Isn't this something which everyone asks oneself at some time or other? So I've decided to do the math and work it out. I hope it makes for interesting reading.
If you save 20% of your income before tax in a mutual fund which returns 20% per annum and if you consider inflation to be at 10%, how long will you take to be financially free? To truly answer that, you need to know what you will need to survive on when you retire and also you will need to know what your investments will earn after you retire. The answer isn't difficult to calculate with an excel sheet and here is a link to a FIRE Calculator which you can customise to your needs. I assume you wish to leave your corpus behind for your heirs, but if you wish to spend down to the end of life, you will need to make an assumption on how long you will live. Now that is a question that Aubrey de Grey has answered in his TED talk here and the answer could well be forever. So be warned, this is not something most financial planners will talk about.
Of course if you can master frugal living and save more (LEAN FIRE), or earn a higher interest on your investments, you could be financially free much sooner. Or if inflation is lower than you expected, then you would not need to save more or or for too long!
If you save 20% of your income before tax in a mutual fund which returns 20% per annum and if you consider inflation to be at 10%, how long will you take to be financially free? To truly answer that, you need to know what you will need to survive on when you retire and also you will need to know what your investments will earn after you retire. The answer isn't difficult to calculate with an excel sheet and here is a link to a FIRE Calculator which you can customise to your needs. I assume you wish to leave your corpus behind for your heirs, but if you wish to spend down to the end of life, you will need to make an assumption on how long you will live. Now that is a question that Aubrey de Grey has answered in his TED talk here and the answer could well be forever. So be warned, this is not something most financial planners will talk about.
Of course if you can master frugal living and save more (LEAN FIRE), or earn a higher interest on your investments, you could be financially free much sooner. Or if inflation is lower than you expected, then you would not need to save more or or for too long!
The FIRE (Financial Independence, Retire Early) movement suggests a 3 to 4% rate of withdrawal to ensure assets last a lifetime, but that is calculated based on several assumptions:
1. Assets will be invested in a 50% debt and 50% equity portfolio
2. Stock market returns will continue at or around their long term returns, but these are hard to predict.
3. You will not drawdown on your capital to fund your retirement but that depends on your portfolio returns.
4. Your life expectancy will be around 100 years which may not be true according to Aubrey de Grey
So what does one do?
For one, if you can be flexible in curtailing wants in lean years, you could retire with a smaller corpus. Or if you can start with a LEAN FIRE, living a minimalist lifestyle, you could retire early. Or go the FAT FIRE way, saving 75% of your income and retire earlier.
The most important thing though is to make a start with conservative estimates for inflation, rate of return and other variables not in your control. The idea is to have your savings outlive you and not vice-versa!
Here are some resources:
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