Early Retirement – How much money do I need to save before I retire “safely”? And “The Rule of 25”

This is a question that pops up a lot in the social media these days. Millenials all seem to be rushing to “retire” as soon as they could, or at least, the idea of an early retirement is something that is soothing to the mind. But what is an actual PRACTICAL way of approaching this? I’ll look at the best alternative (from my point of view)…

I think the best rule you can apply to this is “The Rule of 25”. So how does this work?

For you to retire you should, first of all, know “where” are you retiring in? Each city/country has its own lifestyle which comes with its own monthly expenses (in order to determine that you must also know what type of retirement you are seeking – a typical middle-class retirement or you’d want to have a yacht and a beach house?) After having a long and honest discussion with yourself, the next step would be to get an estimate of how much that life TODAY will cost you per month? Let’s say for a normal life in Canada you’d need $3,000/month which is $36,000 in annual expenses (this is assumed to be after tax). The next step would be to multiply this by 25. The reason for that is that you are considering an average of 4% return on your savings at the time of retirement. So in order for you to be able to retire TODAY with the same exact lifestyle that you have ($3,000/month after tax), you must have $900,000 invested in a portfolio that gives you an average of 4% return and you’re good. However, a few more things to consider here:

1- You should probably leave some buffer to accumulate some savings for the “rainy day”. You obviously don’t want to retire with little or no rooms for any deviations from your soon-to-be boring lifestyle, right? Leave some for surprises!

2- You’d have to consider inflation as a determining factor. At an average of 1.75% per year -let’s say- for 10 years, cost of living has increased about 19% (remember: compound interest) so that’s something to think about.

I personally know people who have done this and by the looks of it they’re happy and what not; I think that while this would be very tempting, should you decide to pursue this you should make sure that you have other sources of income (no matter how little). There are indeed a few options that you could look into. Afterall, you can’t retire and NOT have fun, right? Makes no sense!

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out /  Change )

Google+ photo

You are commenting using your Google+ account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

w

Connecting to %s