Forget the online Financial Independence calculators used to predict early retirement and investment returns. I’m sorry, but you need to create a customized plan to FI or hire a professional to do so. Don’t be discouraged and give up based on results of these tools and think, “I’ll never retire, if I need a bajillion dollars to do so.” Let’s see how a typical american family can retire earlier than anticipated.
The following is a letter to my children on how to properly calculate your way to financial freedom.
Financial Independence Calculators
Dear Calculator Users,
So… you’re looking to plug in some numbers and get an idea of when you will achieve Financially Independence (FI). After discovering FI, one of my initial mistakes was the assumption that all these online retirement prediction and financial independence calculators would give me a decent ballpark number. I frantically input our family’s finances into twenty or so of these tools, many of which were hosted by some bank or financial firm. The results were disheartening until I realized that they were just trying to solicit us as a customer. I found other community developed spreadsheets and FI Tools, but many were also inaccurate and unable to account for everything I needed.
I continued my research and read quite a few articles from influential people in personal finance and investing gurus. Most claim arbitrary numbers and make blanket statements about what you need to retire. None gave a clear picture with our particular financial situation in mind. Nor did I want to spend hundreds, if not thousands, to create a plan toward financial independence with an advisor. Your Uncle is a fiduciary certified financial planner and even he gave me radical numbers which were twice as much as I had eventually mapped out.
It took quite a while to do the research needed to develop a customized FI plan that incorporates all of the minor nuances of life, but it is well worth it to incorporate all the elements that a generic financial calculator could never do. The closest I’ve seen to an accurate retirement prediction tool is Personal Capital’s free retirement planner. It can incorporate many retirement goals, income events, and expense expectations. They can run various simulations and consider identified life events, but it is still lacking in comparison to your own personalized spreadsheet.
If you are too lazy to customize your own FI plan, go with Personal Capital (PC). If you decide to do it right and customize a FIRE spreadsheet, then ignore PCs retirement planner altogether and just use it to track your progress, reduce investment fees, create the right allocations, and analyze income vs expenses. It really is the best free tool out there and will save you a lot of time.
Typical American Family Retirement Prediction
If you want to do it the correct way, you’ll need to create a personalized plan to FI. Using figures from the Bureau of Labor and Statistics, I want to walk you through an example of a typical American family and how online Financial Independence Calculators have failed them. Meet the Smiths.
- Both Parents are Working and 30 Years Old
- Each Earns $75,000 per Year Gross Income
- Supporting 10 Year old Twin Children
- Have an Average Home with a 30 year mortgage
- Own 2 Cars on 5 year payment plans
- Have built a 2 Week Emergency Fund
- Student loans are paid off after an 8 year working career
- Each have less than $10k in retirement accounts
Average American Household Income
Here is how the cash flow would break down for the Smiths if they sat down and ran the numbers today.
- $150,000 Gross Household Income – $33,000 Taxes
- $117,000 Take Home Pay – $80,748 Annual Expenses
- $36,252 to Save and Invest
One FI calculator claims that it will take 33 Years to retire at 24% savings rate, which is ridiculous. These tools make calculations based on the now only. You could suffer for longer than you need to.
Some of the gospel rules from financial advisors do not make much sense either, such as “Your retirement spending will be 80% of your pre-retirement income.” If that were the case, the Smith’s would need to accumulate near $5,000,000 assuming 3% inflation and 2% income increase over the years. They’d be well into their 60’s before becoming financially independent. These blanket assumptions are as volatile as the market itself and don’t consider:
- Not contributing to retirement accounts any longer
- Employer matching
- Home equity growth
- Downsizing of the house and reinvesting profits
- Dropping down to only one car post retirement
- Own cars for 10 years and invest when loans are paid off
- Less taxes during retirement
- No more commute costs
- DIY around the house to save money
- College funding for the kids stops
- Empty nest savings
- Healthcare coverage going down after children
- Healthcare going up without employer assistance
- Returns on portfolio allocation
- Expense Ratios
- …and many other things.
If nothing changed over the next 33 years, then yes…the Smiths would be 63 before they can retire. It is comforting to know that they will be financially set during their twilight years, but demotivating if seeking financial independence and early retirement.
If the Smiths created a customize FI Plan and accounted for predicted situations, they would discover that they can retire by 55 instead. Nearly a decade earlier than everything is telling them. That’s years of enjoying life, fishing, golfing, or whatever hobbies interest them. What a huge motivational boost to save, stay on track, or even cut expenses to achieve financial freedom earlier.
Average American Household Expenses
Let’s look at the monthly expenses of the Smith Family. You can get the full spreadsheet and a copy of your own with detailed instructions via email when subscribed to theFIway’s FREE Priority Mail Service.
The Smiths aren’t frugal by any means and fall within the median of American life. With a monthly take home pay of $117,000 and annual expenses of $80,748, they are able to save $36,252 each year. Following investment optimization strategies, they do the following:
- Each contribute enough to 401K for the company match
- Both max out IRAs and continue to do so
- Remaining funds go into 401K
- All investments are in low cost index funds
Customize a Financial Independence Plan
Retirement calculators can handle those predictions, but what about those life variables I talked about?
- They take 5 year loans on their vehicles and keep them for 10 years investing the difference.
- The house is paid off by 60 and reduces their expenses going forward.
- They drop down to one car post retirement.
- Day care payments end in 3 years eliminating a large expense.
- The kids move out which reduces groceries, clothing, utilities, day trips, restaurants, sports fees, college contributions, and other miscellaneous expenses.
- 7% Average Return on Investments
- 3% Inflation Rate
- No health catastrophes
- No parent or sibling care
- 5% property appreciation
- No crazy market conditions
- Bureau of labor and statistics expense averages
Accounting for all these variables and based on historical data, the Smiths could retire by 55 with $2,867,919 providing $9,560 of monthly income with a safe withdrawal rate of 4%. This will easily cover their monthly expenses of $8,376 adjusted for inflation and lifestyle changes.
The tools out there just don’t cut it in many ways. You really need to map out your Financial Independence path with a spreadsheet to get an accurate picture. Don’t presume the online retirement calculators or generic financial advisor rules are correct. Do the math yourself as everyone is unique.
Sure, your CFP Uncle could create a plan for us once we went through the details and I explained everything in my spreadsheet, but at that point the work is already done. Advisors should definitely be consulted if you’re not willing or confident in their own research and abilities.
Embrace the FIRE spreadsheet that has been tweaked for more than a year. It can be daunting and takes quite a bit of time to do it yourself, but I’ve done most of the work for you. Predict your REAL retirement date and thank me later.
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Kylven Ross is the owner and primary contributor of theFIway.com. He has been married for 17 years and is father to a son and daughter living in New England. Professional accomplishments include a bachelor’s degree and industry certifications in the cyber sector. He has spent the last 18 years working in the U.S. Defense Industry and as a Military Police Officer.
He discovered the concept of Financial Independence (FI) during a rather stressful year in the compliance space. After fully absorbing the benefits of FI, he has since committed to turning his household’s finances in the right direction. His experiences are documented as a series of letters that are used to educate his children and others about money. He does not want the next generation to make the same mistakes, but rather achieve financial freedom and find happiness.