There’s a popular TV commercial that shows people walking around town holding large numbers under their arm. It’s a serious topic - having enough for retirement - but something about the presentation cracks me up every time I see it. If you are serious about retiring early, sooner or later you will hit this question. What is the “number” you need in total investments in order to retire comfortably? It would be great if there were a definitive answer to this question, but unfortunately there are so many variables that it’s impossible to really know. How long will you live, what will inflation be like, how will your investments grow, how will your expenses change over time? In the end all you can do is track your expenses, do a lot of research, do a little math, and come up with your best guess. It makes it easier if you stay flexible - say for example you decide that you’re willing to do some freelance work, work part-time, or even go back to full-time work for a couple of years if you find you are falling short after you retire early.
I could never even answer this question satisfactorily for myself, but I can tell you what factors I considered and the resources I used. As I’ve mentioned before, for years before I retired I tracked my expenses in detail so that I had a clear picture of what my living expenses are. I also worked to keep my recurring expenses as low as possible. Finally, I did a great deal of reading and research on topics such as safe withdrawal rates , investment asset allocation, and individual health insurance policies.
One of my favorite websites for defining investment needs based on expenses (and *not* based on current income) is FIRECalc Most retirement calculators estimate your retirement needs based on current income. This might be fair if you spend most or all of your income. But if you are saving a large portion of your income and living on a relatively small amount, these calculators will overestimate your needs and might keep you chained to a desk longer than is really necessary. If you decide to try FIRECalc, I recommend that you read the background info on how it works, and supply some of the details in the tabs, allowing you to customize your estimate and get a more accurate view. Of course before you can enter the data required on spending, you’ll need to have an accurate number for your spending. Don’t forget to factor in health insurance and taxes.
I try to never rely on just one source when I am researching, and this was very true when planning for early retirement. I did a lot of research on the web looking for what most experts claim to be a “safe withdrawal rate” of investments. There is quite a range, but the more conservative number seems to be around 4%. However this number assumes you’ll be living off your investments for 30 years; if you retire young, you may well be living on that income for 40 years or more. I tried to be ultra conservative in my calculations, so I assumed less than 4% would be better.
I also found this book valuable: The Number: What Do You Need for the Rest of Your Life and What Will It Cost?
Finally, as I hinted to earlier, if you can remain flexible and willing to explore part-time or small business opportunities, you may find you can relax a bit when trying to determine the number you need to retire. If you are willing to do what it takes to remain at least semi-retired, you probably have what it takes to make it work. One more resource I would recommend is this book: Work Less, Live More: The Way to Semi-Retirement
Another day I will go over some examples of how you might calculate your Number once you have determined your average expenses. I will also elaborate on the importance of asset allocation.
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