Millions of people are spending most of their time doing work they don’t enjoy with one burning question on the back of their mind every day: How Much Longer Until I Can Retire?
The simple answer is you can retire when you have either a high enough net worth, or have excess income to cover your lifestyle expenses for life. Using a calculator can give you some valuable estimates.
In this post, I’ll step you through the exact steps you’ll need to use this simple calculator right now as a free guide in your retirement planning. Click here to see the Retirement Age Calculator on my website. If you prefer a video, scroll to the bottom of this post.
You can use this simple calculator to help you see how longer you will need to work before you retire based on how much money you have saved, how much you’re saving each month, how much you want saved for retirement, and the estimated return you think you can get.
The Retirement Age Calculator Steps
Current Age
As you can see, the first field is your age. That’s easy enough! If you are doing this with a spouse, you may want to average your age.
Current Retirement Savings
This is another relatively easy field, although many people have built up multiple accounts for various reasons over the years.
If you’re not sure what to enter for your current retirement savings, spend an afternoon with your wealth. Get to know your investment portfolio intimately.
It’s odd that so few people know their investments intimately yet having funds for life is right up there with food and shelter as far as life requirements. The reality is that money provides the food and shelter.
You can write out your investments, create a spreadsheet, or use an online tool.
Online investment tracking tools have become very popular. If all your assets are at one financial firm, you could use their investment portfolio tracking tool. Most people, however, don’t have all their investments in one place. Marries couple have multiple accounts.
There are often two kinds of IRA’s, retirement accounts, and often accounts for inherited money or other situations.
I am, admittedly, a nerd, so I have used own spreadsheet for years which I also use with my financial coaching clients. It comes in handy when deciding to sell an investment or providing tax information to my CPA. It shows the amount I pay for fees, whether the account is taxable or not, when I bought it, and other handy information. I can also use this to calculate my net worth.
If you don’t know the amount you have in your retirement savings, schedule time to do that now. Remember, be intimately involved with your investments. Know all about them.
Monthly Amount Invested
In this field enter the amount of new funds you are adding to your retirement account each month.
While this calculator is simple, it does require that you know your numbers. This field will call you to check on your spending and explore ways to put aside more money to grow.
A little word of inspiration here that you can skip if you want: Think “wealth accumulation”, “not budget”. Wealth accumulation is much more appealing than saving money. And wealth accumulation is exactly what you’re doing when you “save money”.
Live and speak from where you want to be, not where you are now.
So, you have entered the amount you are saving each month, or the amount that you plan to put aside each month to accumulate.
Annual Interest Rate (ROI)
This is the trickiest field on this simple retirement calculator.
First, ROI stands for return on investment. This is the amount of money you can reasonably expect to make from your investments. A few suggestions:
1. Plan for a lower return than you think you can get. You’d rather have extra money in your retirement account at the desired retirement day than a shortage.
2. Consider how much risk you want to have in your retirement account. The lower the return, in general, the lower the risk.
If you plan to retire very soon, you have the advantage of considering the valuations of the stock market at the time you use the calculator.
Here’s why this is so important. While it’s counter intuitive, right after stocks have crashed, there is a much higher probability that you will have higher returns from stocks in the few years following the bear (downward) market.
On the other hand, if stocks have risen significantly over the many years, the probability is higher that returns from stocks will be lower in the years after an extended bull (upward) market.
This is all based on history and data, not emotions or just my own opinion. Recency bias leads investors to forget this reality.
The shorter the time frame until you retire, the less unpredictable is the return on investment. This is because over long periods of time, investment returns move toward the norm.
There are some very long term trends, however, that can last for twenty or more years. This has been the case with bonds over the past few decades. But in general, stock market trends tend to be much shorter. Statistically, bear markets happen roughly once every 3.5 years, according to the balance. (1) Here is my extensive article on bear markets.
What Return on Investment Should You Use?
Only you can decide what rate of return you want to use in the retirement age calculator.
Here are some return on investment guides. Remember, no one can predict the future. With investing, all we have are probabilities based on history.
Money market and other cash equivalents – 1 to 2%. It’s easy to google and see what return you can get at the time you are using this calculator.
Stocks – Over most twenty year periods, the total return of stocks is about 10%. Over short time frames of one to five years, this number could be roughly -50 to +50% or much more depending on your investment!
