When can you afford to retire?

There are many retirement calculators available online, but it's interesting to look at the figures that pop out of a simple spreadsheet model to guage the effect of savings rate and return have on possible retirement age.

MODEL ASSUMPTIONS:

Start off retirement savings with $0 at age 20

Initially earn $30Kpa which increases 5%pa until hit $50K salary, then 1%pa increase until retirement

Retirement savings to be drawn down during retirement at 70% of final salary

Savings to last in retirement until death at age 85 - this is about the average lifespan for someone who has reached 65. The assumption being that you live long enough to retire!

Investment returns and salary rises are expressed as real, after-tax percentages. This avoids having to guess what inflation rate may apply.

No other retirement income aside from retirement savings eg. no government or company pension.

RESULTS: Table of possible retirement age where funds will last until death
SR = savings rate (% of salary put into retirement account each year)
ROI = avg return on investment

     ROI --->
SR   3.0%  3.5%  4.0%  4.5%  5.0%  5.5%
 8%   74    72    70    68    66    64
10%   72    70    67    65    63    61
12%   70    67    65    63    61    59
14%   68    65    63    61    59    57
16%   66    64    61    59    57    55
18%   64    62    60    58    56    54

CONCLUSIONS:

Early retirement before age 60 is a big ask - you either have to save a huge % of your salary, achieve a very high real return on your investments (which means higher risk of missing you target), or be willing to live on less than 70% of your pre-retirement income as a pensioner. To retire much before 60 you'd probably have to have other sources of wealth beside your retirement savings - such as a successful business or an inheritance.

Typical savings rates (10%-12%) and ROI (4%-4.5% real) result in a typical retirement age of 65

Investing too conservatively (3% ROI) or saving too little (8%) mean you couldn't afford to retire until your 70's if you want your retirement income to last until 85.

Copyright Enough Wealth 2007