Your retirement date: How Mint can help show you the year you achieve financial independence

January 20, 2013

Finance

In a previous post, I talked about the importance of tracking your net worth. Once you’ve set up automatic contributions into your various accounts (401(k), Roth IRA, taxable investment accounts) and set up a simple net worth spreadsheet, it’s easy to visually see exactly what your net worth is projected to be from year to year. But how much do you need to actually to become financially independent and at what age will that occur? The answer to that question will vary from person to person. The answer to those questions depend on two obvious factors:

1) How much you save

2) How much you spend

Some financial sites state that you may need up to 80% of your income in retirement. However, this is not an accurate measure for those who save substantial portions of their income and are on an aggressive path towards early retirement. A more accurate measure is simply knowing what your current expenses are.

How much did you spend last month? What about the month before that? According to USA Today, “more than half of adults do not maintain a budget or keep track of expenditures.” Most people hate budgets and I have to admit that I don’t keep one myself. However, I do monitor and track my expenditures. Luckily for you, in addition to being an amazing product to keep track of your net worth, Mint is also awesome for keeping track of what you spend. First, if you don’t have a account, get one immediately. Once Mint starts pulling data from your checking account, it is simply a matter of clicking on the “Transactions” tab to organize those entries. Mint may not initially categorize them correctly, but it only takes a few seconds to put your transactions in the categories that you want to see them in. The good thing is that once you have made the changes, Mint will remember it for future transactions. If you took money out of an ATM, you can even split those transactions into different categories depending on how you spent the cash. If you’ve just started using the program, I wouldn’t waste a tremendous amount of time trying to categorize every transaction. Just start with the current month and move forward from there.

Once you feel as though your transactions have been appropriately labeled, it’s time to move over to the “Trends” tab. There, you can see exactly where you money went (rent, entertainment, food, etc.) presented in a neat little pie chart. To get an idea of your monthly expenditures, have Mint sort your transactions by duration (last month, last 3 months, last 6 months, last year, etc.) Although you can take last month’s expenditures and multiply that by 12 in order to get an estimated yearly expenditures, the longer the timeframe you use, the more accurate the data will be.

So in just a few minutes, you now know where you spent your money and how much you spend on a monthly/yearly basis. So how does that tie into your financial independence timeline? Take your estimated or actual yearly expenditures and divide by 4%. 4%, as you may or may not know, is what is known as the safe withdrawal rate, or the rate that you can withdraw funds from an account that in invested in an appropriate mix of equities and fix income securities without depleting it. Some have questioned the 4% rule, but according to FIRECalc, which calculates the chances of your portfolio succeeding (not going below zero) based on historical data, the absolute worst case scenario is that your portfolio only lasts 25 years. If you want to be even more conservative, you can divide by 3%. So, let’s say that you spend $30K/year.

$30,000/.04 = $750,000 to be saved

Check on your handy dandy spreadsheet when you expect to hit that amount, and there you have it — the age at which you will have achieved financial independence. If these calculations depress you, take heart in the fact that you can significantly reduce your timeframe to financial independence by taking control of various aspects of your life. For example, if you get a higher paying job and don’t feel the need to inflate your lifestyle accordingly, the numbers in your net worth spreadsheet will increase much faster since you’ll be saving more. Also, cutting spending can have dramatic effects on how much you will need in retirement. In the previous example, a person who spends $30K needs to save $750K to become financially independent. This translates to spending $2,500/month. Let’s say that the same person looks at his expenditure breakout and finds $100/month where he can cut back.

$2,400/month * 12 = $28,800/year

$28,800/.04 = $720,000 to be saved

As you can see from the example, a reduction in $100/month results in a reduction of $30,000 overall that needs to be saved.

There are many tools out there that can help you organize and manage your financial life. Hopefully you take advantage of them to more effectively reach your goals.

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