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How to Calculate How Much You Need for Early Retirement

Diane is on a journey to financial independence so that I can focus more time and energy on the things and people that matter most.

How to calculate how much money you need to save to retire early

How to calculate how much money you need to save to retire early

How Much Money Is Enough?

This is, in part, a philosophical question. Your "enough" may not be the same as my "enough." There has been much speculation in this area over the past decade, as millions of Americans caught in the rat race have asked themselves how best to escape or whether an escape is even possible.

Ultimately, you must determine this for yourself. What amount of money will allow you to live happily and comfortably for one year? ("Happily" and "comfortably" are the operative and very subjective words in that statement.) Take your annual number and multiply that by 25. This is, according to members of the FIRE movement, your FIRE number. FIRE stands for "financial independence retire early," a philosophy that has been brought about by authors and bloggers who have shared how they've achieved financial independence at very young ages.

When you work that number backward, it allows you a "safe withdrawal rate" of 4% each year, along with 3% inflation, based on an average rate of return of 7%. Of course, this assumes your money is invested in a balanced portfolio—but really, the assets that generate your annual expenses could be invested in a variety of ways: stocks and bonds, real estate, businesses, intellectual property, etc.

Multiplying by 25 is easy enough. But- determining your annual expenses is not so simple.

"It's important to understand your ownership pattern because it is an expression of the values that guide your life. The question of what you want to own is actually the question of how you want to live your life."

— Marie Kondo

Start With a Deep Dive Into Your Budget

This step isn't fun at all. I like to read books and blogs about money. I don't mind researching frugal approaches to my day-to-day needs. But ask me to pull up my bank and credit card statements, sit down with a fine-tooth comb, and analyze my spending- I'll find just about anything else to do.

But trust me, you have to do it! This part is critical. It is eye-opening. And it can be life-changing.

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When you are faced with your spending patterns, those actual factual numbers on a page set before you, you can begin to see clearly where you spend frivolously and where you spend to bring joy to your life.

Spending with intention is not just a means to an end but an end in itself. Joy is found in a simpler life, as we have seen evidenced in the minimalist movement. Having less, but focusing on more value, can bring you not only closer to financial independence but also much more happiness along the way.

With this in mind:

  1. Print three months' worth of bank and credit card statements
  2. Calculate your average spending in all areas: from fixed expenses like rent and utilities to variable expenses like dining and entertainment and household items.
  3. Look for areas where you have spent money that did not bring you joy. Create a "no joy" list and calculate your monthly average there. This is where you begin to save [more] money.
  4. Look for fixed expenses like cable, internet, phone, and subscriptions. Can those be canceled or reduced? When I went through this exercise, I immediately saved myself $250+ per month by canceling and adjusting subscription services.
  5. After you see what your patterns are and where you can potentially make adjustments, create a realistic budget for yourself. "Realistic" is important. This won't work if you set yourself up to fail.

"The key is remembering that anything you buy and don't use, anything you throw away, anything you consume and don't enjoy is money down the drain, wasting your life energy and wasting the finite resources of the planet. Any waste of your life energy means more hours lost to the rat race, making a dying. Frugality is the user-friendly and earth-friendly lifestyle."

— Vicki Robin, "Your Money or Your Life"

Now What?

You've analyzed your spending patterns and adjusted your budget. Your monthly budget x 12 = your annual spending needs. Don't forget to factor in annual expenses like auto insurance, taxes, etc.

Now ask yourself the following:

  1. Are my monthly needs higher than my income? If so, you'll need to ask yourself a series of hard questions like: do I have the time/energy/ability to take on a second job? Can my expenses be reduced by changing where I live or what car I own? This is ultimately so important. You must find a way to have more income than expense.
  2. With my additional income, how am I investing? Retirement vehicles like IRAs and 401ks are great tools, but if you're planning on early retirement, you'll want to invest elsewhere as well due to limitations on early withdrawals. Diversity is always a great idea as you grow your nest egg: cash savings, stocks, bonds, real estate . . . it is wise to have a variety of ways in which your money makes you money.
  3. Multiply your annual expense needs by 25. This is how much you need in order to retire—assuming your money is invested in a way that will generate a minimum average of 7% annual return.
  4. Based on your current savings ability, how many years will it take? How might you adjust your investment strategy to get there sooner? How might you increase your income to get there sooner?

This content is accurate and true to the best of the author’s knowledge and is not meant to substitute for formal and individualized advice from a qualified professional.

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