There’s a LOT of different advice and theories on this magical “retirement number,” but as we alluded to in yesterday’s post, there’s one that gets passed around quite a bit amongst the early retirement crowd. And to be honest I’m liking it the more I come across it :)
It goes like this:
You can retire safely when you have 25x your annual expenses invested in income generating assets (which assumes a 4% withdrawal rate annually from these investments to live on – another general rule people tend to agree on)
Notice this all relies on your EXPENSES – not your income, like a lot of calculations use. That’s the part I like the best since a) you have the most control over it, and b) it just seems to make the most common sense – doesn’t it? You’ll also remember this was the “financially independent” section of the PF Score chart yesterday too @ number 25.
But alas, it’s no easy feat. Do-able, sure, but not easy. How many of us even have 1x our annual expenses invested?? I’ve got 6 and 1/2 but I can’t touch most of it! Haha… (more on that below)
Note too that this magical number only includes “income generating assets.” Things like stocks, bonds, CDs, businesses, real estate, etc. And not your personal residence as it does not give you cash every single month as much as we wished it to. That means the future looks even farther for the majority of us looking to stop hustling soon :(
The other month a commenter here asked me if I was serious about retiring once I hit the million dollar mark in 7-8 years, and while I wish I could have said yes, the truth is I still wouldn’t be close. At least not with the way my life and net worth is currently structured (though I still want to hit $1 Million regardless! ;)). And that’s mainly because of two parts:
- Our monthly expenses are still way too high ($5,500), even though we’ve cut out a lot and have since stabilized (pumping out babies is keeping us on our toes though! ;))
- My investments aren’t in easily accessible accounts. Meaning, I can’t touch most of them until I turn old and gray and ready to retire the “right” way according to the gov’t ;) Which was all fine and dandy when originally setting up all these accounts (I didn’t want to be tempted to pull from them!) but now that we’re talking about reaching the end goal sooner, we’ve put ourselves into an interesting pickle.
According to this retirement rule, I’ll need approximately $1,650,000 stashed away ($5,500 x12 x25) in INCOME-PRODUCING assets if I want any reasonable shot of retiring in the near future. I’d call it “early retirement” if I could, but it just may take me until my 60′s to hit it! ;)
But, that’s only if things remain as they are today.
There are ways to knock this number much lower:
- I can reduce expenses even more
- I can invest a lot more money (as time goes on)
- I can start converting some of these accounts to work more in my favor (see Mad Fientist’s post on the Roth IRA conversion ladder) and I can get better at tax hacking (see Go Curry Cracker’s post on never paying taxes again)
So, it’s not *hopeless* per se, but it’s also not very close still either ;) For the first time since starting this blog though, I feel like I’m starting to “get it” and understand more of the realities with retirement. My bubble’s been officially popped, and I’m now floating down from La La Land into the dark and serious “real” world, haha… But a world I very much need to know if I want change to come sooner.
That’s what I’ve been thinking about lately, anyways… The overall picture of retirement, and badly admiring those frugal rock stars who figured it out many a moons ago! It’s no wonder the Mr Money Mustaches and JL Collins of the blogging world are getting so popular – they speak the truth and show exactly how it can be done!
Unfortunately they just don’t DO IT FOR YOU, those bastards ;)
Photo cred: Alaskan Dude