Savings Rate and ER

[TickTock]

I have been wondering about savings rate and time to reach FI and came up with this very simplified model, assuming that desired lifestyle in retirement is the same as while working. All numbers are real, not nominal:

Assumptions

• Wage growth = inflation over entire career
• Homeownership, with a paid off mortgage at retirement resulting in 10% savings of gross income from principal and interest payments
• 20% savings of gross income
• Portfolio is 80% equities / 20% fixed income
• Real average returns during career: equities 7.0%, fixed income 1.5%
• Use of the 4% Rule for portfolio withdrawals
• No inheritance, winning the lottery, or other significant outside income
• Ignore social security
• At retirement, lower overall taxes are offset by needing to pay taxes from portfolio and increase in healthcare insurance costs

Given the above, 70% of income needs to be replaced, so portfolio needs to be 17.5x income. This happens during year 31. Assuming a post-college career starts at 23, retirement is at age 54.

Change savings to 15% of gross income and 75% of income needs to be replaced, so portfolio needs to be 18.75x income. This happens during year 37; retirement at age 60.

...and so on. I made a spreadsheet!

That gives a baseline - to retire in your mid-fifties under the above conditions, plan to save 20% of your gross income.

Now we can consider how changes to the baseline assumptions change the ER age. Let the discussion begin!

 

[equakesfan]

I have been wondering about savings rate and time to reach FI and came up with this very simplified model, assuming that desired lifestyle in retirement is the same as while working. All numbers are real, not nominal:

Assumptions

• Wage growth = inflation over entire career
• Homeownership, with a paid off mortgage at retirement resulting in 10% savings of gross income from principal and interest payments
• 20% savings of gross income
• Portfolio is 80% equities / 20% fixed income
• Real average returns during career: equities 7.0%, fixed income 1.5%
• Use of the 4% Rule for portfolio withdrawals
• No inheritance, winning the lottery, or other significant outside income
• Ignore social security
• At retirement, lower overall taxes are offset by needing to pay taxes from portfolio and increase in healthcare insurance costs

Given the above, 70% of income needs to be replaced, so portfolio needs to be 17.5x income. This happens during year 31. Assuming a post-college career starts at 23, retirement is at age 54.

Change savings to 15% of gross income and 75% of income needs to be replaced, so portfolio needs to be 18.75x income. This happens during year 37; retirement at age 60.

...and so on. I made a spreadsheet!

That gives a baseline - to retire in your mid-fifties under the above conditions, plan to save 20% of your gross income.

Now we can consider how changes to the baseline assumptions change the ER age. Let the discussion begin!

Your wage growth will be greater than the inflation rate if you move up the corporate ladder
Pay off your mortgage as quickly as possible.
If you get employer matching of 6%, you'll only have to save 14%.
The 4% rule is for a 30 year retirement, if you retire in your fifties I'd plan for a longer retirement and withdraw less.
I suggest getting some stock options and an inheritance (be nice to your parents). Don't play the lottery often.
SS can be a back-up but generally agree to ignore.
With more free time your expenses may go up. Play golf everyday your expenses will probably go up...

My 2 nickels (inflation)

 

[Dtail]

I think it is still too early in the process to completely ignore Social Security.

 

[Aerides]

70% of income needs to be replaced, so portfolio needs to be 17.5x income.

I'm not sure the "gross income minus all expenses and savings" is a de facto spending number. It could be, but things do shift in retirement. IE, commuting costs, clothing go down. Travel/hobbies might go up. pre-Medicare ACA could go up if subsidies aren't available due to income or future changes. I would not count them in planning if I were in my 20's or 30's.

You don't seem to have taxes in there, but perhaps your gross means after-tax?

I also agree that a plan starting today, for someone under 40, is more robust by ignoring social security, or at least not putting numbers to it.

 

[Time2]

I have been wondering about savings rate and time to reach FI and came up with this very simplified model, assuming that desired lifestyle in retirement is the same as while working. All numbers are real, not nominal:


Given the above, 70% of income needs to be replaced, so portfolio needs to be 17.5x income. This happens during year 31. Assuming a post-college career starts at 23, retirement is at age 54.



Now we can consider how changes to the baseline assumptions change the ER age. Let the discussion begin!

Your number is less conservative than the Chart the MMM presented many years ago, however I believe he uses 25x income. He assumes earning 5% over the inflation rate and a 4% withdrawal rate and income after taxes for the saving rate. I'm pretty sure the income in retirement is 100% of the work income (after taxes), some one may want to look at the spreadsheet he has in the article. (if the spreadsheet link is still good)
The whole article is here, The Shockingly Simple Math Behind Early Retirement

 

[TickTock]

Time2 - the link works for me. Thanks for posting it. MMM's chart shows retiring in 32 years at a 25% after-tax rate savings. Both MMM and I are looking at replacing 100% of spending at a 4% WR, he is looking at 25x spending rather than income.

Good comments in the posts above.

• Wage growth > inflation shortens the time
• Paying off mortgage prior to retirement increases saving rate, which shortens the time
• I'd include employer-matching retirement contributions as an increase in the savings rate without increasing the base number
• Safety margin is more important the earlier one retires; adjusting WR down would account for that and increased time to accumulate the increased portfolio can be calculated
• I excluded social security deliberately for two reasons; it becomes less of a factor in income replacement the earlier one retires and to build some conservatism into the baseline
• Expenses are another key driver. Increased spending = increased portfolio needed and increased time to accumulate the increased portfolio can be calculated

You don't seem to have taxes in there, but perhaps your gross means after-tax?

My gross means pre-tax. I'm trying to simplify by using savings rate on total income rather than take-home pay, as tax situations vary widely. Then a second simplifying assumption that all spending changes in retirement (lower overall taxes but taxes now have to be supported by the portfolio, healthcare insurance, lower expenses [clothing, commuting]) cancel out. I'm trying to get a reasonable back-of-the-envelope baseline that can then be examined and adjusted for individual cases.

