FIRE – or Financial Independence, Retire Early – is becoming increasingly popular. The math behind FIRE is that you save and invest a higher-than-usual percentage of your income until you reach a “crossover point”. At this crossover point, you have enough invested that you can withdraw a small percentage of your portfolio every year to cover your expenses. The rest of your money continues to grow to fund future years’ withdrawals.
Sounds pretty cool, yeah?
One potential obstacle is that retirement accounts, such as the 401(k) and Roth IRA, are popular vehicles for saving up this nest egg. These accounts come with some tax advantages, but you also cannot withdraw from them until you are 59.5 years old. So, what if you retire at 40? How are you going to get your money?
Can I retire early?
Considering the restrictions on retirement accounts, the question of retiring early is two-fold:
- Do I have enough money outside of retirement accounts to last until I’m 59.5 years old?
- Do I have enough money in my retirement accounts to last the rest of my life thereafter?
The calculator below answers the first question. It looks at how much money you have saved in total – and how much of that is available before the age of 59.5. You can then plug in your expected investment return, the expected inflation rate, your age, and how much money you need to withdraw from your investments every year.
- Total Savings – This is the total value of all of your savings and investments, including any savings in retirement accounts.
- Savings in Tax-Advantaged Accounts – This is specifically just your savings in tax-advantaged, retirement accounts, such as Roth IRAs, the 401(k), TSPs, etc.
- Investment Rate of Return – Your expected average investment return from now until you turn 59.5.
- On average the stock market returns 7-10% in the long-term. For example, the S&P 500 returned an average 9.7% between 1965 and 2018. Note, this is the expected investment return for your whole portfolio – if half your portfolio returns 10%, and the other half returns 4%, your portfolio as a whole is returning 7%.
- Expected Inflation Rate – The expected average inflation rate from now until you turn 59.5.
- From 1950 to 2020, inflation in the US has averaged 3.45% per year, and the Federal Reserve’s target inflation rate is 2%.
- Current Age (years) – Your current age right now, written in years.
- Desired Annual Withdrawal – How much money you would like to withdraw every year. You can calculate this as your average or expected monthly spending times 12.
- The calculator will tell you how long your investments, in non-retirement accounts, will last. If these savings will last until you are 59.5 years old, you can retire early! Of course, you will also want to make sure the savings in your retirement accounts is enough to cover you afterwards. You can run these numbers with the Compound Interest and Savings Longevity calculators.