I’ve been reading a lot of books about normal and early retirement lately and I’m realizing how important it is to decide early when to retire.  This doesn’t mean that you should necessarily decide to retire young, just that you should make a plan for when you’d like to retire as soon as possible.  Anyone asking “When Can I Retire” would be well served to keep reading.

The main reason why you should decide early when to retire is that you’ll have the most options available to you.  While you may ultimately decide to retire at the “normal” age or work until the day you die, those default choices will probably not be what a majority of people choose to do.  If you’re young, you’ll be able to choose between an extremely early retirement, very early retirement, conservative early retirement, normal retirement, or even working until the day you die.

Before we go any further, let me say that retirement means different things to different people.  For some it means an end of working for money.  For others, it means an end of having to work for money.   A person who retires at the age of 40 may very well work for another 50 years doing work that interests them, but without a need to do so to cover their expenses. For the purpose of this post, let’s go with retirement is the point at which your savings and investments are likely able to sustain your current spending level indefinitely.  The generalized level necessary to reach this milestone is having investments worth 25 times your yearly expenses (300 times your monthly expenses).

One way to look at when you’ll be able to retire is how much you’ll have to save to reach that level.  Jacob from Early Retirement Extreme shocked a lot of people when he discussed how to retire in 5 years.  Of particular note was his comment (dated August 14th, 2008 at 7:37 pm) where he said saving 80-85% of your after tax income will allow you to do just that.  His analysis is backed up my calculations as well.  I assumed no savings at the start, an 11% return on investment with 3% inflation and 3% yearly after tax wage increase.  Depending on how much of your after tax income you save/invest you should be able to retire in the following terms:

You Can Retire In:

This assumes that expenses are equal to the rest of your income that you don’t save.  It’s easy to see why saving a huge percentage allows you to retire so soon.  Even investment return doesn’t play much of a role in the extreme cases.  Think about the 90% case.  If you save 90% and have expenses equal to 10%, then for every year you work, you’ll save 9 years worth of expenses.  Clearly that method would let you have 25x yearly expenses within three years.  The main downside is that you may want a standard of living higher than what only spending a small percentage of your income allows.  There’s nothing wrong with that, but it will take longer to retire.

One final note is that those looking to retire early are faced with a slightly more complicated situation if they also have accounts for normal retirement age such as a 401(k), IRA, and to a lesser extent social security.  The complication arises because your early retirement nest egg may not need to last until you die,  but only until you reach the age where you can tap those other resources without penalty.  A 57-year old with a huge 401(k) that they were planning to use once they hit age 60, would basically only need to have 3 years worth of expenses saved to retire early at 57.

So that everyone can insert their specific details and assumptions and see when they’ll meet the 25X expenses criteria, try my saving retirement calculator.