I want to share this simple retire early calculation that has started Bret and I on the path to planning for early retirement.
Who doesn’t want to calculate when they can retire?
This beach picture just screams retirement to me. My ideal retirement would definitely be living on or near the beach or just somewhere sunny and warm.
I’d love to retire early at 55… but sooner would be better, am I right? I am 28, so I have a whole whopping 27 more years to go.
It’s fun to daydream about what I would do if I was able to retire early… live on a beach? Or travel in a van across the country with Bret? The possibilities are endless.
I am working towards this journey… slowly, but surely.
When I started learning more about retiring, I learned you have to invest your money if you want to retire comfortably.
And if you want to retire early, you have to invest more money over a shorter period of time.
Some people choose to pursue investing in real estate, but for this post, when I say investing, I am talking about investing in the stock market.
When I realized I wasn’t investing enough for retirement
Since I started working after obtaining my master’s degree in 2018, I always utilized the retirement account offered by my employer but was not putting much into it.
I was contributing between $70-$100 per month.
My thought was… I have this retirement account (I’ve only had 403bs – nonprofit/government sector’s version of a 401k) through my job and I am contributing some, so I must be good, right?
December 2021, I had about $7,000 in my account which I thought was great until I calculated how much money I would have at retirement if I kept saving at this rate.
I used this compound interest calculator to see how much I would have by the time I was 55 and it said I would have $135,666.45.
That seems like a lot, but if you think about how many years I will be in retirement (approx. 35 years) … that will barely cover 2-3 years of living expenses.
If I am trying to retire at 55, I am going to need a LOT more money than that.
My beliefs about retirement
We are told to put money away for retirement, but I am learning no one is really telling us how much we need to put away.
Now, I know many of us will be eligible for social security, but I, myself, am hoping to have more stored away so I can live comfortably, travel, help family, etc.
According to this Social Security Calculator, it is estimating I will receive about $2,100 a month from social security. Bret may have around that amount, too.
That is definitely not enough to pay our bills AND do the things we want to do during retirement.
And, you are not able to claim social security until you are at least 62, so if I want to retire by 55 (hopefully earlier), we are going to need to have some additional money to afford our living expenses until we are able to claim social security.
Check out this article from The Atlantic, This Is What Life Without Retirement Savings Looks Likeby alana semuels
I have shared the above article before in another post and I feel like it is relevant again.
Relying solely on social security income during retirement has caused some retirees to fall into poverty or force them to get back into the workforce because they cannot afford to pay their bills.
We essentially need to have enough money saved/invested or have enough passive income streams to fund our retirement.
If you plan to retire at 65 and you live till you’re like 90, that is 25 years of expenses you will need to be able to afford.
That’s kind of a lot of money when you think about it.
If you’ve gotten to this point and you’re freakin’ out, just know that I felt the same when I first started thinking about retirement from this lens.
On to the retire early calculation!
Simple retire early calculation
The first place to start is to think about what your yearly expenses might be in retirement.
A few things to consider:
- You may need to pay for health insurance if you want to retire before 65 (65 is when you’re eligible for Medicare); or pay for an insurance supplemental with Medicare since it doesn’t cover everything
- You may not have a mortgage if your home is paid off
- Travel/recreational expenses
Investopedia says, “Most experts say your retirement income should be about 80% of your final pre-retirement annual income. That means if you make $100,000 annually at retirement, you need at least $80,000 per year to have a comfortable lifestyle after leaving the workforce.”
And obviously, no one knows exactly how much money they will be spending in retirement, so it’s not gonna be 100% accurate but it serves as a general guide for you to start planning!
When you decide how much you might spend a year, multiply that number by 25
your yearly expenses x 25 = FIRE number
Your FIRE number or Financial Independence Retire Early number, is the benchmark number people use as a goal for their retirement nest egg. Essentially, when you hit that number, you can retire!
This is assuming you would withdraw at a rate of 4% each year.
The 4% rule is a general guideline we can apply to retirement planning and essentially it’s that if you withdrew 4% of your retirement saving each year, your saving would last at least 30 years.
Read more about the 4% rule here.
For example, my husband and I are planning to need about $70,000 a year in retirement. This will likely change, but for now, it’s a good goal to aim for.
We are assuming at age 65 we will have social security and Medicare for insurance, so we will only need to pay for insurance and our expenses fully for about 19 years.
So, $70,0000 x 25 = $1.75 million.