 

[Lorenzo]

Now we can consider how changes to the baseline assumptions change the ER age.

... assuming that desired lifestyle in retirement is the same as while working

I can relate to that one. One could have two or three different lifestyles while working, due to career changes, going back to school, and of course unforeseen events like divorce. I've lived in nice houses and I've lived in apartments and condos--not in the order one might expect. My highest-earning years by far were in the middle, and I did a lot of traveling. In retirement I'd like to return to something more like the lifestyle I had then than the more austere years. I'm 62 now, and don't feel I can ditch my part-time work just yet if I want to reach that goal.

 

[Aerides]

My gross means pre-tax. I'm trying to simplify by using savings rate on total income rather than take-home pay, as tax situations vary widely. Then a second simplifying assumption that all spending changes in retirement (lower overall taxes but taxes now have to be supported by the portfolio, healthcare insurance, lower expenses [clothing, commuting]) cancel out. I'm trying to get a reasonable back-of-the-envelope baseline that can then be examined and adjusted for individual cases.

So, here's how I remember my paycheck looking. Percentages here are not remotely exact it's been a long time, and my taxes were way higher in the last few years.

-20% savings pre-tax
-5% benefits pre-tax
-20% taxes
-5% other bene's savings, after tax

That means what's truly leftover is about 57%.
Then let's say 10% of that is a mortgage which you will not carry into retirement.

Oh, and to truly ER before at 54, I wouldn't plan on the rule of 55, so some of that savings needs to have been after-tax, which changes all the math above, as post-tax savings don't help your tax rates.

So, anyway, the actual target of "i need 70% gross income replacement" seems high?

 

[TickTock]

For those numbers, yes. 20% + 5% + 5%*0.8 + 10% = 39%. 100 - 39 = 61% gross income replacement, or 15.25x gross income at 4% WR. Spreadsheet says 24 years to accumulate that.

 

[imjustawarrior]

I appreciate your baseline analysis. I should show this to my kids.

Obviously, everyone's situation is different from your baseline, but it is a good illustration. If one can get in the habit of saving 15-25% out of college, then one should be able to retire early if one avoids behavioral errors or black swan events.

If one retires at 54, one may want to consider a 40 year retirement, especially if there are two people aged 54 or have a younger spouse. I retired at 55, but my spouse was 48. We planned a 50 year retirement to be conservative.

 

[Zona]

I appreciate your baseline analysis. I should show this to my kids.

Obviously, everyone's situation is different from your baseline, but it is a good illustration. If one can get in the habit of saving 15-25% out of college, then one should be able to retire early if one avoids behavioral errors or black swan events.

If one retires at 54, one may want to consider a 40 year retirement, especially if there are two people aged 54 or have a younger spouse. I retired at 55, but my spouse was 48. We planned a 50 year retirement to be conservative.

This was my experience. My savings rate out of college & before marriage was 20-25% and I think I would have been somewhere on OP's track had I stayed single. But after marriage, we lived off less than one income, so savings rate was 50% or more, and we did not have kids -- those two factors accelerated everything. We maxed out SEP IRAs (self-employed) and put the rest in after-tax investments (important if planning to retire early). We had a lot of luck (good economy, S&P returns, low mortgage rates) plus some good decisions and behaviors (no student loan or credit card debt, modest cars & house, buy & hold etfs, no panic selling in downturns). Marrying the right spouse is a huge component of this - you need to be a team & have a similar financial mindset/goals. DH was 51 at retirement, but I stopped w*rking a few years earlier in my early 40s. We put a 50 year retirement horizon in Firecalc during planning and did not include SS numbers there to be conservative. (Because there are fewer 50-year periods it's also good to re-run Firecalc for 45, 40, and 35-year periods to find any near-fails).

 

[imjustawarrior]

(Because there are fewer 50-year periods it's also good to re-run Firecalc for 45, 40, and 35-year periods to find any near-fails).

Seems quite reasonable, but I doubt I will remember to do that. I also ran the Fidelity tool, which is a Monte Carlo simulator and does not have that issue. I guess that is why using two different tools that use different methodologies is a good idea. Helps to CYA when you miss something.

 

[TickTock]

My savings rate out of college & before marriage was 20-25% and I think I would have been somewhere on OP's track had I stayed single.

To be clear, those are not our numbers/savings rates. I was looking for a reasonable baseline for retiring in mid-50s.

Also, congrats on living on less than one income. Impressive!

Agree that having a spouse on the same page financially is a huge factor.

 

[Patience]

I use networthify.com.
Appears to be a similar concept.

About 70-75% save rate and I can retire in 3-4 years (before the age of 50). Reduce expenses is the name of the game right now as income is about maxed.

 

[imjustawarrior]

I use networthify.com.
Appears to be a similar concept.

About 70-75% save rate and I can retire in 3-4 years (before the age of 50). Reduce expenses is the name of the game right now as income is about maxed.

I took a look at networthify.com since I had never seen it before. Seems really basic. If you have not done so, you may want to use a retirement calculator with more features like firecalc or the Fidelity one.

 

[Patience]

I took a look at networthify.com since I had never seen it before. Seems really basic. If you have not done so, you may want to use a retirement calculator with more features like firecalc or the Fidelity one.

Me? I have run 5 different calculators. Networthify just sounded similar to OPS spreadsheet.

 

[TickTock]

I use networthify.com.
Appears to be a similar concept.

I wasn't aware of networthify.com . Thanks for the link.

It does seem to be similar. One assumption on their website that's optimistic:

• You will never draw down the principal. Your net worth will never shrink.

That's not always true with their default 4% WR.