It is easy to disregard retirement when it feels far out on the horizon. Imagine your financial life like a sailing adventure—theplace we’re going is beyond our sight, but we can at least set a destination and course correct as needed.
When I did some financial research, I realized that the horizon didn’t have to be that far out. If I adjusted the sails, I could catch some wind (adjust my spending), ride some waves (hop into the stock market), and get there much more quickly.
Putting on my sailor cap, I had to set a destination. I had to figure out how much I realistically need to save for financial independence.
Step 1: How much do you spend annually?
The number one ingredient to knowing how much you need to save is figuring out how much you spend. This is why tracking your expenses is important. Using a tool like Mint, Empower (affiliate link) or just checking your bank statements can help you figure out your yearly expenses.
The benchmark to get you started is:
Based on my expenses, I currently live on ~$23k a year as a single person. However, the number you are saving for is the yearly expenses while you retire, so although I’ll be fighting lifestyle inflation, realistically I am planning on saving more.
| Yearly Expenses in Retirement | Amount to target |
| $20,000 (leanFIRE) | $500,000 |
| $30,000 | $750,000 |
| $50,000 | $1,250,000 |
| $70,000 | $1,750,000 |
| $90,000 (fatFIRE) | $2,250,000 |
Here is what my expense report on Empower looks like for the past year.
Six of those months were spent living in the UK, the other half in a high cost of living city. They are for a single person on one income with no kids. I actually didn’t even know how much I spent in a year until I sat down to write this post and line out my goal. These are my finances without making much effort at cutting back or making extreme frugal measures (besides what was built into me from childhood). I even took vacations to Scotland, London, Sweden, Belgium, and Budapest while living in the UK.
Using the benchmark, if I kept my expenses the same, I could retire on ~$600,000, around the same amount as Mr. Money Mustache who retired at 32. Making some assumptions—keeping my current job, keeping my expenses the same, a 5% return on investment and a 4% withdrawal rate, I could retire in 3.5 years.
This means I could retire before I’m 30.
WHAT!?! Is this real? Has the Financial Mechanic gone crazy from too much tinkering with online calculators? (no but actually try tinkering, it can be pretty fun) With diligence and planning, it is possible to retire early. Don’t forget, your invested money starts making money. Sometimes that income can replace a salary.
It is a matter of spending less money on stuff that I don’t actually care about and investing in freedom instead. It’s not about making extreme lifestyle choices either. MMM has a kid and lives in a nice home in Longmont, Colorado.
My goal is to make my target by 32 with a portfolio of 1.2 million. This is to reach the level where I could hypothetically quit my job in a FIRE-y blaze of glory, but the reality is I will have plenty of work and ambition left in me to continue working. I will need to factor in healthcare costs during retirement as well. I will keep tracking my spending as part of adjusting the sails towards retirement.
Where does this “rule” even come from?
4 % Rule
A financial advisor named William Bengen had countless clients ask him how much they would need to retire. He looked for an established benchmark, but there didn’t seem to be a guideline available. He analyzed historical data on stock and bond returns over a 50 year-period and subsequently wrote a paper detailing the ideal withdrawal rate.
The 4% rule takes into account that two main risk factors of retirement: a major downturn in the market early in retirement and heavy inflation. For most people, he says, the average safe withdrawal rate is 7%, but let’s play it safe, okay? A cushy nest-egg will make it much easier to ride out the stock market fluctuations.
Two years after Bengen’s paper, three professors of finance conducted the trinity study and drew a similar conclusion.
How it works: the first year of retirement, you withdraw 4% of your starting portfolio value. In the subsequent years, you simply take the amount of the previous year, and add the difference based on inflation.
Starting Portfolio Value of $1,250,000
| Inflation (example) | Amount to withdraw | |
| 3% |  |
$50,000 |
| 5% |  |
$52,500 |
| 10% |  |
$57,750 |
Bergen says, “As your ‘time horizon’ increases beyond 30 years, as you might expect, the safe withdrawal rate decreases. For example for 35 years, I calculated 4.3%; for 40 years, 4.2%; and for 45 years, 4.1% […] If you plan to live forever, 4% should do it.”
This is great news for early retirees who will be retired for a long time horizon. The 4% rule and the 25 x yearly expenses rule play hand-in-hand. One is just working the other one backwards.
4% Rule
25x expenses rule
Having a benchmark to crystallize your financial destination should help as you save. Now you have a goal to head for, so instead of feeling like a ship lost in a storm, you can head out into smooth waters.
- What are your yearly expenses?
- What is your target portfolio? (25 * expenses)
- Based on the networthify calculator, how many years do you have until retirement?
Are you happy with that number? Are there ways you can reduce your spending or increase your income? Leave a comment below with your thoughts!
Very interesting post.
Some questions: Should the expenses be actual expenses or the expenses expected after retiring (they would go up if you are going to travel). So are you saying that after a certain point the money will make more money than you are spending?
The expenses should be what you expect to spend after retiring. Some people spend more to travel, for healthcare, and other expenses, whereas others have decreasing costs because they have more time to cook their own food, take on some lower paying side-hustles, etc. You got it, eventually your money can make more money from investments than you spend!
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Great post! I’m currently 24 years old with annual package of around 2.5 lakhs. My net salary every month is around 17000. Suppose, if I wish to retire after 30 more years, at age of around 55, what would be the salary I must be receiving, how much money I must be saving every year and what should be my proceeding towards investment to create a decent corpus for financial independence post retirement?
What you spend is just as important as what you make. To retire in 30 years, you would need to save 30% of your salary. See more here: https://www.mrmoneymustache.com/2012/01/13/the-shockingly-simple-math-behind-early-retirement/