I realized early on that other than falling into a pile of money, funding early retirement will need planning, preferably having no debt, having a pension and/or saving enough to live from. My reaching early retirement through financial independence took financial self-discipline, living a simplified life, and investing wisely.
So the big question I get asked is: How much money does it take to retire early? This happens to be the same question I had myself for many years. Those years before my jumping off of the merry-go-round.
The truthful answer to the question, how much money does it take to retire early? It depends.
Funding Early Retirement: The Steps To Take
My strategy to figure my funding early retirement Number
The amount of money it will take to retire early depends on how much I need every month. The amount needed to pay my living, fun, and hobby expenses. I needed to know what my early retirement lifestyle looks like and what I want to do.
There are a lot of figures thrown around that retirees need to produce 80% of their last salary. Some just say at least $1 million or even more is needed. I don’t think so. I was saving well over 30% of my pre-tax salary and paying another 30% in taxes. That third of my salary that I was happily living on seems like a closer base-figure. That is the amount to use to calculate my early retirement funding number. In any case, I know what I need to support myself and pay for all the Leisure Freak fun that I have planned.
The Importance of Frugal Living Becomes Very Clear
Frugal Living makes early retirement easier to fund. Living A Frugal Lifestyle Means:
- Being debt free
- Mortgage free or at the very least having the lowest interest rate and house payment or rent possible
- Having a focus on what really makes you happy instead of paying for a lot of stuff you really don’t need.
However, a lot also depends on the lifestyle you envision for your retirement. If you choose a retirement lifestyle with extravagant travels around the world. A retirement that includes a 2nd home. Then you will need much more saved to finance that kind of retirement.
Finding your number
When finding my unique number to funding early retirement I decided it takes more than just totaling my monthly bill payments in my checkbook register or bank statements and then multiplying that yearly total by 22 or 25. That is a quick estimate but I wanted to get as close as possible to the right number. I wanted to get closer to know whether I have enough for my funding early retirement. To do so it took my logging every cost for ten years as part of my Strategic Retire Early Plan before retiring.
Fixed and Miscellaneous Costs
I noted my fixed costs and other categories like misc home/auto repairs-maintenance, discretionary, fun, etc. Now knowing what my yearly figure is allows the next step. Using some of the awesome retirement calculators out there to figure out if I had saved enough. The lower that yearly lifestyle cost figure used, the better. That is because it makes it easier to fund early retirement. I also included taxes in my calculation.
Non Fixed Daily Living Costs
I didn’t log every small cost, I have for instance a small weekly cash allowance of $40 I use for the occasional cup of coffee with a friend or other small things during the week. I just logged the weekly cash allowance amount knowing what my weekly budget cash amount is and what I usually spend it on.
Any week where I had to get a little more cash. Usually because we went to a special event like Oktoberfest, etc., I would log that event next to it. That way I could understand the exception and tweak my frugal living budget. That was enough to calculate my lifestyle cost. I still do this in retirement so that I can see what my true cost of inflation is year over year. Inflation is something else I have to consider when figuring out what it takes to fund early retirement.
Income: The Other Side of the Funding Early Retirement Coin
Once I understood my retirement lifestyle cost I took my savings total and plugged it into the free FireCalc retirement calculator to decide if I had enough to fund early retirement. The other side of the coin is getting retirement income from my invested savings.
It is said that one should be able to safely withdraw from our portfolio 4% of our total. Then add in a yearly cost of living by the inflation percentage without running out of money. To use our savings for retirement income we can have investments that pay dividends, interest, and/or have a strategy that sells shares to fund our retirement.
The timing of when to sell whether yearly, quarterly, or monthly comes into play and so does selecting which stocks or funds to sell from.
As far as I am concerned picking which equities to sell can be harder than initially picking and sticking to an investment. I use a CFP (Certified Financial Planner). But this is an area where anyone could do a lot of research and find the answers needed to develop a sound strategy.
The hard part was saving enough money. Figuring out the best way to spend it is phase two. For people who retire before age 55 (401K penalty exception) or under age 59 ½ (IRA penalty exception) then the recommendation is to leave those funds alone to grow tax-free. Then use your non-retirement accounts to fund your retirement. That meaning using any non-retirement brokerage and savings accounts to start an income producing strategy. For those of us who are heavily invested within retirement accounts. Another strategy is necessary to fund our early retirement.
Avoiding Early Withdrawal Penalty
If all or the bulk of funds/savings are primarily in retirement accounts, then there are strategies to get to those funds penalty free. There are many things to consider and rules that must be followed.
I have separate pages with the details you may want to read. Below are provided the page title and links. You can also return to the Funding Early Retirement tab above and use the drop down selector.
I hope by reading through this and the associated detail pages you will be able to find the answer to your own funding early retirement question.
Lastly, don’t underestimate the financial power of a little side income from a retirement job, encore career, or starting a small business. Retirement allows us to do whatever we are passionate about and have an interest in pursuing.
“Disclaimer: This content is not provided or commissioned by any investment company or financial advisor firm. Opinions expressed here are author’s alone and are there as examples for readers to research and investigate their own best investment strategy. As the author is not a financial advisor, there is no implied recommendation being made on a professional level and readers shall invest at their own risk. There are never guarantees in investing”.