According to the balance, the worst performance over a one year time frame between January 1979 and December 2016 for the Russell 2000 index was down 42% ending in February 2009. During the same study, the best year ended in June 1983 at 97% up! (The Russell 2000 index tracks stocks considered small caps, or smaller companies than the S&P 500.)
A clue to the return you can expect is what has happened just before you retire. Unfortunately, you don’t this with long term retirement planning.
Bonds – The return on investment will depend on the maturity of the bonds, and the interest rate. Since the value of bonds is so tied to interest rates, I would not use bonds as an estimate, particularly during times of changing interest rates.
Amount at Retirement
Enter the amount of money you want at retirement. Here are a few guidelines.
First, be reasonable.
Second, consider your current spending. If you’ll likely be spending more, or less, in retirement. I personally don’t like the idea of living on less late in life, but I also see that some expenses have already been eliminated due to life changes as I have gotten older.
Since I prefer living off investments over living on investments (more on this below) in the earlier retirement years, I use a rough guide like this. It allows me to consider retirement income streams based on our investment portfolio.
The Amount of our Investment Portfolio X Income We Expect Our Investments to Earn
Here is my article about this living off investment income.
Currently, for example, these income investment strategies include:
- High Dividend Stocks and “Alternative Stocks”
- Covered Calls (Here is my article about covered calls.)
- Real Estate
- Consulting Income
- Online Business Income
These income streams will change for us as the opportunities and investing environment changes. They will also change as we age and want to “work” less. (We have worked in our own businesses, from home, for many years now.)
Answers from the Retirement Age Calculator
Projected Retirement Age
This is the age that you’ll be when you have accumulated the amount of wealth you want in your retirement account as you specified.
Number of Contributions
The shows the number of months that you’ll invest the additional amount of money you indicated
Total Amount Invested
This is the total amount you have added to your account using the Monthly Amount Invested, the return on investment and the time frame until you reach your retirement goal.
Interest Earned
Interest earned shows the amount that your investment earned. This is the return on investment in dollars.
Estimated Financial Value
This is the total amount that is in your retirement account at the age shown.
Last Deposit Date
This is the date that you made the last deposit into your investment account. It is from the Monthly Amount Invested field.
Do You Want to Live Off Investments or Spend Investment Funds?
This decision will change everything: Do you want to live off investments or live on your investments. While these two phrases sound similar, the result varies greatly. Most people plan to spend their investment funds in retirement or combine the two methods. Here is my entire article on living off investments.
When you live off investments you structure your portfolio in a way that it pays you enough income to cover your expenses.
Unless you have more than $1,500,000 to $2,000,000, are very frugal or live in a low cost area, you will probably need to use a somewhat alternative investment strategy to generate income to cover your expenses. Here is my article on interest off 1 million dollars.
At a minimum, you’ll probably want a more proactive investment approach than the standard retirement withdrawals of 2 to 4% to fund your lifestyle. Here is my article on retirement withdrawal strategies.
Or, you may have real estate, consulting and/or small business income as many early retirees do today, particularly the millennial’s.
Here’s the different between the two retirement funding methods:
When you live on your investments, you withdraw money to live. This gradually depletes your investment account.
There is no right or wrong answer. While it sounds great to live off investments, it doesn’t happen without some work.
Now you have valuable information that can help you estimate about how much longer until you can retire. The good news is that If the age until you can retire is further than you wanted, you can make changes.
As you can see, this retirement calculator is the result of other numbers you’ll need to calculate ahead of time. Remember, there are many variables. Some are under your control, while others are not.
The great news is that you can control the amount you make, save and spend. To an extent than more people realize, you also control the amount you make, especially given the small business internet opportunities nowadays. This has worked extremely well for us as an older, non-techie couple, and I see people every day that it works for, too.
Proactive investing or alternative investing is also a way to change your numbers. This requires more effort. You can learn about investing cycles and take advantage of them, or you can hire financial advisors who have a more tactical approach.
Either way, it’s more work than the standard buy and hold, asset allocation with annual re-balances.
By taking the steps to calculate these other numbers, you’ll have to take a hard look at your current spending and your investment accounts. Explore the opportunities that are available based on your skills and capital.
This leads to positive changes to creating the life you want in relation to your wealth accumulation.
If you’d like a copy of my free eBook, click on here to get it.
Sources:
1. https://www.thebalance.com/u-s-stock-bear-markets-and-their-subsequent-recoveries-2388520
2. https://www.thebalance.com/rolling-index-returns-1973-mid-2009-4061795
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