SCFO #003: The Ultimate Guide to Retiring on Your Terms For Solopreneurs.
Read time: 4 minutes
In today’s issue, I will show you how you can quickly figure out how to reach financial independence (retirement) on your terms.
Knowing where you stand allows you to chart your course toward financial independence and, more importantly, make decisions that align with how you want that journey to feel.
Unfortunately, most won’t carve out time to see where they stand due to:
Feeling overwhelmed by the process
A lack the confidence in their ability to do so
A perception that it will take hours (or days) to figure out
Feeling that retirement is not relevant at their stage of life
The good news?
Figuring out where you stand is easier than you think.
So let’s put an end to inaction by placing a foot in the right direction with 4 simple steps.
Step 1: Discover your retirement target.
Imagine playing darts and trying to hit a bullseye, but you’re blindfolded, and your best friend spins you around three times before you take aim.
That’s kind of what it’s like when you don’t know your retirement target.
But most people won’t spend the time to figure it out because they:
Think it’s too complex to do themselves
Feel overwhelmed by the thought of retirement
See retirement as a distant, abstract concept rather than a concrete goal
Surprisingly, the math behind it is easier than you think.
To determine your retirement target, divide your household expenses by 4% (a rule of thumb for safe retirement withdrawals popularized by the Trinity study).
Here’s an example:
$100,000 (Household Expenses) / 4% (Withdrawal Rate) = $2.5M Retirement Target
Now that you know what bullseye you need to hit, we can take this one step further to give you a semblance of when you’ll hit it.
Step 2: Figure out your savings rate.
Imagine having a crystal ball that could show you exactly when you’ll be able to retire.
What’s the catch?
You need to know your savings rate to track your progress.
To determine your savings rate, divide your annual savings by household expenses.
Here’s an example:
20% Savings Rate = $20,000 Annual Savings / $100,000 Household Expenses.
You'll retire faster or slower by turning the savings rate dial up or down.
If you’re starting at $0 in savings, you now have everything you need to figure out when you’ll reach financial independence.
Expanding on our example, if you start saving 20% today with $0 in savings, you can expect to retire in 37 years.
If you start saving 50% today with $0 in savings, that number is cut down to 17 years.
Here’s a chart to determine your retirement timeline when starting from $0:
Step 3: Incorporate your Nest Egg
Congratulations, you’re one step closer to mapping your path to financial freedom!
Now let’s take the last step further by figuring out your current progress.
Simply add up all of your investment accounts set aside for retirement. Now divide that total by your retirement target from step 1.
Here’s an example:
$500,000 (Investments) / $2,500,000 (Retirement Target) = 20% (Funded)
With this information, you now know your progress toward reaching retirement.
But let’s give it more meaning by determining how many years it takes until you reach financial freedom.
Assuming you’re retirement is 20% funded, and you’re saving 20%, you can expect to reach financial independence in 33 years.
If you want to figure out where you stand, take the information from the previous steps and reference the chart below:
Step 4: Picking your Retirement Journey
By going through the last three steps, you are now armed with everything you need to calculate your path to retirement.
And by dialing your savings up or down, you change how long the journey takes.
But try to avoid overemphasizing your progress.
Instead, focus on how your journey feels.
A few years ago, I found myself obsessing over our progress.
We were on the fast track to retirement, but the journey didn’t feel how I wanted it to feel.
Eventually, I realized (with some gentle nudging from my wife) there were other things we wanted to incorporate into our budget while we and the kids were still young.
We didn’t want to wait until retirement to live out our dream life.
With this shift in perspective, we dialed back our savings rate and purchased our dream home while still charting our course to retirement before 60.
Before even focusing on the math of your retirement, it’s important to first focus on how you want your retirement journey to feel.
Assumptions & Additional Information
4% Withdrawal Rate: a commonly used rule of thumb for a safe withdrawal rate (adjusted for inflation) based on the Trinity study.
5% Inflation-Adjusted Return: since 1881, inflation-adjusted U.S. stock returns average 6-7% over 30-, 40-, and 50-year periods (expected retirement lengths). I used 5% to be conservative and factor in the lower expected returns of bonds since they are incorporated into most retirement portfolios.
Household Expenses: don’t forget to include expected taxes in retirement, which can vary significantly based on how your assets are positioned. Adjust your household expenses up by a rough % of taxes to get in the ballpark of your number.
Retirement Income: if you’re eligible for a pension or social security, that’ll reduce your retirement target. To include it, take your expected retirement income divided by 4% and reduce your retirement target by this amount.
As always, remember that past performance doesn’t indicate future results, and it’s best to work with a professional to fully dial in your retirement plan.
