How Much Do I Need to Retire Early?

A simple approach to a complicated question

First, let’s talk about what is already implicit in the question…money!

Yes, no way around it. To retire early, I do need money and quite a substantial amount. But to answer the question, I need to break it into pieces or steps.

Step 1: How much do I want to spend per month?

Here I need to predict my living expenses assuming I will continue happily married and that I will eventually become a father as well.

Then taking the family into account, I need to predict the cost of living in the area I will live most of the time and likely to be my permanent address. Fortunately, there are free tools like Numbeo, which can help me with the estimation.

In my case, I estimated I would need around $2000 per month to have a decent lifestyle with some traveling. To be able to estimate you need to know the cost of living in the area of choice and your preferred lifestyle.

This would bring my annual expenses to $24000.

As I mention, this is just an estimation. So I always have to take this value with a pinch of salt. It is always always better to have a buffer on top of any estimation.

Step 2: How much do I need to save?

Now that I already know my predicted expenses, I need to calculate the amount I need to save using the 4% withdrawal rate.

This is the so-called “safe withdrawal rate” and came out of the Trinity Study. It basically describes that by using only 4% of my savings each year, it would be technically very hard for me to run out of money.

It is important to mention, that my portfolio needs to be somehow invested so it generates gains over time.

I need to multiply my annual expenses by 25. The result is that I need to accumulate about $600K.

The next natural step is to understand how many years it would take for me to actually save that much money.

Assuming I start from zero savings (which is not the case as you read below), I need to divide my goal by my annual savings. That would be the number of years without any returns on my savings.

Taking the same amount of $2000, which I am able to save per month it would take 25 years for me to retire.

However, if the amount is invested and assuming a 7% yearly return, the number of years would be reduced to roughly 15years.

Bottom line is that the math behind retirement is really simple! The hard thing to do is to be a consistent saver and to not be afraid to invest my money.

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Disclaimer: I am not a financial advisor. Always do your own research when investing.

This article is for informational purposes only, it should not be considered Financial or Legal Advice. Not all information will be accurate. Consult a financial professional before making any major financial decisions.