I Don’t Want to Wait

You want to retire early. You have been saving with a passion. Today’s Safe Withdrawal Rates are too low. You don’t have enough to retire.

You have read You Can’t Count on 7%: Dollars. You have read Since You Can’t Count on 7%. You like the new numbers. But you don’t want to wait another decade. Maybe, you won’t have to. Maybe, you can retire a lot sooner.
You Can’t Count on 7%: Dollars
Since You Can’t Count on 7%

My What-If Analysis

For the sake of argument, let us assume that you would like to retire on $40000 (plus inflation) per year. This normally requires $1000000. References: The Rule of 25 and TIPS Ladders for Today.
The Rule of 25
TIPS Ladders for Today

You can increase your 30-year Safe Withdrawal Rate to 4.4% at today’s valuations by varying stock allocations. Reference: Safe Withdrawal Rates with Switching.
Safe Withdrawal Rates with Switching

If you wait for a decade (or so), you can expect P/E10 to fall to 8.7, which would increase the 30-year Safe Withdrawal Rate to 7.0%. Even better, you could change to a fixed, high stock allocation (80% stocks and 20% TIPS at a 2% interest rate with rebalancing) when P/E10 falls to 8.7 and increase your 30-year Safe Withdrawal Rate to 8.4%. References: Safe Withdrawal Rates with Switching and Since You Can’t Count on 7%.
Safe Withdrawal Rates with Switching
Since You Can’t Count on 7%

If it were a decade from now and you had $572K, you would have it made. After all, 7% of $572K is $40040. Even if you only had $477K, you would have a good chance. Switching to the fixed, high stock allocation when P/E10 = 8.7 increases the Safe Withdrawal Rate to 8.4% and 8.4% of $477K is $40068. It would be a rougher ride, but it should get you to your destination.

If you were to withdraw at your 30-year Safe Withdrawal Rate, the odds are (roughly) 95% that your portfolio would grow, lasting longer than 30 years, possibly much longer.

For planning purposes, you need to have $477K to $572K (plus inflation) ten years from now. This will produce an income stream of $40K (plus inflation) annually that lasts at least 30 years.

You Don’t Have to Wait

You can buy TIPS for tax sheltered accounts and (a limited quantity of) ibonds for taxable accounts. They will cover inflation and add a little bit of interest.

If you were to withdraw $40000 per year for five years, you would spend $200000. If your balance is already $200000 more than the $477K to $571K (plus inflation) that you will need ten years from now, you can retire in five years.

Alternatively, if you have an extra $200000 right now, you can reduce your income needs to $20000 per year immediately. You would spend the $200000 surplus over the next ten years. After that, you could retire completely.

You Fill In the Blanks

Your most important step is to dream. These numbers can help you. Once you see what is possible, there is no holding you back.

Follow Rob Bennett’s advice: always include short-term goals. It is OK to have long-term goals, but always include short-term goals.

All of these numbers scale. Multiply the balance by two and the income stream doubles. Divide the balance by two and the income stream is one half. Put in your own numbers.

Have fun.

John Walter Russell
August 21, 2005