When can I retire?

When can I retire? We all work days in and out without knowing exactly when it will end. Sometimes I am wondering is there any light at the end of the tunnel.

When can I quit my 9-5 job one day? ( Actually, my job is 0-0 round the clock, 24/7-hour job !)

Does my monthly income matter for me to decide when can I quit my job and retire?

With the advancement of the internet and various useful financial calculators freely available online, I am shocked to find out that your retirement timing does not depend on your monthly salary!!

Your monthly income doesn’t matter!!

I have a surprise for you! Hear me right, your time to reach retirement does not depend on your income but rather than your saving rate and return on investment!

How could that be possible?!

Whether you work as a plumber or doctor, both equally have the same success rate of reaching financial independence because it boils down to two important factors,

• Your saving rate (S)
• return on your investment (r)! (It doesn’t matter much if you have a high saving rate and you want to retire fast!)

Let do an experiment

Your saving rate is the most important factor in your financial independence journey.

Go to Networthify.com and put in your figures – your current annual income, saving and expenses, and click to find out when you can fire your boss and retire.

Let put in two sets of numbers ( with equal saving rate of 60%)

1. For a doctor, annual income MYR200k, saving MYR 120k, expenditure MYR80K
2. For a plumber, income MYR36k, saving MYR 21.6K, expenditure MYR14.4k ( I know it is tough to live on a MYR14.4K annual budget in Malaysia)

Both set of numbers come back at 12.4 years! It means both doctor and plumber can retire in 12.4 years if they save 60% of their income provided

• the return of their investment is 5%.
• Both also practice a 4% safe withdrawal rate after retirement.

Other facts to learn from the graph

Look at the graph carefully again, we put Zero (0) in our current portfolio value. Even you start with a zero in your portfolio, you are ready to tell your boss to fly kite ( fire your boss) after 12.4 years!

If you put in MYR100k or MYR 200k in your current portfolio value, you only cut short your working years to 11.6 or 10.8 years( cut short by 9.6 or 19.2 months)!

So do not give up your retirement plan even you have a zero portfolio value now, the most crucial factor determining your working years before retirement is your saving rate not how much you have in your portfolio now!

You are not bad after all!

Don’t feel bad if you are only saving 20-40% of your monthly income, by saving less than 60% of your income, you just need longer working years to retire unless you maximize your investment return (r) more than 5%!

But wait a minute, look at the graph again carefully, the average household saving rate for many developed countries is even more pathetic.

The average US household saving rate is only 6%, therefore an average Joe in the States needs to work 62 years before retirement!

The Chinese and Indian household saving rates are impressive at 26% and 28%. Both the Chinese and Indian only need to work less than 30 years before retirement!

Let do the math behind retirement

I love mathematics! OK, now let us do the math.

To recap, the 4% rule states that you can safely retire for at least 30 years ( with a 95% success rate) once your living expenses equal 4% of your portfolio.

Therefore,

0.04 x P ( value of portfolio) = E ( your annual expenses)

But E ( annual expenses) =I ( income) x ( 1-S ) , S is your saving rate

You can put the equation as 0.04 x P = I x ( 1-S )

Now let say you save for N years and invest your saving in a portfolio that returns at an annualized gain of r ( rate of return on your investment).

See! We have expressed N as a function of only two variables- your saving rate, S ,and your portfolio’s annualized rate of return ,r.

There is no Income ( I ) in the formula meaning your working years before achieving your financial independence do not depend on your income!!

Working years until retirement

Using this formula, here are the working years depending on your saving rate before you can retire ( even you start with a zero amount portfolio and only 5% return on the portfolio),

Saving Rate ( Percent)	Working years till retirement
5	65.8
10	51.4
15	42.8
20	36.7
25	31.9
30	28
40	21.6
50	16.6
60	12.4
70	8.8
80	5.6
90	2.7
100	NOW

It is amazing to know now how many years more you need to save before retirement and it all depends on your saving rate. If you are saving 15% now, your working years can be shortened from 42.8 years to 36.7 years by saving an extra 5%!!

By simply cutting your Astro in Malaysia, Starhub or Singtel fiber TV in Singapore, expensive mobile phone package, stop smoking and drink less expensive latte and cappuccino, saving an extra 5-10% is easy. I would rather retire 6.1 years earlier by saving that extra 5%!

Another piece good news!

All the calculations above are based on a portfolio return of 5 %. There is another good piece news for everyone here! Historical annualized return of S&P 500 from Jan 1910 to Jan 2020 is an impressive 8.47%!

You need less than 12.4 years to retire if you start saving 60% of your income today! To be exact, you only need 10.8 years if your portfolio return is 8.47%.

Conclusion

Do not give up if you start from scratch now. Even having a big zero in your portfolio now, you still can retire if you start saving today.

How fast you want to retire depends greatly on saving rate! Try to achieve a saving rate of at least 50% if you want to fire your boss less than 20 years from now.

Put your savings in a portfolio that generates at least 5% in annualized return and hold your breath and close your eyes, wait patiently!

Ignore the noise and stay on course on what you are doing, you would be surprised how easy you can FIRE ( financially independent, retire early) after a few years of careful spending and saving!