How Much Do I Need to Retire Early?

Traditional retirement calculators assume you suck at money, and the results they spit out are always depressing. But when you adopt an early retirement lifestyle and spend only a fraction of your income, it’s easy to retire much earlier than most calculators predict.

Retiring early is easier than it might seem.

How much money do you need to live well?

Lower spending means less assets are required to support a lifestyle. However, a lot of us have great ambitions to travel and see the world. We want the confidence that once we quit our cushy jobs, we’ll have enough to live well. You don’t want to be forced to stay at home eating ramen noodles to survive – even if you love noodles and being lazy…

A good place to start is by tracking how much you spend now. If you haven’t already, start tracking data on your total spending and net worth each month. We don’t bother with a budget, but we do know how much we spend in a year.

Start testing your retirement budget

You’ll have a much better picture of your retirement spending if you start living as close to your dream retirement life as possible before you quit.

On our journey to financial independence, we did work and save a lot, but we also pursued our passions as much as possible – we just found ways to do them cheap.

Chillin’ on the cheap in Puerto Rico

By the time we quit our jobs, we had a very good idea how much it would cost us to practice our hobbies, eat and drink like kings, and go on tropical vacations like surfing in Costa Rica multiple times a year. So far, our spending has looked about the same, if not a bit less than when we were working.

How will you fund your retirement?

Once you have a good idea of your annual spend, it’s time to figure out how to cover it. There are many investment vehicles out there, and different methods for calculating how much income can be provided reliably.

We like our investments to be efficient and hassle-free. The majority of our assets are in a three fund stock portfolio. Basically, we own a chunk of every major corporation out there. The highly educated and well-paid CEOs and managers of the world are working their asses off to grow our investment and return profits.

Predicting stock market returns

While investing in stocks through index funds is easy and effective, predicting how the market will perform is impossible. Next year could be the best year ever, or we could have a major crash like the one we saw in 2008. We need to know how much we can withdraw from our portfolio on a regular basis and still survive the bad times.

Engineers designing infrastructure face a similar conundrum. Mother nature is unpredictable. Nobody knows how big the next flood or hurricane will be, and yet we still have to build bridges and dams that stand the test of time.

Designers simply use historical data to determine safe sizing. For example, a 100-year flood is a flood level that only has 1% chance of occurring based on historical data. A 50 year flood is flood level that has a 2% chance of occurring any given year.

It’s going to be a lot cheaper and faster to build structure to handle a 50 year flood, but there is a higher chance a rogue storm will take it out.

How do we determine safe withdrawal rates for stocks?

Calculating the probability that a portfolio can survive a retirement during the worst recessions in history was the basis behind the Trinity study. It looked at how different portfolio allocations and withdrawal rates would have performed over a 30 year period starting at different times in the stock market’s history.

This is a great starting point, but 30 years is going to be too short for many early retirees. Luckily, even more work has been done on the subject. Fellow blogger Early Retirement Now took the time to dive deeper, studying historical performances of portfolios for up to a 60-year time period.

These studies generate probabilities of success – you just have to decide what kind of risk you are comfortable with. Do you stay conservative and build to a 100+ year flood, or can you get away with something less that might only handle a 50 year flood?

A 30 year retirement: 4% withdrawal rate

A 4% withdrawal rate is kind of like a 30-year retirement water mark. Based on what we’ve seen the market do, a portfolio of 75% stocks and 25% bonds has a 99% chance of making it 30 years.

That’s pretty good, but there’s also a 15% chance you’ll completely run out of money in 60 years.

That’s pretty good, but you might need to breakout the sandbags in a big storm.

A 60 year retirement: 3.5% withdrawal rate

A 3.5% withdrawal rate is like a 60-year retirement water mark. A portfolio of 75% stocks and 25% bonds has a 97% chance of making it 60 years. There is also a 93% chance you’ll still have all of your money – or more – after 60 years.

That should do it.

I wanna die rich: 3% withdrawal rate

A 3% withdrawal rate is like a 100+ year water mark. Historically, we have never seen a recession so bad that a portfolio of 75% stocks and 25% bonds would have ended up being worth less than what you started with after 60 years. Obviously we don’t know what the future holds, but historically speaking, that’s pretty solid.

Yeah, you’re good…

So how much do I need to retire early?

To figure out how big of a portfolio you need, just take your budget and divide by the withdrawal rate. For a $40k budget, the amounts you would have to save are as follows:

$40k  ÷  4%      =  $1       million
$40k  ÷  3.5%   =  $1.14  million
$40k  ÷  3%      =  $1.33  million

While it sounds nice to have an invincible portfolio, saving additional hundreds of thousands of dollars can take some time. The odds are still pretty favorable for the 4% rule, and really good for the 3.5% rule.

Optimally, I would die having spent my last penny, or maybe even in debt – take that banks. But I know my brain loathes uncertainty and won’t let me optimize that much. For me, a 3.5% withdrawal rate is more than safe enough.

