Some easy calculations for retirement

Or How we got 1000? First, let´s remember the famous 4% rule. Imagine we could retire because we have reached a nice sum of money. The first year of retirement, we can withdraw 4% of the total amount for our expenses. The second year, we take the previous amount plus inflation to keep up our way of living and so on.

It´s been said that we could stayed this way for at least 30 years, until running out of money. The money we leave every year is invested in bonds and stocks. We have said many times that 4% is not a safe percentage. Recent academic papers show that it´s preferable (but more conservative and thus more difficult to achieve) to withdraw 2% instead. We use this percentage to go backwards and calculate the money we need to own before quitting our jobs to be able to retire within reasonable parameters. But, what does this have to do with 1000?

Suppose that we want to get a really early retirement at 46. After going through a life calculator (read our previous article on that), we are going to live 88 years. We add 10% just in case we stay here a little bit longer, so from 46 to 96 we want to be living from our savings. That is 50 years.

With the 2% rule, another way of seeing our saving scheme could be: for every expense I will need in the future, I will have to put aside x50. Example: if we buy books for a total value of 600$ a year, we will need to save 600x50=30,000$ so that we will still be able to buy the same amount every year once retired.

But, we said the 2% rule was calculated for 30 years, and we are thinking of 50 years of retirement. After some calculations, instead of x50 we will use x83 for the case of 50 years of retirement. Most of our expenses are remembered on a monthly basis though, so if we calculate it for a montly cost, we get 83x12=1000. Here it is the new number: 1000. So, for instance, if we are paying for private health insurance 180GBP a month, we will have to save for this purpose 180,000GBP prior to retirement!!