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!
This sounds like a great idea, I’ll have to run the numbers and see when we would get to our “Point of Retirement Inevitability”. It sounds like reaching that point has giving you a great sense of peace and flexibility!
Thanks, MAR! Exactly! The peace of mind is probably the best part. This way, even if we decide to buckle down and knock out the rest over the next few years, we can keep in the back of our minds that we could stop or downshift any time we wanted to.
I haven’t heard the phrase “retirement inevitability” before. It’s a great new way to look at your investments. Thank you :). I did your calculations for myself and if I don’t save anything else I should be able to retire in 16 years. Not bad at all :). Thank you for adding something new to the community and helping expand my mind.
Thank you, Semira! Of course all these things are just thought exercises, but I really feel like looking at it from a different angle opens up a lot of options to you.
That’s an interesting concept that might just catch on! I hit that number decades ago but kept working because it was just too much fun to quit. I lot of guys in my generation(boomer) and in my trade(chemical engineering) drew a lot of life satisfaction from achievement at work. I know I did and kept working until either it, or I or both changed to the point that it stopped being fun. The idea of downsizing my job to something that gave me more family time would not have appealed to me. I mean I had an eight minute commute and never felt like work kept me away from my family. But I think X’ers and snowflakes, er, I mean millennials, don’t see work quite the same way, and maybe that’s an evolutionary improvement over neanderthals like me.
Hi Steve, and thanks for the comment! It sounds like work brought you a lot of satisfaction, and I completely support your decision to go on working! We too might find ourselves working in “retirement” for intellectual stimulation, fun, or just to have some additional social contact. At the moment we’re carefully considering how we can “redesign” our lives to get maximum satisfaction (not necessarily to avoid work, but to maximize our fulfillment)– something it seems like you were lucky to find in your own life!
This is an interesting way to look at things!
I am about 6 1/2 years away from inevitability according to your methodology, but hoping to reach early retirement in about four years. Given that we are over eight years into a bull market, the conservative side of me worries we could have a big correction that will delay things for us, but hopefully the market keeps delivering consistent and good returns.
Definitely a new dimension to consider as I am planning our path to FIRE. Thanks for a thought-provoking post!
Thanks! I honestly believe one of the best possible things I could experience would be a medium-large correction in the near future. Since we’re still far enough off of retirement that we’ve got a at least a few years of work to go anyway, I’d love to spend it buying at a major discount! I still feel a tinge of regret that I missed, by about a year, the chance to buy a single family home here in Silicon Valley during the bottom of the market– If I had had my act together about a year sooner, we would have bought, sold now, and probably bridged the rest of the gap to early retirement. Alas!
In case anyone would like a formula for this: If P is the money you have now and A is the amount of money you want to retire with, then the number of years is: 14.8*ln(P/A).
(The reason for multiplying by 14.8 is because this is the same as dividing by ln(1.07).)
So, for your example, 14.8*ln(1,500,000/515,000) = 15.8 years.
If you want details, of course it’s just algebra, but many people have trouble with logarithms.
We need to solve the equation P(1 +r)^t = A for t. (Here r = 0.07).
First divide by P: (1 + r)^t = A/P.
Now take ln: ln (1+ r)^t = ln(A/P).
Then use a property of logarithms: t ln(1 + r) = ln(A/P).
Finally, divide: t = ln(A/P)/ln(1 + r).
I wouldn’t go into so much detail except I suspect there could be someone who’s been out of school a while and would like to know how this works due to their interest in finance.
Hey Mark, thanks for providing the formula! I’ve updated the post to reflect it and to give you a shout out!
Happy to help. Just FYI I’m not the same Mark as post 7 below.
I’ve been thinking about this a lot recently. I’m 31 and my wife and I should break 100K in our retirement accounts by the end of the year. If we retired at a normal age, using 10 year doubling periods (7.2 returns) we would hit $800K at 61, enough for a $40,000 yearly withdrawal at 5%. We would also be on the verge of receiving Social Security, which could add another roughly $36,000 per year.
At a minimum I want to keep my foot on the gas until we have knocked out at least the next 2 doubling periods ($400K in retirement funds). This would make us far less dependent on rate of return and will greatly speed up our FI date.
Hi. You mention 7% returns in your calculations. Are you 100% stocks currently? Do you plan to stay 100% stock right up until the day you decide to retire? Just wanted to get your prospective. It’s something I’ve been contemplating a lot lately (whether to hold bonds, and even if I went 100% stock, would I have the nerve to stay that way all the way up to retirement age).
We’re 80-20 US Stocks/World Stocks in retirement accounts, but truthfully some of that net worth is in rental property yielding more than 10%. We see that asset allocation changing a bit in the coming year or two, and expect that the total amount in retirement accounts will hit $500K in the next year, so for us this is back-of-the-napkin math. We’re not too bothered by sequence of returns risk since we are ok with making a little money here and there in early retirement, or being flexible with our location to minimize cost of living in the event of a correction or recession. YMMV!
