I’ve recently discovered Mr Money Mustache and have consumed all of his posts and delved headlong into the Forums. What a treasure trove!
One of the themes of his blog is The 4% Rule, which is essentially a rough guide to how much you need to retire. This little figure is based on The Trinity Study, a study to determine “safe withdrawal rates” from retirement portfolios that contain stocks and thus grow (or shrink) irregularly over time. This study defined ‘success’ as not going broke during a 30-year test period.
So if I accept that a 4% withdrawal rate won’t leave me broke in my old age, then the assumption is that I would need a portfolio of $1 Million to give me $40,000 per annum.
The interesting thing for me, is that (as MMM points out) the trinity study assumes a retiree will:
- never earn any more money through part-time work or self-employment projects
- never collect a single dollar from social security or any other pension plan
- never adjust spending to account for economic reality like a huge recession
- never substitute goods to compensate for inflation or price fluctuation
- never collect any inheritance from the passing of parents or other family members
- and never spend less as they age
I fully expect that we will do a bit in our retirement to keep some money trickling in; we expect to get a bit from superannuation in our old age (but when or how much is yet to be seen); and we know that we can downscale our life if circumstances require it. So, in short, the 4% rule is theoretically quite conservative.
After reading all of this, I started to feel like maybe it was possible to retire easily at 40. However being the careful person that I am, I wanted to test some assumptions by running a few scenarios. This is where some Early Retirement calculators came in very handy. You can check them out here:
I decided to base my simulations on the following set assumptions:
- Starting portfolio $600,000
- Property portfolio providing an income of $20,000 per annum
- Superannuation or pension of $30,000 per annum starting when I turn 60.
- Additional savings of $50,000 per annum until 40 (retirement age).
Scenario 1. In the first simulation, I assumed that we continued to spend like we currently do (minus things like childcare that we would no longer use), that we would continue to rent a house in our retirement and that we make no additional income. This scenario has a 63-71% chance of success (i.e. that we don’t go broke).
Scenario 2. On the second run, I cut our living expenses by 25%. This time, we have a 95-100% chance of success. Okay, that sounds better, but we don’t really want to rent forever. We want to buy ‘The Farm’ when we retire! Let’s see what happens.
Scenario 3. Ok, so this time we bought ‘The Farm’ for $500,000 upon retirement. I reduced our expenses by the equivalent of the rent we wouldn’t pay. This scenario has a 73-81% chance of success, which is not good enough for conservative old me.
Scenario 4. What if we bring in a small income of $10,000 per annum in retirement? Well, it looks like we have 97-99% chance of success! That will do!
So what does all of this mean? Essentially I can retire easily at 40 IF we reduce our current living expenses by 25% before then. If we want to buy ‘The Farm’ then we have to be prepared to find an additional $10,000 per annum from some side hustles, which I think is more than achievable.
That was a very worthwhile exercise and I feel like we now have something concrete to work towards:
- Develop a budget such that we can live comfortably on 25% less than what we currently spend (not including childcare and other work-related expenses that would disappear in retirement).
- Identify some opportunities for side hustles that could bring in $10,000 per year.
Photo by: Matt Shalvatis