The thing is, some flexibility might allow you to retire earlier. Even with the 4% rule, there is 81% chance you’d end a 60 year retirement with a portfolio the same size or even bigger. You could always tighten your budget during a recession, or go back to work while stocks are on sale. Earning a little supplemental income could also get you back down to a safer withdrawal rate.

The trouble with making these decisions is the possibility of regret later in life. If you retire earlier, there is a chance of running out of money. If you work longer, you might run out of time. When making this decision, it may be helpful to consider that most older people wish they had traveled more, worked less, spent more time with friends and family, and taken more risks.

40 thoughts on “How Much Do I Need to Retire Early?

  1. All fantastic points. I’ll forward this calculation on to Mr. Picky Pincher. He likes to test out early retirement plan against these calculators to make sure we aren’t batty. 😉

  2. Great points. I’m shooting for around 3.25% for a number, though my date is set later then that so I will likely blow by it.

    I wrote something on Monday about where I stand to this number today as noting things get interesting when you start asking net worth with what assets and spending. What are you including in your net worth for this calculation?

    • If you want to use the withdrawal rules for calculating income, then you need to count invested assets. Other things we own, like our cars, or home equity, still come out in the equation by reducing our expenses. As you noted before, we only count the interest payments on our mortgage, and do not have any car payments in our yearly spending.

      So in the end everything still gets accounted for 🙂

  3. Great post. I think 3.5% is really good for early retirement.
    We’re shooting for a bit less because we’d like to leave some money for future generations. If the kid won’t need the money, then it could go to charity.
    Stress testing your retirement budget is essential. If you don’t try it out, you won’t know if it will work or not. We did that for about a year and a half before I quit my job. I’m very happy we did that.

    • Yep, stress testing the budget worked well for us. I would’ve been a lot more concerned if we had counted on halving our budget after I’d quit my job. It made for a much easier transition knowing what we would need to cover 🙂

  4. When we first started down this path we did our math based on the 4% number. We’re since refined that to 3.5% instead – and the good news is that that didn’t move our date out, because we have discovered that we have the capacity to save more than we originally pessimistically predicted. When we first started out we planned to save $120k a year. We’ve since upped that to $160k a year.

    • It’s funny how fast things move when you keep optimizing. We were planning on both leaving our jobs in 2020. Then things started to snowball for us. All the pieces just seemed to fall in place, and I couldn’t help but quit earlier than planned 🙂

  5. It’s not a novel topic, but I like how you framed it in the terms of an engineer, or a brick mason. As a safety first kind of guy, I want to have the strongest dike possible. I don’t mind working a few extra years to add those top layers.

    Cheers!
    -PoF

  6. I like the comparison to floods and storms… part of me wants to yell “Fudge it” and shoot for 4%, but the rest of me is thinking “Yeah, Queensland has had a few of those Hundred Year storms in the last decade”

    I’m opting for the ‘earn a little in retirement’ option though. I like to do stuff that produces value (basic carpentry, writing) so I’m confident I’ll pull in a little cash.

    Oddly I like the occasional bartending role to, if times get desperate :p

    • I’m with you. Whether it’s working with my hands in the garden, tinkering, or writing this blog, I enjoy creating and will continue to do so. While I haven’t really made any money with my hobbies so far, I can still see it as a possibility 🙂

  7. Nice post, I love the wall/dam/dike analogy!!! And thanks for the shout out! Very much appreciated! The move from 4% to 3.5% doesn’t look like it requires that much more in savings. With additional savings plus market return that may be only 1.5 years, max 2 years. Well worth the wait! 🙂

    • Thanks, I enjoyed going back through your series on the subject. You did some really good work, and I appreciated the in depth coverage on all aspects. Keep up the good work!

  8. This is my reason…”If you work longer, you might run out of time.”. My dad had a heart attack, and survived. He’s under 65. 4 years ago he was retired out of the company he’d where he worked for 30+ years, as management changed over. He didn’t find new work because good investing meant he didn’t have to. It’s great (and a relief to all of us) that he can recover at his own pace and not have to worry about returning to a job.
    We really don’t know how long we’ve got, and I’m not going to rely on government stats to dictate my retirement age. I know I’ve got a few more years of wealth accumulation to put in, before I can leave the 9-5, and plan to target job(s) with flexible schedules so I can travel. 2 weeks just isn’t enough time! We’ll see how it all goes.
    Thanks for a great post. 🙂

    • I’m right there with you, and glad to hear your father had the flexibility to take the time to recover. Two of my friends from work died from cancer while they were in their 40s. They both worked up to the end. Life is short, and we don’t have forever to do the things we want. I have no problem with a failed retirement, it’s not something I will regret on my deathbed.

      Thanks for the great comment 🙂

  9. I always tell people “don’t cut things too close when planning your early retirement”. Even if we have good historical numbers about what percentages work over long time horizons it’s possible to under-estimate annual budget needs.

