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. Here’s a calculator to help you out.
Questions to Ask
Were you surprised by the numbers? Were you encouraged or discouraged? Remember, you can always go back and make adjustments to your expense numbers. You can also look at that monthly requirement and use it as fuel to try to increase your monthly income or reduce your monthly expenses. How will you respond to the numbers?
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?