Early retirement and financial independence sound pretty amazing, right? Stop working full time and pursue other interests, spend more time with family, travel to new places, or just continue working while having the peace of mind to know that you can stop whenever you want. What’s not to like? At this point, you may be wondering how long it would take you to achieve this kind of freedom. Before you can set a goal date, it is important to know how much you will need to officially announce that you are financially independent. The answer to that question may seem complex to figure out, but it’s really pretty simple. This is due to what is known as the “four percent rule.” Basically the four percent rule states that if you have your money in a well diversified portfolio going into “retirement,” you will be able to withdraw four percent of your beginning investment each year without ever running out of money. The calculations that were used to determine this rule are based on historic stock and bond returns. For example, you will need $1,000,000 invested in a well diversified portfolio in order to withdraw $40,000 per year for the rest of your life without ending up in the poor house.
This is somewhat of a worst-case scenario though. Considering the average market return of 7-9% per year over long periods of time, four percent may seem pretty low to you. You’re right, it is low. It is much more likely that you could withdraw a significant amount more than four percent each year and still be fine, but better safe than sorry when your financial future is at stake. I don’t know about you, but I would much rather overestimate and have too much money at the end of my life than to underestimate and end up eating cat food for my last few years on earth.
Figuring out how much money you will need in order to live off of four percent can lead to difficult calculations for some. But, never fear, we have the power of elementary school math to help us out. Working backwards, you can determine how much your current yearly expenses are, and then multiply that number by 25. As with the previous example, if you add up your expenses and determine that you will need $40,000 per year to maintain the lifestyle that you wish to have, $40,000 x 25 = you guessed it, one million dollars (please imagine me saying this in a Dr. Evil voice).
In order to determine what your yearly expenses will be in retirement, you will need to make some educated guesses. Will you be spending less money on gas when you don’t have to drive to work each day, or will your gas bill increase because you plan on driving around the country several times? Will you be living in the same house for the rest of your life, or is it likely that you will upgrade or downgrade? Will your health insurance costs increase after you retire? Will you be spending your extra time cooking more meals at home or will you go out to dinner more often? Only you are able to answer these questions for yourself, but I would suggest being conservative on the estimates.
There has been some criticism of the four percent rule for early retirees because it is usually based on a “normal” length retirement, not fifty or more years that are possible with early retirement. For my situation, I do not believe that this will be a concern. My reasoning for this is that I plan to continue to “work” on something for the rest of my life. It is highly likely that I will be able to monetize one or more of the hobbies that I pursue in the future. Even if this turns out to not be the case, I will have no problem working part time at any number of jobs to earn a little additional money if needed. It would take only a very minimal amount of income to supplement the returns from my investment portfolio, if any at all. In addition, I enjoy earning cashback and achieving now sign up bonuses on credit cards. It is very unlikely that these things will change in the future, and this will lead to some additional income (or at least reduced travel expenses) as well. I will feel completely comfortable declaring myself financially independent when I reach my target number based on the four percent rule.
So now that you have the actual amount that you will need in order to live off of (i.e. the $1,000,000.00 from the previous example), you can use a compound interest calculator to determine when you will be able to get to that number. The calculator is very easy to use and lets you choose all of the factors on which you choose to base your calculations. I use a conservative yearly savings amount as well as a 5% expected rate of return just to be safe.
Fifth Wheel Physical Therapist 
I love cat food! Just kidding! :-S lol
You are right that it is simple math. The Trinity Study did an incredible job with the idea of utilizing 4% as safe rate of withdrawal. The cfiresim calculator is a lot of fun to play with, as well. Also, I downloaded an early retirement Excel spreadsheet calculator from Budgets are Sexy and made a couple modifications, including a “Retirement Budget” that factors into the equation and allows me to plug in part-time income I plan to make.
The way my estimates look right now, we’ll hit FIRE when I’m 45 if I continues working part-time enough to make an average of $1500/month. This is with a budget that includes a $1500 mortgage, which we don’t currently nor will we necessarily have at the time, and it is also estimating our health/life insurance cost at $1200/month. Working part-time could potentially qualify me for health insurance, thereby saving a significant amount of money in that respect.
