How to Retire Early – Let’s Run the Numbers
How the heck do you retire early? Isn’t this impossible? While I have not retired early (yet), I’ve seen others do it, and I do believe I understand the basic concept of how to retire early.
So I’m going to share my beliefs about it with you. I welcome your thoughts in the comments below.
Whether you want to retire at 35, 45, 55, 65, or 75, when you break it down to the basic components, retiring (no longer working for an income) is pretty simple: to retire, you need to save enough money or own enough income-producing assets so that you can live off of the resulting income and withdrawals.
Said another way, to retire, your living expenses need to be less than the amount of safe withdrawal and/or income being produced by your savings and/or assets.
How to Retire Early
The main thing that determines if you will retire early is how fast you are able to save money or acquire income-producing assets. To speed up the rate at which you can save or purchase these assets you simply need to increase your income and decrease your expenses. Decreasing your expenses also has the additional benefit of reducing your income requirements in retirement.
If you can learn to live with less, then you can retire much earlier than someone who hasn’t got a handle on the spending. I highly encourage you to check out Mr. Money Mustache and his story surrounding this topic (he’s in his thirties and already retired from his engineering career). There are countless others who have retired early, and plenty of folks who are heading towards that point at light speed.
I make it a point to discuss both of these things (income and expenses) on the blog routinely. Why? Not because I just want to have more money Scrooge McDuck style or live like a miser. It’s because those two things are directly related to the early retirement goal.
The Numbers Behind Early Retirement
A rule of thumb to determine how much you will need to retire is to multiply your current expenses times 25 (this makes use the of the 4% withdrawal rate rule). So if you spend $50,000 a year in expenses, you need to have $1,250,000 saved to be able to safely withdraw that amount each year. If you want to be really conservative, consider using 3% (or 33 times your expenses) instead of 4%.
If you have income producing assets, like a piece of real estate that pays you $5,000 a year in passive income, then you can subtract that annual income from the $50,000, and then need less in savings. If you are counting on social security then you should subtract that amount as well. Someone my age should expect the future equivalent of $1,100 a month in social security benefits, or $13,200 a year. Of course, your social security wouldn’t come into play until you reached 65, so don’t add that in until the appropriate time.
Let’s say you run the numbers above and you come up with the number you will need to retire. To get from where you are now, you simply need to take the difference between what you have now, and what you need. Then use a retirement calculator to determine how much you need to save each month to get to your goal number by a certain date.
Questions to Ask
There’s lots more to cover in this topic: things like where to save your money if you’re planning on retiring early. I’ll try to handle that in a future post.
For now, I want to hear your thoughts on early retirement. Are you planning on retiring early? What are you doing to speed up the process? What will you do once you get there?
This doesn’t take inflation into account! You have to factor that in, too.
Jenny at FrugalGuruGuide Actually the 4% rule does factor in inflation. Follow the link above to see how.
Philip Taylor Jenny at FrugalGuruGuide The 4% rule does. Your calculator does not. You’re asking people to decide how much they want to retire on, in absolute $, not in inflation-adjusted dollars. If the next 30 years are like the last 30, $40k in the future is like $17k now. So retiring on $50k a year is suddenly far less appealing.
Jenny at FrugalGuruGuide No, the number to retire on is already calculated based on the 4% rule. All the calculator does is show you how much to save each month to reach that level. The inflation was already factored in before you get to the calculator. To clarify, the calculator is helping to determine what you put in, not what you take out.
The money thing is important, but I believe it’s even more important to have a clear idea of what you’re going to do with all that time. I retired by 30, but never could figure out what I wanted to do, so I… went back to work.
William_Drop_Dead_Money Being semi-retired now myself I agree with you. It feels pretty aimless sometimes.
Nice post Phil. The retirement math is pretty straight forward. I think early retirement also includes some qualitative factors such as what are you going to do with your time? I don’t play golf, but I’ve been told by retirees that after awhile they need to do more then play golf or whatever their hobby is everyday.
rwohlner I’m hoping to find a way to invest in others when I’m retired. That way the focus can be off of me and helping always brings joy.
It’s rather hard to expect young people to take much care of their retirement savings. Statistically, young people tend to spend more and focus less on the future. At the same time it’s obvious that the earlier you start saving money the better off you will be later down the line. How can we provide an incentive for young people to save? I think signing up for an automatic savings program so that saving becomes a hobby or a game could be engaging and instructive at the same time
Nikita Brodskiy I think we need to start celebrating the successful types again. Our pop culture (Left media) doesn’t support success. They demonize it as if there is a fixed pie.
Very nice breakdown of retiring early. Many people would really like to retire early (myself included), but it’s impossible to know if you can do it until you run these numbers. Being that I’m only 24 and paying off the last bit of our debt, I haven’t really started crunching the numbers on retiring early. I’d love to retire around 50, but I also want to enjoy my life until that point because you never know if you’ll make it there or not. Thanks for the calculator and explaining the calculation!