My $135,666.45 calculation that I did earlier is waaay off from $1.75 million.
Figuring out our FIRE number, really gave me a reality check about how my actions (only contributing $100/mo to my retirement accounts) were not consistent with my goal of retiring early.
If I want to retire early, I am going to need to start investing more money every month.
What does FIRE really mean?
FIRE, financial independence retire early, in the general sense is aggressively saving/investing your money so you can have enough money within your financial portfolio to not have to work and retire early if you want to.
Alexandra Kerr at Investopedia defines it as: “Financial Independence, Retire Early (FIRE) is a financial movement defined by frugality and extreme savings and investment. By saving up to 70% of their annual income, FIRE retirement proponents aim to retire early and live off small withdrawals from their accumulated funds.”
Some people are focused more on the financial independence part because maybe they like their jobs or don’t want to quit working altogether, but only want to work part-time.
I could see myself still working, but possibly working in a less stressful field than social services and working less hours.
Now, I know there are some individuals on a FIRE journey who are extreme savers, like, not going out to eat for 15 years or only spending money on necessities, type of savers.
And I am not knocking them whatsoever, that is just not the FIRE journey we are on.
We hope to spend money on eating out and doing the things we love doing (within our budget), even if that means we will be retiring a little later than we could be.
We want to try to enjoy the now in our own way, too.
To each their own.
One thing I really like about this FIRE movement is there is no one-size-fits-all savings/investing recipe.
We all have different bills, life responsibilities, values, goals, etc., etc., etc… just find a plan that works for you!
To me, reaching our FIRE number means I don’t have to worry about trading my labor for money.
It means we can travel, and visit with friends and family as we please because we are not worrying about a paycheck.
We can work part-time if we want… volunteer… do whatever we want, when we want!
How to start your FIRE journey
Like I said above, you need to figure out a general number of how much you will need invested/saved to retire, and then you can start planning.
Steps to calculate your FIRE number
- Figure out how much money you think you will need in retirement
- Multiply that number by 25 – this is your FIRE number
- Start making smart moves to reach that goal!
Steps to calculate if you have been investing enough for retirement
- To see if you are on track to reach your FIRE number, go to this calculator and input how much you have invested, how much money you’ve been putting into your accounts every month, and or how much you plan put into the account every month until you retire, how many years you have until retirement, and 8% for the estimated interest rate on your return (example photos below).
- Click calculate – compare this number to your FIRE number that you calculated above. (is the number close? far off? somewhere in between? – let me know in the comments!)
I absolutely love this calculator (shoutout to Delyanne Barros for introducing it to me) and am always messing around with the numbers to see how much $50 more a month or a $100 more a month invested would turn out to be!
For my example below, I am using $2,000 as my initial investment, with a monthly contribution of $200 over a period of 36 years.
This turns out to be $480,981.50.
For some, this might be enough to retire, like Purple, who I mention more about below. If it’s not enough, then this person would need to invest more a month!
These steps can give you an idea of if you are on track or not to retire when you would like to. If you need further guidance or just want to review the numbers with a professional, I would recommend talking with a financial planner.
Financial independence bloggers and influencers talking about their journey
If you are interested in reading and learning more about FIRE from people who have retired early or are farther along on their journey than we are, see below!
- Delyanne Barros, the Money Coach. She was an employment attorney and is now a money coach with plans to retire by 40 and move to Portugal. She just recently shared she is close to this goal! I bought her investing course and would recommend it to anyone who is wanting to learn about investing and managing their own portfolio. She is AMAZZZING.
- Roshida Dowe retired at 39 and now lives in Mexico City. She now helps women plan their move abroad or take career breaks. Click here to see how she retired at 39.
- The FI Couple share their journey of quitting their 9-5’s and working towards financial independence by investing in multi-family homes and the stock market. Check out their Instagram here.
- Purple (a pseudonym) blogs about her FIRE journey, food, travel, and more at A Purple Life. She had $500,000 invested and retired at 30 years old.
- Here is a longer list from the Plutus Foundation of other FIRE bloggers.
I was so excited to learn about FIRE and just wanted to start investing right away… but there are other steps to take first (like budgeting, sticking to that budget, paying off high-interest debt, and making sure you have an emergency fund).
Even if you’re not interested in pursuing FIRE, I hope the retire early calculation has gotten you to think about your retirement.
If you’re wanting to start your investing journey, download my beginner’s investing checklist!
If you are already on a FIRE journey or considering starting your journey, let me know in the comments!