Overall, I feel this is an extremely conservative estimate and, in all likelihood, if we play our cards right and the market cooperates, I believe I’ll be able to drastically change my working situation (if we choose to do so) by the time I’m 40. The good news is that even if it doesn’t pan out at that time and I have to work a while longer, no big deal, I’ll still be retired long before the norm.
Nice post, man. If you missed it while perusing my site, you should check out the article I wrote a few weeks ago titled The Power of 300. It’s a little twist on the “multiply by 25” calculation with a history lesson on Sparta and King Leonidas mixed in. Talk to ya later!
LikeLiked by 2 people
Awesome, I’ll check our your post. I can’t even count the number of different calculators and simulators that I have used over the years and all of them give different information. Because of that, I went ahead and made my own spreadsheet and that’s what my current estimates are based on. I don’t recommend a more “normal” person taking all the time to make their own spreadsheet though so that’s why I recommended the compound interest calculator. Are you doing part time work at a different hospital? I’m always looking for a PRN job but they are difficult to find on a short term basis to coincide with my travel contracts.
LikeLiked by 1 person
No, I’m not working anywhere else. Working for the federal government, I remember it being somewhere in my paperwork that I actually have to request permission to work elsewhere even if I wanted to. We are in such a remote location that the nearest hospital is about an hour away, so other than a Davita dialysis center in the backyard, there is otherwise nothing else around. Besides that, if I want to work OT, it’s generally never an issue because I have the option of working in the ER/Urgent Care departments, as well. I’ve cut back on OT just because of our crazy busy time with our kiddo and general lack of sleep (lol!) but if we want the extra money, it’s far more lucrative than trying to work somewhere else would be. You guys should look into coming here with your PT travels; we’ve had nothing but travel PT’s since we moved here two years ago and while I’m not sure when the current guy’s contract is up, I’m sure they’ll be in the market soon enough looking for a replacement (or two.) If you’re ever interested, email me at nurseonfire@outlook.com and I’ll tell you the hospital I work for.
LikeLiked by 1 person
Awesome, what state are you in?
LikeLiked by 1 person
South Dakota. It really wouldn’t be ideal for you guys in your fifth-wheel…the winters can get pretty brutal here, plus the closest RV site with hook-ups is about 20-ish minutes away from our hospital. If you wanted a temporary break from RV life, they have hospital-provided housing for travelers but not sure what they charge (if anything?) for that.
LikeLiked by 1 person
I’ll be posting about our plan with locations soon but we are actually planning to be around that area in the Summer of 2018 if everything goes according to plan. We’re basically going to be bouncing North to South every six months and gradually working our way across the country.
LikeLiked by 1 person
That’s awesome that you guys are planning out so far in advance. Summers around here are incredible; we get the occasional triple-digit day but we’re not overly humid and almost constantly have a breeze so it’s not too bad. If all goes well, and assuming we’re still living here, we’ll have to have you guys over for a cook out or something. I’ll be looking forward to your post, man.
LikeLiked by 1 person
Wow 33rd birthday?!?! That’s crazy! (In a good way!)
I haven’t crunched any numbers yet but I don’t foresee us retiring SUPER early … We plan to have kids and I don’t know yet how much extra I’ll need to add to our monthly expenses and for how long, but I’m sure 18-20 years sounds about right!
LikeLiked by 1 person
I’ve always been a little crazy. I like to set lofty goals for myself and, worst case scenario, I have to keep working part time for a few more years if things don’t work out. I enjoy my job (most days) so that really isn’t a bad thing.
LikeLiked by 1 person
Extremely jealous of the 33rd birthday prediction. It’s hard not to get discouraged sometimes, all I can do is keep telling myself that there is no point comparing, as long as I’m doing better than I did before, that’s all that matters. Great post.
LikeLiked by 1 person
Yeah, no point in comparing and although that is my projection, there is a lot that could happen between now and then that could push that date back a lot. I’m flexible on that though and won’t be too upset. I have a job that I don’t mind and actually enjoy occasionally so that helps as well.
LikeLiked by 1 person