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Here at All Options Considered we like to share tools, information, and resources with our readers to help others with financial literacy. We also want to support people in being as independent and self-sufficient with their personal finances as they are comfortable being. With all of that in mind, we’re releasing the AOC Simpli-FI-ed Calculator to help you estimate your FI number.
First we should mention that if you’ve heard of our super-mega-complex-magic-FIRE-life spreadsheet, that is not what this is. This Simpli-FI-ed spreadsheet is relatively simple compared to our super spreadsheet. And for now our super spreadsheet is still only for personal use during our coaching sessions after a ton of other data collection and sole searching by FI hopefuls. But we figured it was about time to share a piece of that super spreadsheet with everyone, so we’re sharing the new AOC Simpli-FI-ed Calculator.
By the way, since this calculator is a Google Sheet file with complex rules and formulas built in, it can only be used within Google. If you download it and try to use it in Excel or Numbers, it will break. Just click on the link, go to “File” and then “Make a copy” so you can save the calculator to your own Google Drive.
This Simpli-FI-ed Calculator is based on some of the core ideas found in the Trinity Study which pretty much every FIRE blogger references. The FIRE community talks a lot about the 4% rule and the 25 times living expense rule based on that study. In short, the Trinity Study found that if you have saved 25 times your estimated retirement expenses you should be able to live off an initial 4% withdrawal rate every year (increased by inflation there after). That study also predicted that an equity to bond ratio of 50/50 would mean your portfolio should last for about 30 years.
Most people who look into the 4% rule and the 25 times living expense rule have a dream of either being financially independent or retiring early, or both. With this in mind, it’s important to look past baselines and averages. The Trinity study was geared towards an average retirement and derived from data collected back in 1998 when the study was published. Most of us aren’t average and it’s November of 2020 as we write this post. The Trinity Study’s standard portfolio life ranging from 15 to 30 years was based on the life expectancy of the average retiree way back when, so that may not be enough years or enough money in many cases today depending on your circumstances and your goals. Because of that, we’ve built the Simpli-FI-ed Calculator to be adjustable so you can set the parameters to be more or less conservative. When you calculate your own FI number be sure to consider your comfort level, your needs, your risk tolerance, as well as your specific and very personal FI goals.
Just like so many others, we loved the simplicity of the guidance in the original Trinity Study and used it as a baseline to build our own FIRE plan. We adjusted the baseline to fit our own portfolio and FI comfort level, and ended up with a 3% withdrawal rate to start our FIRE years with 33 times living expenses already invested.
Here’s How it Works
The Simpli-FI-ed Calculator uses some basic information including your age, the year you want to be FI or FIRE, market growth rate, inflation, estimated expenses, portfolio value, additional contributions, life expectancy, and the expense rate multiplier (with a default baseline number of 25) for your annual expense number.
After you enter your numbers and your goals into the Simpli-FI-ed Calculator, it will do the math and generate a cool graph for you to work with. With this graph you can see if you’re on track to hit your FI number and how long your portfolio might last. It’s then super easy to change some of the inputs to see how you need to adjust in real life to reach your goals.
The graph will show your portfolio as it grows as well as what it looks like as you continually draw down the balance. It also illustrates the way your portfolio gets drawn down and then generates less and less income as your original withdrawal amount increases with inflation. Not to worry, as long as you start with a big enough balance and that stash outlasts you, it’s all good. Whether you run the calculator once with a fixed set of numbers, or run it multiple times with multiple scenarios to work with like us, we hope this calculator is helpful for you.
A Few Things to Remember
Age: Retiring at 65 is not a rule we all need to live by. If that’s your goal there’s nothing wrong with that, and good for you! If you want to retire early, then do some dreaming about your own life and enter your retirement year target.
Market Returns: Do some research when picking the growth rate that feels right for you. No one can predict how their portfolio will perform with complete accuracy since we can’t predict or control economic factors, political forces, or market sentiment. With that in mind it’s a good idea to be a little conservative when picking the growth rate you base your FI calculations on. From our perspective being a little conservative gives us the best chance of being pleasantly surprised by our portfolio growth in the future. One option is to start with 6% and adjust down or up as you feel comfortable.
Expenses: If you don’t know what your expenses are right now, it’s time to start tracking to find your true number. And remember that if you are a W-2 employee today, your expenses at this moment most likely don’t include the full cost of healthcare and taxes. Do some research to see what healthcare expenses are for people who have to pay them without an employer. Also, do some research to see how much people pay in taxes without an employer. Then add back some or all of those costs when estimating your expenses so you’re using a more realistic number for later years when you aren’t employed.
