Well the first thing that comes to mind is, how long is a piece of string?
This is a difficult question, and I feel that most people don’t put much thought into it. They probably just plan on working until 65 and hoping for the best that whatever is in their CPF/Superannuation accounts + anything from their pension (Australia) will hopefully see them through to the end of their days.
Myself on the other hand, I secretly have much more ambition to retire early (what will I do with all the spare time I haven’t quite figured out yet, but I’m sure I’ll enjoy figuring it out). I could always keep working for the fun of it! Or do more charity work. I recently returned from Bali helping teach less fortunate children some basic computer skills – a very worthwhile experience.
Anyway, this interesting couple at Go Curry Cracker has really got me thinking about this lately. They live a very low-cost lifestyle, and it appears they can live off $40K USD per year quite comfortably which is coming off a nest egg around $1M USD. If they are expecting 9% returns, that would be 90K per year, after which they will be following The 4% Rule – which in theory should see their nest egg last them until the end of their time on this planet.
Ultimately, I am working towards having a portfolio which is literally, “Too big to fail“.
So once again, how much do you need to retire?
- What are you expected ongoing costs? Housing? Healthcare? Food? Travel? You need to have a realistic idea of these costs and then factor in some inflation at the same time. Three percent is a good number for inflation.
- Once you have worked this out, you can then use a few different tools to run simulations to see how your investments will fare:
cFIREsim: This is a really fun tool to use, as it will input your data and back date it to see how many times over the last 115 years that if you retired at any given point – how you would have fared.
The example above started with an equivalent of today’s $1,000,000 with an annual equivalent of $40K withdrawals. We can see from the graph and table that this strategy only failed 8 times in the last 115 years.
You can also use the Retirement Planner template in Excel:
This one is also quite interesting to adjust the underlying figures with. Small percentages can make large differences!
I’m kiasu enough that I really want my portfolio to be too large to fail. Meaning that every year it is just going to snowball into something larger and larger while my withdrawals will hopefully be quite conservative only.
On the other hand though – will I come to regret working for longer than I actually needed to? Or could I simply enjoy more luxuries? First class travel everywhere for example – but even then, that would just become the new norm and ultimately you may have appreciated more time that you could have spent with friends and loved ones.
There are a lot of people out there that absolutely have more money than they need, but their personality is so intertwined with their work that it appears that will work until they drop dead. You just have to look at some of the mega CEO’s out there. They could have retired 30 years ago but for some inexplicable reason they choose to keep working. Maybe they just like having some skin in the game, the thrill of competition – or maybe they are too scared to let go of their companies – they have become their babies and their employees are like extended family to them. They are concerned that if they retire, the next person at the helm will not look after the company properly. (This is why I don’t have any CEO ambitions at this point in time!)
Anyway, I don’t have the answer just yet but personally I believe that if nothing unexpected happens (touch wood) and I stick with my plan, I can reach my early retirement goal. Another 2008 financial crisis could upset things, but it may also be a great opportunity to pick up some bargain basement shares.
In my next post I’m going to write about timing the market – when is a good time to buy? Maybe I’ve already written about it but I feel I need a dedicated entry just for this topic.