How much do you need to save before retiring?


I’ve named this financial blog “FIRE Checklist” for a reason.  There’s a copious amount of early retirement blogs that all provide similar content.  My goal has been to provide content that is original and quite different from information provided on those aforementioned blogs.  For those like me, who are preparing for an early retirement this blog is for YOU.  I not only offer original content on subjects like Cash as an asset class but also alternative investment articles such as Selling puts & Real Estate Crowdfunding

I now plan to begin the actual Checklist” with a series of articles specifically focused on retirement preparation.  This series actually began with the article Debt which stressed the importance of eliminating debt and highlighted Dave Ramsey’s debt snowball technique.  The elimination of debt is as integral to retirement preparation as socking money away in a tax-deferred savings account.  It needs to be prioritized.  A retirement plan that excludes debt elimination (not simply reduction, Elimination!) is not a sound plan at all.

The question that’s on everyone’s mind is How much do you need to save before retiring?  I’ve spent countless hours in search of the answer.  Sadly, I can’t offer the holy grail.  What I can offer is what I consider to be the minimum amount one needs to have saved before considering full retirement.

Universally, the financial planning industry recommends a 4% withdrawal rate to cover living expenses.  If the retiree only needs $40,000. to cover annual living expenses, then according to this “4% rule” all one needs is $1 million in investments.  ($1,000,000 X .04 = $40,000.).  The back story of this plan is found here: Trinity Study  If we reverse the math, one needs 25x their annual living expenses in order to put this plan to use. This plan assumes one’s investments are evenly split between equities and bonds.  In addition this 4% withdrawal rate takes place in year one, increasing withdrawals each subsequent year based on the inflation rate.  This can get “hully gully” when the early retiree ponders unknown and unpredictable expense items such as health care/health insurance.  Shoot me now!

Look it, I’m planning on full retirement by the year 2023 and barring another calamitous 2008-style crisis I should reach this goal one year earlier (in 2022 when I’m 55 years old).  I’ve been very diligent in reducing debt (total elimination before my retirement date) and saving (currently a rate of 30% of my income) and investing (across numerous asset classes).  I’ve carefully considered this 4% rule and I believe it’s a fairly safe rate to use in one’s own retirement plans.  A 3% withdrawal rate might be enough if the retiree can sustain oneself with a Spartan existence .   If you’re planning quite a bit of leisure travel, then a 5% rate is for you, but you’ll need to have 30x your current annual expenses socked away to make these travel plans a reality.

The one common denominator of all this math are your expenses, both current  and eventual.  One expense you’ll be able to eliminate from the ledger (once you’re retired) is your retirement savings contributions.   You won’t be contributing to your 401k any longer, that’s a current expense that goes away.   Also consider whether or not you’ll be fully retired or will you still work part time.  Many of you simply want out of the daily grind or the corporate, bureaucratic B.S. and you plan on “retiring” to part time work that is enjoyable.  At the end of the day, it’ll all come down to your spending….



3 thoughts on “How much do you need to save before retiring?

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