paying taxes (1099) and repairs for our business equipment so we actually make less than that. We would love to travel when we retire but apart from that we don't really have any other expensive plans...

Your income has no bearing. Only your expenses. How much do you spend per year? Figure that out, multiply by 25*, and that will give you a ballpark estimate. Keep reading and learning and you'll be able to figure out if you'd be comfortable with that amount or whether it could be higher or lower based on other income streams, conservative nature, whatever. But that'll be a good estimate of the total to get started.
*Multiplying by 25 is the same as using a 4% withdrawal rate.

Also, read this post:
http://www.mrmoneymustache.com/2012/05/29/howmuchdoineedforretirement/

And you'll want to include inflation in your calculation. If you're wanting to retire in 10 years, you can assume 10 years of 3% inflation per year.
For example, if your annual expenses are $40,000: $40K x 25 = $1,000,000 (if you retire today)
But 10 years from now: $40K * 1.03^10 = $53,756 x 25 = $1,343,916 (if you retire 10 yrs from now)
The less your expenses are, the less ugly that big number gets!
These kind of calcs assume your investments cover everything. If you have annual income planned (like Social Security), you can get by with a smaller investment amount.

I don't think you need to calculate inflation. If you view everything in terms of "today's dollars" then 25x expenses always assumes 25 times current expenses. Then for your investment return estimates simply always use real return which is net of inflation. Keeps things simpler and more accurate in my imo.

I agree, but I think that assumes you're running a spreadsheet to predict the future numbers. I do that too. If you're just trying to get "the number", the size of the nest egg or whatever you want to call it, it seems like you have to figure in inflation. Now vs 10 to 20 years from now makes a big difference.
When I set up an egg size calculator, it really drove home the importance of reducing costs. To me you need both in your planning. I'm always reassessing the "how much is enough" question.

Here is a quote from MMM's post that Eric linked to above:
"Financial Independence enthusiasts will have the closesttocorrect answer: take your annual spending, and multiply it by somewhere between 20 and 50. That’s your retirement number. If you use the number 25, you’re implicitly using a 4% Safe Withdrawal Rate, which is my own personal favorite number.
So where does this magic number come from? At the most basic level, you can think of it like this: imagine you have your ‘stash of retirement savings invested in stocks or other assets. They pay dividends and appreciate in price at a total rate of 7% per year, before inflation. Inflation eats 3% on average, leaving you with 4% to spend reliably, forever."
Seems like inflation is already accounted for.

You guys are talking about two different things. 94  inflation is accounted for in the SWR calculations. uniFI is talking about how big your number will need to be. For example, say based on your $40k spending you'll need $1,000,000. If it takes you 10 years to save $1,000,0000, by the time year 10 rolls around, $1,000,000 will probably not be quite enough as your $40k annual spending will have increased because of inflation.
It's a slightly more accurate way of gauging how long it will take. However, it's all just ballparking the numbers until you actually get close, so whether you use inflation or not to determine your "number" when you're a ways out probably doesn't matter much.

Got it. Sorryguess I wasn't reading carefully enough. Thanks, Eric.

If it takes you 10 years to save $1,000,0000, by the time year 10 rolls around, $1,000,000 will probably not be quite enough as your $40k annual spending will have increased because of inflation.
Probably. But if your expenses are still 40k, you still only need 1MM. At any given time to FIRE you need 25x your expenses in your portfolio (assuming a 4% SWR). This may (and likely will) increase in the future as your expenses increase naturally due to inflation (assuming they do), but there's not much point in calculating what that number will be, given all the uncertainties in market returns, future inflation, etc.
Better to just calculate 25x what you need now, and adjust every so often as you get closer. It'll probably end up being less than you think, and won't be so discouraging when you get a giant inflated number.