M. asks: Did you use 25 times your annual spending to estimate your "magic number" for retirement savings?
She is referring to the post about my "magic number" challenge, which is $3,000,000.
When I was estimating my number, I did not use the popular among FIRE community members 25 times annual spending calculation. it seemed to be an underestimation to me.
I went another way and calculated my annual expenses, added comfort margin and ran it trough inflation calculator.
I also made some optimistic assumptions about the life expectancy (at least 102 years, see why in the Challenge 102 post).
And I made some pessimistic assumptions about the investment growth which included absence of social security income and low returns).
I also didn't assume that I will retire early, and my estimated retirement age was 65.
Per official government actuary table I as a female of 44 years of age have life expectancy of 38.65 years more to live and my estimated expiration date provided by the government is in 2056 at age of 82.65.
If I just take 25x my annual expenses, first thing that bothers me is that 25 is less than estimated 38.65 and the second is that the expenses in this calculation don't appear to be adjusted for inflation.
I will make some example calculation with the following data:
Female 44 years old, official life expectancy 38.65 years (age 82,65 years)
Retirement savings: 25 x annual spending = $1,250,000
Retirement date - now at 44 years of age (FIRE)
Yearly returns - 7%
Estimated annual inflation - 3%
Calculations done on www.mycalculators.com, you can use your variables for your own calculation.
You can see that at 7% annual growth rate on the investments the yearly withdrawal is around $62,000 per year. For the first few years that will work.
It looks like in this calculation the annual inflation rate is only applied to the growth. The withdrawal amount is the same each year and is not adjusted to inflation (you can see it on the withdrawal schedule which is provided by the www.mycalculators.com.
But how much are the $62,000 in today's dollars are worth in 38 years?
I calculated it on www.smartasset.com. The $62,000 will be equivalent of approximately $190,637 in 2018 dollars.
It doesn't look like it will be enough.
That supported my suspicions that FIRE is not for me.
Next, I used the Retirement Income Calculator from www.bankrate.com
It gave me the monthly income at age 45 (the same for the next 38 years).
I decided to check the only 3% yearly return which is what you can reach with government bonds. The monthly income decreased appropriately.
With the inflation, the necessary withdrawal amount will have to increase. The monthly withdrawal amount income should change with estimated inflation of 3% from $4,217 to $12,966 in 2056.
The inflation increases the amounts substantially. That was my main reason not to use the 25x yearly expenses estimate. The number $1,250,000 seems to be too low.
My estimates gave me the number of $3,000,000 as a comfortable minimum.
If I don't retire early and keep working as planned until 65, this number should be reachable for me.
If I figure out how to stay alive until 102, this amount should be enough.
For calculation, that will be 37 additional years from age of 65 to 102.
According to the inflation calculator the $50,000 of yearly expenses will be approximately $93,000 in 2039 (retirement year).
At that time I will be able to withdraw about $152,000 (according to the calculator below) every rear for 37 years until age of 102 (year 2076).
The inflation calculator from www.smartasset.com doesn't go until year 2076, it only goes until 2068 and the value adjusted for 3% inflation for that year is $219,000. If I use less in the beginning and more later, it seems to be enough.
I am finding it very funny to plan until 102 years of age. That is probably a serious overestimate. I am really curious about how it will turn out.
