Formula to determine readiness to retire based on age, networth and annual expense
"The standard interpretation of ""can I afford to retire"" is ""can I live on just the income from my savings, never touching the principal."" To estimate that, you need to make reasonable guesses about the return you expect, the rate of inflation, your real costs -- remember to allow for medical emergencies, major house repairs, and the like when determining you average needs, not to mention taxes if this isn't all tax-sheltered! -- and then build in a safety factor. You said liquid assets, and that's correct; you don't want to be forced into a reverse mortgage by anything short of a disaster. An old rule of thumb was that -- properly invested -- you could expect about 4% real return after subtracting inflation. That may or may not still be correct, but it makes an easy starting point. If we take your number of $50k/year (today's dollars) and assume you've included all the tax and contingency amounts, that means your nest egg needs to be 50k/.04, or $1,250,000. (I'm figuring I need at least $1.8M liquid assets to retire.) The $1.5M you gave would, under this set of assumptions, allow drawing up to $60k/year, which gives you some hope that your holdings would mot just maintain themselves but grow, giving you additional buffer against emergencies later. Having said that: some folks have suggested that, given what the market is currently doing, it might be wiser to assume smaller average returns. Or you may make different assumptions about inflation, or want a larger emergency buffer. That's all judgement calls, based on your best guesses about the economy in general and your investments in particular.  A good financial advisor (not a broker) will have access to better tools for exploring this, using techniques like monte-carlo simulation to try to estimate both best and worst cases, and can thus give you a somewhat more reliable answer than this rule-of-thumb approach. But that's still probabilities, not promises. Another way to test it: Find out how much an insurance company would want as the price of an open-ended inflation-adjusted $50k-a-year annuity. Making these estimates is their business; if they can't make a good guess, nobody can. Admittedly they're also factoring the odds of your dying early into the mix, but on the other hand they're also planning on making a profit from the deal, so their number might be a reasonable one for ""self-insuring"" too. Or might not. Or you might decide that it's worth buying an annuity for part or all of this, paying them to absorb the risk. In the end, ""ya pays yer money and takes yer cherce."""
If annualized rate of return is what you are looking for, using a tool would make it a lot easier.   In the post I've also explained how to use the spreadsheet.   Hope this helps. I'll offer another answer, using different figures. Let's assume 6% is the rate of return you can expect.  You are age 25, and plan to retire at age 65.  If you have $0 and want $1M at retirement, you will need to put away $524.20/month, or $6,290.40/year, which is 15% of $41,936.  So $41,936 is what you'd need to make per year in order to get to your target. You can calculate your own figures with a financial calculator:  480 months as your term (or, adjust this to your time horizon in months), .486755% as your interest (or, take your assumed interest rate + 1 to the 1/12th power and subtract 1 to convert to a monthly interest rate), 0 as your PV, and $1M as your FV; then solve for PMT. "It depends what you mean. Finance Independence and Retirement Early (FI/RE) are two overlapping ideas. If you plan to retire early and spend the same amount of money every year (adjusted for inflation), then you need to save twenty-times your yearly spending to satisfy the 4% Safe Withdrawal rule of thumb. Carefully notice I say ""yearly spending"" and not income.  I'm unaware how it is in Pakistan, but in America, people who retire in their sixties tend to reduce their spending by 30%. This is for a host of reasons like not eating out as much, not driving to work, paid off mortgages, and their children being adults now. In this type of profile, a person needs to save 17.5x yearly spending. This numbers presume a person will only use their built assets as an income source. Any programs like a government pension acting as a safety net. If you factor those in, the estimates above become smaller." You should also update your Net Worth Statement as well as an inventory of all your assets.  Unfortunately these are extremely time consuming, but in the event that you pass away your loved ones will know all of your finances and it will be easier for them in a very difficult time.   The Net Worth Statement compiles just that, your net worth.  The net worth is compiled by subtracting your liabilities from you assets.  Assets include things such as cash, money in accounts, all estimated value of your household items, any life insurance, bonds, mutual bonds, and retirement money.  The liabilities include amounts such as your mortgage, second mortgage, car loans, unsecured loans, credit cards, student loans, and life insurance loans.  This statement is a great way to track year to year how you are doing on your finances and if you are where you need to be in order to retire when you would like. The Inventory is also very important. This is used in the event that you have a fire or some sort of disaster that requires you to give a statement of any items you had in your home.  