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How much money do you need to retire early?

How much money do I need to retire early? Now that's a question that I typed into Google more times than I can count!

I know that lots of other people have written about this, but we will all have our own take on it, so another post doesn't hurt one bit.

In fact, I was searching for answers to this question right up to the day that I retired, and I'll bet that most of the population doesn't have much of an idea on this topic.

For this, I'll actually look at four questions:

  1. What do you want your early retirement lifestyle to look like?

  2. What is your attitude to risk and, if you want a safety net, what should it be?

  3. What will your early retirement cost/spending be per month or year?

  4. How much money do you need to retire early? But we need to go through the first three questions before getting to this one.

No doubt there are a whole heap of other considerations as well, but if we try to cover them all, this post will be a lot longer than it already is, and I'm sure that none of us want that!

Question 1 - What do you want your early retirement lifestyle to look like?

I find the terms "Financial Independence" and "Financial Freedom" useful when thinking about this. Although I get a bit confused because different people use them to mean different things. The definition I found on Physician on Fire struck a chord with me - I've put it broadly into my own words and this is what I'm going to use for this post:

Financial Independence

With Financial Independence, you will have enough passive income to live without a paycheck from a job. Quite likely it will be a fairly basic level of lifestyle, but it should cover all of your necessities. For sure it's a great place to be, but you will probably have to carefully manage your expenditure and watch how you spend your money.

Financial Freedom

Financial Freedom is like Financial Independence on steroids. Still without needing earned income from a job, you can enjoy some additional elements to your lifestyle, perhaps eating out more often, an additional vacation, or other things important to you. You're on a more generous budget. For most people it won't mean you can do absolutely anything irrespective of cost, you probably watch the finances but don't have to count the pennies so much.

At the point of either financial independence or financial freedom, you are in a position where you can choose to retire. Whether you choose to or not is up to you. The financial independence lifestyle might fit your perfectly, or you may choose to keep working to upgrade to the lifestyle available at financial freedom, or perhaps you just enjoy your job and want to keep doing it. Either way, the great thing is making it your choice, in your hands and not someone else's.

So your first decision point is what kind of retirement lifestyle you're looking for, the lower cost financial independence lifestyle or do you want the upgraded financial freedom lifestyle?

Both of these stages will still be subject to a fair amount of personalization. For example, my idea of Financial Freedom may include an extra holiday of two weeks camping, whereas someone else may want it to be a month travelling first class and in five star hotels.

Question 2 - What is your attitude to risk and, if you want a safety net, what should it be?

Your attitude to risk will be a factor in deciding when you can retire early. It can add years onto the date, or take years off it.

While I can't tell you about your attitude to risk, because it will be personal to you, I can tell you what I have found from looking back at my own experience. I'm sure that my attitude to risk added a number of years onto my early retirement date because:

I was too cautious

This isn't a bad thing, because I sleep soundly at night pretty certain that we will be OK financially throughout our retirement. My instinct is to build some contingency into financial plans, but in hindsight I was too cautious. I put too much focus on what could go wrong, rather than applying a more balanced approach.

I had difficulty predicting my early retirement lifestyle

I thought that if I wasn't working, I'd have eight or ten extra hours a day to entertain myself. For some strange reason I imagined I should be sky diving in the morning and scuba diving in the afternoon, otherwise I would be failing at early retirement. That's nonsense, at least for 99.9% of the population. I'm certainly enjoying my early retirement lifestyle, but the reality is the new things I do mostly don't cost much.

I overestimated my early retirement spending

Early retirement life isn't costing any more than when I was working. In fact I'm spending less in some areas: grocery costs, where I have time to shop at better value stores; my vehicle costs are less because I've sold my car and now share a vehicle with my wife; generally I'm now more selective in what I buy for myself compared to when I was working - I'm not going without, but realise that when I had my employment income I bought things unnecessarily, simply because I could.

I didn't recognise that I had "get out of jail" options

I thought I needed extra money to have a belt and braces approach to guard against things not going as planned. I now realise that even if things go astray, the chance that it is catastrophic is tiny, and I'm not going to starve or be homeless. In fact, most likely things won't go wrong at all, but even if they do, there are get out of jail options. I could cut back on some expenditure, find a side hustle, perhaps work a day a week or consult. It's a personal choice, but it may be worth trading enjoying early retirement sooner against the very slight risk that you might need to engage in one of these "get out of jail" options later on.

After you've thought through your attitude to risk, and perhaps taken on board the items from my own experience, you may decide that you do want to allow for a safety net. Again, how you do this is personal to you. It may be that you want to reserve a lump sum of £/$XXX to cover unknown things, or perhaps you have worked out the yearly cost for your retirement lifestyle and you decide to add 5%, 10%, 15% (whatever makes you comfortable) to that figure. It's completely up to you - do what you feel comfortable with, but remember that you have those get out of jail cards so maybe you don't have to be ultra cautious.

I'm certainly not advocating taking unreasonable financial risks, but from my own make up I know that it's possible to be overly cautious.

Question 3 - What will your early retirement cost/spending be per month or year?

