There’s not much on this planet I love better than a good spreadsheet. It goes, my wife and son, family and friends, Summit EPA, Game of Thrones, Snickers salad, good spreadsheets. In that order. And Chris from Keep Thrifty is a master at good spreadsheets.
I recently had the chance to take one of Chris’ best spreadsheets out for a test flight. It’s called the Retirement Freedom Calculator and it comes with this post on his Keep Thrifty blog. Let me tell you, it has changed my entire outlook on the future.
It took a while to really sink in, though. What month is it, now? August? He dropped Retirement Freedom on us in January? Talk about a delayed reaction! What can I say, Chris? Sometimes I’m a little slow.
Here’s the nut of the concept. Hopefully, I don’t butcher the metaphor…
Retirement is a spaceship…
Think of retirement as a capsule on top of a rocket fueled by 401k and IRA contributions. It’s really tough to get the ship off the launch pad. It takes lots of money at first. It takes a lot of thrust from the rocket to fight the pull of gravity. But once that rocket-powered spaceship gets going, gravity is less and less a factor. It’s easier for it to accelerate higher and higher, boosted by the magic of compounding gains.
At some point the inertia of compounding gains takes over completely and the rocket (your bi-weekly payday contribution) is no longer needed for the ship to reach space (your retirement funding goal). That’s the moment of Retirement Freedom. When the rocket can peel off and the capsule can get the rest of the way into orbit on its own.
Keep Thrifty’s Retirement Freedom Calculator helps people pinpoint the exact moment of Retirement Freedom for them. Here are my own results.
“When Blue meets Red”
Two and a half years to Retirement Freedom! That’s what the Retirement Freedom Calculator spit out for me…
I plugged our numbers in and the calculator said my wife and I will reach Retirement Freedom in two and a half years! The blue line kisses the red line just in time for New Years 2020! That absolutely blows my mind! That’s why I’m using lots of exclamation points!!! Especially because our combined balance will only be just over $280,000 by then. We’re not even close to maxing out our retirement accounts.
The Keep Thrifty Retirement Freedom Calculator clearly shows the true power of compounding gains. If my wife and I contribute nothing after our Retirement Freedom date, if we completely ignore our 401ks and IRAs for 23 years after that date, our retirement accounts should still be fully stashed and ready for when we turn 65 (assuming things stay hunky-dory with the stock market long-term, of course). We could have $1.6 million sloshing around in our retirement accounts just waiting there for us. Man, am I glad I’ve resisted primal urges to raid those accounts early.
The Nitty Gritty Numbers
Naturally, I plugged ambitious numbers into the Retirement Freedom Calculator. I definitely didn’t go the uber-conservative route. I didn’t go too conservative, because my wife and I don’t plan to completely rely on retirement accounts to fund our lives after 65 (more on that later). And I believe in us as supremely adaptable people.
Because of that, I felt comfortable plugging in what I consider a minimal amount for annual living expenses in retirement. $30,193. $30,193 happens to be Mr. Money Mustache’s 2016 spending. If it works for him, that number works for me if we absolutely had to live off just retirement accounts with no other money coming in.
I also used 8% for annual portfolio growth. That number is often used for expected returns for the stock market over the long term. Some may argue that 8% is high, because of the short-term volatility of the market and it’s really risky to have most of your money in stocks. You may worry…
What if the market is down significantly over a period of five years just before you want to retire? Or what if there’s a prolonged downturn and your portfolio only returns an average of 5% over the next 25 years?
That’s where trusting in our ability to adapt comes in for my wife and I. And that’s where supplemental cash flow from other sources comes in. Remember when I said, We may never be millionaires and that’s okay? Even if we don’t see that 8% growth and we fall far short of the predicted $1.6 million, I’m totally confident we’ll be just fine.
I used the default values for most of the other numbers in the Retirement Freedom Calculator:
- 2.5% inflation seems like it could be right – I actually think inflation may stay much lower in some sectors because of technology and the sharing economy and other things the future brings (there’s me being optimistic again). But 2.5%. Sure. It’s a solid guess.
