Capital you can live on
What the calculator works out
First the target amount: yearly expenses divided by the withdrawal rate. With expenses of $3,000 a month and a 4% rate, that is $36,000 ÷ 0.04, or $900,000. Then how many months it takes to get there from your existing capital and monthly deposits at the given return.
The answer is split in two: how much you pay in yourself and how much the return adds. Over long terms the second part is usually bigger than the first, and that is what makes an early start matter more than the size of the deposit.
Where the withdrawal rate comes from
4% is a guide from a US study of historical returns on a portfolio of stocks and bonds: at that rate, the capital did not run out in most 30-year periods. It is not a law and not a guarantee. A lower rate – 3 or 3.5% – means a bigger target and a bigger cushion; a higher one means an earlier start and a higher risk of running the capital down in a bad decade.
Why the return is compounded monthly, not divided by 12
12% a year is not 1% a month. The monthly rate here is the one that, applied twelve times, gives exactly the yearly rate: for 12% that is 0.949%. Dividing by twelve would overstate the result, and the longer the term, the more visibly.
Inflation
The maths is done in today's money. If you enter a nominal return, the target capital comes out in today's money but the term follows nominal growth, and the two do not match. The simple way out: enter the real return, that is nominal minus expected inflation. Then both the amount and the term read in today's buying power.
Common questions about financial freedom
Does the home I live in count as capital?
No. Capital here is what pays you income every month. The home you live in pays nothing, but it lowers your expenses: if you pay no rent, your target is smaller already. A property you rent out does count – at market value, not purchase price.
What happens if I save nothing?
Enter zero as the monthly deposit, and the calculator shows how long your existing capital takes to grow to the target on its own. If you also have no savings, or the return is zero, there is no answer – and that is honest: capital does not appear from nothing without deposits.
Why is the term so long?
Most often because of the ratio of deposit to expenses, not the return. The target capital is tied to expenses: every $100 a month you live on less takes $30,000 off the target at a 4% rate – and at the same time adds that $100 to the deposit. So expenses affect the term twice as strongly as it seems.
Are taxes included?
No. Investment income is usually taxed, and funds charge their own fees. The simplest way to account for this is in the return field: enter what is left after tax and fees.
Can I enter a savings account rate?
Yes, that is a valid scenario – the term will just be longer. A savings rate is often roughly equal to inflation, so the real return is close to zero, and the calculator is then in effect working out how long it takes to reach the amount with deposits alone.
What do I do with "you are already there"?
It means your savings already exceed the target. The question is no longer the term but the investment mix: will the portfolio survive withdrawals in a bad year, is there a cushion of a few years' spending in cash, and is too much in one asset.