This is a very difficult thing to go through, and having this statement ready to hand over only makes thing easier.  There are a couple ways to do this.  Some people take pictures of everything they have in their house and make notes of prices and values, some people take a video of the whole house, and some people write down item by item on the computer or on a piece of paper.  Whatever way you would like to do it is fine, what works for one person does not necessarily work for the other. You can take a queue from any sales opportunity and position it in ways that will still appeal to someone who intends to continue working perpetually. Here are some of the points I would make: 401k matching funds are free money that you will have access to in ~20 years whether you retire or not. Long-term savings that grow in the stock market turn into residual income that will add to your standard of living whether you retire or not. There are tax advantages to deferring income if you are in a high tax bracket now. You will have flexibility to withdraw that money in future years where you might have lower earnings. (For example, in a future year, you could take a sabbatical trip to Europe for a few months without pay and draw on your savings during that time that you are not making money.) Even if you don't invest in a 401k, you and max out HSA accounts if you are eligible, and position that as money for medical expenses. If you never have medical reasons to spend that money, you can still withdraw at retirement age like a 401k or IRA. (Though it gets taxed as income if not used for qualified medical purposes at retirement time.) With an unwilling partner, it's difficult to make a lot of progress, but if you have matching funds from your employer, do make sure that you are getting at least those for yourself. Ultimately if he doesn't want to save for himself, you should for yourself. There are no guarantees in life. If he dies or leaves, you must be prepared to take care of your own needs. "Not to state the obvious, but whenever an investment is being made, the ""nuts and bolts"" is your return on investment.  Analyzing the rate of return on an investment is the primary factor in any decision.  Ideally, once the actual mechanics of investment and side ""benefits"" are factored out, the goal is to be able to analyze the pure financial return. Usually the biggest problem faced in analyzing various investments is comparing the Present Value of an investment to a series of payments that may be made or received in the future.  When considering the purchase of a large equity, for example, you might be looking at what series of payments are required to purchase the asset.  You can also reverse this and ask, ""What amount of money is equivalent to this series of payments?"" Ultimately, the Present Value of an Annuity is the way to make these comparisons equal.   Fundamentally, the Present Value of an annuity is an amount of money that should, in theory, be equivalent to a series of payments.  There is, for example, technically no difference between $1064.94 today and $100 a month for a year, at an interest rate of 1% per month.  Grant you, most people would be happier with the money now, but that is what interest does - it compensates you for waiting on your money.   You can fire up a spreadsheet and calculate the Present Value as long as you have the monthly payment, interest rate, and number of periods.  Alternatively, you can calculate any one of those missing four variables - and the key is usually to understand what that rate would be in order to compare the investments. Finally, the taxable implication is really just an adjustment to the rate of return. Imagine the following three scenarios: (Obviously the rates are fictional - the goal is to show they are the same). Scenarios 1 & 2 are really just two sides of the same coin.  Using the Future Value formula in Excel = FV(0.5%, 12, -100), you get $1233.56.  In scenario 1, you would have $1233.56 in your bank account.  In scenario 2, your bank would have $1233.56 from you, and you would have $100 less debt per month.  They are equivalent transactions.   Scenario 3 is really just a variation on scenario 2, localized to the United States.  Because the interest is tax deductible, however, the rate of 6% isn't really accurate.  Assuming you had a 25% tax bracket, you'd actually be getting back one quarter of your interest.  Put another way, 7.5% mortgage interest costs you as much as 6% credit card debt. This is how you compare apples and organges - just turn everything into an annuity or a lump sum, using Present Value calculations.   Finally, quick rule of thumb - if you owe taxes in both Canada and the US, your Canadian taxes are probably higher than your American ones.  As such, any tax incentives will be concomitantly higher.  If you only can only use Canadian tax incentives, then look to those incentives, other things being equal." If you set a savings amount now and leave it totally fixed you're likely to massively undershoot or overshoot.  What is more likely is that you will adjust either your savings or your retirement expectations as things go along.  If it turns out you have $10M (2010 dollars) at age 50 perhaps you'll retire early, and if you have $10k perhaps you'll buckle down and work much longer or save much more. So I think what you are looking for is an assurance that if you budget to save x% of your salary over n years, and you get an after-inflation after-tax return of y% pa, you will eventually be able to retire on an income equivalent to z% of your working income.  