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Wednesday, November 16, 2016

Can You Retire Early?

Here's a neat little chart from businessinsider "How close am I to early retirement"? Just find your income level and then the difference between your spending and saving. The answer as shown in the chart is how long it takes to build a next egg you can retire on by taking the magical 4%/year. Do this and you won't run out of money.

Simple? Yes, but useful as a general guide.

The problem is tricky as I've written several times on this blog. You've got inflation, market performance, how long you will live, medical costs and all sorts of unknowns. Some people take more comfort in getting complex analyses which produce Monte Carlo scenarios etc. To me simple is better. But it is very important to revisit the issue every couple of years at a minimum to see where you stand.

Some people target a number. For example they might have $1 million as the value of their nest egg at which they can retire. A problem here is that the number will be hit when the market is at a high point. I had a distraught individual who came to me after he had retired in 2000 and then went through the bust and had to go back to work. He then retired after the market hit a  record high in 2007 and then experienced the 2008 down 37% market. Needless to say he was at wit's end!

One way to approach this is to consider 4% of 80% of your portfolio. Can you have a nice retirement off of this? It may not be ideal but would it be ok? For example, if your nest egg is $1 million then 4% of 80% (.04 * $800,000) would be $32,000. If this would be ok (combined, of course, with Social Security etc.) then you could withstand a downturn in the market.

But back at the chart, what I really like is the out front emphasis on income and sending. The gap is what is key and it is important to not get lost in the weeds with all the other moving parts!

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