I focus a lot on reaching financial independence.
There are a few different paths you can take to get there, and I have stayed incredibly focused on the fastest, most direct path, which has kept it top of mind for me. Plus, I author a personal finance blog, so I’m neck deep in financial topics on a daily basis.
It’s not that I hate my job and am desperately looking for an escape. Rather, I’m a very goal-driven, numbers-focused individual who enjoys and sees the value of a frugal lifestyle. I genuinely believe that this world would be a much better place if more people were financially independent, allowing them to reach their full societal potential by having more time to focus on what they are truly passionate about. If that’s keeping their existing job, more power to them.
When it comes to financial independence discussions, I’ve found people react in different ways. Any time I bring up the topic with friends or family (of any age) and discuss my aspirations to reach financial independence at any age prior to my 50’s, I usually face a healthy dose of teasing, discomfort, a whole lot of doubt, and even a little bit of anger.
And when you get to the part around “how much money you need to retire”, the discussion can get pretty heated. So I thought to myself – “why not make a blog topic out if it and push a few buttons?”
How Much Money do I Need to Retire?
The math behind retirement can be fairly simple. If you know just a few different variables:
- your savings
- your income
- your expenses
- your age
- average inflation rate
then you can come up with some reasonable estimates of how much money you need to retire (or achieve financial independence if that “retirement” word scares you. Let’s use the two words interchangeably for the purposes of this article). Retirement calculators like Firecalc or CNN Money’s retirement calculator are great resources for that.
What they help you answer is essentially the quantitative calculation of financial independence, or the Your Money or Your Life Crossover Point concept, that we’ve discussed before.
The Reality of Retirement
Despite the cold hard numbers suggesting an objective retirement amount, reaching that number is simply not enough for most people. We (humans) keep plugging away, and very few actually retire when they get to that number.
Why? It’s usually some combination of:
- Fear – we’ve run the numbers, but we get scared we’ll run out of money, inflation will speed up, health care expenses will blow up, or we’ll live to be ridiculously old. We’ve seen a few scary examples, or have played out the disaster scenario in our heads, and it has us scared silly.
- Consumption Addiction: we can’t separate wants from needs and envision our later years being focused on pricey travel, golf courses, expensive cars, fine dining, and whatever else we believe we deserve.
- Indifference or Contentment – we’ve run the numbers, and we know we have enough, but our jobs don’t suck that bad. A few of us actually like them. Why not keep plugging away to build that safety margin?
- Disbelief or Ignorance – the idea of financial independence, or early retirement, isn’t something we’ve ever considered because we’ve only seen people retire in their “golden” years.
How Much Money would YOU Need to Retire?
The question that this begs is:
“Knowing what you NEED to retire, what savings level would you ACTUALLY retire at? And why is there a difference between the two?”
When I say “retire”, I mean, walking away from your current job/career. What you choose to do with yourself after that, whether it’s sitting on a beach or starting your own business, is entirely up to you.
For example – I may know that I will technically hit my Crossover Point when I hit $700,000 in savings. Will I walk away from my career when I hit that savings level? I can say I will now, but my life situation and fear or some of the other factors listed earlier might result in me actually not walking away until I reach $1 million or more.
The gap between what we actually need and what we want to actually make the move is incredibly fascinating to me. It basically takes the numbers we’ve worked out and then says “F the numbers, it’s not enough!”. We then continue to work so that we can further build a psychological cushion that encourages us to finally call it good one day.
The psychology that goes into that makes for some interesting discussion. So let’s discuss!
Update: I recently posted the details on safe withdrawal rate and using it to calculate your retirement number to provide further guidance. Retirement number predictions gone wrong have unintended consequences.
Retirement Savings Discussion:
- What do the numbers say you need to retire?
- At what savings level would you actually retire at?
- Why the gap between the two (if at all)?
Depends on exactly what you mean by walking away. My goal is $300K/year trading income and a paid off house before I quit my engineering job. The assets behind that might be $500K liquid plus the house.
Of course, if I’m trying to earn $300K+ trading every year, well, that’s not exactly work free. Just less work.
Great article, I get the same guff from my family when I talk about financial independence or early retirement, whichever you want to call it. It’s so hard to openly discuss with anyone who isn’t a member of the online personal finance community.
As for how much I need, I’m hoping to reach financial independence before the age of 40, (I’m 29) I believe I’ll need to have my primary residence paid off, 500,000 in 5% average paying dividend stocks and 4 rental properties all paid off netting an average of 7k post taxes.
I currently am self employed and I wont give up my business, but I’ll definitely replace myself with a competent manager to run the show, and step away from day to day operations when I am able to! (at least I say that now, we’ll see)
Also just started blogging cause it seems like it will help me on my path to F.I. http://www.financialpenguin.com
thanks, great article!
