A Simple Model On When You Can Retire

…Or when you can take the leap from your stressful job to a low paying more satisfying work.

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I was recently reading about the book written by Bill Perkins — Die With Zero. I loved the concept where he mentions that maximum net worth of most people is at the time of their death. That means any money that is left in the bank account at the time of death is not fully utilized. Ideally, we earn money to bring us joy or comfort. Yes, some part of it we want to give away to our children or society. However, most of it we want to utilize on ourselves by spending when we have the health and time to enjoy it.

Bill Perkins introduced the concept of identifying peak net worth based on our lifestyle, hobbies, desires and health. He essentially tries to say that if we enjoy scuba diving we shouldn’t wait till long to enjoy that experience because later on we may not have the necessary fitness or time for it, while if we are passionate about opening a café on the beach then we should do it when we know that we have enough wealth to help us survive even if we make no income from our café. Graph below shows the traditional net worth (blue curve) and optimal net worth (yellow curve) curve.

diewithzero.com

Another retirement rule by William Bengen says that we can comfortably retire if our net worth is 25 times our annual expenses. We can survive for a long time by spending 4% of net worth every year post that retirement. He came to this conclusion by analyzing 50 years of economic data and assuming that the portfolio is invested in stocks and bonds in the ratio of 50:50. However, this theory does not include life expectancy as a parameter and current turbulent market scenario.

Considering the above two concepts, I tried to design a very simple model that can tell us whether we will be able to retire at a particular age or not. Assuming the default values of the model the net worth at retirement totals to a little higher than 25 times of annual expenses, however, this can be tested using different values in each parameters. This model takes into consideration the following parameters:

• Current Total Savings — this parameter includes all your savings invested in debt, equity, gold, real estate, or cash instruments.
• Monthly Salary — this is the current take home monthly salary (after taxes) of yours. This does not include bonus, ESOPs, or other one time allowances assuming that you would like to spend it on vacations or other luxuries.
• Monthly Expense — this would include all expenses related to your basic needs (rent, groceries, insurance, utilities, transport, etc.) and lifestyle needs (shopping, weekend trips, furnishing, mortgage, dining, etc.).
• Inflation — this is the rate at which expenses would increase annually. Default assumption is at 5% considering Indian economic scenario.
• Earning Increase — this the rate at which earning would increase annually. This is assumed slightly higher than inflation i.e. 7%.
• Interest Income — this is the rate at which your total savings will increase. Ideally it would 2–3% higher than inflation, however, given the volatility it is assumed same as inflation in current scenario.
• Age — current age of the individual.
• Life Expectancy — age up to which an individual can expect to live. Model supports till 100 years, however, by default I have taken it as 80.
• Retirement Age — this is the age at which individual wants to retire. Try putting in some different numbers to arrive at the ideal age at which you can retire.

Link to Download the Model: Simple Retirement Model

Limitations

The model has some limitations:

1. It does not include any major expenses that you want to incur in your life going forward like buying a house or funding your child’s education.
2. It also does not include an exponential increase in income during a promotion or a job change.
3. It assumes that your lifestyle will remain the same throughout your life, while you may want to improve it by buying more expensive things and living more comfortably.
4. The model assumes that whatever you are not spending is saved in a diversified portfolio that earns the desired interest, which always may not be true.

With above limitations and few benefits, I would like you to invite you to try this file. It may bring a lot of perspective. Most probably it will help you decide when you shall be able to retire or take the leap of faith of following your passion worry free.

I would like to listen to your feedback so we can improve this sheet jointly.