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“How much money do I need to retire?” … Isn’t that the magic question?
No matter what your plan is or how you intend to go about achieving financial freedom, we’ve all got some idea of what the “number” is. Inside of our heads, we all have some amount of money that we think we need to shoot for in order to finally feel secure enough to be able to quit our jobs.
But how many of us really know what our number is based on? How did you come up with your goal? Are you assuming that you’ll need the same amount of money in retirement that you do right now?
What if you could be just as happy living on $10,000 less? After-all, did you know that every $10,000 less that you need in retirement works out to $250,000 fewer that you need to save in your nest egg?
Are you basing your goal on the 4 percent rule? Or are you listening to one of those “doom-and-gloom” headlines that try to convince you that you’ll only be able to pull out as little as 3 or 2 percent in the future? Worse yet, did you actually calculate your number, or are you simply following along one of those sensationalized headlines from a major media outlet that says we’ll all need at least “a couple of million dollars” in order to live happily ever after? Please!
If there’s one thing I’ve learned from all the thousands of early retirement posts, articles, and books I’ve read over the years, it’s that you in NO WAY need “a couple of million dollars” in order to retire successfully at any age you want! With the right know how and a tiny bit of math, I can show you that a nest egg half that size will be able to create all the passive income you’ll ever need for the rest of your life! The trick is in knowing what the right values are to use for your plan. To do this properly, you need to separate fact from fiction.
This is exactly what we’re going to explore in my new ebook “How Much Money Do I Really Need to Retire and Achieve Financial Independence?” from our Early Retirement Solution series.
The Dangers of Over-Saving
Why write an entire book on this topic?
Because like many things in personal finance, I’m trying to help you make your life BETTER!
By that, let me explain …
As I mentioned above, when it comes to planning for retirement, you’ll find no shortage of articles that talk about what an awful job most people are doing on building their nest eggs. Hence, the bland advice and generalizations that we should all be saving “a couple of million dollars” for retirement.
But there’s something I’ve noticed about that kind of advice that you don’t hear a lot of people talking about. And I didn’t realize it until I was out at lunch with a friend one day.
My friend was doing a pretty darn-good saving for retirement. But he was blindly saving towards one of those generic goals of thinking he needed a couple of million dollars to be secure. Hence, he had no idea what his “number” truly was.
What’s the problem with this? Over-saving! Thinking he’ll need more money than he actually needs could end up causing him to:
- Work for longer than he needed
- Save harder than he needed to
- Enjoy less of his money in the present
Who wants to do that? When it comes to putting your money to work for you, I want you to get the most amount of value out of your money that you can possibly get!
And if that means figuring out a way to retire sooner, saving less, and enjoying more of your money right here and now, then so be it!
Being Realistic With Your Goals
A big part of your success will start with the one major decision you need to make about your future: How much money you think you will need in retirement each year.
Whether it’s whatever you make right now, more, or less, it doesn’t matter! You have to have some sort of goal in mind.
Don’t worry! I’m not going to try to beat you down and convince you that you need to live at near-poverty level in order to retire more quickly.
I don’t want to do that! And I don’t think anyone else should have to do that either.
You should enjoy your financial freedom the way you want to!
Instead, we’ll talk to you about two main things: Being realistic and understanding what sorts of challenges the number you pick might mean for you.
In addition, we’ll also cover a few income-reducing techniques that you may not have previously considered. For example:
- If you think you will need the same income you’re making right now, did you consider that in retirement you won’t have to pay the same 7.65% FICA (your Social Security and Medicare) that you are now?
- You also won’t be saving for retirement when you’re retired. So that might be another 5 to 15% off your current income target.
- What if you could have your house paid off by then? That might be almost $300,000 less you’ll need to save.
- How about stretching out driving your car so that you don’t have to make car payments? Saving $500 per month would knock off another $150,000 in savings that you’ll need.
There are lots of these little tricks you can use to whittle-down how much you’ll actually need. And as a result, each of them will only help lower the amount of money you’ll need to save.
What Exactly Is a Safe Withdrawal Rate?
Another thing I’ve discovered on my own personal finance journey is that the rate at which you plan to withdraw money from your nest egg will have a HUGE impact on how much you’ll ultimately need to save.
For example, if you want to generate $50,000 of income but plan to conservatively withdraw only 3% per year, then you’ll need $1,666,667 in savings. But what if a number as high as 5% could work? If it that was possible, then you’d only need $1,000,000.
