How to Calculate What You Need in Order to Retire Early
When considering retiring early there are two issues which makes be thought about first.
1. Can you really afford to retire early?
2. Do you actually really want to retire early?
In order for any one to retire early then will need to calculate out how much they will actually need in order to live comfortably.
1. First you need to determine your pay out period. This relates to the length of time you will need your retirement funds to last for. So really what we are asking here is what is your life expectancy? A great way for finding out what your life expectancy will be is by looking at the Life Expectancy Tables provided by the IRS. However, it might be advisable to add on a further 5 or 10 years on to the figure that they come up with and this will be your pay out period.
2. Once you have determined what your pay out period is going to be you can then calculate the inflation adjusted withdrawal rate. During this part of the calculation you will need to think about how much risk you are willing to take.
To calculate what your expenses will be on an annual basis in order to calculate early retirement. What you do is take your annual expenses and then increase them by 5% in order to provide you with a ball park figure of what it is likely to cost you to live comfortably each year during your retirement. In to this equation you will also need to include an inflation rate. So I would recommend that you say put this at about 4% as during the last 20 years it has sat at around 5%.
So by using the pointers provided above a person should be able to calculate early retirement in order to see if it would be beneficial to them to do so.
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