January 2021 Retirement Update

The recent holidays have been productive for my retirement planning!

I’ve been working for a few years on writing my own Monte Carlo retirement simulations and other algorithms. Now I’ve added some graphs to better visualize my progress, including the one below:

The chart shows the progress of my net worth (in dollars, and not starting at zero, although I’ve chosen to omit the units) over the last few years.

For each combination of age and net worth, the diagonal black lines mark my estimate of the probability of not running out of money during a long retirement. The probability values are based on my projected future expenses and assumptions about taxes, investment returns and other factors.

In other words, when the red net worth line reaches the probability of retirement success that I’m comfortable with, I can retire.

The progress is exciting: had I been forced to retire four years ago, my probability of financing retirement with my savings was only 10%, but today it is 90%, and the 99% success rate is in sight within a few years!

If the economy slows but doesn’t collapse and I keep my job, I should reach financial independence by age 55!

During my first 20 years of working and saving (before the time interval shown in the chart), the probability was always close to zero (remember, it’s the probability of having enough money if retiring at that early age and with the limited savings I had), yet those savings are the foundation that made the recent progress possible.

For many people, the progress in the last years before retirement is faster because of higher income and sometimes lower expenses (paid off loans and kids moving out). But the diagonal probability lines are also closer together in the middle while they are more spread apart both for low and high net worth values.

This is because the probability has a bell-shaped distribution. The last 0.01% from 99.9% to 100% would be very hard to attain, as 100% means having enough money to cover all future expense even in high-inflation scenarios and with limited investing to avoid the (small) risk of repeated market crashes. In practice, the range from 90% to 99.9% should be enough for most people, especially if we can be flexible with our expenses.