The other day J-Walk posted How to Retire at Age 40:
If you were to take 20% of your annual income starting at age 20 and put it in a fund following the S&P 500 Index ($INX), that fund continued to grow at the long-term historical rate (12%) and you received a 4% raise each year, you could walk away from your job and live off the interest at age 41 matching your current salary — or quit at 43 and be able to give yourself a 4% “raise” each year from the interest, which is probably the better plan because it combats inflation. Original Source
Then today, he posted Retirement Revisited which proves out the math.
I’ve been working on this also and wanted to post my results too. Instead of assuming that the S&P 500 returns 12%, I used actual returns and based it on my actual life. Sort of.
I started at Standard & Poor’s – Indices S&P 500 and clicked on the “S&P 500 historical returns” link to download the Excel (xls) file. I don’t remember how much I made when I was 20, but it wasn’t much because I was still in college and had initially ended up succumbing to easy tribal loans for bad credit to pay for some aspects of college. In fact, I think I was a third-year freshman. I turned 20 in June of 1989 and let’s assume I made $15,000 per year. I’ve hid some columns and rows, but here’s the gist of it:
Column D is the monthly return for the S&P 500 for all 240 months between my 20th and 40th birthdays. Since I’m not 40 yet, the last 19 months are the average annual return of the index from June ’89 to October ’07 (7.98638%). That was computed thusly:
The interest rate for 221 months when I start at zero, put $250 per month in, and end at $125,150.57. The $125k is what I get from this worksheet when I don’t increase the monthly pay by 4% and is not shown in the screen shot.
Column N is just a counter showing the month. Column O is the monthly amount saved. The formula in O9 is
$O$1 is the annual salary at age 20. Divided by 12 months. Times 20% savings rate. Increased 4% every 12 months.
Column P shows the interest I earned for the period and column Q is the balance in my investment account.
I’ll have $196k to live on. Let see if it will last.
Nope. If I live until 75, I’ll be $3 million in debt. At age 40, I’m making about $33,000 per year and that’s the standard I need to maintain. If I pull out 1/12 of that every month, I’ll be broke sometime in September of 2017. Damn, the Huskers might be good by then and I won’t have any money to go to the games.
=D3*MONTHLYRETURNS!$D$9 $D$9 is the average return of ~8% per year from the other sheet.
It’s not prettied up, by you can download SP500Monthly.zip.