![]() So this week, I invited Karsten Jeske, PhD – a former professor, Fed economist, quantitative finance researcher, and early retiree – to the podcast to share insight on how to estimate your safe withdrawal rate in retirement. It turns out that even a modest salary is actually pretty valuable when viewed through that lens.When it comes to early retirement the most important (and difficult) thing you have to grasp is your safe withdrawal rate.įIRE bloggers rave about “the shockingly simple math behind early retirement,” but they almost never talk about the shockingly un-simple math behind safe withdrawal rates. You will find that even a very small paycheck covers massive shortfalls in savings.įor example, to match a $30,000 salary with "risk free" 10yr Treasuries earning 1.5% would require a $2,000,000 portfolio (not including benefits ). You can run the portfolio math in reverse to see how much of a portfolio-gap your job covers. Why suffer for a long time in a high paying job that you hate, when you can enjoy Financial Freedom years (often decades) sooner and still achieve FI later on. It's not a race to get to FI as fast as possible. In my opinion, too many FIRE followers overlook readily available options to improve their life. We started appreciating our jobs again, and we made more money!īy putting myself in new situations as I was growing my business, new opportunities and sources of revenue kept coming my way. This allowed us to spend more time with our newborn son and work on entrepreneurial endeavors and passion projects (like this blog).Ī funny thing happened. When my wife and I were very close to achieving our Freedom Number, we both shifted to working part time. ![]() I just wanted to spend my time with family and work that was purposeful and rewarding. ![]() I had no intentions of "retiring" anyhow. I would still need another source of income to purchase the "wants" and continue to save if I still wanted to achieve FI at some point.īut, that was fine by me. The resulting number was dramatically smaller than my FI number and to my surprise I was almost there. Next I calculated the amount of cash flow my Income Ladder would safely produce (a topic for another article) and determined the portfolio size I required to cover my "needs" -Forever. I quickly added up all of my necessary living expenses and multiplied by 12. I didn't need to replace ALL of my income (yet). Specifically. You can calculate the impact various withdrawal rates have on the "retirement multiple" using this formula: This rule (as most use it), states that 4% of the total portfolio value will be withdrawn in the first year followed by small increases for inflation each year.īut, that number required to retire is always depressingly high!įor example, a 100 k/yr earner would need to save $2,500,000 or 25x his income to produce that income. low risk = low return).įor many people "the dream" is replacing a full time salary with Passive Investment Income.Ī Financial Adviser might use the 4% Rule to calculate the size of the portfolio required to produce that result. Unfortunately, their is almost always a price to be paid for this convenience namely, t he safest investments are typically the most expensive (i.e. Yes, that is typically called "Investing". ![]() While their are hundreds of approaches to build Passive cash flow, the most surefire method of generating PI is to simply "purchase" an existing income stream. ![]()
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