How much money do I need to retire?
It is impossible to give one number (e.g. a million dollars) that will meet everybody's needs, wants, and abilities.
First, it depends on the degree of self-reliance and DIY-skills. Starting from the default number of $1M, a person who is 50% self-reliant only needs half as much, namely, $500,000. Such a person would have the skills to supply 50% of his needs or wants on his own, e.g. changing the brake pads yourself costs $20 in materials whereas paying someone else for the job costs $100 in materials and labor with the time spent changing the pads yourself compared to the time spent taking the car to the mechanic and waiting for them being roughly equal.
Second, it depends on the degree of frugality. Starting from the default number of $1M, a person who is able to spend his money efficiently will be able to make his money last longer. A person who is twice as efficient as the average, e.g. buys quality that lasts twice as long, will only need half as much money to reach the same level of utility and use-value.
ERE combines frugality with self-reliance and most people have target amounts of $250-500k with a few being lower (more frugal and more self-reliant) and a few being higher.
From the Early Retirement Extreme 21-Day Makeover:
From the Early Retirement Extreme blog:
- Can I retire young?
- How little do you need to retire?
- Can I retire with 2 million dollars?
- If I retire with a million dollars how well can I live?
- Do I need a million dollars to retire?
- What should my savings rate be?
- What should my savings rate be-some comments
The choice of safe withdrawal rate (SWR) depends on how long one expects the money to last. A 3% SWR has historically lasted "forever," whereas a 4% SWR has lasted 30 years. Young retirees should choose the 3% SWR, however people who are 60 or older may choose a 4% SWR.
|Expenses||3% SWR||4% SWR|
If the real return is known and the investment horizon is very long, the amount which is needed for financial independence can be calculated as a perpetuity.