Added a simple but dynamic time to retirement calculator to the website. The calculator is based on the financial independence, retire early (FIRE) principles of accumulating a retirement nest egg and then using a safe withdrawal rate (SWR) to fund all retirement expenses.

For those not familiar with FIRE, a quick rule of thumb is that you can retire using a safe withdrawal rate of 4% or less. This means that you have enough money to retire when your nest egg reaches 25x your annual expenses. In FIRE circles, this is known as your “FI number”. You don’t necessarily need to retire when you hit this number, but you do achieve true financial independence.

The calculator takes inputs including your annual expenses, your annual investment contributions, and your current portfolio size, as well as your desired safe withdrawal rate (SWR) in retirement and your projection of future investment returns to calculate the number of years needed. You can change any one variable in isolation, or change all of these variables simultaneously to find out how long it will take for you to reach FI.

Most traditional retirement calculators tell you whether you are “on track” or not to retire by a certain age, such as 65, by calculating how much retirement savings you’ll accumulate by that age given your current trajectory. Many will also ask you for your life expectancy as well as the percentage of your current income you want to spend in retirement. They will then tell you whether you need to save more or not. The FIRE community, however, is interested in how quickly you can reach financial independence, and wants to remain financially independent thereafter regardless of retirement length or life expectancy.

There’s also a link to the calculator prominently on the main page, as I imagine this blog article will eventually be shuffled into obscurity 🙂

For anyone interested in the technical aspects, the calculations are made in Excel with the NPER function. NPER stands for number of periods (to pay off a loan or reach an investment goal). In Excel, the NPER function takes the (rate, pmt, pv, fv), where rate is the interest rate per period, pmt is the payment or contribution, pv is the present value of the loan or portfolio, and fv is the future value.

The calculator is just a script that lets you dynamically modify the values for rate, pmt, and pv. It calculates fv from your annual expenses and SWR and nestles this within the NPER function. Finally, with all four variables, it can show the resulting NPER.

In fact, Excel has a whole family of functions related to these 5 variables. Any variable can be computed if the other 4 are known. The 5 functions are as follows:

• NPER(rate, pmt, pv, fv)

• RATE(nper, pmt, pv, fv)

• PMT(rate, nper, pv, fv)

• PV(rate, nper, pmt, fv)

• FV(rate, nper, pmt, pv)

All of these functions can take an optional additional argument, type, at the end of the function syntax, where 0 means payments are due (or investments are made) at the end of the time period, and 1 means payments are due at the beginning of the period.

Variables in the calculator

Annual expenses. You can use either your current total annual expenses, or your projected total annual expenses in retirement. The idea behind using the same number for both is if you want to maintain your current lifestyle and standard of living in retirement.

Annual investments. This is how much you are contributing to your total investment nest egg every year. The more you can contribute, the quicker you will grow your nest egg to sufficient size. This should include all of your savings and investment contributions, whether in tax-advantaged retirement accounts or not. If you receive an employer match, the employer match amount should be included as well.

Current nest egg value. This is the size of your current nest egg, including cash, savings, investments, and retirement accounts. Basically, your investable net worth. Do not include assets that you cannot “draw from” in retirement, such as your primary residence. If you already have a large investment portfolio, you may be very close to retiring. Set to 0 by default.

Safe withdrawal rate. This is the safe withdrawal rate you plan to use (see below for further explanation of SWR). Set to 4% by default. I recommend using 4% or less. Higher SWR decreases the size of nest egg you need, and therefore time to retirement. However, it also increases risk of portfolio depletion if you experience unfavorable market conditions in retirement.

Annual investment returns. The annualized returns you expect to receive from your investments in the future. This affects how quickly your nest egg will grow to sufficient size. Set to 7% by default. The U.S. stock market historically returns between 9% to 10% annualized. Real estate returns may be similar. Bond returns are lower. See this article for data from Vanguard on historical returns from various ratios of stocks and bonds. Also note that unless the entirety of your investable net worth is actually invested, your overall returns will be less than the market (i.e. the cash portion of your portfolio gets no returns). It’s probably best to use a conservative estimate here.