It's pretty easy to calculate that through a future-value formula.   For instance, one set of values that works is saving 20% of income, 5% real return, 30 years = final income of 66% of working income.  Or save half your income and within 14 years you can retire and keep spending the amount you were previously spending.  Resist the temptation to crank up the assumed return until you get the value you want. I think it would be great hubris to try to make this very precise.  Yes, probably you will get raises, of course there are taxes to take into account (probably higher while you're saving), inflation and returns will vary from year to year, et.  You can guess at them.  But they'll change, and there are bigger things that are unpredictable: your personal life, your health, the economic future of your career or industry.  I reckon this simple formula is about as good as you will get. You want the net expense of the surcharge minus the rewards to be no more than the interest that you would pay otherwise.   Where t is the compounding period for the rate D expressed as a fraction of the overall period for D.  So if D is an annual rate (not the APR, the simple rate), it would be expressed as something like 1/365 if compounded daily.  That is the number of years in the compounding period.  If a monthly rate or weekly compounding, that would change.   And p is the number of such time periods in the grace period.  So if the grace period were one month, this might be 30.   Other variables are as used in the question, all expressed as percentages (which is why I'm dividing by 100).  The D rate should be the simple rate, like 6% not the APR of 6.24% or whatever.   Note that I'm saying <=.  When equal, there is no financial advantage or disadvantage.  You could choose either method for the same cost.  Now, one method may be more annoying to implement, in which case you might add a fee for it on one side or the other of the equation.  Or simply change the less than or equal to be just less than.   I may be missing something that you should consider but I don't know.  The problem is generic enough that pertinent details might be hidden.  But hopefully this at least gives you a framework under which to consider it. According to my reading, the Trinity study says you can withdraw 4% a year for 30 years without exhausting your nest egg, not necessarily that it won't shrink. In most cases, your nest egg will indeed grow. But unfortunately you can't plan to leave no estate while simultaneously preparing for worst-case scenarios in case you happen to pick a bad year to stop working. You can run simulations based on historical data on sites like cFIREsim. And once you're retired, you could potentially increase your spending if simulations show that you're likely to leave behind a large estate. You also probably want to look into things like charitable remainder trusts. It's important to have both long term goals and milestones along the way. In an article I wrote about saving 15% of one's income, I offered the following table:  This table shows savings starting at age 20 (young, I know, so shift 2 years out) and ending at 60 with 18-1/2 year's of income saved due to investment returns. The 18-1/2 results in 74% of one's income replaced at retirement if we follow the 4% rule. One can adjust this number, assuming Social Security will replace 30%, and that spending will go down in retirement, you might need to save less than this shows. What's important is that as a starting point, it shows 2X income saved by age 30. Perhaps 1X is more reasonable. You are at just over .5X and proposing to spend nearly half of that on a single purchase.  Financial independence means to somehow create an income you can live on without the need to work. There are many ways to do it, but it usually starts with a high saving rate. Your numbers suggest a good income now, but maybe this is only recently, else you'd have over $200K in the bank.  I suggest you read all you can about investments and the types of retirement accounts, including 401(k) (if you have that available to you), IRA, and Roth IRA. The details you offer don't allow me to get much more specific than this. Pete, 25 years of inflation looks like 100% to me with back of napkin math. $220K will feel like $110K. In today's dollars, can you live on $110K?  (Plus whatever Social Security you'll get)? My concern from what you wrote, if I'm reading it correctly, is that you have this great income, but relatively low savings until now.  From the recent question Building financial independence I offered a guide to savings as it compares to income.  Even shifted 5 years for a later start, and scaled for a 70-75% replacement ratio, you should be at 2X (or $440K) by now. That's not a criticism, but an observation that you've been spending at a nice clip so far. The result is less saving, of course, but also a need for a higher replacement ratio.  Last, a 10% return for the next 25 years may be optimistic. I'm not forecasting doom or gloom, just a more reasonable rate of return, and wouldn't plan to see higher than 7-8% for purposes of planning. If I am wrong, (and if so, we can both laugh all the way to the bank) you can always scale back savings in 10-15 years. Or retire earlier.  Note: Pete's question asks about a 40 year old working till 65, but the comment below has him 48 and planning to work until 62. 