What’s tough with those calculators is that they ask for your expenses, income, and savings now. I don’t have kids yet, but I probably will in the future. We don’t own any property yet. I’m also early in my career with a low-ish salary, my husband is looking for a job, so no income coming in now from that, and we are opting not to spend money on things that we’ll want to spend money on later when we are bringing more in. I just don’t see how someone in their 20s can accurately assess how much they will need for retirement when there are so many moving pieces.
If I was handed $2.2 million tomorrow, I’d be done. That would let me:
1. Pay off the house and student loans
2. Have around $6k/mo to live off of for 14 months
3. Have around $7.5k/mo to live off of for as long as I earned at least 5% on my investments (conservative, may go higher depending on risk) – of that, I’d probably put $1.5k back into investing (to hedge against inflation, rising taxes, etc… additionally, when 5 years hit and taxes changed (right now down to 8%), that would also be reinvested)
But this isn’t real of course – who knows what kind of buying power I’ll need in 42 years! I agree with BF on this one, those of us still starting out don’t yet know all the variables.
Great topic! Instead of “the” number, I encourage people – especially young people – to think of it at 3 thresholds. At point A, the lowest of the 3, you can walk away, but to a modest (low frills, but comfortable) lifestyle. At point B, you can maintain your current lifestyle. At point C, you can live a “dream” lifestyle. What I like about this is that it more closely matches the tradeoff mentality that the people I know who have walked away (like me) actually go through. It’s hard to know in your 20s how you’ll be feeling about your job by the time you start approaching point A. So just get moving towards point A as fast as you’re comfortable going, and wait to decide among A, B and C until you start getting close.
A) I could probably lock it down right now if I wanted to live off rice and beans and tell my kids to finance their own college. It feels good that if/when I get laid off; I can scale down and survive.
B) I would need another $400K-$500K saved to keep my lifestyle and help my kids substantially with college. I save about $36,000 a year so 10 years is doable.
C) This is the wild card. I love to travel. This sets this number fairly high. Or does it? I spend a lot of time looking at ways to travel for cheap (rent a cheap house in India for 2-3 months) instead of the way I travel now (safari in Africa for 2 weeks).
Nice comment to the blog. You got me thinking in a different direction.
Fatchance, LOVE your A, B, and C, and congrats for reaching point A! Your breakdown really illustrates the value of this kind of ABC thinking – it really feels different to continue to work, when you fully understand, and buy into WHY you are. (I love to travel too, first place I went after I walked away was Antarctica – only continent I’d never been to!)
Interesting. I was thinking of this in more general terms while reading a review of this book. I think you might find it interesting.
The number is elusive because of all the variables:
Taxes: Will we be paying more tax in the future?
Technology: What other technology expenses will be “regular” expenses like cell phones, computers, and tablets.
Health care: Will we be able to purchase a policy when we are not employed? Will it cover most expenses?
Aging: When you get old, where and how do you want to age? There are GREAT retirement communities at $6 to $7K per month plus other expenses. How much money do you need to live for 10 years in a place like this.
So, while I enjoy my job, I’ll keep working even if it’s beyond the number.
My wife coined a phrase for exactly this: drop dead money. How much money do we need before we could tell our bosses/customers to drop dead? :)
Fatchance: about the travel – you can start a travel blog now and build it up to the point that when you travel you have connections where you’re going and there might even be revenue from the blog to support your habit! :)
Dropdead ain’t bad. But I prefer “walk away” or “FU” money.
But never actually say anything close to what you’re thinking, because you never know when you might need them again.
I had to leave the firm I thought I would be working for until retirement when my mom’s illness became severe.
But I was able to work part-time, so some income was still coming in over the next decade, until the disease finally claimed her.
Just a few things to think about regarding “Inflation”
1) The CPI changed the way it measures housing from actual cost, to equivalent rent in 1983.
2) The CPI also includes Standard of Living increases. Think about it, along the lines of what Holly has said. Did anyone have computers, dishwashers, cellphones 10,20,30,40 years ago… Is that really inflation? Are your personal Wants/Needs going to change from Today to retirement?
3) I think the CPI is the best measure we have to go off, but I just feel like ACTUAL inflation is a bit lower.
Here’s another way to think about financial freedom…having enough passive income to meet your on-going expenses. For those who are not “savers” this might be an easier concept to embrace. The question is how do you stop trading your time and passion for money. Make the money passively and put your energy into what really matters to you.
Exactly! Make your money work for you, rather than you working for your money… I believe the earlier in your working years that you can master this, the more secure you are enabling yourself to be for financial independence. Its all about assests.
I’ve never thought about the A, B and C ideas. I’m 27, so young and probably naive, but my number is $5 million. My real goal is to find something I love that also gives high remuneration. I don’t plan on ever not working. I like having a job. If I didn’t work at my current job I would work at something else. I enjoy going to work and interacting with people. Even a bad day at work is better than that third day in a three day weekend. I just like the schedule of it. I guess I just can’t fathom being able to do everything I want to do without an income. Perhaps if my job really sucked I would develop an A goal – but my A goal would only be enough to tide me into the next job. It’s probably the definition of ‘work’ and ‘retire’, but I can’t imagine not working.
