How Much Do You Need To Retire?

I mentioned last week that prioritizing your financial goals and working only on one or two at a time will help you reach them. One common goal that young workers have is early retirement. When I use retirement I define it as having your necessary living expenses covered by investments and having the option to work. Many people also use the term financial independence, which I think is a good one too.

Retirement Fund: Look at What You Need to Survive

Let’s start at your monthly expenses and examine them. Pretend that you’ve lost your job. What expenses do you need to cover just to stay afloat? I’ll use our current family expenses as an example. Here’s what we have planned:

retirement nest egg
How much do you need to retire?
  • Mortgage: $850
  • Extra Mortgage Payment: $175
  • Groceries: $350
  • Home Association Fees $100
  • Electricity $100
  • Cellphone $150
  • Internet/Basic Cable $75
  • Car Insurance: $85
  • Dining Out: $100
  • Student Loan: $150
  • Entertainment: $35
  • Shopping (Personal Care/Household/Baby Stuff) $165
  • Irregular Bills: $60

Looking at these expenses we see that can trim it down a tad to get the basic expenses. If we both lost our jobs, the extra mortgage payment would be gone. You better believe the cable would be cut (not the internet – we use that for projects), dining out would be gone, and shopping would be for essentials only. (Note: We’re still under contract on our phones.)

Now considering that scenario, here’s what our basic budget would look like:

  • Mortgage: $850
  • Extra Mortgage Payment: $175
  • Groceries: $350
  • Home Association Fees $100
  • Electricity: $100
  • Cellphone: $150
  • Internet/Basic Cable:$50
  • Car Insurance: $85
  • Student Loan: $150
  • Entertainment: $35
  • Shopping:$100
  • Irregular Bills: $60

That would bring the monthly total to $1,930/month or $23,160/year. From there you can figure out how much you need to cover these bills and ‘retire’. How do you determine your target amount? Using Jacob’s formula, it comes down to:

Annual Expenses < 3% of Your Invested Savings

So to cover your expenses, you’d need about $750,000 in invested savings. Not a small amount by any means, but much lower than people expect for retirement.

If you know how much you need to have invested you can use that as motivation to be more aggressive about saving and investing for a finite period of time. Perhaps you’ll work hard to contribute to the maximum you can to your 401(k) and IRA. You can also look at dividend investing to increase your nest egg faster.

On the other side of the equation you can see where you can reduce expenses.  You may decide to go ahead and wait on buying a new car and instead find a reliable used car for sale or use another mode of transportation.

Decide How You Want to Work When Retired

With free time on your hands, there are many ways you may want to spend it. If you want to travel and you want to ‘upgrade your lifestyle’ you can. One route is to work, but the difference here is that you’re working for luxuries; if you have to or want to quit you can. Your essentials are covered. If you want to live a simplified life and don’t need to add to your monthly expenses you can focus on other activities, perhaps volunteering.

If you’re looking for more ideas on investing for an early retirement you may want to check out Your Life or Your Money. It’s a fantastic resource. You may also want to check out some of the following posts:

These posts can give you some ideas on investing as you find a strategy that works for your circumstances and goals.

Thoughts on Retiring

How many of you want to ‘retire’ early? Have you calculated what you need to make it? Do you plan on generating income?

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4 Responses to How Much Do You Need To Retire?

  1. In addition to the money for your expenses you also want to be sure that your money is growing at the rate of inflation at the very least. This changes your 3% to a minimum of 6% I think. So instead of $750k you would need $1.5M. Big difference.

  2. I have take my bills and done something similar many times so i can start putng money away as early as possible so I can actually enjoy my retirement. I recently just bought a program that helped me plug in all of my expenses and tell me how I should apply my money to pay my mortgage and other loans off quicker, continue paying my bills, and put away a descent amount of money to retire even earlier then I expected. To check out the program go to http://www.advancedinterestminimizer.com/

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