How Long Until You Can Retire?

In “How Much You Need To Retire”, you learned that you need to save about 25 times your retirement spending to retire. When I first heard that number, I thought saving that much would take forever. Fortunately, there are two giant tailwinds to help: compounding returns and decreasing spending.

Early Retirement Sample Situation

Now, let’s set up a (reasonable) example so we have some concrete numbers to talk about. Let’s say you’re married, and this is your situation:

What will things look like for this couple when retired?

First, our couple is done saving for retirement, and they no longer have to pay Social Security and Medicare tax. With a paid off house, their $30,000 mortgage ($2,500/mo) is replaced by $6,000 in property taxes. However, they have to pay for healthcare.

How much are their Federal Taxes?

At the highest, their taxes will now be $3,712, if all of their retirement income comes from an IRA or 401(k) and taxed as “ordinary income”. Even so, they will pay less than a quarter of the tax they had to pay when working! If half of their spending comes from Social Security ($28k), their total tax goes down to just $823, because their Social Security will only be partially taxed. If instead of Social Security, half comes from dividends in a taxable brokerage account, their taxes go down to just $323 because dividends at this income level aren’t taxed at all!

So, in summary, our couple went from paying $15,100 in federal taxes each year to $3,712 (worst-case) or potentially less than $1,000 per year depending on where their retirement income comes from.

See Getting Retirement Money Out for more on optimizing taxes in retirement.

Let’s stick with the worst-case retirement taxes and no income from Social Security. Our couple estimates that they need $59,000 in retirement income, which means $1,475,000 saved up ($59k x 25).

About Inflation

When talking about retirement money, you need to remember inflation. Something which cost $100 in 1991 costs about $200 in 2021, 30 years later. If you decide you’ll need $1,500,000 to retire, you want to know when you’ll have that much in today’s dollars, rather than the less-valuable dollars of the distant future. To do that, you just need to find out the “real” or “inflation-adjusted” returns of different investments.

An example: If you invested $100 in an S&P 500 index fund in 1991 and left it alone, that account balance would now be $2,230. However, since prices are about twice as high now, the account is really worth about $1,115 in “1991-equivalent dollars”. The S&P 500 had a 10.94% annualized return since 1991, and an 8.46% inflation-adjusted annualized return.

Below, all of my numbers are after-inflation returns, so you can use them to understand how money you invest will grow in “today-equivalent dollars”.

Compounding Returns

Between 1871 and 2021, an S&P 500 index fund provided an after-inflation annualized return, including dividends, of 7.04% per year. How much does this matter?

If you’re saving $10k per year, in year two you’ll find that the $10,000 from the first year grew to $10,704. Not terrible, but not much of an impact compared to the money you put in. After a while, though, that growth really starts to pile up:

After ten years, you contributed a total of $100k, but the account is worth $138k, and the growth is almost as much as your contributions.

After 20 years, you make another $100k in contributions but the balance has shot up to $411k. The growth next year will be almost three times your contribution.

After 36 years, $10k per year has grown into just over $1.5 million, enough for our sample couple to retire.

To summarize, over time, compounding returns are what really enable retirement.

Decreasing Spending

Hopefully, you look at the numbers above and are excited to see how much time will grow your money. You might also be discouraged, though, because it takes a long time for that compounding ball to really get rolling.

Is there anything you can do to speed it up, or do you just get it going and then have to sit on your hands for a few decades? That’s where decreasing spending picks up.

Once you have an effective budget, you’re in control of how much you spend. At first, you set aside savings to get that ball rolling. What happens if as you get raises and find ways to trim your bills, you keep choosing to save more and more?

In this example, let’s see what happens if every year you find another $500 to save. Since you spend just under $50,000 per year on “Other Spending”, this is only a 1% cut to your spending each year (and saving an extra 0.5% of your pre-tax income).

Do you think it will help much?

Believe it or not, this change brought your retirement forward by eight years, from a 36 year wait to a 28 year wait.

First, the bigger savings means that after 28 years, you saved $1,190,401 instead of $812,328. It’s a big difference. In addition, however, you slowly trimmed your expenses from $59,000 at first to $45,500 at the end, reducing the amount you needed for retirement from $1,500,000 to $1,137,500. Together, these two changes gave you eight extra years of freedom.

Is this plausible? Saving an extra 0.5% per year sounds reasonable, but cutting your spending from $59k to $45.5k, even over a long time, sounds hard.

However, when there’s 2% inflation (as has been the average in recent US history), this really means getting by with just a 1% raise in spending each year. If you only got 1% raises, could you manage? You need to find things to trim here and there as prices go up, but it’s possible, we did it, and it can make a huge difference in your retirement over time.

Years to Retirement Table

In our original example, we saved 10% of our income and our retirement budget was 60% of our income. What happens at higher and lower savings rates?

In this table, I keep 30% of income as the “fixed” part (taxes and mortgage, approximately) and assume that every time you save an extra 5% of your income, your spending also goes down by 5% of your income. Here are the “years to retirement” for various savings rates:

As you can see, the original “save 10%, need 60%” row has 36 years to retirement. Ramping up saving from 10% to 20% brings your retirement date from year 36 to year 25, 11 years sooner! This is mostly because you doubled your savings (10% -> 20%), but the slightly reduced retirement spending ($60k to $50k) also helped.

If you went crazy and doubled savings again, you might expect the retirement date not to get much better, because there’s a lot less time for the compounding ball to roll. However, this isn’t the case - going from 20% to 40% savings brings retirement another 12 years closer, from year 25 to year 12.5. In this latter case, the biggest difference is spending dropping drastically ($50k to $30k).

Spending only 30% of your income isn’t realistic for most people, but with a huge income or a very modest lifestyle, it’s possible - that’s how a lot of the very early retirement bloggers have done it.

The big point here is that while compounding can grow huge amounts of money over time, having a high savings rate (or relentlessly raising it) can also drastically bring in your retirement date through the combination of more money to grow and less money you need.

Conclusion

So, how long do you need to retire? If you save 10% of your income and need 60% of it in retirement, you should be done in about 36 years with an S&P 500 index fund. Doubling your savings rate will allow you to retire about ten years sooner, as will halving your retirement expenses. Since saving more also normally means spending less, even small cuts along the way can make a huge difference.

Want to plug in your own numbers? Download the Excel spreadsheet I used for these tables and play around. =)