- 15% tax rate on withdrawal – If I pulled out $30,000 per year right now, my effective tax rate would be much lower. If I’m calculating it right, less than 12% between federal and Minnesota state taxes. I’m not a tax guy though and who knows what the future brings, so I didn’t touch this number. 15%.
- 4% “safe withdrawal rate” – Who am I to argue with the fabled “Trinity Study“.
Why Retirement Freedom is a particularly powerful concept for my family
Retirement Freedom has me jazzed! Combine the concept of Retirement Freedom with the, let’s call it, “alternative” approach I take toward retirement, and I’m even more excited.
Those of you who have read this blog before may have come across an article talking about our 7-year plan to a Runway Retirement. I coined the term, runway retirement, to describe a sort of mini retirement that has a longer runway of cash, somewhere in the neighborhood of 2-3 years. Ours may even end up being a 5-year runway, if everything plays out right.
This is a runway that should be long enough to…
… help your ideal life take flight. It buys you time, valuable time in the prime of your life. It buys you time away from 9-to-5 work so you can instead launch that project you’ve been meaning to get off the ground, build a lifestyle business, find the job of your dreams or simply take a much-needed break to rediscover what life is really all about.
When I first plotted our runway retirement plan, I thought my wife and I would be abandoning any hope for a fully-funded traditional retirement if we pulled the trigger. I didn’t even bother running the numbers. I thought we’d fall hundreds of thousands short in our nest egg if we cut off our 401k contributions so early.
That was a trade-off we were willing to make, though. We felt we had a good chance of making up for the shortfall with all the other opportunities that could crop up from our runway retirement. We’d have other sources of cash flow by then.
That doesn’t mean it didn’t make me a little nervous. That doesn’t mean I didn’t have visions of working as a 80-year-old greeter at Wal-mart. Much respect to all the octagenarian greeters out there, but I can get moody, so I don’t think I’d be any good at it.
The Keep Thrifty Retirement Freedom Calculator blew those worries out of the water. Now I know we can stop contributing to our retirement accounts in 2020 and still have a good chance at a nice-sized nest egg to draw from at age 65.
Now I feel even more confident in our runway retirement plan. With Retirement Freedom in our back pocket, we theoretically won’t have to worry about after age 65. That leaves 21 years to cover when we pull the trigger on runway retirement in 2022.
Since we could easily end up with a runway of 5 years, that leaves just 16 years to scramble for. 16 years is still a long time, but I can easily wrap my head around 16 years. It’s a whole lot easier to figure out than forever.
Besides, a runway can be stretched quite a long ways with a little creativity and a few thousand dollars a month in supplemental income from side projects. Even if we crash and burn on the runway and one of us had to go back to the 9-to-5 grind or even toil a third-shift to make ends meet, it becomes much easier knowing Retirement Freedom has us covered on the back end. As Chris from Keep Thrifty put it…
If your income no longer has to cover retirement, all you’re responsible for covering in the interim is your annual expenses and a bit of a safety fund. With that, you can have the flexibility to try a whole lot of new things with your career, living situation, etc.
Here’s more good news. Since we will reach Retirement Freedom a full two years before the end of our 7-year plan for a runway retirement, we could, if we so chose, redirect retirement savings to our runway stash. That could help us either build a longer runway or take the leap into runway retirement months earlier.
Retirement Freedom is such a powerful concept for my family. And that Retirement Freedom Calculator is just so dang fun to play around with. Big ups to Chris at Keep Thrifty. I highly recommend you check out his blog!
What do you think? When will you reach Retirement Freedom? Do you have plans for a mini or even a runway retirement? Now that you know about Retirement Freedom, does it make that much easier to pull the trigger? I’d love to hear your thoughts below.
These are my opinions. Please do your own research before deciding what to do with your money.