There’s a milestone on the path to financial independence that, for most people, goes unnoticed. I call it the Point of Retirement Inevitability. It’s the moment when, left completely alone, your assets will appreciate enough between now and retirement to achieve your retirement savings goals without any further contributions.
Let’s take my family as an example. Between my wife and I, we currently have a combined net worth of about $515,000 ($390K from me, $125K or so in her accounts). Assuming all of our assets keep pace with the long term average return of the stock market, we can expect them to grow at a rate of 7% after adjusting for inflation. The “Rule of 72” tells us that a 7% return will result in our money doubling every ten years or so. Basic compounding math looks like this:
Assets * (1 + Rate of Return)^Number of Years = Result
My wife and I are aiming at a net worth goal of between $1 and $1.5 million dollars to retire. The 4% rule tells us that $1.5 million earns us a yearly income of $60,000. To hit that goal, we need to double our current money between one and one-and-a-half times. Specifically, the first (rough) doubling looks like this:
515,000 * (1 + .07)^10 = $1,013,082
Once we hit a million, achieving (roughly) $1.5 million looks like this:
1,013,082 * (1 + .07)^6 = $1,520,362
This means that after doubling our $500,000 in ten years, it would take us six more years to hit (around) $1.5 million. With absolutely no further contributions, we’ll be ready to retire in 16 years, or when we hit age 53. Not only have we already reached the Point of Retirement Inevitability, we’ve reached the Point of Early Retirement Inevitability! Assuming we can simply work enough to cover our expenses, we’ll be ready to retire fifteen years early!
UPDATE: Math whiz and nice guy reader Mark helpfully provides the actual mathematical means of solving for time directly, for those comfortable with using natural logarithms:
t = ln(A/P)/ln(1 + r)
Where t is time, A is the goal amount, P is the starting principal, and r is the interest rate/rate of compounding.
How Does Retirement Inevitability Help Us?
With our little one on the way, my wife and I have talked a lot about what the next few years look like. We know that spending as much time together is really important to us, so we’re trying to figure out the life and lifestyle changes we can make that will allow us to spend as much time as humanly possible, as soon as possible, together.
Since we’ve already reached the point of retirement inevitability, we have a couple of options. The first is to continue to work and save as hard as possible to further reel in our retirement date. This is pretty appealing because we could probably hit our lower goal before our baby is even ready to start school. It does mean maintaining two incomes, and potentially missing some early and important milestones for the baby.
The second option would be to downshift to jobs that cover our costs and allow us to continue to grow the emergency fund, maintain our skillsets and employability, and still spend a majority of our time together. I figure I can support our cost of living in many of the places we’d love to slow travel on around 15-20 hours per week of work. My skills are fairly in demand, and I could even accept a lower hourly rate for that time using the power of geographic arbitrage.
More and more, the second option sounds appealing to us, though nothing is set in stone. In the coming years, we’ll probably have some years of option one, and some years of option two, as dictated by what our baby needs. We’ll figure it out. What we do know is that it’s tremendously reassuring to have achieved a level of savings that will allow us to hit our goals with absolutely no further major sacrifices from us.
Nothing is Truly Inevitable
Of course, there are no guarantees in life, nor in finance. The long term average return of the market could drop, we might encounter an unforeseen major expense, and our goals might change. Still, the evidence points to the point of retirement inevitability being a real thing. As ever, the FIRE ethos is about flexibility and the freedom that having options brings to our lives. We’re practically giddy with anticipation for the arrival of our little one, and knowing that we have the option to spend a retirement-light lifestyle with him or her from the very beginning is an incredibly liberating feeling.
How about you? Did you make note of or celebrate the Point of Retirement Inevitability in your own life? Let me know!