This isn’t a post on how to accumulate massive amounts of
wealth, or to assist with identifying what types of careers or business
ventures will allow you to retire well ahead of the commonly accepted “Full
Retirement Age” of 65-67.
This is an overview and “food for though” for the individual
interested in discovering how to leave their job or business for good to live
off their accrued investments for a period of more than 30 years.
Bert is 47 years old with a wife, and 2 children beginning
college this year. Thanks to a
successful career in his 20s and 30s, and a business he sold last year, he has
accrued $3,500,000 in a mix of taxable and tax-advantaged retirement accounts
held at Vanguard.
Bert would like to consider himself “financially independent”
and he and his wife are considering using the “R” word as their newest
profession.
Well, if you’re anything like me, at first glance I think they are good to
go.
But lets take a closer look at how
they might go about solving this desirable problem.
After all, how many lottery winners lose
their fortunes within a few years of winning it!
How long will your retirement be?
We never know when we'll die, but in my financial modeling... the age of 95 looks like a pretty conservative figure to use for our example.
Assuming either Bert or his Wife live to the ripe old age of 95, that leaves 48 years that they'll need to survive on this nest egg!
Down the line, social security will likely help a bit, but Bert has decided to view SS as more of the "icing on the cake" and will focus instead on his investment portfolio as the primary source of future income.
Enter the Trinity Study
"One scenario backtested in the
Trinity study suggests that a retiree
with a suitably allocated $1 million portfolio could withdraw $40,000
the first year, give herself a cost-of-living adjustment every year
afterwards, and have a 98% chance of the portfolio lasting at least
30
years."
This sentence pretty much sums up one of the most commonly referenced studies of the rate at which retirees should withdraw from their retirement accounts to assure it lasts the standard 30 year retirement window. (Age 65 to 96).
But remember the name of our post?
How to retire, EARLY.
So Bert and Co. have a time horizon of 48 years. What % of their portfolio can they withdraw each year, and can they adjust for inflation?
It seems that the consensus among forum members over at bogleheads.org, (one of the most widely read and followed investing forums on Earth) is that a withdrawal rate of 2-2.5% should be used for perpetual withdrawals.
For example, if the Rockefeller family creates a charitable trust with $100,000,000, in order to preserve principle and keep up with inflation, these funds should be invested in some form of a 25 to 75% equity allocation, and the annual withdrawal should not exceed 2%, adjusted upward each year at the rate of inflation. This would (hopefully) ensure that annual gift giving could continue far into the future.
Since Bert and his family have a time horizon of 48 years, hardly FOREVER, it would be a logical assumption that a 2.5% withdrawal rate on $3.5 Million ($87,500) adjusted for inflation would result in a high success rate.
(By the way, one method of adjusting for inflation is to find out how much social security payouts increased each year and increase your withdrawals by this %).
Is It Enough?
How did Bert arrive at this healthy portfolio balance? Well, a successful career in his 20s and 30s, as well as the sale of his business was the primary source of the wealth he's accumulated. Do you think $87,500 adjusted each year for inflation would support his family's lifestyle?
I'd assume so, but what if he didn't save a high percentage of his income? Or what if his annual expenses were $150,000 throughout his adult years? Would his family be able to retire and keep their current lifestyle?
Herein lies the question. If Burt ended up with $3,500,000, he either made a high income, was a very disciplined saver, inherited it, or a combination of the three. I can almost assure you that the average family earning the median US income will not reach this figure by age 47.
The Allocation Variable
The Trinity Study also took into account the overall mix of an investor's portfolio, and how it may effect success rates. The short version is, investors in their 50's and 60's should consider having between 40 and 60% of their portfolio in equities (the rest in bonds) to retain buying power. Here's my asset allocation plan, you're welcome to use this as a starting point:
Stay the Course:
Age..........Ratio
25-50........80 stocks/20bonds
51-65........65/35
60-75........50/50
over 75.....35/65.
(Equities divided 70/30 between Domestic and International)
60-65 year old would be in the 65/35 if still working, in the 50/50 if not.
Takeaways
Now that you have a grasp of what it takes to retire early, do you think
you have what it takes? A retirement age of 60 to 65 may very well allow a safe-withdrawal-rate of 4%. If you've accumulated $1,000,000 by age 65, this would leave you with $40,000/year. But if you choose to retire in your 40s or 50s, this may only support an income of $25,000/year.
I hope you have a better understand of what you'll need to do to retire early if that is your desire, be it by increase your savings rate, or MAKING MORE MONEY. Whatever the case, it would be wise to aspire to have fun along the way, and do you best to not run out of money in your
golden years.
With a heart full of love,
TB
, Bill Schultheis’ 
, and 
by William Bernstein are a few of the titles I remember.