Portfolio, fees, and equity/bond ratio: Add up all of your taxable and tax deferred accounts. Include your HSA if you have one. Track down any orphan 401k or 403b accounts that might still be held by an old employer. It might also be time to open up a Personal Capital account (or something similar if your money lives outside of the USA). We know from experience that having a free Personal Capital account means you’ll probably get a phone call encouraging you to buy additional services, but we simply said no thank you and asked that they not call us again. Done. Their free accounts can help you track all of your accounts and identify how much of your portfolio is in equities. Most importantly it can also show you how much you’re paying in investment fees.
Contributions: We recommend using all possible avenues for saving and investing to reach your FI goal. So we’ve broken out annual target contribution rates for tax deferred accounts separate from annual target contribution rates for taxable and tax free accounts. You can test your FI calculation with a few different sets of numbers, including the allowed limits for tax deferred and tax free accounts. You can find the current limits on the IRS website.
Expense rate multiplier: The Trinity study starts out at 25 times your estimated retirement expenses, which is a good baseline. Remember that your retirement expenses are probably different from your pre-retirement expenses, and that number will likely increase over time due to inflation at a minimum. It’s a good idea to add some flexibility into your plan by increasing your estimated retirement rate multiplier in order to also extend the life of your portfolio past the baseline of 30 years.
The rest of the bells and whistles in the Simpli-FI-ed Calculator show what your starting Safe Withdrawal Rate is estimated to be given all of your inputs, how long your portfolio should last, and when you will be 100 years old. We all have to have goals right?
What If I’m Short?
If you’re short on money and the numbers you inserted in the calculator don’t show you reaching your FI goal, the calculator will tell you. If the calculator thinks you might need to save more money to hit your FI number some key cells will be highlighted in RED, just so you don’t miss anything. The calculator will also make it clear if there’s no year when you would hit your FI number with the existing figures you’ve included.
If the numbers you’ve inserted in the calculator don’t hit your FI goal, the graph will also tell you. First of all, you won’t see that cool magenta bar on the graph since there’s no year when you would hit your FI number in the existing calculation. In this example below the green safe withdrawal income line never touches the red budget line, and the green line drops further and further as the red line keeps going up. This is a clear warning that the portfolio needs to be larger and the retirement timeline needs to change in order to reach the FI target.
If your first few calculations don’t work out, don’t freak out! Unless you’ve been an aggressive saver since high school, it’s normal to make adjustments a few times before your path to FI is 100% clear. It’s best to change one cell at a time, and take notes as you go so you can return to a baseline setting for comparison as you bring the data inline with your goals. Here are a few ideas for making adjustments…
- If you’re set on your timeline, add more annual savings.
- If you’re set on your savings rate, add a few more years until retirement.
- If you have a long time to go to get to FI and you have a conservative equity percentage, shift the allocation higher.
- If you’re close to retirement and you know you have a pension or feel confident about social security coming, it’s time to use other income types to find your Gap Number. If you won’t have to cover all of your expenses from your portfolio, finding your Gap Number might be the key to reaching your FI goal.
Below the main worksheet area are two more mini calculators. The first one helps you calculate how much of your expenses really have to be covered by your portfolio. Simply add all of your expenses, including any taxes and healthcare costs as well as your daily living costs. Then subtract any expected pensions, social security, or rental income. Boom, that’s your Gap Number. Now, enter the Gap Number in the expense line and see how your numbers change. You might find you are 100% on track as we found in our case study for the Wannabe Retiree.
Realizing you might have a small pension, social security, or rental income to help reach your FI goal is like having a little pot of gold you forgot about. If you can reduce your expense number to cover only the Gap Number that your portfolio won’t cover, you might be pleasantly surprised.
The second mini calculator takes a look at how much you’re be saving in your 401k to see if you’re maxing out this tax deferred account. It’s always better to target a dollar amount rather than a percentage when saving. That way you’ll always be looking to a specific amount instead of an “idea” of what someone else thinks you should be saving.
That’s it! You’re On Your Way!
Running your FI numbers can be scary for some people. It took me years to find the courage to run our numbers this way. But it doesn’t have to be scary. Information is power and it gives you the data you need to make changes. Information also tells you when it’s time to celebrate. So have fun with this calculator and enjoy planning for your future.