Are you asking yourself: How much money do I need by age to retire early?
If you want to retire early, you need to have as much of your money in after-tax investment accounts generating passive income as possible.
Pre-tax retirement accounts like the 401(k) and IRA are excellent retirement vehicles that reduces your taxable income, but you can't touch them without a 10% penalty before you're 59.5.
Let me share with you how much you need to have in your tax-advantaged retirement accounts and after-tax investment accounts in order to retire early.
I would NOT recommend retiring before age 40 because your investments need time to compound. Once you build a healthy financial nut, your returns start getting very lucrative as you'll see in the chart below.
However, if you achieve the ideal net worth of $10 million or more, you can retire at whatever age you want!
$10 million or more is also the amount many to consider having generational wealth. There's a growing angst among parents with children that their kids will experience downward mobility given how competitive the world is.
How Much Money You Need To Retire Early
Suze Orman believes you need $5 million or more to retire early. After maxing out your 401(k) and other pre-tax retirement contributions, it's important to generate as much after-tax investments as possible for passive income.
After-tax investments include all stocks, bonds, rental property equity, real estate crowdfunding (my favorite), business equity, and private investments. You could include your primary residence equity if you plan to rent out rooms or sell the property, but a conservative person would not.
Have a look at my base case after-tax investment amounts chart, which will allow you to comfortably retire between 40 – 50 if you so choose with a safe withdrawal rate of between 3% – 5%.
As you can see from the chart, if you retire at age 45 with $1,875,000 in after-tax investments, you're only generating about $75,000 a year in income at a 4% rate of return. That's definitely NOT enough to retire comfortably if you have family and parents to support.
Once you get to about $3,000,000 in after-tax income at age 50, you should be able to generate at least $90,000 a year risk-free, or $120,000 a year at a 4% rate of return.
A 4% withdrawal rate has traditionally been considered the safe withdrawal rate. Whether that's still appropriate in today's times is debatable. Ultimately, your personal retirement philosophies will help determine your withdrawal rate.
How Much You Need In Your 20s To Retire Early
Your 20s: The hardest part about achieving financial independence is getting started. Your 20s is a time of uncertainty. You’re not exactly sure what you want to do, where you want to live, and how you plan to get your finances in order. Maybe you have student loan debt as well. The easiest way to get started is to read your employee handbook and contribute as much as possible to your company’s pre-tax retirement accounts ASAP.
Since you have the lowest earnings power, it may be difficult to comfortably max out your 401(k). However, it is important to also build up after-tax investments at the same time. The ideal situation is to max out your 401(k) and then save 20% or more of your after-tax, after-401(k) income.
By the age of 30 or after eight years in the workforce, your goal should be to have as much in your after-tax investment accounts as you do in your pre-tax retirement accounts. In this chart, that figure is $150,000 + $150,000 = $300,000.
How Much You Need In Your 30s To Retire Early
Your 30s: You should hopefully know what you want to do with your life by the time you hit 30 or after eight years worth of work experience. If not, retiring early will be difficult.
For this decade, your goal is to get your after-tax investment accounts equal to at least 2X your pre-tax retirement amounts by 40. Once your after-tax investment amount surpasses your pre-tax amounts, you will finally start feeling like early retirement is a possibility.
In your 30s, you're thinking about a great retirement, not just a good retirement. Your income is growing with your experience and you're hoping to really build more capital.
The Minimum Age Decade To Retire Early
Your 40s: If all goes according to plan, you’ll have accumulated between 2X – 3X in your after-tax investments. In such a scenario, you are free to leave work behind. I think the best age to retire is around 45. This way, you maximize your earnings power and education ROI, and minimize regret.
It’s important not to hit the eject button before you hit at least a 3X ratio (~$1.5M). Otherwise, you’ll likely experience a tremendous amount of anxiety in early retirement, which would defeat the purpose of retiring early. There are plenty of folks who decided to retire in their 30s because it was the fashionable thing to do and ended up decimating their wealth and their relationships.
There’s often a lot of financial pressure in your 40s due to kids, aging parents, health problems, and so forth. This is the sandwich decade that must be taken very seriously.
In fact, I'm planning on re-retiring under President Biden because I've had enough. I don't want to pay higher taxes nor do I want to work as much anymore. The pandemic has wiped me out! I think many people are burned out and want to enjoy living the YOLO economy more.
Retiring In Your 50s
Your 50s: If you’ve been wanting to retire, but still haven’t, hopefully it’s because you enjoy your job, enjoy the camaraderie, or are waiting for a meaningful pension that will set you up for life. Retiring in your 50s still feels great because it’s still 5 – 15 years earlier than when the average person retires. We’re also living longer as well.
I believe the ideal age to retire early is between 41 – 46. You'll have worked for at least 20 years in the work force, so you won't be wondering what else more you can do. You'll have had a long enough time for your investments to compound. And you're still young enough to travel and pursue other professional dreams.
I Retired At 34, Which Was A Little Too Early
When I negotiated my severance in 2012 at the age of 34, I had about $80,000 a year in passive income. That was enough since I only had myself to take care of. But I ideally wanted to keep working until 40 in order to earn $20,000/year in company profit sharing and save an extra $1 million or so.