14 years of $45K deposits total less than $700K. Even at 10%, it wouldn't grow to much more than $2M, let alone $5M. "Another approach would be more personalized, which is to measure the risk of missing your goals, rather than measuring the risk of an investment in some abstract sense. Financial planners do this for example with Monte Carlo simulation software (see http://en.wikipedia.org/wiki/Monte_Carlo_method). They would put in a goal such as not running out of money before you die, with assumptions such as the longest you might live and how much you'll withdraw every year. You'd also assume an asset allocation. The Monte Carlo simulation then generates random market movements over the time period, considering historical behavior of your asset allocation, and each run of the simulation would either succeed (you are able to support yourself until death) or fail (you run out of money). The risk measure is the percentage of simulation runs that fail. You can do this to plan saving for retirement in addition to planning withdrawals; then your goal would be to have X amount of money in real after-inflation dollars, perhaps, and success is if you end up with it, and failure is if you don't. The great thing about this risk measure is that it's relevant and personal; ""10% chance of being impoverished at age 85,"" ""20% chance of having to work an extra decade because you don't have enough at 65,"" these kinds of answers. Which is a lot easier to act on than ""the variance is 10"" or ""the beta is 1.5"" - would you rather know your plan has a 90% chance of success, or know that you have a variance of 10? Both numbers are probably just guesses, but at least the ""chance of success"" measure is actionable and relevant. Some tangential thoughts FWIW:" Set your xirr formula to a very tall column, leaving lots of empty rows for future additions. In column C, instead of hardcoding the value, use a formula that tests if it's the current bottom entry, like this: =IF(ISBLANK(A7),-C6, C6) If the next row has no date entered (yet), then this is the latest value, and make it negative. Now, to digress a bit, there are several ways to measure returns. I feel XIRR is good for individual positions, like holding a stock, maybe buying more via DRIP, etc. For the whole portfolio it stinks. XIRR is greatly affected by timing of cash flows. Steady deposits and no withdrawals dramatically skew the return lower. And the opposite is true for steady withdrawals. I prefer to use TWRR (aka TWIRR). Time Weighted Rate of Return. The word 'time' is confusing, because it's the opposite. TWRR is agnostic to timing of cashflows. I have a sample Excel spreadsheet that you're welcome to steal from: http://moosiefinance.com/static/models/spreadsheets.html (it's the top entry in the list). Some people prefer XIRR. TWRR allows an apples-to-apples comparison with indexes and funds. Imagine twin brothers. They both invest in the exact same ideas, but the amount of cash deployed into these ideas is different, solely because one brother gets his salary bonus annually, in January, and the other brother gets no bonus, but has a higher bi-weekly salary to compensate. With TWRR, their percent returns will be identical. With XIRR they will be very different. TWRR separates out investing acumen from the happenstance timing of when you get your money to deposit, and when you retire, when you choose to take withdrawals. Something to think about, if you like. You might find this website interesting, too: http://www.dailyvest.com/ Yes, assuming that your cash flow is constantly of size 5 and initial investment is 100, the following applies: IRR of 5% over 3 years: Value of CashFlows: 4.7619 + 4.5351 + 4.3192 = 13.6162 NPV: 100 - 13.6162 = 86.3838 Continuous compounding: 86.3838 * (1.05^3) = 100 You can't get there from here.  This isn't the right data.  Consider the following five-year history:  2%, 16%, 32%, 14%, 1%.  That would give a 13% average annual return.  Now compare to -37%, 26%, 15%, 2%, 16%.  That would give a 4% average annual return.   Notice anything about those numbers?  Two of them are in both series.  This isn't an accident.  The first set of five numbers are actual stock market returns from the last five years while the latter five start three years earlier.  The critical thing is that five years of returns aren't enough.  You'd need to know not just how you can handle a bull market but how you do in a bear market as well.  Because there will be bear markets.   Also consider whether average annual returns are what you want.  Consider what actually happens in the second set of numbers:   But if you had had a steady 4% return, you would have had a total return of 21%, not the 8% that would have really happened.  The point being that calculating from averages gives misleading results.  This gets even worse if you remove money from your principal for living expenses every year.   The usual way to compensate for that is to do a 70% stock/30% bond mix (or 75%/25%) with five years of expenses in cash-equivalent savings.  With cash-equivalents, you won't even keep up with inflation.  The stock/bond mix might give you a 7% return after inflation.  So the five years of expenses are more and more problematic as your nest egg shrinks.  It's better to live off the interest if you can.  You don't know how long you'll live or how the market will do.   From there, it's just about how much risk you want to take.  A current nest egg of twenty times expenses might be enough, but thirty times would be better.  Since the 1970s, the stock market hasn't had a long bad patch relative to inflation.  Maybe you could squeak through with ten.  But if the 2020s are like the 1970s, you'd be in trouble.