How am I going to retire? I wanted to use this blog post to discuss how much money I think I will need, why that is, and how I plan to have that quantity of money.
I think using real examples can sometimes be the best way to learn so I wanted to offer my personal experience and plan to achieve full FIRE (financial independence retire early) and live on my investments and possibly some part time work.
First off, I like to calculate how much money I will have if I continue the same habits I have now and retire at the normal retirement age of 67. According to NerdWallet, if I save only $300 per month from now until the age of 67 and my investments return 8% per year, I will have about 4.6 Million dollars. During retirement I can spend $3000 per month until I am 120 years old without every running out of money.
With a 10% rate of return, I will have about 9.5 Million dollars which is significantly more than I will need, but it is a more realistic number if I decided to retire at 67. I DO NOT PLAN to retire at 67, I would like to retire much earlier which means I will have a lot less money.
If I only save $500 per month from now until I am 40 years old I will have about 0.9 Million dollars ($900,000) at a 10% return on investment. Is that enough?
Well according to the 4% rule you should save 25x the amount that you spend each year and that should be able to last you forever if you only spend 4% of your money each year. I can get by on less than 25k per year but for retirement I’d like to be a little bit more comfortable and travel more so 30k seems more reasonable (for just me not my spouse or children if that happens). 30k times 25 is $750,000. I will be quite a bit over my needs at age 40 because it is expected that I will be worth about $900,000. Having $900,000 would allow me to spend about $36,000 per year.
There is a very high chance I end up saving more than $500 per month at some point before retirement, I will also probably be married by this point. That means her income can also be used to help boost the savings which can get us probably closer to 1.5 million dollars. That would allow us both to have quite a bit of money to spend each year and hopefully be close to having a paid off home.
It’s important to note that in my opinion you should try to pay off your house/mortgage before retiring. This allows you to be WAY less stressed about money because worst case you can do nothing fun and stay in your paid off house for a very long time. Expenses are much cheaper when you have a paid off home. Planning for the worst-case scenario I believe is very necessary, especially if you plan to retire at a young age and even more important if you have children. Also, if you home is paid off you can probably afford food and taxes working a part time job while the economy is bad, and your investments are crumbling. You could even start a garden to have some cheaper food. That’s not a terrible worst case in my opinion. Of course, I don’t want to be in that situation, so having some wiggle room in the budget is a MUST for me. If I must cut vacations for a year or two and everything else will be normal that’s something that I can handle. If I decide I never want to cut anything out of my budget even when the economy is trashed, I will have to save more than I currently think I do before I retire.
I also want to note that if I push off retirement even just 5 years, or if I work part time to cover most of my expenses for a few years that can drastically increase the amount of money I have saved. After years of saving, your money starts to compound drastically. Instead of my investments making a few thousand per year they might be making $100,000 per year (if I have 1 million dollars and it is returning 10% per year). So, delaying five years of retirement could make me worth an extra $500,000 for example. Like I stated in the beginning, retiring at 40 vs. 67 is almost 10 million dollars difference in money. I personally would rather not work a desk job for 30 more years and have less money. But, if I have my own business that I am passionate about or just a hobby that makes a little money that is something I will do.
With a paid off house and vehicles, your expenses are almost only taxes and food (not including things that are for fun). Between housing, and transportation the average family in the U.S apparently spends about 30% of their income. Honestly, in my experience it is closer to 50 or 60% for most of my friends and family. But let’s say 30%. if you spend $60,000 per year, if you pay off your house and your vehicles, your income will “increase” 30% (because those are no longer expenses). That’s $18,000 that you are no longer spending which means you now only need about $42,000 to live on (you may need to factor in future vehicles if one breaks/repairs/insurance, but this is just a rough guess).
Next up, depending on how you invest, your taxes will decrease significantly, which means you need even less to live on, I’m going to say that you will save 10% on taxes to make this simple, this brings you down to $37,800. To be clear, this is if you are now only requiring $42,000 per year to live on as an income, because you are living off investments you are no longer paying income tax if your investments are something like a Roth IRA or Roth 401k. This brings you to a requirement of $37,800.
You no longer must save any money because you are retired and living off your savings. If you are planning to retire in your 40’s, you are probably saving at least 20% of your income (probably much more). 20% of the original $60,000 is $12,000. So, $37,800 – $12,000 takes you to $25,800 dollars.
Of course, you might add expenses when you retire, you may have income when you retire from a side gig or hobby. You may just want a part time job for fun, or even decide to start up a small business (be careful with small business, they can steal a lot of money from the retirement fund).
My point of this all is that I can easily live off $30k once my house is paid off. If I have a family This may need to increase to $40k or so because of the extra food and clothing costs, maybe another vehicle and more expensive travel. But YOU DON’T NEED THAT MUCH to have a comfortable early retirement. If you have any extra income you can easily reduce your retirement timeframe by years.
The house I am currently living in will become a rental property, after putting most of rental profit in savings, this will at least provide a few hundred dollars per month of extra income. If needed the home can be sold for a few hundred thousand late in life to keep the retirement going (hopefully that is not the case). I will keep my money invested until I absolutely need to sell the stocks/crypto/houses etc. I also will continue to do part time work, like this blog or working at a cafe or any other project that comes up.
I really encourage you all to really figure out the math on how much money it will take you to retire. Would you start saving 30% of your money so you can retire at 40 instead of 65? Would you get roommates to help pay off your mortgage? Would you work a part time job at a coffee shop, or gym, or freelance writing, even become a semi-professional sewer.
There are two ways to retire early, make more money or spend less money. You can combine these two things for the best benefit. When you have children wouldn’t you like to spend every day with them without worrying about the office calling you, or that stupid e-mail. Travel the world without stress of returning to work or spending too much money. No debt in your life, and hundreds of other benefits.
I have many other blog posts that cover retirement, how to save money, how to lower your expenses, and much more. Please check them out!
Reach out to me if you need tips or want me to help you breakdown how much you may need to retire. Thanks for reading!
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