When you plan to retire early, one of your key questions is likely “when will I be financially independent and can retire early?” This question easily translates into “how many years does it take to my retirement in financial independence?” The answer can be motivating and eye-opening. Learn how the Early Retirement Calculator will assist you to answer this question – and much more.
The math behind the calculator is based on the results of the Trinity Study. This study is an influential research publication from 1998 by three professors at Trinity University in San Antonio, Texas. The paper answered an essential question for future retirees. “How much money can I extract from my financial assets per year without risking running out of money before I die?” It concludes: it’s possible to fully finance retirement expenses for long periods with a decent probability.
Which parameters does the early retirement calculator use?
Based on the study, the calculator uses three parameters. They determine how many years and months it will take you to amass enough financial assets.
The Withdrawal Rate (WR). A sustainable (or later reduced to “safe”) withdrawal rate in the context of the Trinity study is the percentage of your investments that you can withdraw from your net worth each year that will, with a 95% probability, not exhaust your net worth to zero within the pay-out period.
The Savings Rate (SR) describes the percentage of the money you save from your income. But rather than considering savings as a resulting component, I’d suggest considering them as a design component in the equation.
| Component | Size | Comment |
|---|---|---|
| Income | 100 | net after mandatory deductions for social security and before tax payments |
| ./. Savings | 20 | Desired savings amount |
| = Expenses | Resulting money for expenditures | |
| t/o fixed | 70 | taxes, mobility, health & insurance, housing, household expenses |
| t/o variable | 10 | |
| Savings Rate | 20% | (Savings divided by Income)* 100 |
The annual Return (R) that you expect on your financial assets. Nobody knows whether history repeats itself and whether future returns will be similar to historical returns, which the Trinity Study used. Even if the last 150 years held to the promise, this is uncertain for the future. But if you’re ready to accept this caveat, the math will provide an answer to your questions.
Which questions does the calculator answer?
First, the calculator allows you to play and simulate with these parameters. Thus, you gain a feeling of how they impact your financial independence date. Second, the calculator provides a data set and diagrams for a set of common parameters. E.g. will lead you to understand answers to questions like:
- How much faster can I retire when I save 5% more?
- Or, how can I speed up the date of my retirement party when I achieve 0.5% higher returns?
- Which combination of parameters is necessary to retire 15 years from now?
Keep in mind that you need to keep up the level of these parameters during your journey. So, I’d recommend being realistic. Can you keep your savings rate at a high level for many years? Furthermore, it may be wise to remain prudent with future expectations. Since its inception, the MSCI World yielded 4.7% (in EUR) respectively 6.9% (in USD).