> We were living off less than 30% of our after tax income. Remember, you should enjoy yourself while you're making money now, not just save it all for the future.
If you can live off of 30% of your income, the future becomes a lot closer: you can retire in ~8.8 years. (Or round it up to 10 or so and you'll have even more income during retirement.)
Try http://networthify.com/calculator/earlyretirement if you want to fiddle with savings rates and find out how long you need to work. Notice that the number of years depends solely on the savings rate, not on the total salary.
Even if you limit it to the investment return: It is ignoring variation in return for that level of return, which is a terrible way to do long-term planning.
Agreed, that is the main problem with this plan. The 4% withdrawal plan is increasingly less likely to work the longer the length of your retirement. If you retire at age 65, the probability is low enough to not generally worry... but if you retire at 30, you might want to think twice.
I'm sure somebody somewhere has calculated or estimated the probability of the 4% plan lasting for a given number of years. I'm curious what the results were.
The "4% plan" is a way to explain the problem for your avg Joe who can't do math. It's a nice rule of thumb (often you'll see 3% even) but doesn't leave a ton of room. Just look at the current environment if you need an example: Lots of people who retired in the 90s are getting killed on their principal.
Sensible planning involves calculating the probability that you will not outlive your assets: Portfolio planning will pick points from the so-called efficient frontier, and then often run Monte Carlo simulations to get a handle on whether the expected variation will put you in the poor house.
BTW, this is usually where the 3-4% plans arise from. People will make an assumption about return+variation, and then see what withdrawal is likely (but not guaranteed) to avoid outliving the principal.
Take a look at the Trinity Study: https://en.wikipedia.org/wiki/Trinity_study . The authors did a historical analysis of a reasonably sensible retirement portfolio (50/50 stocks/bonds), and figured out the minimum rate of return you could safely assume over any 30-year period (even those including the Great Depression). They also made some very conservative assumptions, such as that the retiree will continue increasing their spending every year by inflation (as measured by the Consumer Price Index). The answer: 4% per year.
This number commonly goes by the name "Safe Withdrawal Rate", or SWR. You'll see that term quite a bit in discussions of retirement, especially early retirement.
Turns out that very little difference exists between the amount needed to sustain 4%/year for 30 years and 4%/year indefinitely. The numbers also get better if you make a few less conservative assumptions, such as some flexibility in the amount you spend (buying fewer luxuries if another depression happens, for instance), or receiving any kind of additional retirement benefit later on (Social Security, corporate retirement), or various other safety nets that the study didn't cover.
In any case, if you don't feel comfortable with 4%, you can adjust it easily by working only a little longer. For instance, in the previously mentioned case of spending 30% of your income, if you've already saved 25x your annual spending (so you can live on 4% returns), and you work one more year past that, you'll save another (7/3)x of your annual expenses and earn about 1x in returns, meaning you now only have to assume a ~3.53% return (1/(25 + 7/3 + 1)).
If you want to account for inflation, just subtract it from your savings rate. The market typically supports a 6-7% return before inflation, or a 4-5% return after inflation.
Nope, that calculator assumes you want enough retirement savings to cover your expenses indefinitely. The numbers do vary based on your assumed rate of return; a more conservative estimate would put it at ~9.1 years, while a more aggressive estimate would put it at ~7.3.
If you can live off of 30% of your income, the future becomes a lot closer: you can retire in ~8.8 years. (Or round it up to 10 or so and you'll have even more income during retirement.)
Try http://networthify.com/calculator/earlyretirement if you want to fiddle with savings rates and find out how long you need to work. Notice that the number of years depends solely on the savings rate, not on the total salary.