How to calculate your predicted retirement age

Note: I’m not a financial advisor and I’ve tried to source where I’ve found my recommendations. These tend to be skewed towards the UK, but you can find your country’s equivalents. Create your own investment strategy based on your risk appetite. It’s worth the time!

Do you know what your predicted retirement age actually is? Most of us don’t.

Maybe you’ve never had a reason to calculate your predicted retirement age or you’re not sure how to.

But there’s another common blocker: that it can be incredibly uncomfortable to be accountable for your finances.

Knowing the state of your future finances might be something you’d rather block out… if I don’t look at it, it doesn’t exist and everything’s going to be magically fine.

But discomfort is a very good reason to do it now.

Calculating your retirement age is based on:

Your age

The younger you are, the longer you have for compounding interest to work its magic. But it doesn’t matter what age you are. It’s more important to realise that it’s never too late to sort your finances. Now is a better time than any other.

Your income after tax

The more money you make, the quicker you reach your financial goals for retirement. But this depends a lot on…

Your expenses

You don’t need to have a six-figure salary to retire early. In fact, one of the best strategies is to save a helluva lot instead. Financial blogger Mr. Money Moustache’s key philosophy is that cutting your spending rate is much more powerful than increasing your income.

How many years you will have to work for a range of possible savings rates, starting from a net worth of zero. From Mr. Money Moustache.

Saving at a rate of 80% can be worth much more than getting a raise, but this means clever budgeting and avoiding lifestyle inflation like the plague.

To avoid increasing expenses with income, automate your investments and keep a set amount in your current account per month, regardless of how much you’re making. If you don’t see it, you can’t spend it.

Your current net worth

This is the sum of your assets minus debts and other liabilities. If you’ve been financially savvy for a while, you’ll have a better foundation to work on. Some people will have been born with a golden ticket. But if you’ve got work to do, that’s fine. Your net worth is the number that will increase once you take care of everything else on this list.

The balance of your portfolio between stocks, bonds, and cash

A typical portfolio consists of cash, bonds, and stocks. Cash is safe, but you’ll lose it over time with inflation. Bonds are reliable but won’t give you massive returns. Stocks have higher risks but the highest returns.

Most experts agree that an index-fund tracker is the best way to invest long-term (more on this in another post) and that to balance risk, hold bonds.

In Smarter Investing, Tim Hale recommends owning your age in bonds and the rest in equities when accumulating general funds to support your future lifestyle. Increase the ratio of bonds if you want more certainty of your outcome but likely lower returns.

Expected average rate of return for stocks, bonds, and cash

No one can predict the future, but a more conservative estimation is 5% return for stocks, 2% return for bonds, and -3% for cash reduced by inflation.

Get calculating

Playing with FIRE’s calculator uses your income, expenses, investment portfolio and current worth to estimate your time until financial independence. This is when you’ll be able to live off your investments at a 4% withdrawal rate.

Note: your financial independence age isn’t necessarily when you will or should retire.

Many people who reach financial independence carry on working for some time afterwards, or they take on part-time work or projects that they find more rewarding. But it’s a milestone that can take a lot of financial pressure off you.

Your predicted financial independence year might be better than you think or worse than you think, but anything is better than not knowing.

So do the calculation and see what the result is.

If you’re 26, earn 60k a year after tax, save an ambitious 75% a year, and have 50k net worth, here’s what you’ll be looking at:

If you’re doing well, awesome. Keep doing what you’re doing and make small changes to bring your financial independence year closer.

If the number makes you want to marry someone fifty years your senior with a heart condition to put your mind at ease, slow down. You’re not competing with anyone else. Your financial timeline is your own.

Maybe you’re going through some trouble right now and you just don’t have the money to save. But if you do, now’s the time to make changes.

The best move you can make is to start owning your finances and not comparing yourself to others. There will always be people who seem to be doing better than you. Especially if you lurk in financial advice subreddits. Don’t. Compare. Yourself. It never makes you feel good.

There are a lot of things you can do to make financial independence more of a reality:

  • Focus on building up your emergency fund. This is the first step before anything else. The number is up to you, but use six month’s expenses as a benchmark. Keep it in an easy-access account with as much interest as you can find. One good pick is Marcus.
  • Invest what you can every month (the next bullet points show you how). Even small amounts will compound into something beautiful over time. If you decide not to buy an iPhone 11 Pro Max for $1099 (shit, really?) and invest this instead, your money will be worth $1,810.06 in 10 years with 5% returns. That’s $711.06 more than you started with.
Use a compound interest calculator to see what your $ will be worth in future.
  • Create an account on Vanguard and invest in low-cost funds online. If you’re in the UK, you can pay £20k tax-free into a Stocks & Shares ISA every year.
  • Consider Tim Hale’s advice to invest your age as % in bonds and the rest in equities. Increase the proportion of bonds for less risk.
  • Invest in stocks with an index fund for simple passive investing. In this case, passive is a good thing. Active hand-picking of stocks is much riskier and tends to be far less effective. Automate monthly contributions into an index fund like Vanguard’s Global All Cap, forget about it, and over the long-long-term hopefully look forward to some good returns.
  • Automate your investments. Set up direct debits so the money flies into investments without you doing anything.
  • Pension contributions tend to be the most tax-effective way to save for the long-term. Make sure you’re making the most of your company’s plan if you’re an employee. Negotiate for employer match contributions if you don’t have them.
  • If you’re self-employed, you have no excuse not to have a pension. Set up an SIPP with a platform like Fidelity and contribute monthly into low-cost funds that match your risk appetite.
  • Time in the market, not timing the market. Don’t try and outsmart the experts about when to invest your cash. Just put the damn money in.
  • Set and hold. Take time to work out your ratio between equities and bonds based on your risk profile, but once you know what your strategy is, hold firm. No matter what the market throws at you. When things wobble, don’t move your money. Don’t. Do. It. If there’s anything you can learn from the history of markets, it’s to not panic and leave things to settle.

Earn more when you can. Spend less. Invest the rest. Marry someone who’s financially compatible. Get on with life.

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Lucy Fuggle
I'm Lucy – an adventurer, writer, author of Mountain Song: A Journey to Finding Quiet in the Swiss Alps, and creator of Live Wildly.