Do you know how much money you need to retire?
After graduating, I had sadly accepted that I’d be working for the next 40+ years and selling my time and happiness to support myself and my family.
This past year, however, the personal finance community has showed me that:
- Retirement isn’t an age, it’s a number.
- Early retirement is a very viable option – something that regular people plan for and do!
What is FIRE?
FIRE (Financial Independence, Retire Early) is a movement that promotes saving and investing to allow for early retirement. The basic concept is that if you save and invest a specific amount by a certain age, you’ll be able to stop working and live off withdrawals from your investment portfolio for the rest of your life.
There are several FIRE milestones:
🔥 Coast FIRE: You have invested enough that you will be able to support retirement at the traditional retirement age without making any additional contributions.
🔥 Barista FIRE: You have invested enough to quit your 9-5, as long as you have part-time or side hustle income to supplement withdrawals from your investment portfolio.
🔥 Lean FIRE: FIRE, but requires that you maintain a minimalist lifestyle in retirement.
🔥 Fat FIRE: FIRE, but with a bigger nest egg to allow for a more lavish lifestyle in retirement.
The Formula For Retirement
Annual Expenses in Retirement x 25 = How Much Money You Need to Retire
This formula is based on the “4% rule”, a widely-accepted retirement convention stemming from research by Trinity College in 1988. The rule states that investors “can safely withdraw 4%, adjusted for inflation, from a balanced portfolio of stocks and bonds each year in retirement, and be relatively certain that the money in the portfolio won’t run out”, thanks to compounding interest that keeps the portfolio growing.
Translation: If you have a portfolio of 25 x your annual expenses in retirement, that money will last you the rest of your life.
If you want a more detailed look at your projected retirement date based on inflation and potential income growth over the years, I recommend using WalletBurst’s FIRE calculator.
Be Flexible With Your Estimates
The downside to trying to plan out an early retirement that’s several years away is that the process requires you to estimate what your expenses will be like in retirement…and your life, responsibilities, and expenses will change so much over the years that it’s very difficult to accurately estimate that number.
Life events like having a child, paying off your mortgage, moving to a different area, supporting your parents as they age, or medical issues can all impact your expenses in retirement.
Even so, I think an educated estimate is better than no estimate at all! Just remember to stay flexible and revisit & revise this calculation as needed over the years.
Estimating My FIRE Number
I currently spend ~$15k/year on housing, and ~$20k/year on other expenses such as food, transportation, and entertainment. That puts my current annual expenses at $35k/year.
As I mentioned above, the big issue with trying to plan out an early retirement is factoring in the uncertainty. I’m 23 years old, and my annual expenses at this age probably look very different from my annual expenses at age 45.
Given this, I’m increasing my estimated annual expenses in retirement to $60k, to factor in inflation as well as lifestyle cost increases, and for buffer room.
Using the $60k/year number: $60k x 25 = $1.5 mil 💸
My Retirement Timeline
Now that I know that I’m aiming for a portfolio of about $1.5 million, I used this investment calculator with my approximate numbers to calculate my expected returns from investing.
If I continue investing at my current rate (about $4000/month), I’ll reach a portfolio of $1.5 mil in 16 years (when I’m 39), and could theoretically retire at that age.
However, I also assume that my income will increase over the years, and I will be able to invest more and more, which would shorten the timeline and help me reach $1.5 million even sooner!
How To Retire Sooner
You might say: well, this is all great in theory. You’ve told me (approximately) how much money I’ll need to retire, but you still haven’t told me what I can actually do to retire early.
Here are the concrete steps you can take to speed up the process to early retirement:
- Understand your current financial situation.
You can’t identify where changes need to be made if you don’t know what your current financial situation is. Start by answering the basic questions:
- How much do you make?
- Where does your money go (how much do you spend vs. save)?
2. Figure out how much money you need to retire (25 x your expected annual expenses in retirement).
To do this, you first must estimate your annual expenses in retirement. Remember to factor in inflation, and consider how unexpected life changes or lifestyle inflation might impact your expenses in retirement. I’d also recommend adding a buffer (better to overshoot than undershoot)!
3. Determine how far you are from that retirement number.
This will require a bit of projection based on your current portfolio value and how much you invest.
You can use this calculator to estimate your investment portfolio value over time. Keep in mind that you may be able to increase your investment amounts over the years, if, for example, you pay off debt or your income increases.
4. Reduce spending where possible.
Ultimately, your retirement comes down to one simple truth: the more money you save the earlier you can retire. If early retirement is a goal you feel strongly about, then find ways to reduce your expenses.
5. Invest as much as possible.
For the 4% rule to work, you need to have a portfolio the size of your FIRE number. The safest, easiest way to achieve this is by investing in low-cost, passive index funds. If you’re new to investing and don’t know where to start, take this course on building wealth by investing in index funds. I’m taking it now to get a more formal overview of investing concepts, and it’s absolutely worth the money.
Related: How I saved $100k by age 23.
Why Do I Want to Retire Early?
Whenever I post about early retirement, I get DMs from people saying I should just find a job I like better. Those DMs are based on the assumptions that I want to retire early because I don’t enjoy my job, or I don’t like working. Both of which are untrue.
I love working! I love working on Organized Finance, and on web development contracting jobs I do. I enjoy coding, and I actually like my job a lot (as far as jobs go, it’s a pretty great one – it’s intellectually stimulating, pays well, great work culture/environment – I could go on).
For me, the desire to reach my early retirement number isn’t about not working. It’s about having the choice. I like working, but I want to spend time working on the projects and causes I care about. I like working, but I want to be able to take a 3 month break if I or a loved one needed to for medical reasons. I like working, but I want to work without the fear that losing my job will ruin me financially. It’s all about having the choice.