My plan is to only retire if I am physically or mentally unable to work. If I can, I’ll work until the day I die. What else am I going to do? Sit around and watch TV, and live on someone elses dime, like the Greeks do?
I would like to hope there is more to life than watching TV. But I think it comes down to: do you want to spend the rest of your life on someone else’s watch, or your own.
I’m always on my own watch. I work because I choose to, not even because I really have to at this point. If you understand how markets work and the monetary system, it’s easy to make money in this country without doing the 9 – 5 bit. I do that because I enjoy it. While Greenspan was keeping interest rates artifically low through manipulation of the markets, some of us saw the bubbles inflating and made moves not only to protect ourselves from the collapse, but to make some coin. For years no one believed me when I told them that totally fiat money always returns to it’s instrinsic value – ZERO. I got in when the getting is good…$5/oz Silver and $350/oz gold. Look who’s laughing now…
Well, I have about 4.4million and anticipate 500k plus in passive income from several LLCs in a few years. I make about 180k plus about 160k from dividends. I still work because I am able to play golf everyday and I want to give back by protecting this great country against her enemies. Oh, I am 51 and my wife spends more than my take home pay… so you can thank her for stimulating the economy.
Well done sir. I too have a substantial sum which I fear will be used to determine thru means testing what I am and am not entitled to. So I sense they are going to solve the problem on the backs of people like us who generated income and wealth. Now I need to dedicate myself to hiding assets. Any ideas?
Myself and family don’t focus much on trying build up an x amount of money to retire. Instead we focus on investing in what we can do to make ourselves not dependent on money for retirement. This is how we do it. We have a ranch in which we set aside a part for fruit trees and a large vegetable garden. (seeds are cheap! $1 or so for a package) So we are focused on being food independent. We don’t spend much on groceries at all. We have our own water well for drinking and irrigation. So we’re water independent. We have our own septic system and burn or compost our trash. We have no water, septic or trash removal bills. Our house and ranch is paid for. We have no mortgage or rent bills. Our tractors and cars were paid for with cash. No vehicle bills except for gas, insurance and oil changes/maintenance which I take care of. The only utility bill we have is the electricity which averages between $60 and $80 a month. We’re looking into installing solar power to take care of this. Because the ranch is Ag exempt and we don’t live in the city our property taxes are $98 a year. Because of our low cost of living I have $500 a week left over that I put into our savings. We have about $250K saved up so far. My wife stays at home and our daughter is in middle school so we didn’t have any day care expenses to pay every week while she was little. I’m 53 and my wife is 50. Still more years of work and savings ahead. When I retire we won’t need much at all to live on since we focused on being money independent.
I am 61 and have delayed action on retiring for years due to my need for engagement with the world. The need to be connected keeps me accumulating assets far beyond what I’ll realistically need.
I am concerned however with the looming financial meltdown of the Great depression variety. Although I am sustainable, the overall nation is not. But if everyone was a frugal and austere as I am hell, there’d be a $&%(-load more of people unemployed. I intend on spending no more than 10% of my monthly income (~8K) on needs and desires. Most of it lacks quality anyway so why do I need that crap.
Retirement without purpose is dangerous and you can’t buy purpose or meaning, that’s my problem. Can only raise so many dogs or can only drive 1 car at a time. And waste is just not something I will engage in (so don’t envision many trips to Vegas (a place built by people who failed math)).
Turn 57 this October and retirement is my birthday present.
Our intent is to enjoy life while we’re healthy.
We have $500000 in IRA’s, paid-for home, and Mrs CantWait has $3K/month pension w/ healthcare. We have paid for both kids college and have zero debt. Time to quit !!
When X-husband and I were in our 20’s he said he’d be a millionaire by age 45. At that time, in the early 80’s it sounded crazy. He was making 35k a year, I was raising babies, mortgage rates were 14%.
Frugality and hard work on both of our parts gave us 38 rent houses and a home paid for. He made his goal and now he does what he wants.
It can be done, just don’t make it the goal of your entire life, or you may lose other things in the process.
I focused on retiring at 50 back in 1990 when I saw a lot of companies laying off people at that age. I maxed out 401K and saved on the side. (overtime money was invested) Coworkers said i was cheap etc. Last year for my 46th birthday I gave up my full time position that i had and changed to a new part time job. The move was at the right time and the part time job pays what my full time job did and supplies me with health insurance. It was a win situation. I invested in rental properties to keep the cash flow the same as when I was full time. This change in job gave me freedom that I needed and will last as long as I want it to. Financial freedom early in life is possible if you put your mind to it. Just avoid American consumerism and peer pressure to follow the Jones. Now people I know who don’t know my whole story look at me like how’s that possible that I gave up my job??
It’s a great feeling to work at something I want to do and know I’m NOT dependent on a company to pay the bills it’s spending money.