Over on Flannel Guy ROI, blogger James has been talking about retirement.
Specifically, he's discussing pretirement, which he defines as "a stepping-stone compromise between full-time work and full-time retirement." Basically, you stop contributing to your retirement savings and let them grow on their own until you actually retire, when you start using them.
While pretirement sounds appealing, we're most interested in his calculations, which show how long you'd need to let your retirement savings grow before tapping into them if you stopped saving today.
Technically, you could raid them any time after age 59 1/2, but James has calculated the waiting period based on your savings increasing enough to generate the income you expect to have in retirement.
Check out the chart below. The bottom axis represents your current savings. Trace up to the colored line that represents how much income you want each year in retirement. Then look to the left axis to estimate how many years it will take your current savings to grow enough to support you during retirement.
There's a table version, as well:
Essentially, the chart tells us that if you have $200,000 saved today and wanted to have a $40,000 income in retirement without saving another penny, it would take 41 years to achieve your goal.
Here's his methodology:
There are a few caveats to this information. First, I’m assuming a 4% safe withdrawal rate and a 4% real rate of return. The rate of return assumption might be a little conservative for long-term, inflation-adjusted growth on a stock portfolio while the 4% safe withdrawal rate might be a little aggressive, depending on whom you ask.
The idea behind the 4% withdrawal rate is that you could theoretically maintain it forever because investment growth will cover or outpace withdrawals … your $1,000,000 nest egg never really gets any smaller even though it keeps throwing off $40,000 in passive income per year.
Some experts say that many modern-day retirees will need upwards of $1 million to support the retirement life they plan to lead, and James's calculations don't dispute that theory: His numbers find that if you retire this year with $1 million in retirement savings, you'll be living on a pretty conservative $40,000 annual income.
And for the record, no one is saying you should stop saving for retirement — just the opposite. If your current savings could grow by this much, imagine how much more money you'll have if you keep contributing?
Hat tip to Rockstar Finance.
More From Business Insider