We talk a lot here at Let Luc Finance about spending less and saving more. And if you want to have money to retire one day, there’s just no way around it – you have to save money. But just how much money are we talking?
There’s a lot of research on this topic and an often mentioned concept commonly referred to as the 4% rule. Some people agree with it, some people say it’s too high, other that it’s too low…but I’ll spare you all the (boring) research. It’s a good estimate that essentially says you can safely spend 4% of your portfolio (your investment assets) each year in retirement without running out of money.
Now, as with all investments, nothing is guaranteed, and bad market timing and large unexpected expenses can throw your plan off course (but you’re flexible and smart and will adjust as needed anyway). So, the 4% rule a good rule of thumb.
Great. What does this have to do with me? I’m not retired!
Well, if you can safely withdraw 4% of your portfolio each year in retirement, then you need 25 times your annual spending to be able to retire.*
Annual Spending in Retirement x 25 = The Amount You Need to Retire!
Fair enough. Let’s look at some examples:
If you want to spend $100,000 every year in retirement, as a general rule of thumb, you need $100,000 x 25 = $2,500,000. That’s a lot of money!
But, what if you only plan to spend $30,000 every year in retirement? $30,000 x 25 = $750,000. That’s still a lot of money, but it’s a lot less than a cool $2.5 million.
So, to give yourself an estimate of “your number” simply take your desired annual spending and multiply it by 25. That’s how much money you need to retire. Steady progress and compound interest win this race!
Does this help? What do you think? What’s your number?
Your Investment Portfolio x 4% = Annual Spending in Retirement
==>Your Investment Portfolio = Annual Spending in Retirement ÷ 4%
And, 1 ÷ 4% = 25
So, Your Investment Portfolio = Annual Spending in Retirement x 25
More on the 4% Rule
The Shockingly Simple Math Behind Early Retirement