How Much Do I Need to Retire Early?

How much do I need to retire? This is an important question few people ask themselves. Yet, the answer can help lead to a faster path to financial freedom. So today, join me as I find my magic retirement number. I’m going to show you my thought process to retirement planning. 

Retirement Assumptions

I’m not married and don’t have kids. Although, that could change down the road. But for simplicity, I’m going to omit those variables. 

I’m also not relying on social security or other government promises. I’m 27 and have a long way to go before tapping into those funds. The government already has over $50 trillion in projected liabilities from Social Security, Medicare, and other programs. Yet, politicians continue to make even bigger promises. So if those funds do come through, it’ll be a nice bonus. 

How Much Do I Need to Retire Early?

To determine how much I need saved up, I need to estimate and average out all future expenses. Here’s my starting list and the total amounts on an annual basis…

Expense Category Annual Cost 
Food $5,200 
Housing $9,600 
Healthcare $6,000 
Travel $3,000 
Miscellaneous $6,200 
Total $30,000 

These are broad categories that can include all expenses throughout a year. For example, for travel I’ve included car costs (including insurance), flights, Uber and a few other line items. And for food, I’ve allotted $100 per week for healthy meals at home. 

America doesn’t have a food problem like it used to. Obesity now runs rampant in America’s poor population. They have access to enough food but they buy less healthy options that are more expensive. Instead, they can find healthier options with a lower price tag at grocery stores. This is one of my 30 Frugal Living Tips to Build a Fortune

In the Miscellaneous category I’ve factored in entertainment, books, gifts, etc. This category is also a backup. I’ve included a margin of safety for unexpected expenses. And if I don’t have to use it all in one year, the money will continue to pay me dividends and go towards future expenses. 

Another important note is healthcare. The $6,000 allotment is high for my current age and health. So assuming my health doesn’t deteriorate at a faster pace than average, savings each year will go towards higher healthcare in my later years. I also have an HSA as further backup for unexpected medical expenses. 

Now, a total of $30,000 to live a year might not seem like much. But I’ve learned to live a happy life without inflating my lifestyle

I’ve also considered that my living expenses will grow with inflation. But I plan to structure my savings to do the same. My nest egg will grow and pay bigger dividends each year to meet retirement expenses.

Retirement Savings and 4% Withdrawal Rule 

With annual expenses at $30,000, I figure I’ll need about $750,000 to retire early. This assumes a 4% withdrawal rate each year. Now, I’m not a huge fan of the 4% withdrawal rule, but my reasoning is different than most people who use it. They usually use the 4% rule with a portfolio containing bonds and other lower returning assets. Over time, they tap into the principal and their portfolio decreases in size. This is where my strategy is different… 

Outside of an emergency fund, close to 100% of my portfolio will be in dividend stocks. Even with today’s low rates, I can buy a basket of healthy companies that pay close to an average of a 4% dividend yield. And hopefully I find even better opportunities when the market drops next. 

In determining how much I need to retire, I also factor in dividend growth… 

The S&P 500 has an average annual dividend growth of about 6% (recent growth over 9%). This easily outpaces inflation and should cover growing retirement expenses. Now, there are setbacks with the entire market’s dividend growth but to counter them, I’ll buy dividend achievers and aristocrats. These are companies that continue to pay bigger dividends each year, no matter what the market does. 

On top of the dividends meeting all expenses, there’s capital appreciation with dividend stocks. Since I’ll only use the dividends, stock price appreciation is the cherry on top (also added security for unexpected big expenses down the road). 

Bear Markets and Tax Won’t Stop My Early Retirement 

When living off growing dividend income, I won’t have to worry about selling stock to make ends meet. But it will be a bumpy ride. It’s near certain the stock market will crash again after I retire. 

When I’ve retired and a recession hits, it won’t feel good. I might see my net worth drop 30%… but I won’t be forced to sell at lower valuations and the market will recover. 

When I retire, taxes are also important to consider. On the federal level, I can collect up to $40,000 (2020 limit) in qualified dividends and not have to pay any taxes. That’s assuming it’s my only income source. So, my plan puts me well within the tax-free zone.

Retire Early Misconception

When most people hear I want to retire at 35, they get the wrong idea. They think I’m going to put my feet up and watch Netflix all day. Sure, I’ll be able to do that whenever I want, but that’s not my goal. I want to be able to pursue passion projects and spend more time with friends and family. 

I also love a lot of the work I currently get paid to do. Once I hit my magic retirement number, I’ll probably pick up some part time jobs here and there. I might also take up consulting and help others reach their financial goals sooner. That’s something I’m passionate about. 

Any extra income I make in retirement can strengthen my safety net. But I also hope to reach a level that I’ll be able to give sustainably back to others and charitable organizations.

Final Thoughts on Retirement Planning

Retirement planning doesn’t need to take months or even weeks to plan. With a few hours each year, you can map a better Path to Financial Freedom. You can come up with a good estimate of how much you’ll need to retire. 

My magic retirement number is $750,000 and that factors in multiple safety nets. It won’t lead to an extravagant lifestyle but I’m not materialistic. I’ve learned lasting happiness doesn’t come from buying the newest toys every year. 

I urge you to take your financial future into your own hands. Take inventory of where you’re at and where you want to be. A little retirement planning goes a long way. 

Please let me know your thoughts or any questions from the ideas I’ve shared with you. If you choose to, you can comment below.

Invest mindfully,

Brian Kehm

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