When can I retire?

This is a pretty involved question. There are a lot of factors at play -- anticipated spending rate, savings rate, investment returns, etc. However, a much simpler question to answer is "when do my investments completely replace my income?"

With a little bit of mathematical digging, I was able to come to some conclusions. Here are a few assumptions:

(1) Your yearly income keeps pace with inflation. This is not a guarantee. In fact, median U.S. wages have been losing to inflation for the last couple of years. In order for this assumption to be accurate, you must receive a 2-3% raise EVERY YEAR.

(2) You make yearly contributions directly proportional to your yearly income. The rate at which you contribute to your retirement funding is denoted by percentage of your income.

(3) You consistently invest in the stock market, and are dedicated to receiving acceptable returns.

Next, I want to say that these annualized returns are net of inflation (inflation-adjusted). Therefore, when you take your annualized returns, you should subtract 3% for inflation.

Finally, I want to make clear what it means to "replace your income." This refers to the ability to have returns/ interest on your investments completely cover your yearly income. However, simply having your investments accrue and amount equivalent to your income in a year is not sufficient to make a declaration that you can live off the investments. This is because market fluctuations make it difficult to predict the exact amount of money you will make in a year. Historically, many advisors have suggested the 4% rule, which states that a yearly 4% draw down of the market value of your investments will result in a sufficiently low risk that you may safely plan to live off this number. However, due to recent low interest rates, bonds and other low-risk assets do not cover the necessary growth to support this level of consumption; and higher-risk assets generally have too great a volatility to allow 4% withdrawal without more risk-management. I do not claim to know the level of draw down that best describes your situation, but I myself am planning on a 2% yearly draw down rate, just to be conservative.

This computation challenges a lot of traditional assumptions about how much one ought to save for retirement. If you want to have the same level of income as you do now in retirement, then for people in their 20's ought to plan to save 15-20% of their income for retirement. People in their 30's who have not already started saving for retirement, ought to save around 30-35% of their income . People in their 40's who have not already started saving for retirement ought to save 40-50% of their income if they plan to replace their income with investments in retirement.

Notice, too, how the later you are in life, the more risk is necessary to meet your retirement goals. With more time, you have the luxury of a more assured retirement.