Consider an individual earning $100,000 per year, aiming to retire on $50,000 annually, with a 4% rule (withdraw 4% of your portfolio per year, indexed to inflation) and a 7% annual return on investment. To calculate the years to retirement, we can use the following formula: Total Amount Needed = Desired Annual Retirement Income / (4% rule), and then calculate the number of years it takes to reach this amount based on the savings rate.
For a 10% savings rate, the calculation would be: Total Amount Needed = $50,000 / 0.04 = $1,250,000. With a $10,000 annual savings (10% of $100,000), and a 7% annual return, the years to retirement can be calculated as follows:
- Year 1: $10,000 (savings) + $0 (interest) = $10,000
- Year 2: $10,000 (savings) + $10,000 (previous balance) * 0.07 (interest) = $20,700
- Year 3: $10,000 (savings) + $20,700 (previous balance) * 0.07 (interest) = $32,049
- ... and so on, until the total amount reaches $1,250,000.
Using this method, we can calculate that it would take approximately 37 years to reach the retirement goal with a 10% savings rate.
In contrast, with a 50% savings rate, the annual savings would be $50,000, and the calculation would be:
- Year 1: $50,000 (savings) + $0 (interest) = $50,000
- Year 2: $50,000 (savings) + $50,000 (previous balance) * 0.07 (interest) = $103,500
- Year 3: $50,000 (savings) + $103,500 (previous balance) * 0.07 (interest) = $164,215
- ... and so on, until the total amount reaches $1,250,000.
Using this method, we can calculate that it would take approximately 15 years to reach the retirement goal with a 50% savings rate.
The Freedom Calculator can also be used to determine the years to retirement based on the savings rate and expenses. For example, an individual saving 25% of their $80,000 annual income and seeking to retire on $40,000 per year could use the calculator to find that they need around 22 years to reach their goal, assuming a 25x rule (save 25 times your annual expenses) and a 5% annual real return.
Here are some examples of how different savings rates can affect the years to retirement:
- 10% savings rate: 37 years to retirement
- 25% savings rate: 22 years to retirement
- 30% savings rate: 19 years to retirement
- 50% savings rate: 15 years to retirement
As shown, increasing the savings rate can significantly reduce the number of years needed to retire. By prioritizing saving and investing, individuals can work towards achieving their retirement goals more efficiently.
New to FIRE? See our primer at https://freedomcalc.app/what-is-fire.
With a 50% savings rate, an individual can retire approximately 22 years earlier than with a 10% savings rate, based on the calculations above.
Tools worth looking at
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- Empower — Free net worth tracking, portfolio analysis, and retirement planner. The dashboard serious FIRE chasers actually use.
- Acorns — Round-ups that invest your spare change automatically. The lowest-friction way to start investing if you have been putting it off.
- Wealthfront — Tax-loss harvesting, a 5% cash account, and direct indexing once you cross $100k. Solid robo for the set-and-forget crowd.