Knowing when to retire is difficult. There are a lot of variables. The websites and financial advisors tend to be overly conservative. Many early retirees (and traditional retirees) have embraced the Trinity Study’s 4% Rule. Meaning you can withdraw 4% of your starting portfolio every year, updated by inflation, and have reasonable odds of success (not running out of money).
I think the 4% rule is a great starting point. I think it’s very defensible and fairly conservative. It’s been our guidepost in determining when we have enough.
What the Trinity Study does is look at each 30-year period over time and determining if a retiree would run out of money before the 30 years ended. And at the end of the 30 years, most successful portfolios still had money left over – which means that 30 years is more or less the same as “forever”.
But what if I want to be more aggressive and withdraw more than 4%? What if there is a big personal deadline that forces an earlier than ideal retirement? There’s a very cool web tool to test such scenarios called http://firecalc.com.
You input your annual spending and portfolio value and it tests the success of your personal numbers over historical periods. You can tweak spending over time, debt vs. equity of portfolio, future income/expenses, and years until retirement. It’s a great tool.
Based on history, our odds of a successful retirement sit at 91%. That’s our chart up at the top of the page. We plan to withdraw more than 4%, which is why we’re below the ~95% success of the 4% rule.
The reason we’re comfortable pulling the plug a bit earlier than “ideal” is that we have a window in our lives where we can be together as a family. The kid(s) aren’t in school yet. The first 20+ months of baby girl’s life have flown by. It’s amazing how fast time goes. I feel like I didn’t had time or energy to savor her life so far, and that kills me. It’s been way more fun having a kid than I could have ever imagined. It’s hard and tedious, but so much fun – and so fulfilling.
If the worst case happens and we begin to run out of money, we can always make more. Because we have a fairly sizeable portfolio today, it’s unlikely that a bad year or two will wipe us out. We’ll probably see a shortfall coming and be able to find a way to make money to course correct. And besides, going back to work isn’t the worst possible outcome! It’s just back to where we are now!