As I mentioned earlier, before I retired I struggled to calculate what my early retirement costs would be each month and year, which was a big problem as this is an essential figure that we need to know.

The good news is that I've since found out that it's actually not so difficult to figure out. Basically, there are two things - one to do, and one not to do.

Firstly what not to do. Don't take notice of any website that tells you to base your retirement spending on your pre-retirement earnings. That's nonsense, it's not about earnings at all, it's all about costs i.e. what you spend.

And now what you do need to do is figure out what your retirement costs will be.

  1. My experience is that as good a way as any is check what your current costs are, and then base your retirement costs on these. Remember that I said earlier that my overall post retirement spending is close to my pre retirement spend, and in some areas it's less.

  2. If you're not already keeping a record of you spending, then start now so that you find out how much you spend each month and on what. This is my post of my October 2017 costs if you want to see what information I record.

  3. You can make adjustments if necessary. For example, if you have large commuting costs that will cease in retirement then you can take these off, the same if you have a mortgage which will be finished by the time you retire, or if your grocery shopping includes your kids who will move out then you can make an adjustment there.

  4. Conversely, if you know of some new costs you will have that will repeat each and every year, then you can add them in.

  5. But by and large, I've found that our pre and post retirement spend has not been significantly different. I wish I'd known that before, it would have been a weight off my mind.

Question 4 - How much money do you need to retire early?

So this is the million dollar question! Or maybe it's not a million, perhaps it's less, or more, and whether it's in $'s, £'s, €'s or some other currency, the logic is the same.

There are basically two main ways to calculate how much money you need.

Option 1 - A Retirement Calculator

Use a retirement calculator and plug some figures into it. This is what I did before my early retirement. It's OK, but there are drawbacks to it. Generally you have to put in many assumptions like what investment return will I get for the rest of my life, what will inflation be, etc. Mostly I just guessed and threw numbers at it, which probably became a bit pointless.

I think retirement calculators are useful, but if I was doing it again, I would use a calculator as my back up tool, the place where I perhaps checked different scenarios, or sensitivities.

Option 2 - The 4% Rule (also known as the Safe Withdrawal Rate or the SWR)

I'm going to say that this is my new preferred option, partly because it's really simple to use, and partly because it's backed up by a ton of historical data.

Now I know that past investment performance is not an indicator of future returns, but as the data set covers almost 100 years of investment performance, it does deal with about as much volatility as I can imagine. Remember that in this timeframe there has been the Great Depression, the Second World War, the Oil Crisis of the 1970's and the more recent Global Financial Crisis.

So what do we do? Just take your annual retirement spend that you calculated earlier and multiply it by 25 (in case you're wondering where multiplying by 25 suddenly came from, it's the same as dividing by 4%, it just sounds simpler to do).

For example, if your costs are 30,000 a year, then to fund your retirement requires investments of 750,000 (i.e. 30,000 x 25 = 750,000).

Yes, it's as simple a calculation as that. OK, the background to it is a bit more complicated. Instead of me trying to reinvent the wheel, have a look at this excellent post on Mr Money Mustache that explains the background behind the rule, and also deals with some of the doubters. Below the article are some great comments that are worth reading, including around the subject of tax and risk.

There are various ways of legally reducing tax, for example with tax advantaged accounts. For myself, I know what my effective tax rate is, so I actually gross up my yearly retirement spend to get a pre tax figure, and then use this in my 4% calculation.

As I alluded to earlier, my attitude to risk used to be overly cautious and I used to try to eliminate all financial risk by simply targeting a higher and higher retirement fund. I've now realized that you don't need to eliminate all risk (in fact you can't), you instead just need to reduce the risk to a level that is OK for you. I talked earlier about my get out of jail free options, and the post on Mr Money Mustache has it's own version of these.


So that's it, my post on how much money you need to retire early. It's not new news, there are lots of other posts on the same subject, but perhaps someone will come across this one and find it useful.

What I've tried to do is use my real life experience to show how I look at the three build up questions of:

  1. What do you want your early retirement lifestyle to look like?

  2. What is your attitude to risk and, if you want a safety net, what should it be?

  3. What will your early retirement cost/spending be per month or year?

With those questions answered, we now know of a simple tool to answer that question of how much money do you need to retire early?

Perhaps I've spent too much of life with my eyes closed, but I had not come across the 4% rule before I retired early. I wish I had, because it would have told me that I had reached somewhere in the financial independence/financial freedom range some years ago. But because I didn't know it, I continued in a difficult job without realising I had an alternative - I didn't consider some of the other choices that I had.

Last thing, I promise. Please know that I'm not a financial advisor or expert, just someone who has found his way to financial independence, financial freedom and now to early retirement, and who wants to share his experience in case it is useful to others. I hope you've enjoyed this post and found it useful, but most of all, make sure you are comfortable with your own decisions. There are loads of other great posts out there, so read some more and see what fits for you - there are people who are comfortable taking more risk and there are others like me who are more cautious and build in a bit more of a safety net. There is no right or wrong, but I do think the 4% rule gives a good starting point, which you can then tailor to reflect your personal risk profile.


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