How much do you need to retire early? Some might say you need at least $1 million and others may say you need $3 million or even more. Even though those are really large sums of money, will it be enough to sustain you in your years of retirement? While there is no guaranteed answer to this question there are a number of ways to get an amount that’s more probable of yielding success when compared to randomly plucking a number out of the air.
Here are two things that are extremely important to know how much money you’ll need if you want to achieve financial independence and retire early.
- Number of years expected to be in retirement (Years Retired)
- Your cost of living during retirement (Annual Spending)
These two things, time and money or expenses to be more specific, are critical to most if not all calculations related to finding out how much you’ll need for retirement.
A Simple Calculation
The most simple calculation to get your total retirement amount is to take the number of “years retired” and multiple that by your total “annual spend”.
Example: 40 x $50,000 = $2,000,000
This number doesn’t take into account inflation, fluctuations in your annual spending, the growth of your retirement funds if you invest it, and so on.
You may find some who say based what you’ll need for retirement on how you earn in income today. This assumes that your current expenses align in some way with how much you make. This method breaks down for people who spend close to all or more than what they earn. This is why I feel knowing your lifestyle expenses in retirement is more valuable when calculating how much you’ll need to sustain that lifestyle.
The 25x Rule
Another way of calculating how much you’ll need for retirement is the 25x rule. The rule uses your total annual expenses as we did in the previous calculation and multiples it by 25. So in this scenario, we would take the $50,000, multiply it by 25 and get $1,250,000. The 25x rule is based on the 4% rule that we’ll get into next and therefore assumes a 10.3% stock return, a 5.2% bond return, and a 3% inflation rate. These assumptions are not guaranteed since past market performance does not predict future results.
The 4% Rule
You can also use the 4% rule to calculate how much you’ll need to reach financial independence so you can retire. The 4% rule is a basic rule of thumb of how much to withdraw from your retirement funds. In a 1994 study by William Bengen, William determined that a 4% withdrawal rate from a retirement portfolio with a mix of 50% stocks and 50% bonds would last 30 years. So if you already have a lump sum of money using this rule of thumb to find out the max withdrawal rate per year.
Here are a few calculators to help you figure out how much you’ll need for retirement.
- Calculator.net Retirement Calc – https://www.calculator.net/retirement-calculator.html
- FI Calc – https://calculator.ficalc.app/
- FIRE Calc – https://firecalc.com/
- NerdWallet Retirement Calc – https://www.nerdwallet.com/investing/retirement-calculator
- The Ultimate Net Worth, Budgeting, And FIRE Spreadsheet – https://johnnyafrica.com/net-worth-budgeting-spreadsheet/
In summary, the amount “You” need to retire is personal. There is no one rule or method that’ll calculate the perfect numbers for one to retire. Use your best judgment and seek the help of a professional. The most impactful metric to measure will be your expenses so make sure to understand what they are and measure them often while in retirement.