    For example, what happens if your healthcare costs jump by $1000 a month? Or, perhaps food costs skyrocket and cost an extra $500 a month?

    See what I mean? The world is a constantly changing place. When planning how much you’ll need in early retirement don’t cut things too close. Leave lots of buffer room.

    Great post Mr. CK!

    • Every retiree should have some flexibility. Whether it’s in their budget or willingness to earn added income if needed. While it’s nice to look at historical data for guidelines, it’s still no crystal ball 🙂

  10. I think that a lot of people forget to factor in “unexpected expenses”. Perhaps you’ll come down with an illness that costs hundreds of thousands of dollars out-of-pocket to treat. You never know with these things. Assuming that you’ll be the lucky and healthy one until death is not a good idea.

  11. Hi all,

    Sometimes one cannot expect the unforeseeable circumstances in particular for the illness which may take much money to cure. Even if one has such money for the treatment, this does not guarantee full recovery.

    I am of view that one should opt for early retirement if possible in 30s.

    Life is short. Cherish the moment in retirement.

    Ben

  12. Hi Mr. CK! Love your posts and thought processes. Question – what percentage of you net worth is held in 401k and other retirement account vehicles, and what percent is held in taxable accounts? Reason I ask is that most of my net worth is tied up in retirement vehicles, which cannot be tapped until the age of 59.5 (without penalties). I believe there may be some esoteric means to tap early without penalty – are you familiar with? Also, assume you guys have no children – what do you do for healthcare coverage?

    Thanks!

    • Hey Ted,

      I had the same question as you years ago. More than half of our investments are in retirement accounts. After doing some research I discovered there are several ways to withdraw money without penalties including a ROTH conversion ladder and SEPP distributions. I talk more about these and why I prefer Pre-Tax retirement accounts in my post Screw the Roth, Max Your Pre-Tax

      Our insurance is through Mrs CK’s retirement gig teaching at the community college. We’d have to get on an exchange if and when she gets tired of that, but we’ll probably also move somewhere cheaper. We don’t have kids.

      Hope this helps 🙂

  13. Nice Article! I’m glad I found your blog. I’ll have to poke around a bit.

    I’m a bit more conservative, mostly because of having 2 young boys, and feel much more comfortable with a 3% SWR for a long retirement, especially after the good run in investments we’ve had. But anything beyond this is not needed and there is a very high probability that your net worth will simply continue to grow with a 3% (and even in many cases with a 4%) SWR.

  14. What are your thoughts on finding alternative sources of income during bad market times? Whether that’s selling something that’s not tied to the market, Cash value on life insurance, or even picking up a side job for a year?

    Jordan @ New Retirement

    • Hey Jordan,
      I think finding alternative sources of income during a crash would be a great way to help preserve a portfolio – especially if you go with a less conservative 4% withdrawal rate.

      I wouldn’t have a problem with doing some contract work if the market took a huge dive. Since any money earned would go to preserving shares – or buying more shares – I’d be getting a lot more value for my efforts while stocks are on sale 🙂

  15. Hi there Mr. CK! I’m surprised no one caught this yet in the comments, but I think you have your numbers inverted in the section “So how much do I need to retire early?” The amount you need to save should be *less* for a lower withdrawal rate. Not a big deal, since most here are “with the program” and we get the concept. Just might be worth making a quick update or note to the post.
    As a first time visitor, I’m super impressed by the space you’ve created here. Fresh content and inspiring. Keep it up!

    • Hi AC! Glad you are enjoying the site 🙂

      I’m not seeing the issue you are describing. For this math, the withdrawal amount is fixed at an example budget of $40k. The withdrawal rate is a measure of safety we use to ensure (to the best of our capabilities based on historical market returns) that we won’t run out of money in early retirement. You take whatever your budget is, then divide by the withdrawal rate.

      A 4% withdrawal rate would require a portfolio of 25X spending and a 3% rate would require a portfolio of 33X spending. So if you want to be super safe, you go with 3% rate but have to save up more money.

      Hope that helps, and sorry for the confusion 🙂

    • There are no assumptions. These numbers are derived from studying actual historical market data. The safe withdrawal rates account for inflation, and their probability of success is based on looking at all periods in the stock market history to see how they would have performed.

      Hope that helps 🙂

    • The tough thing about this is the assumption that the market will continue as it always has. If you’re looking at a 60 year retirement, so much can happen. The history of the world has been a story of change and adaption.

      That said, if you’re still healthy and the conditions change, you can always deal with it.

  16. so, if I have $1.33M I can withdraw $40k per year. What about inflation and increasing the $40k by the rate of inflation? how does that fit in to the model?

    • Hi Earl,
      The studies already assume that the withdrawals increase each year with inflation.

      So you would be able to maintain your lifestyle and take out more each year to keep up with cost increases.

      Hope that helps 🙂

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