Early retirement planning with FIRECalc

For those thinking about retiring early, two of the most frequently asked questions are the following:

• If I retire today with my current savings, how much can I safely withdraw each year?
• When can I retire with $40,000 yearly income (or another desired amount) if I continue to save at the current rate?

FIRECalc is a simple web calculator that can help you answer these questions. FIRECalc makes one key assumption to answer these questions, namely, that the future can't be all that different from the past.

According to the Wall Street Journal:

To gauge your strategy's likely success, [FIRECalc] looks at investment returns since 1871. But the calculator doesn't use average historical rates of return. Instead, it analyzes what would have happened if you retired in 1871, in 1872, in 1873 and so on. It then calculates how often your strategy would have panned out historically.

In other words, it uses historical data about the US stock and bond markets to calculate your odds of not running out of money during retirement. It also adjusts for inflation automatically, so you can enter figures in today's dollars.

I will use FIRECalc to answer the two key early retirement questions below, using my own data as posted in my last Net Worth update.

If I retire today with my current savings, how much can I safely withdraw each year?

There are two versions of FIRECalc: standard and advanced. You can answer this question using FIRECalc Standard.

I plugged the following figures into FIRECalc:

• Retirement savings: $425,736 (the portion of our Net Worth intended for retirement)
• Asset allocation: 75% equities, 25% fixed income (our target asset allocation)
• Number of estimated years in retirement: 60 (this assumes that we will live for 60 more years from now)
• Investing fees: 0.5% (a rough estimate of the average expense ratio for our investments)

You can select a desired success rate, which is the chance that you will not run out of money.

For 95% success rate, I get the following result:

A withdrawal of $14,589 (3.43% of your starting portfolio) provided a success rate of 96.1% (76 total cycles, of which 3 failed).

And for 99% success rate:

A withdrawal of $13,547 (3.18% of your starting portfolio) provided a success rate of 100.0% (76 total cycles, of which 0 failed).

FIRECalc also provides the following chart of my success rate for different yearly withdrawal amounts.

For 100% success, I can withdraw no more than $13,547 (inflation-adjusted) each year. Clearly, my chances of retiring with my current savings are pretty low.

Now for the second question:

When can I retire with $40,000 yearly income if I continue to save at the current rate?

To answer this question, you need FIRECalc Advanced, which provides more options than the standard version.

I used the following figures:

• Desired yearly income: $40,000 (in current dollars)
• Retirement savings: $425,736 (the portion of our Net Worth intended for retirement)
• Asset allocation: 75% equities, 25% fixed income (our target asset allocation)
• Number of estimated years in retirement: 60 (this assumes that we will live for 60 more years from when we retire)
• Investing fees: 0.5% (a rough estimate of the average expense ratio for our investments)
• Total yearly contributions to our retirement savings: $53,750 (based on last year's data)
  

I have ignored Social security for simplicity, but FIRECalc does allow you to enter estimates for social security payments and other expected sources of retirement money, such as an inheritance.

I selected the option: "What happens if you retire in any of several years between now and 10 years from now?"

FIRECalc produces the following charts. The first one shows my success rate for each target retirement year. The second chart shows three different curves showing my best-case, average and worst-case (from top to bottom) balance at the end of retirement, for each target retirement year.


Based on the above, if we continue to save at the current rates, we have a 100% chance of retiring in 2016 with a $40,000 annual income (in current dollars).

FIRECalc does have some limitations:

• It ignores the tax status of your accounts, i.e. whether it is taxable or non-taxable. To be on the safe side, I assume that the expected income that I enter in FIRECalc is the pre-tax amount.
• FIRECalc only includes data for the US market. Considering that global markets are increasingly interconnected, this does not appear to be a big limitation. The data for US markets include the great depression, two world wars and periods of severe inflation, so it represents a wide variety of investment environments.
  

FIRECalc (both standard and advanced versions) is free for use, but a small donation is recommended.

Related links:

• CNN Money quick calculator: Can you retire early?