I’ve been thinking a lot about this very recently. Maybe it’s because my parents are on the verge of retiring or maybe it’s because financial freedom has been a goal of mine since I discovered investing back in 2007. Either way, it seems that it’s a question that most people don’t think about until they see the end of the line in front of them and personally, I think that if one only thinks about it at that point in time, then I’m sorry, it’s too late.

Anyway, I’ve been thinking and researching on what I think is a goal that every one should/can work to. After all, everyone wants to retire but how many people know when they’ll be able to? This is how to tell WHEN you can retire.*

Now, upfront, I have to say that there is no magical number (unlike someone who is clueless and thinks there is). What’s more important is to understand the logic and principles behind the target and voilà, there you have it- retirement.

The first trick to the target number is something known as the 4% withdrawal rate and the 4% withdrawal rate basically says that if you retire with a certain sum of money and withdraw 4% from it every year, that sum of money, adjusted for inflation, will last you for 30 years. This rule was developed by William Bergen in 1994 and has been widely quoted by financial planners for many years. Of course, there are some criticisms of the study and the rule which was subsequently developed as a result of those studies (read more here) but at least we’ll a target in mind.

In our case, I’ll use 3% which is the withdrawal rate recommended over at Early Retirement Extreme. So basically, as long as your annual expenses are less than 3% of your invested sum, you’re safe. To give a numerical example, let’s say someone decides to stop working and has $1 million at that point in time. As long as that person can keep his/her annual expenses equal to $30,000 or less, this person can retire.

Now, I don’t care if you say that $1 million is impossible or living on $30,000 a year is impossible. That’s not the point here. The point is to be able to figure out either 1) how much you would need to retire** OR b) how much you can afford to spend each year after retirement.

Notes

*I actually hate the word ‘retire’ because the way most people understand the word seems to be that one would not do any work after retirement. A retired person will obviously have to do something after retirement but why should it be that a retired person only spends? Can’t someone who is retired do something of value and in return, is compensated for that value? And if that is not work, then what is? Hence I prefer the word ‘financial freedom’. However, I’ll stick with ‘retirement’ as people are more familiar with the term.

**For (1), a simple calculation would be to multiply current annual expenses by 33.

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