How Much Money Do I Need To Retire?

Need To Retire

When Will I Retire?

We all dream of that day when we don’t have to go back to work and we can enjoy our free time in retirementat least, I do.  We all know we need to retire, but how do we know if we have enough money saved to have a comfortable retirement?

That is a difficult question to answer because it depends on many different factors, such as your age when you retire, lifestyle, health, and how long you plan on living on retirement money.

There are dozens of retirement calculators that will tell us how much money we will need to retire, but most of them only makes my heart skip a few beats.  The numbers those calculators tell us are a little too high, at least for me.  My plan is to be able to retire early, but according to those calculators I’ll never be able to retire.

How Much Money Do I Need To Retire?

I don’t know about you, but I don’t want to work until I’m 65 years old.  Let me rephrase that, I don’t want to HAVE to work until I’m 65 years old.  So maybe the question shouldn’t be “How much money do I need to retire?” but “How much do I need to become financially independent?”

Many people get all worked up when they hear that somebody retired at 40, but still works on their blog or works somewhere else.  They argue that you only retire when you don’t work anymore… ever!  I see their point, but I also think they need to relax a bit.  If you reach a point where you can quit your job and never go back because your money is making enough money to sustain your lifestyle, then you have reached financial independence and therefore you can say you retired, whether you decide to work or not.

So, How much?  It depends on who you ask.

Fidelity suggests you should save at least 8 times your ending salary to help increase the chance you won’t outlive your savings during 25 years of retirement. That is, if your end salary is $70,000 you should have at least $560,000 in your retirement account.

To me, this number seems very low especially since they are assuming I’m going to work until I’m 67 years old, will live on only 85% of my salary, and I will be receiving around $2,000 in Social Security benefits.  If they are right about Social Security benefits, this number might be good enough if you plan to retire at 67, but I don’t plan on doing that.

This brings me to the second suggestion.

The 4% Rule

The 4% Rule was proposed by William P. Bengen in the article, “Determining Withdrawal Rates Using Historical Data,” published in the Journal of Financial Planning, October 1994.  In the article, Bengen argues that a retiree with a diversified portfolio split between stocks and bonds can safely withdraw 4% of their initial balance, adjust the dollar amount for inflation every year, and have an income stream that is sustainable for 30 years.

In order to calculate how much money you’ll need to retire just multiply the amount you spend per year by 25.  Just remember you don’t need to use your whole annual salary for this calculation.

Let’s say you make $60,000 a year but are contributing 6% ($3,600) to your 401k, are contributing $5,500 to your Roth IRA, and are putting $700 per month into your savings ($8,400).  Assuming that you have a fully funded emergency fund, which you should, then you don’t need to be saving any money.  Therefore you only need $42,500 a year to keep your same lifestyle.

So if you multiply $42,500 x 25, you would need $1,062,500 invested and you could retire and not have to worry about your money running out.  This of course is assuming an annual return of 7% on your investments — 4% withdrawals + 3% inflation.

There are some naysayers that think the 4% rule no longer applies in today’s market, but I disagree with them.  Yes, the market is very volatile and you won’t get 7% return every year, but they are also assuming that you won’t have any other stream of income, such as social security benefits, pension, part time work, or passive income.

The naysayers also assume that we will spend every penny of the 4% and not adjust for economic downturns, but we are smarter than that.  We are now “frugal folks” and we realize we don’t need that much money to be happy.  When the economy is bad, instead of going to Europe, we’ll go to Latin America or South East Asia where you need less money to live.

Afraid The Money Will Run Out?

Everything in life has risks and relying on 4% of your investments is definitely a risk, but it is a risk I’m willing to take.  If you feel less brave, then aim for 3%. However, that means that you will need to work longer in order to save more.  If that’s what you want then go for it.

The 4% withdrawal rate is just a reference point.  You can adjust it to fit your needs.  The one thing I can tell you is that as soon as I reach that 25x mark, I’m out!  When will it happen?  I can’t really say for sure right now.  Since I started late, it looks like I’m going to be playing catch-up for a while, but I’m trying to make some moves to make more money so I can save more and reach my goal faster.

Don’t be afraid of the 4% rule.  If you have been doing everything right – have a fully funded emergency fund, paid off your house and have zero debt, and have been able to save 25x your annual expenses, then I would say that you are ready to retire because you know what you’re doing.

So take out a piece of paper and calculate how much money you really need and you’ll see that early retirement is within your reach as well.  I always thought that I would have to work until I’m 65 years old – and if I don’t do anything to earn more and save more I might have to – but now I see what I need to do in order to cut my retirement age significantly.

[Photo credit]

What do you think of the 4% rule?  Would you like to work forever or join me for a cocktail in my beach house in Costa Rica?


  1. I like the 4% rule. I think it’s still reasonable.

    I like that you said you don’t want to HAVE to work until your 65. That’s how I feel. I know I will always love what I do and I’ll probably never stop working, but if I ever decided to, I want to be able to!
    Kalen @ MoneyMiniBlog recently posted…How to Set Up Your Own Home Inspection BusinessMy Profile

  2. But what do you do when you get old and life costs A LOT MORE than before?

    Mr. Money Mustache hasn’t even addressed this (yet?). But long-term care is inevitable if you live long enough. My grandparents would be paying $150/day if they didn’t have LTC insurance. So do you recommend we factor in the LTC premiums into our retirement monthly expenses just the same as any other expense?

