Interactive Monday: How Soon Can I Retire?
We all know how difficult it is to get kids to think about investing for retirement but also know how important it is to convince them to start investing ASAP given their youth and the magical powers of compound interest. So, what's the hook? What young person doesn't dream of retiring early which is kind of ironic given that many of them have these thoughts before they even have their first job. Stay with me. This focus on early retirement, which has gained more prominence recently with the F.I.R.E. movement (financial independence retire early), may be just the right hook to get kids to sit and take notice. Listen to our podcasts with Canada's youngest retirees and a leader in the movement JL Collins.
Hat tip to Rita on our team who pointed out calculators that run the numbers to answer the question "How soon can I retire?" This might be a good interactive to use at the tail-end of the semester as it spirals back to many of the topics you see in personal finance courses: savings, taxes, investing, asset allocation, spending rates, budgeting, compound interest. It will not only be an engaging interactive but can lead to some great discussion afterward (e.g., do you think you can really live on $10,000/year?; isn't that 15% investment return a little too aggressive?).
There's a lot going on here so let me explain the inputs, all of which you probably covered earlier in the semester. You might want students to complete this information in a table PRIOR to them using the interactive. I created a spreadsheet that makes the format a bit easier for students to think about the assumptions before they plug them into the calculator. Here's a portion of it:
I assumed a 22 year old earning $50K a year (1%, able to save 40% of their income, investing 80% in stocks, 15% in bonds, 5% in cash with a targeted withdrawal rate in retirement of 4% would be able to retire with a "nest egg" of $1.3 million and spend $50K per year in retirement.
A few different ideas for how to use this calculator:
High School graduate
James leaves high school at 18 to go to work immediately. He goes to work immediately since he has no savings, which is not unusual for a high school graduate. He has starting salary of $27,000 and will likely grow at the rate of inflation (0% on a real basis). He decides he wants to start saving 50% of his pay to start on the path to retirement. It helps that he is living at home still. When it comes to investing, he wants to mostly be in stocks (90%) with the rest in cash (10%). As for retirement, he doesn't anticipate having great needs and expects that he can live on $20,000 a year and will choose to withdraw about 4% of his nest egg to fund those spending requirements in retirement. He uses the stock and bond returns and tax rates provided by the interactive.
- Based on the model, at what age can James retire?
- What if James decided to save only 10% of his salary, how would that change his retirement age?
- Change his savings percentage back to 50% but now change his investments to 100% cash b/c he doesn't want to invest in the stock market, how does that change his retirement age?
Jacqueline graduates college at 22. She goes to work immediately since she has no savings, which is not unusual for a college graduate (she in fact has student debt of about $20,000). Her starting salary is $50,000 and will likely grow 1% on a real basis (above inflation). She decides he wants to start saving 10% of her pay to start on the path to retirement. Having an apartment in the city and repaying student debt makes it hard for her to save. When it comes to investing, she wants to mostly be in stocks (90%) with the rest in bonds (10%). As for retirement, she wants to travel and enjoy life and anticipates spending about $40,000 a year. She thinks she will want to withdraw about 4% of her nest egg to fund those spending requirements in retirement. She uses the stock and bond returns and tax rates provided by the interactive.
- Based on the model, at what age can Jacqueline retire?
- What if Jacqueline decided to save 20% of her salary, how would that change her retirement age?
- Change her savings percentage back to 10% but now change her investments to 50% bonds/50% cash b/c she doesn't want to invest in the stock market. How does that change her retirement age?
Envision your life
Now that they are familiar with the tool, have them create their own life path with their own assumptions.
- Have them tweak the savings rates, investment allocations, and retirement spending to see how the assumptions impact their expected retirement age.
Use your creativity to make this activity come alive for your students. I just wanted to give you a head start and the kernel of a good idea. If you tell me you really like it and plan to use it, we might even create an NGPF Activity.
About the Author
Tim's saving habits started at seven when a neighbor with a broken hip gave him a dog walking job. Her recovery, which took almost a year, resulted in Tim getting to know the bank tellers quite well (and accumulating a savings account balance of over $300!). His recent entrepreneurial adventures have included driving a shredding truck, analyzing executive compensation packages for Fortune 500 companies and helping families make better college financing decisions. After volunteering in 2010 to create and teach a personal finance program at Eastside College Prep in East Palo Alto, Tim saw firsthand the impact of an engaging and activity-based curriculum, which inspired him to start a new non-profit, Next Gen Personal Finance.
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