But my severance was darn good, providing me with roughly 6 years of living expenses. So in essence, I retired with the confidence of a 40-year-old man. But to be frank, if I could retire all over again, I would have worked at least a couple more years to build more wealth. I also would have liked to have taken advantage of my firm's generous parental leave policy as well.
That said, it's been a great 10-year run so far. My wife and I traveled everywhere. We also finally were able to have children, probably because we were much less stress. Finally, I've grown Financial Samurai into a steady income generator.
Current Passive Income For Retirement
Now, I generate over $250,000 a year in passive income, which is barely enough to support my wife, son, and daughter in expensive San Francisco. Thanks to inflation, everything is so much more expensive since 2012. My goal now is to generate closer to $300,000 a year in passive income to live our best lives where neither my wife and I have to work.
Below is a snapshot of my passive income streams with real estate crowdfunding as the one that's too conservative. I'm probably going to earn 3X the amount in my chart due to some excellent investments around the heartland of America.
Here's a snapshot of how my family spends our $200,000 in passive income. As you can see, there's not that much room for extraneous expenses or luxury vacations. Sure, we could spend less money on food, but that's about it.
If we can generate $50,000 – $100,000 more in passive income, we'd be able to afford more extensive travel during the summers and winters. Our plan is to slow travel for three months a a year to a new country during the summer and spend a month in Hawaii during the winter.
See: Why You Need To Earn $300,000 A Year To Live A Middle Class Lifestyle Today
Very Few Retire Early
Only 18% of Americans retire before the age of 61. Therefore, it's normal to feel bothered by my realistic after-tax calculations.
Even if you don't achieve my figures, at least with focus, and proper financial planning, you will come closer than those who don't even bother.
Retire To Something You Love
Passive income is everything if you truly want to live a carefree retirement lifestyle. Shoot to have as much in after-tax investments as you do in pre-tax investments by age 30. By age 40, shoot to have at least 3X in after-tax investments or at least $1.5M.
Lots of people I know earn supplemental income in early retirement, including myself. Every $10,000 in supplemental income you make equals $250,000 in capital at a 4% withdrawal rate. The key is to work on something you love. For me, it's writing on Financial Samurai, which makes advertising income.
I really wouldn't retire before the age of 40. I'm 45 now and I feel like my life has just begun. Let your savings and investments compound over time. You can see in the charts how explosive the net worth grow becomes towards age 60. I saw you need at least $1,500,000 to comfortably retire early with another $500,000 in pre-tax retirement accounts you can draw from after age 59.5.
Be Flexible In Retirement
Don't underestimate the cost of healthcare and accidents. The average company pays $20,000 a year in healthcare costs for their employee. If you retire early, you will bear these costs. We're personally paying $2,300/month for a family of four ($27,600/year), which I found utterly ridiculous.
Retiring early after years or decades of a steady paycheck is scary. It took me about a year to get used to not having a paycheck hit my bank account every two weeks.
But I eventually got over it and started really enjoying my freedom. Freedom is priceless. Not a day goes by where I'm not thankful my wife and I didn't retire early to travel and take care of our boy.
Just be flexible in retirement. Even if you plan things out meticulously, some things simply don't go according to plan.
Recommendation To Retire Earlier
Sign up for Empower, the web’s #1 free wealth management tool to get a better handle on your finances. You can use Personal Capital to help monitor illegal use of your credit cards and other accounts with their tracking software.
In addition to better money oversight, run your investments through their award-winning Investment Checkup tool to see exactly how much you are paying in fees. I was paying $1,700 a year in fees I had no idea I was paying.
After you link all your accounts, use their Retirement Planning calculator that pulls your real data to give you as pure an estimation of your financial future as possible using Monte Carlo simulation algorithms.
Definitely run your numbers to see how you’re doing. I’ve been using Empower (previously Personal Capital) since 2012 and have seen my net worth skyrocket during this time thanks to better money management.
Generating Retirement Income Through Real Estate
Real estate is my favorite way to achieving financial freedom because it is a tangible asset that is less volatile, provides utility, and generates income. By the time I was 30, I had bought two properties in San Francisco and one property in Lake Tahoe. These properties now generate a significant amount of mostly passive income.
In 2016, I started diversifying into heartland real estate to take advantage of lower valuations and higher cap rates. I did so by investing $810,000 with real estate crowdfunding platforms. With interest rates down, the value of cash flow is up. Further, the pandemic has made working from home more common.
Take a look at my two favorite real estate crowdfunding platforms. Both are free to sign up and explore.
Fundrise: A way for accredited and non-accredited investors to diversify into real estate through private eREITs. Fundrise has been around since 2012 and has consistently generated steady returns, no matter what the stock market is doing. For most people, investing in a diversified eREIT is the way to go.
CrowdStreet: A way for accredited investors to invest in individual real estate opportunities mostly in 18-hour cities. 18-hour cities are secondary cities with lower valuations, higher rental yields, and potentially higher growth due to job growth and demographic trends. If you have a lot more capital, you can build you own diversified real estate portfolio.
Pick up a copy of Buy This, Not That, my instant Wall Street Journal bestseller. The book helps you make more optimal investment decisions so you can live a better, more fulfilling life.
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