Retirement Planning Guide: Achieving a crazy rich retirement

This entry builds on the previous two entries regarding budgeting and investing. Once you know your yearly expenses, you know your financial independence number. Hopefully by now you have already selected your investing style across all of your accounts. For the purpose of this blog entry, we're going to use the historical returns of the S&P 500 to model future returns. This will allow us to anticipate when we will become financially independent. Keep in mind these are all back of the napkin calculations and hopefully your results will be even better than these models.

The back of the napkin math

In this example, we have a family of three with yearly expenses of $110,000. They want to know when they will be financially independent as the parents are worried about layoffs. Once they reach their goal, they will worry less about layoffs while continuing to work towards their crazy rich retirement. Their household income is $250,000 before taxes and both the husband and wife work full time jobs. Across all investment accounts, they are able to save $60,000 a year.

They have chosen to VOO/VTI and chill and want to know when they will be financially independent. They aren't new college graduates with this income so their current balance across all accounts is $300,000.

After speaking with the family, we find out they would take a safe withdrawal rate (SWR) of 3.5% if both husband and wife were laid off, but they would continue to seek employment until their child is either headed off to college or finished with college.

First, let's find out their financial independence (FI) number.

$110,000 divided by 0.035 is $3,142,857. The family needs approximately $3.14 million ($3.14M) to be financially independent. The next calculation will assume the family is always able to contribute $60,000 a year across all investment accounts (401K, HSA, Roth IRA, taxable brokerage). This includes free contributions from their company in their workplace retirement and HSA accounts. The family will need to adjust their starting number and yearly contributions every year as the couple get promotions and raises, but for now we'll just assume what they can contribute is constant.

Compound Interest Calculator Variables

We're going to use the following Compound Interest Calculator and adjust the number of compounding years until we reach $3.14M:

https://www.investor.gov/financial-tools-calculators/calculators/compound-interest-calculator

Here are the values we're going to enter:

1. Initial Investment: $300,000

2. Monthly Contribution: ($60,000 divided by 12): $5000

3. Length of time in years: 16

4. Estimated Interest Rate: 10

5. Interest Rate Variance Range: 14

6. Compound Frequency: Annually

   
   

   

   It looks like we overshot a little with our time frame, but we are close. Adjusting the time frame to 15 years:

For the sake of our example, let's say the couple have a newborn baby. This means they will work at a minimum of eighteen years before retiring. Let's plug in the two scenarios for the family. Retiring when their kid goes to college and retiring when their kid finishes college. We want simplicity so let's assume a four year bachelor's degree.

18 years - When their kid goes off to college, they will have $4.4M.

22 years - When their kid finishes college, they will have $6.7M.

There are a few ways people can try to read tea leaves. Some adjust the annual return down to 7% to account for inflation. Some leave the annual return the same and assume the yearly contribution stays the same (despite raises and promotions).

Whatever method you use, update your investments once a month and this is also a good time to buy since you should know how much money you saved that month.

Good luck on your journey to your crazy rich retirement and hope to see you back soon for my next blog entry.