If you have dreams of retiring early, chances are there’s a big looming question on your mind: How much money will I need?
Maybe it’s $10 million? Or, perhaps $5 million?
Or maybe if I live a minimal enough lifestyle I can get away with retiring early with only a million. Is that even possible today?
Luckily, figuring out how much money you’ll need to retire early is a simple mathematical formula. And when I say simple, I mean it. Simple.
How Much Money Do You Need To Retire Early?
As with most things in life, the amount of money you need to retire early will be very different than what someone else needs. It all comes down to your lifestyle (and how expensive it is).
To do the math, use what’s broadly known as the Trinity Study.
The Trinity Study, formally known as the “Determinants of a Sustainable Spending Rate for the Financial Independence and Early Retirement Community,” is a research paper from Trinity University that examined historical stock and bond market data to determine safe withdrawal rates for retirement portfolios.
While the study itself is old, its findings are still applicable today.
The key principle revolves around the concept of a “safe withdrawal rate” (SWR), which is the percentage of your portfolio you can withdraw annually without depleting your principal over a given time horizon.
The study analyzed various portfolio allocations (stocks and bonds) and withdrawal rates over different retirement periods (typically 30 years). It found that a 4% SWR had a high probability of success (meaning the portfolio wasn’t depleted) for most 30-year periods, even during market downturns.
This 4% rule has become a popular benchmark for retirement planning, particularly within the FIRE (Financial Independence, Retire Early) community.
A few things to keep in mind:
- Inflation: The 4% rule typically assumes adjustments for inflation. This means your withdrawals increase each year to maintain purchasing power.
- Portfolio Allocation: The study considered different stock/bond mixes. A higher stock allocation generally offers greater growth potential but also higher volatility.
- Time Horizon: A longer retirement period requires a more conservative SWR. For retirements lasting longer than 30 years, a lower rate, such as 3.5% or even 3%, might be more appropriate depending on the cost of your lifestyle.
- Taxes: The 4% rule usually refers to pre-tax withdrawals. You’ll need to account for taxes when calculating your actual spending needs.
- Unexpected Expenses: It’s wise to build a buffer into your plan for unforeseen expenses, such as healthcare costs or home repairs.
Examples of Using the Trinity Study
Here are two examples demonstrating how to use the Trinity Study’s principles:
Example 1: 30-Year Retirement
- Desired Annual Spending: $50,000 (in today’s dollars)
- Assumed SWR: 4%
Calculation:
$50,000 / 0.04 = $1,250,000
This means you would need $1,250,000 in your retirement portfolio to support a $50,000 annual withdrawal (adjusted for inflation) for a 30-year retirement with a reasonable probability of success based on historical market data.
Example 2: 40-Year Retirement (More Conservative)
- Desired Annual Spending: $60,000 (in today’s dollars)
- Assumed SWR: 3.5% (lower due to the longer time horizon)
Calculation:
$60,000 / 0.035 = $1,714,285.71 (approximately)
In this case, you would need approximately $1,714,286 to support a $60,000 annual withdrawal (adjusted for inflation) for a 40-year retirement with a reasonable probability of success.
The higher your early retirement lifestyle, the more money you will need before calling it quits at work. If you want to retire as soon as possible, minimizing your spending will help tremendously.
It’s important to remember that the Trinity Study provides valuable insights based on historical data, but it’s not a crystal ball. Market conditions can change, and individual circumstances vary. It’s crucial to regularly review and adjust your retirement plan as needed.
Hiring a qualified financial advisor is highly recommended for personalized guidance.
