Time to retirement calculator — A Frugal Doctor (2024)

Variables in the calculator

Annual expenses. You can use either your current total annual expenses, or your projected total annual expenses in retirement. The idea behind using the same number for both is if you want to maintain your current lifestyle and standard of living in retirement.

Annual investments. This is how much you are contributing to your total investment nest egg every year. The more you can contribute, the quicker you will grow your nest egg to sufficient size. This should include all of your savings and investment contributions, whether in tax-advantaged retirement accounts or not. If you receive an employer match, the employer match amount should be included as well.

Current nest egg value. This is the size of your current nest egg, including cash, savings, investments, and retirement accounts. Basically, your investable net worth. Do not include assets that you cannot “draw from” in retirement, such as your primary residence. If you already have a large investment portfolio, you may be very close to retiring. Set to 0 by default.

Safe withdrawal rate. This is the safe withdrawal rate you plan to use (see below for further explanation of SWR). Set to 4% by default. I recommend using 4% or less. Higher SWR decreases the size of nest egg you need, and therefore time to retirement. However, it also increases risk of portfolio depletion if you experience unfavorable market conditions in retirement.

Annual investment returns. The annualized returns you expect to receive from your investments in the future. This affects how quickly your nest egg will grow to sufficient size. Set to 7% by default. The U.S. stock market historically returns between 9% to 10% annualized. Real estate returns may be similar. Bond returns are lower. See this article for data from Vanguard on historical returns from various ratios of stocks and bonds. Also note that unless the entirety of your investable net worth is actually invested, your overall returns will be less than the market (i.e. the cash portion of your portfolio gets no returns). It’s probably best to use a conservative estimate here.

Results

Your personal savings rate (PSR) is simply how much of your disposable income you save & invest. For example, if your income is $75,000 and you spend $60,000 for your total living expenses, then by definition, you will save/invest $15,000 per year. Your PSR is $15,000/$75,000 = 0.2, or 20%. PSR is the greatest determinant of time to retirement and is income-agnostic; higher PSR reduces time to retirement in a non-linear fashion.

Your nest egg size needed for retirement is how large your total investment nest egg needs to be to support your annual expenses given the SWR you plan to use. Using a 4% rule means that you can retire when your nest egg reaches 25x your annual expenses.

Finally, your time to retirement is the number of years it will take for your nest egg to grow to sufficient size, based on all of the input variables.

How does it work?

In FIRE, the basic premise behind financial independence, or readiness for retirement, is having an investment nest egg that can pay for your living expenses in retirement without depletion. This is possible because with a large enough nest egg, your investment returns exceed how much money you need to withdrawal for living expenses.

For example, if you need $50,000 annually for your total living expenses, and you have $1,000,000 invested somewhere earning 5% interest annually, in theory, you can withdrawal 5% of your starting portfolio and keep withdrawing this amount every year. You can retire and live off that interest forever, without any change to your lifestyle or standard of living, and without touching your nest egg (aside from inflation).

In reality, the U.S. stock market, as measured by a market index such as the S&P 500, returns around 9% to 10% annually (with dividend reinvestment), when returns are averaged over long time periods (decades). However, because the stock market is quite volatile and can experience decade-long periods of negative returns, you cannot safely withdraw 9% of your initial portfolio value annually when you retire. This is a concept known as sequence of returns risk.

Many studies have been conducted, using real historical market data, to see what withdrawal rate was sustainable under all historical market conditions - known as the safe withdrawal rate or SWR. The most famous of these is the Trinity study, and it gave rise to a popular concept known as the “4% rule”. Using 4% as the safe withdrawal rate means that you can withdraw an amount equal to 4% of your initial retirement nest egg annually, regardless of subsequent portfolio performance. In other words, you can retire when your nest egg reaches 25x of your annual expenses for the first time.

Without getting too deep into the weeds, the 4% rule is just a guideline and is not some iron-clad guarantee. There is no absolute “safety” in any safe withdrawal rate, although lower rates are always safer. I discuss this topic in more detail in chapter 9 of my book. I can also recommend, without reservation, the comprehensive safe withdrawal rate series by the blog EarlyRetirementNow. The original Trinity study has many caveats which do not necessarily translate well for early retirees. The general consensus of the FIRE community, as well as my personal opinion, is that a safe withdrawal rate is less than 4%, but withdrawal rates between 3% to 4% will work for most people. I should also point out that 4% is actually quite conservative under most historical market conditions. It’s meant to mitigate the worst case scenarios since you can’t control market conditions when you retire.

There are many other nuances to the SWR concept, which I won’t go into in detail. For example, SWR studies are traditionally backtested only with stock and bonds, rather than portfolios containing other assets. And the Trinity study only studied retirements lasting 30 years, so its definition of “safe” included scenarios where the portfolio would have failed in year 31. So the SWR of 4% from the Trinity study is not quite the same as a perpetual withdrawal rate (PWR), where a portfolio will never deplete. Finally, there is increasing awareness in recent years on the limitations of historical backtesting, and a new emphasis on other methods, including Monte Carlo simulations, to model retirement portfolio outcomes. Nonetheless, the 4% rule is a common starting point for FIRE retirement planning.

Lowering your SWR increases the size of the nest egg you need. For example, if you plan on 3% SWR, your nest egg will need to be 33x your annual expenses to retire. But you’re much less likely to deplete your portfolio than 4%.

Your time to retirement, then, is how long it will take for you to build your nest egg to sufficient size. As you can see, this will depend on a number of factors: your annual expenses and your planned SWR (these determine the size of the nest egg you will need), as well as your current nest egg size, your annual investment contributions, and your projected investment returns (these determine how quickly your nest egg will get there).

Caveats (important!)

Future investment returns are unknown. Unfortunately, past returns do not predict future returns. This is the biggest hypothetical facing all investors, and the biggest unknown with any investment calculator. Just because the S&P 500 returned 10% annualized in the past does not mean it will keep doing so in the future. However, the U.S. stock market has been remarkably consistent in the past, especially over long time periods, and it remains the benchmark to which all other assets are compared.

This calculator does not account for inflation! Inflation averages around 3% per year. This means that cost of living and consumer goods will double every 25 years or so. One roundabout way to account for this is to reduce your expected investment returns by 3% (for example, 7% instead of 10%). I should note that the Trinity study did account for inflation by increasing withdrawals annually, adjusted for inflation.

The calculator uses annual contributions and annual compounding of returns, rather than some other periodicity (such as monthly).

You cannot dynamically adjust your annual investment contribution (for example, people expect to earn more money over time from raises and promotions, and can increase their contributions). Therefore, this calculator can only provide a result based on a snapshot of your current finances. It cannot account for career advancement or setbacks.

This calculator does not account for other sources of income in retirement, such as pension plans or social security. It only models a scenario where the entirety of retirement living expenses are funded through withdrawals from your investment nest egg. The reality is that many people will have access to additional retirement income. One potential way to get around this is to decrease your annual expenses by the amount that you expect to receive from these other sources.

This calculator does not account for debt repayment. If you are currently in a phase of prioritizing debt repayment, the calculator can greatly overestimate your time to retirement.

Conclusion

Have fun with it! Because of all of its limitations and assumptions, this calculator is not meant to provide any kind of reliable or definitive timetable for retirement. I hope it is helpful, however, in showing the relationship between the input variables, and especially the importance of minimizing expenses and maximizing investments during your working career. If you’re not quite sure how to start investing for retirement, check out my Investing 101 series. As always, thanks for visiting my site and happy investing!