One of the biggest challenges for people working toward financial freedom is patience. You’ve got all the right systems set up to get you there but there aren’t many victories to celebrate along the way. With that in mind, I’m going to give you one to add to the list.
As a refresher, financial freedom is the point when you no longer have to bring in active income to maintain your lifestyle. A rough rule of thumb is that you’ll need to save 25 times your anticipated annual expenses. This is the granddaddy of all financial goals - once you achieve financial freedom, money shouldn’t have a hold on you anymore.
But I didn’t want to wait until I’m all the way there to celebrate - so I created Retirement Freedom as an intermediate milestone. Here’s my definition:
Your retirement accounts are big enough for you to retire at 65 even if you stop contributing today
In other words - if you never put another penny in your retirement accounts but they’ll still grow big enough for you to retire at age 65, congratulations - you’re retirement free!
So, how can you figure out if you’re there?
Retirement Freedom Calculation
The calculation here is fairly simple.
Rt your retirement funds today and
g the rate you expect your retirement funds to grow with no contributions. If your projected retirement funds at age 65 is called
R65 = Rt * (1+g)^(65-age)
Et your expected retirement annual expenses (in today’s dollars). We’ll call
t your expected tax rate on your retirement funds and
i your expected rate of inflation. If your necessary retirement fund stash at age 65 is called
E65 = Et * (1+i)^(65-age) / (1-t) * 25
R65 is greater than
E65 and your assumptions hold true, you already have enough set aside to cover your retirement expenses. Congrats - you’ve achieved retirement freedom for age 65 (RF65).
Pretty awesome, right?
What Retirement Freedom Buys You
Think of the mental freedom in knowing that you will retire at 65 regardless of your contributions from here on out. No worries about failing pension plans or social security; you’ve already got everything covered.
Once you’ve achieved Retirement Freedom, you gain incredible peace of mind. No longer are you questioning when, or if, you’ll be retiring. When you know you can comfortably retire at worst at age 65, your attention now can shift to making the most out of the time between now and then.
The Retirement Rocket
Whenever I think about Retirement Freedom and financial freedom, I have a vision of a rocket taking a capsule into outer space. There’s a ton of force needed to get off the ground, not to mention escaping earth’s atmosphere. Once the payload is in space, however, the rocket has served its purpose. It separates from the capsule and burns up in the earth’s atmosphere.
Retirement Freedom is getting you off of earth’s surface and into outer space. At that point, you’ve taken care of the toughest part. Armed with the security of your imminent retirement, you can direct your attention to the fun of navigating the financial cosmos.
Do you want to speed up your retirement - maybe instead of RF65, you want to target RF45? Or do you want to spend your time working only on things you find fun that can cover the bills?
If your income no longer has to cover retirement, all you’re responsible for covering in the interim is your annual expenses and a bit of a safety fund. With that, you can have the flexibility to try a whole lot of new things with your career, living situation, etc.
Are You Retirement Free Yet?
If you’ve read much on this site before, you’re probably expecting a spreadsheet at this point.
The formula above is great and all, but it’s much more fun to analyze how you stand on Retirement Freedom using a spreadsheet instead of a calculator.
With that in mind, here’s your present for today: The Keep Thrifty Retirement Freedom Spreadsheet
If you click on the link, you can get your own copy of the sheet using Google Sheets. Enter in your information and you’ll see:
- Whether you’ve already achieved Retirement Freedom
- When you’ll achieve Retirement Freedom based on your current monthly retirement contributions
- If cell E10 is blank, then your current contributions aren’t enough for you to hit retirement by the age you set.
Go ahead and play around. It can take a bit for Google’s servers to compute everything, so be patient.
Here are some of the fun scenarios I found using the spreadsheet:
- I’m on-track to hit Retirement Freedom in April of 2020 (shortly after our goal of when we’ll achieve debt freedom)
- I’ve already got enough put away to retire at age 70
- A baby born today could be Retirement Free by their 18th birthday if their parents made a monthly contribution of just $169 (assuming $20,000 annual expenses). Wouldn’t that be a nice graduation present? This smells a bit like Mr. Groovy’s Junior IRA
If you haven’t gotten to financial freedom yet, consider making Retirement Freedom an intermediate target. With 29% of households age 55 and older having zero retirement savings, you’re doing pretty well if you can achieve it!
Play around with the spreadsheet a bit. Have you already hit Retirement Freedom? If not, when will you get there? What opportunities will open up for you once you hit Retirement Freedom?
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