On this site, you can read many articles about financial independence. The end goal of financial independence might be to retire early. But when can you retire early? That’s a difficult question to answer. The early retirement calculator below might give you some insights into the drivers behind early retirement.
The calculator works fairly easy. The top part of the calculator contains six input fields. You can use the sliders to adjust the numbers, but you can also just type into the number fields. If you choose to type, you can hit enter to apply the input.
The six inputs that the early retirement calculator needs are Yearly Net Income, Yearly Spending, Current Investments, Expected Return, Your Current Age, and your intended Withdrawal Rate. Play around with the early retirement calculator first, below it I will explain how it works.
The FTB Early Retirement Calculator
How the Early Retirement Calculator Works
This calculator is actually fairly easy. It calculates two things. The first is the amount of money you will need to retire early. To calculate this number, it needs your yearly spending, and the withdrawal rate you’re going to use.
The second number it calculates is the growth of your portfolio over time. To do that, it takes your current investment portfolio as well as your yearly savings. These are calculated from your income and expenses. Together with the expected rate of return, the calculator will plot the growth of your portfolio over the next 30 years. You will be able to retire early when your investment balance is higher than the amount you need to retire on.
The first input variable is Yearly Net Income. This number is only used to calculate your yearly savings and your savings rate. Your yearly income is not used for anything other than to calculate your savings rate.
The early retirement calculator uses your Yearly Spending amount to calculate a few key numbers. Obviously, one is your target amount, the amount you need to retire. This amount is depending heavily on your yearly spending number. The savings rate calculation also uses this yearly spending number.
Current Investments is the input variable the calculator needs to properly plot the growth of your portfolio over time. Your yearly savings are important, but your actual investment balance you have right now can start compounding from day 1!
Expected Return is the percentage return that you expect to make over your investment lifetime. I defaulted this number to 7%, which I believe is close to the actual inflation-adjusted return that equities generate over long periods of time. You can use any number you want, just make sure to work with inflation-adjusted numbers.
The calculator uses Your Current Age to report on the age at which you will be able to retire early. As a nice little gift, the early retirement calculator also calculates the age at which you’ll become a millionaire.
The Withdrawal Rate is a topic that many people have written about. It is the percentage of your portfolio that you will withdraw each year to live off. A higher withdrawal rate means you can retire on less money, but you will risk running out of money. A lower withdrawal rate requires a larger nest egg, but increases the chance your portfolio will survive.
The Math Behind the Early Retirement Calculator
Earlier I wrote an article about the math behind your investment potential. That article inspired me to create this calculator for the world to use.
The math is actually pretty simple. There are quite some calculations used in this calculator, however, they are driven by just a few variables.
The main calculation is the one that is explained in detail in the investment potential article. There are two equations that have to be solved by the early retirement calculator to determine your investment balance in a given (future) year.
The future value of one-time investments is calculated as FV = P*(1+r)ˆn, while the future value of a periodic investment is calculated as FV = P*(((1+r)^n–1)/r).
In these calculations, FV is the future value, P is the invested amount, r is the expected rate of return, and n is the number of periods.
I didn’t program this calculator myself, that would have been too much. To build the early retirement calculator, I used
With Power BI you can connect to all kinds of data sources and create a data model out of them. You will then build visualisations on top of that data model. However, for this calculator, I didn’t load any data. Rather, I used the “what-if parameter” functionality and the math described above to create this calculator.
The Principles of Early Retirement
This early retirement calculator is all nice and shiny, but you won’t have any use for it if you are not on the path to financial independence. While some of you already know them from reading my blog, here are the three key principles behind early retirement that form the basis of my calculator.
Your savings rate is the most important factor to determine if early retirement is something for you or not. For starters, the savings rate is the percentage of your net income you can save.
You calculate it by taking your income and subtracting your spending from that. That’s the amount you can save. Now you divide this amount by your net income to arrive at your savings rate.
The FTB Early Retirement Calculator uses both the savings amount and the savings rate to calculate the year in which you can retire early.
The reason the savings rate is so incredibly powerful as a tool to determine your early retirement date is that it indicates not one but two key indicators in your financial situation.
The first indicator it shows is how much you can save and invest. That should be simple, because the more you can save, the higher your savings rate is. But it also indicates how much you need in the end. Because your savings rate reflects your spending in a way, and your spending determines your early retirement amount, the SR also works in that direction.
It is a very powerful indicator to keep track of, and increasing your savings rate by lowering expenses is a double-edged sword. If you do this, not only you can invest more, but you also need less.
After you have been working hard to increase your savings rate, you want your money to work for you instead of you working for your money. The best way to do that is by investing it and generating significant returns on your investment.
Even with high returns, the absolute profit you’re making might not be high at the beginning. That is why saving more is more important than chasing returns. But after a few years, compound interest starts to work for you.
If you are using the early retirement calculator on top of this page, you will see that the curve starts creeping upwards, at an ever faster rate. That is the effect of compound interest.
The final thing I want to discuss here is the withdrawal rate. If you are building up a net worth large enough to sustain your lifestyle, you might wonder how much of your net worth you can withdraw without running out of money.
The first thing that comes to mind is to live off of your returns only, that way, you’ll never run out. In theory, this is true if the markets are only going up. In practice however, this will not work because the markets might be going down as well.
So you will want to come up with an average of what you can withdraw, smoothening out both the good and the bad years. In academia, the safe withdrawal rate has been researched quite a lot, and numbers like the 4% rule have been thrown around everywhere.
Personally, I calculate my numbers using a 3.5% withdrawal rate because I want to be a little bit more conservative in my numbers. But you can put in anything (reasonable) into the calculator above and see what that does to your early retirement year!
There are quite some factors impacting your chances of early retirement. In the end, it all comes down to earning more, spending less, and investing the difference. It’s all about increasing that gap.
My Early Retirement Calculator has been built around these core principles mentioned above, and hopefully gives you some insight into what drives your early retirement date.