So how do we find out? What would be the implications of using a higher (or lower) safe withdrawal rate?
To know for sure, we’ll take a deep-dive into the world of retirement planning research. We’ll see what kind of facts these authors have uncovered and what this could mean for our savings efforts.
We’ll start with the gold standard: The 4 percent rule. As it’s widely known, the 4 percent rule says that you can start off your retirement taking out 4 percent of your portfolio and then you can keep making that same withdrawal inflation-adjusted every year for at least 30 years with a high-degree of success.
How high? This is where it gets interesting. People often mis-quote the 4 percent rule as having a 95% chance of success. But this was the result reported in the second of two papers that made the 4 percent rule famous: A paper called the Trinity Study (1998). In the original article from 1994 that first suggested the idea of the 4 percent rule, the author Bill Bengen actually concluded that you would have a 100% chance of success for a minimum of 33 years!
A 100% chance? That’s pretty good!
And notice we said “minimum”. That means out of all the dozens of time-periods he back-tested, 33 was actually the lowest number. For a great number of those same time periods, the 4 percent rule actually worked for 50 or more years!
What else is interesting about both Bengen’s original article and the Trinity Study is that there was a ton of other useful conclusions made. For example:
- If you want to retire early and want your money to last 50 or more years, Bengen found that a rate of 3.5% would accomplish this for nearly every rolling period he back-tested!
- If you could be flexible with making inflation adjustments, you could actually increase your safe withdrawal rate all the way up to 7.0%!
But we’re not going to stop there. We’ll also look at:
- An economic indicator called the Shiller CAPE and what how that might allow you to use a higher safe withdrawal rate.
- Some of the skeptics of safe withdrawal rates and the alternative strategies they offer instead.
Once we put all of this together, you’ll have an arsenal of ninja-moves to use to put together one super-powered retirement plan! You’ll have options, and be able to customize each of these strategies to make it fit to your own unique needs.
Download Your Copy Today!
If you’d like to know more, then please: Download “How Much Money Do I Really Need to Retire and Achieve Financial Independence?” today! Your return on investment may help you to save hundreds of thousands of dollars less, knock years off of your time-table, and give you the confidence and peace of mind that you’re looking for!
And as a favor to me, after you finish reading, please leave a review on Amazon. It will help me to know how I’m doing as well as let other readers know if you believe there’s value in what they’re about to learn!
Thank you in advance!
Featured image courtesy of Amazon / MyMoneyDesign
This is awesome, you are putting out books like a madman. I guess you are taking advantage of this great online self publishing industry. I will check it out soon, thanks.
Thanks EL! I hope you like it. Please feel free to let me know what you think.
I’m finding writing ebooks to be a natural extension of writing blog posts. Once I start writing about a topic and find that I’m at 5,000 words or more, I’ve decided that this is when its crossed over into ebook territory.
Thanks for sharing your book! MMD, Will definitely do a review about it on Amazon. Good luck. I just hope this book will reach thousands of people.
Thanks Liz! I really hope you enjoy it and take away some useful info.
Mustard Seed Money says
I think it’s incredible that you have put out a book. I think one of the things that really transformed the way that I looked at FIRE was basing on what I needed less on what I made and more on what I spent. This was such an easy thing to see but for whatever reason I was blind to it. I assumed that what I made now was what I needed to save up for in retirement. This was ridiculous and I realize that now.
Thanks for sharing your knowledge with everyone.
Thanks! I agree about the power of needing less. Study any FIRE case and you’ll see that no one saved up millions of dollars. In most instances, they reached their goal with less than a million dollars, and they were able to do this by scaling back how much money they “thought” they needed. It’s a very powerful component to the overall equation that I think a lot of people overlook!
Jayson @ Monster Piggy Bank says
I am deeply interested about the 4% rule, and I’d like to learn more about this concept from you, MMD. I am so excited to grab a copy of your book to learn more about financial independence. Thanks for sharing.
Thanks Jayson! I’ve really done a lot of research and packed as much in there as I could. I hope you enjoy it.
Erick Brunet says
Great post! Thank you for sharing. It’s very useful. Hope to hear more from you.
Joanne Mahoney says
Great article. You have my attention. Working in the insurance industry, our job is to counsel our clients to make good choice between their budget and their long term financial plan.
Aman Bansal says
Financial independence is quite amazing even after retirement. Money is a must after retirement as body is not much as strong after an age. So such passive income sources are helpful. 🙂
Thanks for fantastic post.