How Much Money Do I Need To Retire At 40 – Retirement isn’t about working until you’re 65, it’s really about how many dollars you need to invest to survive the rest of your life. This is something that a lot of people don’t know about, so I’m excited to share that it’s a possibility.
We’re entering the final part of my three-part series on how to retire early. If you haven’t seen the first part, be sure to check it out – How to enter the concept of FI/RE and how to find your savings rate and reduce costs. Today we are talking all about how much money is needed to earn and Invest for retirement. Talk about money!
- 1 How Much Money Do I Need To Retire At 40
- 2 Can I Retire Early?
- 3 How Much Money Would You Need To Retire Off Stock Dividends?
- 4 How Much Money Do I Need To Retire? (infographic)
- 5 How Much Money You Need To Retire Comfortably Around The World
How Much Money Do I Need To Retire At 40
The easiest formula and the one I actually used when I calculated my first number was:
How Much Super Do I Need To Retire On $60,000 A Year?
Are you wondering why 25? That number comes from the 4% rule from Trinity Studies. This is a retirement portfolio study based on historical stock market data that shows they can withdraw money from retirement portfolios and not run out of money. They determined that 4% is a safe withdrawal rate where you can survive your nest egg and not run out of money.
For early retirees, there is some playing it safe because we have a longer life expectancy than the average retiree. They use the formula:
This means you can achieve a safe withdrawal rate of 3%. Check out this chart from the Early Retirement Now blog, which basically graphs the data from the Trinity study and explains how they arrived at the 4% rule.
OK, I lied! I know I said that you will never run out of money but the truth is that there is a 1% chance that you will run out of money based on their study. This assumes a 75%/25% share of your retirement investments over 30 years. However, the odds are definitely in your favor.
Can I Retire Early?
That’s good news! But since we are early retirees here, we have to look at the 60 year time frame. . If you use the Trinity Study and the 4% rule to determine your FI/RE amount and safe withdrawal rate (SWR), your portfolio will be 85-89% successful, if you have 75% + of portfolio.
To offset the potential downsides of a 4% SWR, many college-age retirees end up pursuing hobbies that earn them money — hobbies that don’t feel like work. It’s easier to make money doing things that make you happy, especially if you have more time to practice your skills.
If you plan to never work again, 3% SWR may be a better goal for you. You can see from the chart that even if you have a conservative 50% stock / 50% bond portfolio, you still have a 100% chance of success with a 3% safe withdrawal rate.
If you calculate that number, you can add up big expenses. For example, if you want to pay for your child’s school or you want to have a beautiful wedding, you must bring it. Consider this example:
Your Mastery Over How You Frame Your Lifestyle Will Drive Your Retirement Capital Needs
($50,000 annual expenses * 25) + ($250,000 college tuition * 2 children) = $1.75 million for early retirement. What is inflation?
I am often asked if this causes inflation in the economy and the answer is yes. If the average market return is 10%, you subtract inflation. So 10% growth in the stock market – 3% inflation = 7%. If you pull 3-4%, below this growth, you should be “safe”.
So yes, this formula accounts for average inflation and average market returns, but it doesn’t account for lifetime inflation. This assumes that your lifestyle remains the same or less the same. You can’t spend lavishly when you retire, and that’s if you want to live the lifestyle you’re living now. Unless your portfolio is so good that after many years of the same life you can have millions of dollars, then you can go ahead and bet!
When I retire, I don’t see myself flying first class anywhere. It’s not something I appreciate spending money on. I clearly prioritize retirement and becoming financially independent over eating caviar every day.
How Much Money Would You Need To Retire Off Stock Dividends?
So, let’s dive a little bit into exactly what I was aiming for my FI/RE numbers and how I got the numbers I did. Now I am the only earning woman without children or drowning. This is an acronym commonly used in the FI/RE community. DINK stands for Double Income No Kids or DI1K stands for Double Income One Kid. The acronym FI/RE can be a bit confusing! WASH does not mean wash your hands!
So as a MAN, my current annual expenses are about $30,000 per year. I actually live at home with my parents, but I based my life in Los Angeles after living there for 10 years. However, part of my plan for early retirement is to have children.
To ensure that I can safely have children with or without a partner, I will increase my annual expenses to $60,000. This way I feel like I have a safety net to take care of them and stay well in my own way. Since I’m targeting a 4% SWR, I multiply $60,000 x 25 to get my FI/RE number of $1.5 million.
Hopefully this amount will help me save for my children’s education, take care of them myself, and if I have a spouse, our FI/RE number will double – $3 million. That’s 4% SWR on $100K/year. Target the FatFIRE DINK!
How Much Money Do I Need To Retire? (infographic)
I’m comfortable withdrawing at 4% because I don’t sit around doing nothing all day. I plan to be a stay at home mom and take care of my kids, but I will continue to work in a hobby that pays. I have an Etsy shop and my YouTube channel. Most of all, though, I want to enjoy time with my children and go as fast (or as little) as I want. I just want to make money doing what I love.
One important thing to remember about your own FI/RE number is that it can always change. In my short time looking for FI/RE it changed from $1.25M to $1.5M because I felt it was a safer number. You should always plan for the unknown. You never know how crazy your health care costs are. On the other hand, you should not keep pushing the door and never achieve what you consider financial freedom.
So $1.5 million is a safe fire number for me right now, but is always subject to change. It is very important to be true to yourself and feel what is best for you. This is your life, don’t let anyone tell you it’s too small. One comment I get from people who care…
Many others before me have done this. I wouldn’t be a pioneer in the field and retire early otherwise there are other people who have written about this and successfully retired early. I see them and I want to live too! I want you and everyone else to know that they can retire early and not have to work until they are 65, which I always thought you should do.
Ways Hr Can Help Millennials Be Smarter Than Their Parents About Retirement
To summarize everything on how to retire early, be sure to check the first thing about getting the right mindset for FI / RE, the second about tracking your money and learning how to reduce your expenses, and the third. This is about finding your FI/RE number.
I hope you find this series helpful. It is very important whether you retire early or not, to have the opportunity to choose whether you want to work or not. It will help you enjoy life better, knowing that you don’t have to work, rather than an option.
I’m so glad I’m on this journey with you and going on this early retirement adventure together! What do you think about the 4% rule and if you have calculated your FI/RE numbers, be sure to leave a comment below! Share when you retire so maybe we can see each other and see each other for margaritas haha!
Hope you like this series! Be sure to subscribe to Millenial Money Honey on YouTube so we can continue to spread the word about FI/RE.
How Much Money You Need To Retire Comfortably Around The World
Disclosure: Some links are affiliate links, which means I receive compensation at no additional cost to you. All opinions are 100% my own! I thank you and your support.
27 year old real estate engineer living in Los Angeles and FAT FI/RE-ing
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