Congratulations on your very impressive financial position in terms of your joint retirement nest egg. It affords you flexibility going forward as you describe. However, I’m doubtful that “retirement” as you seem to be contemplating it, is “inevitable” quite yet.
I do think cutting back on work is very possible. But with a child on the way, securing health care would be important for American citizens. So I think you or your spouse may need to have a job that provides health insurance. Ask around what it costs to deliver a “well baby”. It’s quite unbelievable.
While the math supporting your inevitable retirement is fine (e.g. at 7% interest, single sums will “grow” as you have projected), that’s not how actual stock market (I’m using S&P 500) returns “work”. And, the “4 percent rule”, while gospel for many FIRE acolytes, is downright dangerous today (Google Michael Finke, Wade Pfau, and David Blanchett and 4% Rule) given especially historic low interest rates on bonds.
While sequence of return risk is not in play when compounding a single sum of money into the future, human behavior (e.g. panic, loss aversion) remains. How would you react should 2017, 2018, and 2019 generate the same stock market returns we got in 2000, 2001, and 2002 (respectively they were -9.03%, -11.85%, and -21.97%)?
Plug those returns into your calculator and see how inevitable your retirement looks in three years. Not very, I’d assume.
Since the great recession of 2008, stocks in the US have been on a tear as follows:
2011 + 2.10%
I’m not sure when the next bear market will come, but come it will at some point. Will it be like the beginning of the 2000’s or more like the great recession in 2008 when stocks lost 36.55%? Who knows? Surely not me.
What about inflation? In the US, it’s been essentially non-existent for quite a while. What if it returns at 2% a year? The Rule of 72 works here too.
What will a million dollars be worth when you inevitably retire if inflation is 2 percent a year going forward? What will whatever a sustainable stream of income purchase from that million dollars inevitably be when you retire?
You are to be congratulated for your current financial position. It gives you and your family flexibility and breathing room. But as to inevitable retirement…not so much. At least not yet.
Of course each person should plan according to their beliefs and tolerance for risk. Personally, given the fact that the 4% rule holds up even through the great depression, the extended flat markets of the 60s and 70s, and through the great recession, My wife and I are comfortable with continuing to use it as a rough yardstick. Moreover, on items like health care and education, we’re also flexible in that our planned lifestyle involves life abroad and the potential to continue to make money doing things that interest us rather than merely maximizing income. Peace of mind is one of the best things about the FIRE ethos, and everyone should plan however they need in order to sleep at night!
(FWIW, I also mentioned that nothing is truly inevitable– the best we can ever do is approximate and do our best!)
Please provide your source(s) for your statement: “…the fact that the 4% rule holds up even through the great depression, the extended flat markets of the 60s and 70s, and through the great recession.”
Bengen’s original work (which pre-dates the Trinity Study) showed the 4% rule “worked” for 30 years of withdrawals through the Great Depression in part because that event also brought years of price deflation. And bonds played a big part in getting the 4 percent rule to work through the 60s and 70s (when bond interest rates were sky high compared with today (although Bengen and Trinity used different types of bonds in their work).
Since the “internet bubble collapse” of the early 2000s and the great recession of 2008 are relatively recent events, we don’t factually know whether or not a 4 percent withdrawal rate will last 30 years since we don’t have thirty years of experience yet.
But, you can look at S&P 500 returns from 2000 through 2016 and see how a million bucks and a level $40,000 annual withdrawal would look like. It’s not pretty. And bonds are of virtually no help now given historically low yields and future interest rate risk.
Simulations and back-testing are helpful but they aren’t the real world, they aren’t forward looking, and don’t factor in behavioral finance/economics (i.e. humans make mistakes).
I think super aggressive savings by living WELL below one’s means, and investing prudently, building up an emergency fund in cash, etc. all lead to getting to FI ASAP. That’s commendable.
However, I think using the 4% rule for anything other than a “very rough yard stick” is problematic, naive, and dangerous. Life is not that simple. Period.
That said, as this post celebrates, with your nest egg and spending habits, you have plenty of FI right now; you have great options, flexibility, and choices going forward
We agree; “nothing is truly inevitable”. But I guess that doesn’t make for a compelling blog title compared to “The Point of Retirement Inevitability”.
Once again, I don’t suggest or plan on mindless adherence to the 4% “rule.” I don’t know if you’ve had a chance to read anything else on the blog, but flexibility is a huge and important part of what I believe in. We just happen to see the option to be flexible as part of the fun (like using geographic arbitrage to reduce costs if there is a sudden and unexpected correction).
You seem very well informed, so I am guessing that you know about the 2009 and 2011 updates to the Trinity Study, which effectively confirmed that the available 30 year periods through those years still resulted in a success rate north of 96%. Of course, we don’t know how a retirement starting from this year, or any year in the recent past, will fare– but that’s what the 4% rule has always been: a statement that if the future is no *worse* than all 30 year periods in the past, a 75/25 stock/bond allocation will be successful 96%+ of the time. That’s what I was referring to when I said that the 4% rule (or more accurately, the Trinity Study) took into account those periods, though of course it’s only as trailing years for periods 30+ years ago.
It sounds like you will be very well prepared!
