How to Retire in 5 Years

The other day it occurred to me that I could retire in 5 years. It’s not that I’m going to retire in 5 years (at least I don’t think I will) but it’s kind of exciting to be so close to a goal.

Calculating whether you can retire in 5 years is surprisingly straightforward. In fact, there aren’t many variables involved.

If you’re curious if you could retire in 5 years, I put together this little calculator so you can run the numbers yourself. The calculator defaults to retiring in five years, but you can adjust the number of years if you want to see whether you could retire 7, 10 or 15 years (or 2 years?).

Ready to be financially independent?

If you’re not on track to retire in five years, you should isolate each of the variables in the equation to understand what needs to change so that one day you’ll be 5 years away from retirement.

1) Current Retirement Savings Too Low. Your current retirement savings may be too low if you’re just getting started saving for retirement. Many lawyers are behind their undergraduate peers in terms of retirement savings thanks to the three years of professional school. You might have even taken a couple of years before law school to gain experience. This means that many lawyers don’t start in a legal career until their late 20s. While there isn’t much you can do about your current retirement savings, you’ll need to focus on boosting your nest egg if you want to take advantage of compound interest.

2) Interest Rate Too Low. If you’re not invested in risky assets like stocks, your rate of return will be too low to generate the wealth you need to retire. If your retirement savings are in cash or bonds, you’re relying entirely on your own savings rate to build up your retirement account. Regular readers will know that the best way to get the market returns are low fee index funds. Don’t rely on brute force savings for retirement when you can let the US and international economies work for you.

3) Safe Withdrawal Rate Too Low. The Safe Withdrawal Rate is the percentage you can withdraw from your nest egg each year without worrying about touching the principal. If all goes well, you can withdraw funds at the safe withdrawal rate for 30 years or longer. I’ve written before about using 4% as a benchmark safe withdrawal rate. Depending on market performance in retirement (i.e. if you retire during a bull or bear market), you might even be able to withdraw 5% or 6% each year from your portfolio. Still, others are pessimistic that 4% is too aggressive. If that’s you, know that you’re going to have to work extra years to account for a more conservative withdrawal strategy. There’s no other way around it.

4) Expenses Too High. The Desired Annual Income in Retirement is the amount of money you need each year before taxes. Rather than guessing your desired income, the easiest number to plug in is your current expenses adjusted for the reality of not working. If you’re like most, this means your expenses in retirement will probably be lower once you subtract commuting expenses, job-related expenses and convenience expenses. There’s less pressure to order take out when you have all day to cook your meals. If you’re planning an extravagant retirement with lots of annual spending, you’ll need to work longer.

Calculating a realistic retirement goal

If retiring in 5 years is out of the question, you’re probably wondering how many years until you can retire.

To answer this question, I repurposed the calculator and probably made it more user-friendly. You can type in your specific numbers here and then calculate how many more years you’ll need to work in order to retire.

It’s fun to make slight adjustments in variables like your annual savings amount or income in retirement to see how it impacts the calculation.

Will I actually retire in 5 years?

Probably not. I’m enjoying my career and while I could retire in 5 years, it wouldn’t be a luxurious retirement by any stretch. Plus, I’m getting married this year and could be starting a family soon which will likely increase my expenses (or so I hear).

There’s also some other risks to retiring that could derail a portfolio, including sequence of return risks. That’s when you retire into a bear market. Anyone who retired in 2007 is familiar with sequence of return risk. The problem is that you start off retirement receiving lower or negative returns early in the period when withdrawals are made from your underlying investments. Ideally you’ll retire into a bull market and have the bear years come 10-15 years after you retire.

Another problem could be longevity risk. As humans are living longer and longer lifespans, it would be risky to rely on a nest egg in your mid-30s to last through a retirement that could take you to your mid-90s. Of course, the reality is that if I retired in 5 years I would still engage in income-producing activities. In fact I think it would be hard to sit around and not make any money.

It’s not all bad news though.

The good news about getting close to your retirement number is that you’re achieving financial independence, where you’re no longer required to exchange your time for money. Whether that’s 5, 10 or 25 years away, we all know that if you’re reading a blog like this you hope to achieve that financial independence at some point. Now you have a simple calculator to plug in your numbers to see how long it’s going to take!

Joshua Holt is a former private equity M&A lawyer and the creator of Biglaw Investor. Josh couldn’t find a place where lawyers were talking about money, so he created it himself. He convinces the student loan refinancing companies to give you cashback bonuses for refinancing your student loans and looks forward to you discovering how easy it is to track your net worth with a free tool like Empower.