“When can I retire?”
“Can I retire when I’m 55?”
Our clients, many in their 30s or 40s, ask us such questions all the time.
The thing is, if all you do is ask me about the “when” of retiring, I can’t tell you anything useful. Why? Because there are two other huge variables that we need to look at:
- How much you’ll spend during your retirement (which dictates how much money you need when you start retirement)
- How much you will save between now and retirement (which influences how much money you will have when you start retirement)
Those are the three basic levers you have to push and pull when making a plan for your eventual retirement:
- When
- Spending in retirement
- Saving/growing your wealth between now and then
You know that old product development saw? Good, cheap, and fast…pick any two.
You can apply the same logic to retirement planning.
You get to pick two of the variables listed above. The other is simply a result of those two choices.
So, if you ask me “Can I retire early?” I will likely say, like the language pedant I was raised to be, “Sure you can!”
But the more interesting question is: How do you retire early? That “how” gets into the trade-offs you have to make, the priorities you have to choose.
Please note: Retirement planning, when you get close to and in retirement, can get really detailed. If we were discussing retirement at that stage, I’d be looking at questions like “Do you live entirely off your investment portfolio? Do you buy annuities? Do you use a bucketing strategy?” By contrast, in this blog post, I’m addressing the question of retirement planning when you’re still many years—and many life events—away.
What Do You Even Mean, “Retire”?
If you come to me when you’re 40 and ask, “When can I retire?” the first thing I’ll probably do is explore a bit more what you mean by “retire.”
For a lot of people, it does not mean you want to stop working forever. It’s more of a “financial independence” goal than a “retire” goal. It’s often because people don’t really like their work life and cannot fathom doing it for another few decades.
This can open up conversations about changing the direction of your career sooner rather than later, not just grinding through another 10, 20 years of your current career that you actively don’t like, just to reach the point of not having to work anymore.
This is one of those cases where the question you ask (“Can I retire early?”) might not be the right one. But it’s a helpful start to an exploration of what your true question really is.
It’s also possible that you’re not chomping at the bit to get to retirement as soon as possible, but you do want to have an idea (any idea!) of your retirement trajectory. As a client once asked (I paraphrase): I’m saving all this money. But what does it mean? What kind of retirement is this setting me up to have?
The Limitations of Planning for Retirement 20 Years Ahead of Time
I’m gonna go on the record right now and say that multi-decade projections of any sort, but specifically here, of saving and spending levels, are utter bunk. I know, totes controversial. I’m over here, stirring it up, making waves…yelling into the void.
Try to remember what your life was like 10 years ago. Feel it, see it, imagine it. Looking forward from that perspective, could you have imagined half of what has happened since then, and what your life looks like now?
I know I couldn’t have. When I was 38, I never would have spent $25k to take my family to Europe (I mean, aside from the fact that my kids were 4 and 1 at the time). And yet I did that earlier this year, with pleasure. Nor had I any concept of starting my own firm as a financial planner and enjoying this work so much that I can see doing it for decades more (which enables me to continue to earn and save, and delay the age at which I need to draw on my retirement portfolio).
That said, in order to plan, we have to have some sense of our destination. And so we make our best guess with the information we have now and make a plan around that. Time passes. We are that little bit closer to the goal, we gather more information, and re-do our guess. That guess is now a little more accurate, and we can make a little more accurate (and reliable) plan for your retirement. But it’s iterative, over time.
Because of the “make a guess, let time pass, reevaluate” nature of the work, I don’t see merit in getting hyper specific. But I do encourage you to revisit this high-level retirement projection regularly, as you draw closer to retiring. We do it once a year for some clients, less frequently for other clients.
Solving for “When,” Spending Level, and Savings
The way I look at it, you have three variables that determine your retirement projection, more specifically, three variables that you have control over. (You can’t, by contrast, control stock market returns or inflation.)
- When do you want to retire?
- How much will you spend in retirement?
- How much will you save each year between now and retirement?
As I hope you can see, you can combine these variables in an infinitude of ways.
Are you most concerned with retiring by the age of 50 and spending a lot on travel once retired (and we guess that results in yearly spending of $200k/year)? Great! No problem. That means we’ll calculate how much you need to save and grow that bucket of money between now and that target retirement age.
Or are you more concerned with enjoying life (which costs $150k/year, leaving you with $80k/year to save) over your whole life (your kids are young and under your roof for only so long, after all), and you are willing to work as long as it takes? Great! That means we’ll calculate how many more years you have to work (in other words, your retirement age) so that you have enough years to save and grow your money.
For those of you who remember high school math somewhat fondly, you might recognize the problem: “If you have three variables, you need three equations to solve the problem. With only one equation, you can’t solve the problem.”
In this retirement projection, we don’t have three equations, we have only one. That singular “equation” is your one big, beautiful path to retirement. So, we have to simply assign values to two of the variables. Now we have only one variable to solve for, which we can do! (Ha ha! Remember kvetching in highschool math about “When am I ever gonna need this?” Looks like you shouldn’t have besmirched the good names of Gödel, Newton, and Euclid after all!)
We can easily run this calculation 100 different ways, to help you get a handle on the possibilities. (Yay, software.) But in all cases, you need to tell me the value for two of the variables, and we can see how that affects that third variable.
The Hardest Thing to Know: How Much Will You Spend in Retirement?
Of the three variables at play here, the least intuitive for our clients is how much you’ll spend in retirement.
Your easiest (and not unreasonable!) guess for how much you’ll spend in 20 years is simply what you spend now (adjusted for inflation).
There are, however, a few major spending categories that you can adjust, to make your guess… reasonable-er:
- Subtract from current spending:
- Childcare. This is a huge expense with a known end date.
- Housing. If you have a mortgage now, will it be paid off in retirement? That would leave “only” property tax and insurance (and, of course, ongoing required maintenance and optional upgrades).
- Add to current spending:
- Health insurance and care. Do you currently have health insurance provided by your employer? Will you need to get your own health insurance when you retire? If you retire before you’re eligible for Medicare (and can’t get on a spouse’s plan), then you will. If you move to the Affordable Care Act, either the insurance or your out-of-pocket expenses will likely be way higher than it is now. Even with Medicare, you’ll likely need to buy supplemental health insurance or Medicare Parts B and D.
- More leisure spending. You will, after all, have more leisure.
I honestly wouldn’t try to get more nuanced than this. It would provide precision without accuracy (which can be dangerously reassuring), given how far in the future this spending will occur.
I know I haven’t given you the exact equations or spreadsheet or software tool or all the assumptions (inflation rate, growth of investments) you need to actually solve this “equation.” That was on purpose. There are plenty of free calculators online. If you work with a financial planner, they’ll probably use industry-specific software with a lot more knobs and buttons.
I think it’s more important to understand the mental framework of creating a retirement projection so far in advance. Only once you understand that do all the calculations and tools become actually useful to you.
Which two variables are most important to you?
How would it feel to understand how you’re progressing towards your eventual retirement? Reach out and schedule a free consultation or send us an email.
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Disclaimer: This article is provided for educational, general information, and illustration purposes only. Nothing contained in the material constitutes tax advice, a recommendation for purchase or sale of any security, or investment advisory services. We encourage you to consult a financial planner, accountant, and/or legal counsel for advice specific to your situation. Reproduction of this material is prohibited without written permission from Flow Financial Planning, LLC, and all rights are reserved. Read the full Disclaimer.
