Want to learn how to retire early and work out exactly how much you’ll need?
In this week’s video Ray will go over the simple calculations you can do to establish how much you need to have invested in the market, what you need to have it invested in and look at major research papers on this exact topic.
Everyone wants to retire early, but how much would you realistically need to have enough to live off?
What type of lifestyle will you want to have in retirement?
Are you going to live fairly lean in retirement or do you want to go all out for your later years?
During this video we’ll cover two simple methods of working out how much you’ll need and what amount annually you’ll be able to draw down on. It’s a great starting for anyone considering retiring earlier than normal.
The 25x Rule is a way to estimate how much money you need to save for retirement. It works by estimating the annual retirement income you expect to provide from your own savings and multiplying that number by 25.
The 4% Rule was made famous by a study named the ‘Trinity Study’ which was done in 1998 by 3 professors from Trinity University in Texas. The purpose of their study was to establish how much money people would need invested to retire and how much of their returns they could withdraw annually without running out of money during (a traditionally 30 year) retirement.
The rule is very simple – you add up all your investments, then each year you withdraw 4% of the whole amount. Note you must adjust the dollar amount you withdraw to account for inflation too. This rule is very popular with the FIRE community (acronym for Financial Independence Retire Early) as a solid starting point to figure out how much you’ll need + what quality of life that would give us.
Hope you enjoy the video, and if you have any questions feel free to comment below the video!
Ps. Connect with me on Instagram @raycorc
G’day there, Ray Corcoran here. In today’s video, we’re going to be talking about how to retire early and the kind of calculations that you need to make to figure out how much money do you need to retire. And just some of the common calculations, like if we retire with X amount, how much can we take out per year as a percentage so that we never run out of money, essentially, in retirement.
So the first thing that we need to do is we need to work out how much do we need to retire? And to do that, one of the rules that we can use is the 25 X rule. So basically the way that works is you work out how much your annual expenses are and you multiply that number by 25. Now, one of the assumptions this is based on is a 25 to 30-ish year retirement, which would be considered a traditional retirement. If you want to retire earlier than that and that money needs to last for longer, you may want to use a multiple of say 33 or 35 or 40, depending on how young that you want to retire. We use some basic numbers. If you wanted to live off a hundred thousand dollars a year, every year in retirement, based on the 25 X rule, you would need to have $2.5 million invested in the market.
And if you wanted to live off $50,000, for example, then that number would just be halved. So it would just be $1.25 million invested in the market and so on. So if you’re happy living a leaner retirement, then you don’t need to save as much, obviously. So do that for yourself, work out, maybe look at last year’s numbers. How much did you spend throughout the whole year, and multiply that number by 25, and just compare that to what you have right now.
Now, for a lot of people that might be a bit depressing, because you might realise that you have nowhere near enough to retire on as of right now. But the good news is, it’s a good wake up call. It can help you realise, look, I’m a bit behind the pace at the moment, but if I save more and invest more and cut my costs and increase my income, then I will be able to build up that nest egg so you can retire comfortably and maybe even retire early.
So we’ve worked out roughly using the 25 X rule, roughly how much we need to retire. But how does that all actually play out in the real world? What is it invested in? How much can I take out? How do I make sure that it lasts the distance? In 1998, there was three professors from Trinity University in Texas, and basically what they did was they did something, a famous study called the Trinity study. And what they basically looked at was historical returns based on a certain type of portfolio. And they worked out that if you had a portfolio that was roughly 80% equities like stocks and 20% bonds, which would be more of a bit more of a defensive asset, they worked out with a higher degree of certainty that you would be able to last a traditional 30 year retirement, right to the end and not run out of money.
And basically what they were looking at is, so they came up with this rule and they back tested it against over 75 years of market returns, up markets, down markets and all that sort of stuff to figure out would this actually work in the real world? And while they always say previous performance is not a reliable indicator of future performance, it was reassuring to see that over the last 70 plus years, that with a pretty high degree of certainty, I think it was over 95%, that in most scenarios, that that money would last the longterm.
So what we wanted to do is really work out, because basically the way it works is, assuming that portfolio of 20% bonds and 80% equities, if that did a 7% return adjusted for inflation, then they believed that if you had a 7% return and you only took out 4% of that return each year, then you would have a 3% buffer and you would never run out of money.
And obviously if you want to live a leaner lifestyle, you might only take out 3.5% or 3%, and live leaner and have even more money leftover. So a good activity for you to do now is really work out what kind of level of lifestyle would you want to live realistically for the rest of your retirement? What age do you want to retire? How long do you expect to need to have that money for retirement? Are you going to have a 40 year retirement or a 50 retirement or a 20 year retirement? Work out a few different scenarios. You can get out a spreadsheet and have a look at different types of scenarios, different lengths of retirement, different levels of spend per year.
I would really encourage you to kind of add in everything that you would really want to do plus some extra, just in case, because I couldn’t think of anything worse than not having enough in retirement, having to make all these compromises in the later stages of life. It’s really worth mapping out your expenses now. Is there any extra stuff that you’d love to do, whether it’s luxury holidays every single year, maybe a multiple of those every year, cars that you would love to buy or things you’d like to experience or money that you would like to give to other people or charity stuff. Factor all that in, because that number’s probably going to be a lot higher than your current, or may be higher than your current yearly spend, and as a result, you’ll need more in retirement.
Hope you found that useful. Try do it yourself, work out how much you’ll need in retirement using the 25 X rule, and you can look at the 4% rule as well to see that if you can get a 7% return reliably, or even if you can find ways to get an even better return than that, then it means you’re just going to have plenty of cash flow through your retirement. You might be able to retire early and all that good stuff. So hope you found that useful. If you have any questions, let me know below and I’ll see you on the next video.