I’m quite familiar with the “old” updates to Trinity. More recent research has concluded that the “4% rule” is dead. As I mentioned in my original post, see Pfau, Finke, etc., etc.
Here is a link for you and your readers:
The 4% rule is dead for retirees, let alone those hoping to FIRE (retire early).
FIRE bloggers and readers should proceed accordingly. That’s all I’m saying.
Your site popped up via Rockstar Finance so this blog on Inevitable Retirement is the first one of yours I’ve read. I retired three and a half years ago at age 60 with a pension, employer paid health insurance, a 401(k) and IRAs. I was a qualified retirement plan (IRC 401(a)) consultant for most of my career starting shortly after ERISA became the law of the land in 1974.
I like what I see on most FIRE blogs in that they preach living within one’s means “aggressively: i.e. save way more than 10 or 15 percent of income. more like 30-50%. I’d say that’s (aggressively saving)is critically important given the fragile state of the economy: the more frugal you are, the more money you save, the smarter you invest, the better off you’ll be. That might mean you are FI do downsize your job when you want but it also means that your won’t be desperately NEEDING your job when your 52 and are “excessed” by your employer.
Lots of FIRE blogs casually mention the 4% rule as if it is still relevant (which is how I read your blog this morning). And some readers can be (I think) mislead by those types of statements. The most recent academic research shows the 4% rule is…dead.
That’s a pretty cool calculation, I hadn’t thought about it like that before. We’re pretty close to the finish line, already. I used 0.06 as a more conservative number and we still would hit our retirement needed number in 4 years if we add nothing else to our nest egg. Woohoo!
Of course we’re still planning on adding to it over the next 2 years, maybe 3 but it’s nice to know that we could take the foot off the gas and cruise to the finish. Even with a correction or possibly increased health care costs. That’s our newest unknown that we’re trying to buffer our yearly cost against what insurance actually may cost.
Four years is the blink of an eye, congratulations! I am so impressed! Can’t wait to hear how you guys find FIRE!
What about inflation. 16 years from now 1.5 million will be worth maybe 2/3 what it is today.
In a move that will surely irritate the 4% rule haters, 7% is actually our inflation-adjusted number. All you have to do to account for inflation mathematically is change the compounding rate.
Very enjoyable article, FrugalVagabond. My main man Dave A. sure knows how to party. “I’ve got a pension, paid for health care, a 401K, a money tree and printing press. The rest of you are screwed!” Nothing like a fella exclaiming…”I’m in the boat, pull up the ladder!” ( rant over ) 🙂
I think you’ll find with your fantastic start, good habits and positive attitude, you’ll not only reach your goals more quickly, you’ll retire with well over your 1.5 million projection amount.
Hey Jon, thanks for the encouragement! You can’t satisfy everyone, but I mean it when I say that I’m glad for anyone that has managed to retire and is able to sleep at night. We obviously have a higher tolerance for risk than Dave, but I’m an optimist and feel like there is plenty of upside left in both the market, and the ability to achieve FIRE.
We had a health scare with my dad just after Christmas. He is recovering very well and was already early retired. The lack of pressure to get back to a job has been a blessing. I was expecting your retirement inevitably to be a discussion of people who plan to work into their 90s but are forced not to. Yours is a much happier discussion! !
Hey Jacq, I’m really glad to hear that your dad made it through his health scare, and can only imagine the peace of mind afforded by not having to get back to a job. That kind of scenario is a nightmare, but one we think of often– stress is toxic, and, as I’ve written before, is in my opinion a chronic illness. It eats you up over a lifetime, and FIRE is the ideal cure.
Fantastic point and post! We’re focusing on our goals, and this helps a ton by giving us an intermediate – and very meaningful – goal that’s really easy to figure and analyze. I just ran it through excel.
It was very encouraging. We’re not there yet, but it’s easy to see how we could get there very soon. It showed me that we’re much farther than I would have thought towards traditional retirement, at least, and we’re just beginning.
I’ve actually been thinking about this concept a lot lately as well. We’ve reached the point where if we stopped adding to the stash, we could retire at 62 using 3.5% SWR or 58 using 4%.
I’ve come to the conclusion that my fiancee and I won’t just pull the plug once we reach FIRE. Life isn’t clean like that. She likes her job and gets fulfillment out of it and (as of right now) wants to do it for another 10 years at least. Whereas I don’t like my job as much and don’t really get fulfillment out of it. Thinking about retirement inevitability helps because I might be able to step away from traditional employment sooner than later, even if what I decide to do only makes $20k or $30k a year or so. As long as we can cover our expenses, we’re good to go (obviously would still like to pad the stash along the way).
Ha, this comment is like you’re channeling me! Well, aside from the one member of the partnership wanting to continue working– we’re both pretty ready to do different things, but to have the power and flexibility to just cover costs feels like a big milestone that the community doesn’t (yet) celebrate much. To me it’s as nicer than any randomly-selected 100K increment that we mark!
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Great post! I had explained this concept in the beta version of a course I’m creating on how to take a Mini-Retirement and one of the beta members linked to this post in our fb group. 🙂
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