Silly question, isn’t it? Maybe the answer automatically popped up in your head - I retire, when my government tells me to.

However, the second interesting questions may sounds like “Can I retire earlier than the government allow me to?”

The answer is Maybe.

There are some variables in the game which could tell us if it’s possible and if, then when:

1. Your average monthly expenses - this one is simple. The amount of money going out of your pocket or bank account
2. Your salary - The amount of money coming to your pocket or bank account
3. The percentage amount of your salary going to saving/investment account - How much money going out to your investment portfolio? Let’s say your income is 2000€ and 200€ goes to investment account, then you have 10% of your income goes to investment account.
4. The portfolio growth - You expect your portfolio to grow over a time period. Otherwise you wouldn’t send money there. Let’s say your portfolio consists of stocks. One share of stocks has some value - let’s say 100€. If the next year the value of this stock is 110€, then the growth of this stock share is 10%. If you had all your money invested in this one stock and you had bought shares of this stock - then your portfolio growth would have also 10% growth. I would highly don’t recommend doing this - you should never have all your money invested in one stock unless you really know what you do. You want to have your porfolio to be diversified and have money in different places at one time.
5. Yearly dividend yield of portfolio - Some of your stocks can also pay dividends. Therefore it can helps kick in some cashflow which is important for our goal. For example Apple share paid 1.31% annualy - it means that if you have $1000 invested in apple stocks - you could expect $13.1 every year. (Generally, it is expected that dividends will grow over time). You have to take in mind that you have to pay tax on dividends - it varies from country to country.
6. Age is very important here. When you are young you have a lot of time ahead of you - you can afford some risk. When you are too old - it’s not considered to be safe to place your money to stocks. Bonds would be safer option here. Investing in bonds brings less risk, but also lower gains in comparison with stocks.

Why are these things important? In the 5.th item of the list above I mentioned yearly dividend. You can be paid on the yearly basis!

Now the question you can ask is - how much do I need on my investment portfolio, so the yearly dividends and overall growth of my portolio would cover all my expenses? In other words - you don’t have to go to the work again because your side income covers all your expenses = retirement! When is that time?

When? It is quite difficult question to ask.

There are a lot of scenarios that can possibly happen. You can die, lose job, lose health, war, financial crisis, recessions, bank crash, broker crash, hyper-inflation. Thousands of things to cut you off the idea of earlier retirerement - but this is really pessimistic point of view. Instead, we can take a look at the most common and probable scenario.

If you want to get right to the math example, jump on the section.

Inflation

One thing I want to explain is the inflation. Inflation is, when prices goes up. On the other hand, if prices goes down - it’s called deflation. The economy is healthy, when there is a little bit of inflation. The average inflation rate is 2-3%. This means that year later, for what you paid 100€ - now you have to pay 103€.

This is the reason why our parents are always tell us they could afford the whole shopping cart for a few pennies when they were young. That is true but the salaries were lower too! I don’t want to go into the details. One thing is for sure - inflation makes prices higher every year.

Why am I telling this to you? Because when your monthly expenses are now 100€ then in 30 years from now it will be 181€ - and this doesn’t mean you will spend more because you decided to live above your means. Instead, you will pay 181€ for the same exact things you bought 30 years ago. But inflation is not as bad as you maybe thought. It also “reduces” amount of debt. And debt can be bad and good.

You can try inflation calculator to figure out how fast money in cash form lose its value.

So when am I going to retire?

The math behind the yearly retirement is as simple as this sentence:

You can retire as soon as your (passive) income is greater than your expenses.

So when your expenses are zero it means that you can retire exactly right now because you have nothing to spend therefore you don’t need any income to support these expenses. Both you and I know that the person like this doesn’t exist (maybe some ridiculous exceptions like breatharianists - the people who can live without food). But the math is as simple as that - when your expenses are higher you need more passive income to support these expenses. On the other hand, when you have little (or no) expenses your retirement age is going to be earlier than with higher expenses.

Passive income

Passive income is often made by investing. Investing is when your money is making another money for you. It can be investments to the real estate, stocks, bonds, business or whatever you in what you believe makes you another money. Historically, the best options were always stocks and real estate. Both have their advantages and disadvantages but overall these two can make you pretty good bunch of money.

Value growth

When evaluating what your passive income is, people always think of frequently phone notification with messages that the money was transfered on their bank account every single day - but income can be understood also as the growth of some asset value.

When you own stock which doesn’t pay dividend, you really don’t getting any money or income from that stock. But when that stock is growing on its value, we can think of it as “income” - the difference is that we don’t have value in luquid (cash) form but in the asset form.

Saving Rate

Everything is about the saving rate. When you can save 50% of your salary, then your saving rate is 50%. The higher saving rate is - the more money is accumulated right away in your bank account. But instead of holding the 50% in cash (in your bank) - you need to invest the money with some return rate - as you previously read - to the stocks or real estate. Money sitting in your bank doesn’t return anything, instead they lose on value every year (purchase power) due to inflation. Keep some money also in cash form for any type of emergency! Don’t let your bank account on zero.

By holding saved money in a bank account you lose 2-3% every year. Because of inflation, you can buy less for the exact same amount of money.

The 4 percent rule

Another handy indicator for evaluating when to retire is the 4 percent rule. The 4 percent here stands for frequent yearly withdrawal from your porfolio to cover your expenses. And why 4% ? Well, because market yearly grows on average 7% and when you withdraw 4% then in long term your portfolio will grow at 3% rate. Which also covers your expenses grow due to inflation. So simply said, you should be able to withdraw money and cover expenses infinitely.

How much money do you need?

Multiply your yearly expenses x25 - this is the value your portfolio need to have in order to safely retire.

Example: Your average yearly expenses are 20,000€. So your portfolio needs to be 20,000 x 25 = 500,000 €.

I hope I’ve made you a little bit more interested in these concepts and also hope, you’ll find some more information about investing and finance.

Struggling figuring out when to retire? Try this money calculator I’ve made for you.