    Secretly, I think MMM wants us all to kill ourselves before we get too old. Just a feeling I have. But ultimately, I do really enjoy MMM.
    Will @firstqfinance recently posted…Switching to Online Classes Boosted My GPA from 3.2 to 4.0My Profile

    • Aldo says:

      Long term care is a must and you should definitely include it as an expense. All types of insurance premiums should be added to the expenses because that is something you can’t go without.
      Aldo recently posted…How Much Money Do I Need To Retire?My Profile

    • LOL, too funny about MMM. Planning for retirement makes me sad as I’m so behind — but I think I will always be making money in some way.
      Melanie @ Dear Debt recently posted…Life and Debt RecapMy Profile

    • Tim says:

      I am fully funding my HSA and my intentions are after I retire I will draw money from my HSA to cover my LTC insurance needs. That is currently how I have been planning for that future. However, I have never run the numbers to see if that shakes out.. at this point it is a qualitative assessment.

  3. I also feel that LTC is an expense that a lot of people don’t factor into the “retirement” equation. I also started later than I should have but I should be able to step away from working if I wanted to in 12 years; hopefully less!
    Kassandra @ More Than Just Money recently posted…Don’t Let Debt Amount To A Life SentenceMy Profile

  4. Even Steven says:

    4% is a fair withdrawal rate. I’m in the school of thought that you should have multiple streams to have this equal 4%. Maybe the first 2% is if from your old 401K, 1% if from your rental house income, and the other 1% if from an annuity or dividends. Basing your retirement income off of one income stream is asking for Murphy to kick you in the shin. As far as long term care, it should be calculated into your expenses, but that’s about the only calculation I would use to factor in is expenses.
    Even Steven recently posted…Are You Ready for Some Fantasy Football?My Profile

  5. Autumn says:

    I love this rule. For one, it focuses on your monthly expenses and not your income. Those are generally easier to control. I am a little obsessive right now and so I am constantly playing around with my number. I think of new scenarios constantly. If everything stays exactly the same as it is now, I’m looking at a good 15 years. That’s a long time – so I think the next time I get bored at work I’ll calculate how long it will take if I take two mini-retirements along the way. It’s a good thing to have a number to work toward – it helps me focus at least.
    Autumn recently posted…A Fun New Savings GameMy Profile

  6. I have a difficult time believing any of the numbers sites give you about retiring. For me, I am just trying to get my cost of living to the lowest possible number and live there consistently while building my wealth. I am hoping that this plan will mean financial freedom in more like 15 years rather than retirement in 30 years. I really just hope to get to the place where I don’t need my salary and I just work for fun. Working hard to get there as fast as possible.
    Shannon @ Financially Blonde recently posted…Music Mondays – Seasons of LoveMy Profile

  7. Good stuff here Aldo! I think what really is setting people on edge now about the “how much?” question is the rising cost of health care. It was difficult enough to fund the post retirement years before…now with the new laws it may just get ridiculous. 5 years in a nursing home (which isn’t unreasonable to expect – happened to my grandmother) could eat up a ton of life savings. So I think the answer to this question is a lot murkier than it seems.
    Brian @ Luke1428 recently posted…Should I Leave An Inheritance To My Children?My Profile

  8. Liz says:

    At this point in the game, we simply try to set aside as much as possible for retirement without stretching ourselves too thin. I definitely don’t expect to see a dime of social security.
    Liz recently posted…July And August {In Review}My Profile

  9. Since my wife is in grad school and I’m still deciding where I want to go in my career, I don’t think too much about calculating how much I’ll need for retirement. We consistently pay down debt, put money in our retirement and HSA account, and work to increase our income. We’ll get into specifics – such as running retirement calcs – down the road.
    DC @ Young Adult Money recently posted…5 (More) Things Every Blogger Struggles WithMy Profile

  10. I like this rule. I’ve also been wondering how much I should save so that I don’t have to work anymore. We don’t know how long we’re going to live and our health condition when we’re old, so I agree that to have our expenses under control we have to include the cost of insurance too to have better estimation of how much we should save.

  11. I think that it’s one of those questions that: “if you have to ask, you haven’t got enough”.

    I’m a big believer in increasing your income as well as reducing expenses. Sometimes concentrating too much on either will give you tunnel vision and you can miss the opportunity that will catapult you 10 years ahead in your “plan”.

    Earn BIG, spend small.

  12. LTCOptions says:

    I also agree with Ivan here that purchasing life insurance is a must nowadays. However, purchasing one is something that consumers should think about especially now that newer insurance products are entering the market. Hybrid policies or combination products are new products that are becoming popular today especially to people who want to protect their assets from the high cost of care. Since long term care insurance cost is expensive, consumers are looking for alternative ways to pay for nursing homes, assisted living facilities and other long-term care services.

    This new product works this way, you’ll purchase life insurance and you choose long term care as your benefit rider. You can use this policy to pay for long term care and give the remaining amount in your pool of money to your beneficiaries when you die. This is only recommended to people who will only need limited coverage and keen in living something behind to their loved ones.

    Some would argue that they have enough retirement income from 401(k), bonds, stocks and mutual funds but with the way the cost of care is increasing, you might exhaust all of these due to your care expenses. It’s best to plan ahead and purchase the necessary insurance products in order to avoid financial woes and to give your family a bright future.

  13. Maybe the question in the title is worth answering a little perversely. Instead of wondering how much money you need to retire, you better consider changing the current way of making money. If in your life you are dealing with things which cause you an authentic pleasure and you are earning on it the question included in the subject is losing the meaning. In addition, people who take pleasure in their work often earn quite good money.