When Can You Retire?

Bottom Line Up Front: When you have 25 times your retirement expenditure invested in a well-diversified portfolio, you could be in a good position to retire.

Alright, so the exact answer is situationally dependent, but I didn’t want to bury to led. In 1994 three professors from Trinity University published a paper titled “Sustainable Withdrawal Rates From Your Retirement Portfolio. This paper is commonly referred to as simply “The Trinity Study". The study concluded using historical data that over a 30-year retirement period, a withdrawal rate of 4% in the first year, then adjustment for inflation in subsequent years, would reliably provide inflation-adjusted income for retirees. The authors updated their findings in 2009, and several others have replicated their work, and proposed different safe withdrawal rates since.

The 25 times expenses guideline allows for an initial 4% withdrawal rate. A more conservative approach would have a lower withdrawal rate, whereas a more aggressive strategy would allow for a higher withdrawal rate. However, 4% is typically a good benchmark to work from. It is important to note that this methodology utilizes a 4% withdrawal rate the first year, then only increases the withdrawal each year by inflation. The 4% rule does not mean an investor can withdraw 4% of their portfolio each year. While this rule isn’t a substitute for diligent financial planning, it does give investors a rough benchmark to assess their investments.

So what’s the catch? 

There are several factors to consider when determining how much you need for retirement:

• How will your tax position change retirement?
• How does the balance of Roth versus Traditional funds change the needs of your portfolio?
• How will social security benefits or pension income help offset your investment needs?
• How are you going to cover the costs of healthcare?
• How will your housing needs change?
• How will social security benefits or pensions potentially offset the need for retirement income?
• How confident are you that your investment portfolio will remain stable while also outpacing inflation?
• Do you want to leave anything to future generations or charities as part of your estate?

Whether you're already retired or just planning when you might be able to retire, working with a financial advisor can help map out how much you need to invest and all the strategies to reach that goal in the best way possible.