OBJECTIVE: Use current spending as a starting point to estimate retirement spending and income requirements
How would you feel if you knew you could have a simple yet comfortable life going forward without ever making more money?
Unless you plan to work until the day you die, most of us are hoping to reach this point eventually. Even the workaholics among us should consider the alarming statistic that 56% of workers over the age of 50 have been pushed out of jobs before they would willingly have retired. Learn more in this article:
Investopedia – What Is Forced Retirement? https://www.investopedia.com/terms/f/forced-retirement.asp
How would you feel if you knew you could have a comfortable life with some splurges like travel or a vacation house going forward without ever making more money?
Both of these scenarios are examples of FIRE – Financial Independence/Retire Early. “FIRE people” have accrued sufficient investments and passive income to live indefinitely without traditional work.
How will you know when you have enough?
MATH
Screams Heard Echoing in the Distance….
Fear not! This week’s calculator will do all the math for you. You enter your spending into the relevant categories (most will remain $0) and the calculator will do all the math.
The calculator uses the “4% Rule”, based on the Trinity study. The Trinity study concludes that retirees can safely withdraw 4% from their investments every year and support themselves for 30 years (and frequently end with more money than they started). Read this article to learn more about what asset allocations are necessary for the highest likelihood of success and what data the study was based on.
White Coat Investor – The 4% Rule and Safe Withdrawal Rates
Calculating your FIRE numbers
We start with your current spending patterns because many aspects of your life will be the same in retirement. If you plan to stay in your current community, near your family and friends, you will probably shop the same stores for groceries, clothing, etc…
This system allows you to:
- Keep all the things you plan to continue doing the same,
- Eliminate categories that will no longer apply, such as business travel and expenses
- Add in retirement categories like golf or traveling in an RV
- And you are done!
You have created a realistic picture of what your typical spending will be like in retirement.
Digging INTO The Calculator –
What is this “Future Expenses” section all about?
Have you ever looked at your suddenly drained bank account and wondered “What happened?”
You are not alone!
Many of us have a good sense of our typical monthly expenses: rent, car payment, groceries, etc… However, most of us have a TERRIBLE sense of our annual expenses, such as life insurance, and eventual expenses, such as car repair. We cruise along managing our cash flow and monthly expenses, but every few months a large annual or eventual expense comes along and wrecks everything, and we are left feeling financial progress is hopeless.
The Future Expenses section solves this issue once and for all.
You will track all your annual, semi-annual, and quarterly expenses in the future spending section, recording how much money you will need and when you will need it.
You will also track all your eventual expenses. If you have a car, you may not know when you will need new tires but you know you will need them eventually. Record the estimated cost of new tires and other necessary car repairs and estimate a date. If you have a home with a 20-year-old furnace. You may not know when your furnace will die but you know it will probably happen sometime in the next 2 to 8 years. Record the estimated cost of a new furnace and other necessary home repairs and estimate a date.
The calculator will divide the amounts you need by the number of months you have left to calculate your monthly transfer amount.
The calculator will also sum all the “monthly transfer amounts” from all you future spending categories. Practitioners of the “Automatic Budget” aka “No-Budget Budget” will open a separate high-interest savings account and automatically transfer this amount from their checking account to their high-interest savings account each month.
This leaves only the money that can be spent this month in your checking account. You can check the spreadsheet once at the beginning of the month to see any annual expenses that are due this month (showed in BLUE) and proactively transfer that money back to checking. Any time one of the “eventual expenses”, like car repair, occurs you simply transfer the money back from your high- interest savings to checking.
Capturing and estimating these annual and eventual expenses are the only way to have a realistic picture of your typical spending and how your spending will change in the future.
What is Survival FIRE?
Survival FIRE exists when you have accrued enough investments and/or passive income to support your basic needs without working. You define what are your basic needs.
- Do you need a car?
- Could you get a roommate?
- Do you need Netflix and Hulu and Disney+……?
- Do you need to go out to eat periodically?
- Do you need to travel and go on vacations?
- Do your kids need to go to a private college rather than a state university?
