As an educator, I often get this question from students. Yes, I know they have attention spans that are minute to minute (or text to text) but when the subject of retirement comes up, they usually fixate on “How can I get there as soon as possible?”

What I love about this post from Mr. Money Moustache (last seen on this blog in 2014), is the simplicity of his answer and how it all comes down to ONE factor: 

Well, I have a surprise for you. It turns out that when it boils right down to it, your time to reach retirement depends on only one factor:

Your savings rate, as a percentage of your take-home pay

If you want to break it down just a bit further, your savings rate is determined entirely by these two things:

How much you take home each year

How much you can live on

While the numbers themselves are quite intuitive and easy to figure out, the relationship between these two numbers  is a bit surprising. If you are spending 100% (or more) of your income, you will never be prepared to retire, unless someone else is doing the saving for you (wealthy parents, social security, pension fund, etc.). So your work career will be Infinite. If you are spending 0% of your income (you live for free somehow), and can maintain this after retirement, you can retire right now. So your working career can be Zero.

He created this handy bar chart that shows how years to retirement (Y-axis) varies based on savings rate (X-axis):

Here’s a calculator that your students can use that may be more engaging than having them read off the chart. Have them run through a few scenarios by changing the assumptions (annual income, annual savings, annual expenses, portfolio value) on the spreadsheet:

The opportunity to create scenarios is endless. Here are a few that I came up with:

Johnny BigSpender earns a salary of $85,000 and is happy to be able to save 5% of his salary (need to convert into $s) every year. Using the assumptions of a

1. Current portfolio value of $0
2. Annual return on investment
3. 4% Withdrawal rate

How many years before he is able to retire?

______________

Muriel earns a salary of $85,000 and is able to save 40% of her salary every year. What would her time to retirement be using the same sets of assumptions (1-3)?

______________

Sid earns a salary of $50,000 a year and saves 40% of his salary every year. BEFORE using the calculator, would you guess his time to retirement is more or less than Muriel’s? Why? Now use the calculator to see how well you were able to predict?

______________

You want to retire by the age of 40 and anticipate that you will be earning $45,000 after you graduate from college. How much will you need to save in order to achieve that goal? Hint: Change the Current Annual Savings number and see how it impacts the Time to Retirement. Use the same assumptions from above (1-3).

• Does this seem reasonable?

_______________

What’s  your key takeaway from working these various scenarios? How might this impact the way you think about saving for retirement?

About the Author

Tim Ranzetta

Tim's saving habits started at seven when a neighbor with a broken hip gave him a dog walking job. Her recovery, which took almost a year, resulted in Tim getting to know the bank tellers quite well (and accumulating a savings account balance of over $300!). His recent entrepreneurial adventures have included driving a shredding truck, analyzing executive compensation packages for Fortune 500 companies and helping families make better college financing decisions. After volunteering in 2010 to create and teach a personal finance program at Eastside College Prep in East Palo Alto, Tim saw firsthand the impact of an engaging and activity-based curriculum, which inspired him to start a new non-profit, Next Gen Personal Finance.

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