Most people aspire to greater luxury and comfort than their basic needs and will continue working beyond this point. HOWEVER, knowing that you have reached Survival FIRE could dramatically reduce the stress in your life. If there are rumors of layoffs at work, you don’t need to stress about losing your housing. If you hate your job, you can now consider switching careers, even with a reduction in pay, without putting your future at risk. Any situation where you feel taken advantage of, you can take your ball and go home whenever you choose.
Calculating Your Survival FIRE Number
After completing the Future Expenses and Monthly Expenses sections of the “AutomaticBudget” worksheet, switch to the “SurvivalFire” worksheet (second tab). The expense fields will be populated with the numbers you entered on the “AutomaticBudget” worksheet. Now go from top to bottom and eliminate all the spending you would not need if you stopped working, as well as anything you could live without.
At the bottom you will see your projected “Survival Fire” expenses and your associated “Survival Fire Number” based on the Trinity study’s 4% rule. You can change the safe-withdrawal-rate to 3.5% or even 3% if you feel the Trinity study is not conservative enough.
The health insurance costs assumptions are based on this article: Investopedia – How Much Does Health Insurance Cost? However, you may get a more accurate number by contacting your state’s healthcare exchange.
What is Comfy FIRE?
Comfy FIRE exists when you have accrued enough investments and/or passive income to support your comfortable life with no sacrifices without working.
You define your comfortable life.
- Where do you want to live?
- Do you want to travel?
- What interests and hobbies do you want to pursue?
When you reach Comfy Fire, you get to decide the best way to spend your future knowing that your needs and comforts are provided for. You may love you work and decide to continue working. You may decide to work part-time and develop “core pursuits” that you will continue in retirement. You may decide to pursue a new career that you always loved but wasn’t lucrative enough.
Read this to learn “What Are Core Pursuits?” by Wes Moss and how they contribute to a fulfilling retirement.
Calculating Your Comfy FIRE Number
After completing the Future Expenses and Monthly Expenses sections of the “AutomaticBudget” worksheet, switch to the “ComfyFire” worksheet. The expense fields will be populated with the numbers you entered on the “AutomaticBudget” worksheet. Now go from top to bottom and eliminate all the spending you would not need if you stopped working and add any new categories you will pursue when you retire.
At the bottom you will see your projected “Comfy Fire” spending and your associated “Comfy Fire Number” based on the Trinity study’s 4% rule. You can change the safe-withdrawal-rate to 3.5% or even 3% if you feel the Trinity study is not conservative enough.
The health insurance costs assumptions are based on this article: Investopedia – How Much Does Health Insurance Cost? However, you may get a more accurate number by contacting your state’s healthcare exchange.
What is Retirement After 65 Financial Independence?
Your expenses may change significantly when you are 65/66/67. Some factors include:
- You will be eligible for Medicare
- You will be eligible for Social Security
- You kids will likely be fully self-sufficient
- You may choose to include extra medical spending if you have a medical condition that worsens with age.
Calculating Your Retirement After 65 Financial Independence Number
After completing the Future Expenses and Monthly Expenses sections of the “AutomaticBudget” worksheet, switch to the RetirementAfter65 worksheet. The expense fields will be populated with the numbers you entered on the “AutomaticBudget” worksheet. Now go from top to bottom and eliminate all the spending you would not need if you stopped working and add any new or increased categories you will need at 65.
At the bottom you will see your projected “RetirementAfter65” spending and your associated “RetirementAfter65 Financial Independence Number” based on the Trinity study’s 4% rule. You can change the safe-withdrawal-rate to 3.5% or even 3% if you feel the Trinity study is not conservative enough.
The health insurance costs assumptions are based on this article: Investopedia – How Much Does Health Insurance Cost? However, you may get a more accurate number by contacting your state’s healthcare exchange.
Legal Disclaimer
This website and calculator do not provide personalized financial advice. It is merely a tool to organize your information. Before making any financial decisions consult a licensed financial professional with any questions you have. This article provides a comprehensive review of what to look for and what to avoid in a financial advisor.