There are three retirement goals to shoot for in order to comfortably walk away from your day job and remain retired. They are:
- Accumulate 25X your annual expenses
- Accumulate 20X your annual household income
- Be able to live off a 0.5% annual withdrawal rate
Instead of viewing these retirement goals as at odds with each other, view these retirement goals along a spectrum. They were all introduced at different times in history to address different economic conditions.
Let's review each of the three retirement goals and see how they can apply on your financial journey.
Retirement Goal #1: Achieving 25X Your Annual Expenses
The baseline retirement goal is to build a liquid net worth equal to at least 25X your annual expenses before you retire. A liquid net worth excludes the value of your primary residence.
If however, you can generate income from your primary residence by renting out rooms, then I suppose you can include your primary residence's value in your 25X calculation.
25X is the inverse of 4%. 4% is the longstanding safe withdrawal rate that has been espoused since the mid-1990s. I believe the 4% rule is outdated, which is why accumulating 25X your annual expenses is the minimum net worth amount to achieve before retirement can truly be considered an option.
Accumulating a net worth equal to 25X your annual expenses is the easiest goal, but it is also the most aggressive goal to live off. The reason why it's the easiest goal is because expenses can be reduced to more easily achieve the goal.
For example, let's say your desired lifestyle is spending $40,000 a year. You would, therefore, need to accumulate a net worth of at least $1 million to retire.
But if you wanted to cheat, you could lower your expenses to $20,000 and pretend your life would still be as great living on half as much. As a result, you may tell yourself that you only need $500,000 to walk away from your job.
You can pretend your ideal living situation is only eating boiled eggs with raw onion for dinner in a studio apartment in your 40s. However, deep down, you know you would love to live in at least a one-bedroom so you and your partner don't drive each other crazy during future lockdowns.
25X Expenses Is Not Enough To Feel Secure
Here's the thing. I don't know anybody who retired with 25X their annual expenses who isn't frantically working to make more money. The majority of people who only have a net worth equal to 25X their annual expenses have simply changed careers.
I also don't know anybody who retired with 25X their annual expenses who is truly living their best lives. Besides lowering housing and food standards, there may be other sacrifices such as travel, charity, and even family formation.
Given these two big reasons, I recommended giving yourself a high-five once you've achieved 25X your annual expenses. Then, come up with a plan to accumulate a net worth equal to 20X your annual household income.
Related: The Curious Case Of Retiring And Living In Abject Poverty
Retirement Goal #2: Net Worth Equal To 20X Your Household Income
Achieving a net worth equal to 20X your household income is the main retirement goal everyone should shoot for today. It is a net worth target I came up with in 2016. The income to base your calculation on is the average of your three highest income-earning years.
Not only is the 20X income goal based on logic, I've also carefully monitored how it stacks up through the course of my retirement. So far, it's held up reasonably well, although it's being challenged in 2020+.
The significance of the 20X income goal is that it prevents you from cheating. You can't lower your expenses to achieve your net worth target quicker. Instead, you are forced to always stay disciplined the more you make.
The Focus On Investment Income
There's a natural tendency to spend more the more you make. By following the 20X income goal, you also become more focused on making more money through your investments.
Conversely, with the 25X expenses goal, you may be more focused on reducing expenses.
Since day one of this site in 2009, I've always emphasized making money over cutting expenses as the best way to build wealth. You can only cut so much, but the amount you can make is unlimited.
More Satisfying Achievement
The 20X income goal is also great because the more you make, the more challenging your net worth target gets. With the 25X expenses goal, the more you make, the easier your net worth goal becomes. As a result, if you achieve a net worth equal to at least 20X your income, you will feel more satisfied.
Not only will you feel more satisfied with your accomplishment, you will also feel more at ease in retirement. You won't feel as great of a need to make supplemental retirement income if you don't want to. However, you will probably end up doing something due to your interests and desire to be productive.
For example, I enjoy playing tennis, teaching, and meeting new people. Therefore, before I had kids, I decided to give private tennis lessons once or twice a week sporadically. Each lesson earned me $80, which was nice beer money.
Related: Target Net Worth Amounts By Age And Work Experience
Retirement Goal #3: Withdrawing Only 0.5%
The final retirement goal is one that is practiced after you leave your day job. Once you've accumulated a net worth equal to 20X your income, I recommend withdrawing no more than 0.5% of your portfolio during your first three years of retirement.
You want to stay conservative during your initial retirement years because you're still trying to figure out how to live your new life and spend your capital. Further, the earlier you retire, the greater your uncertainty of whether you did the right thing.
Withdrawing only 0.5% a year may sound aggressive, but it is aligned with the times of permanently low interest rates. It takes much more capital to generate the same amount of risk-adjusted income. Therefore, it's wise to lower your safe withdrawal rate accordingly.
As I wrote in my Proper Safe Withdrawal Rate post, one of the reasons why the 4% rule is outdated is because when it was proposed, the risk-free rate was between 5% – 6.5%. Therefore, it doesn't take a PhD to know that withdrawing 1-1.5 percentage points below a guaranteed rate of return is safe.
After a lifetime of accumulating wealth, withdrawing money will feel foreign. Therefore, it might not be as hard as you think to keep your withdrawal rate at 0.5% or less.
Retirement is a very emotional process. It doesn't fit neatly into a model.
200X Expenses Is Too Much
The flip side to a 0.5% withdrawal rate is trying to accumulate a net worth equal to 200X your annual expenses. In other words, if you are comfortable living off $50,000 a year, you would need to amass a $10 million net worth. If you do so, then you can more easily withdraw 4% or more.
Intuitively, we understand that $10 million is unnecessary for a $50,000 a year spender. Even if there is a 10-year bear market that wipes away 70% of your net worth, you'll most likely still be fine with $3 million if you keep spending the same.
After all, to live off $50,000 a year is like making $70,000 a year in gross income. If you follow my 20X income goal, then all you would need is $1.4 million, let alone $3 million.
Therefore, instead of focusing on accumulating a net worth equal to 200X expenses, focus on lowering your safe withdrawal rate when you are retired. The only way to lower your safe withdrawal rate is to earn supplemental retirement income, hopefully through work that gives you purpose.
Further, the 10-year bond yield has been inching up and is close to 1% now. Therefore, instead of a 0.5 percent withdrawal rate, you can bump it up to a 0.8 percent withdrawal rate.
My proper safe withdrawal rate is calculated by taking the 10-year bond yield and multiplying it by 80%. Therefore, with the 10-year bond yield back up to ~1.1% in 2021, the proper safe withdrawal rate is closer to 0.88% now.
Finding Purpose Is Important
What the retirement models and researchers won't tell you is that once you retire, your desire for having a purpose will dramatically increase. Given your identity is no longer wrapped up in your career, there is a void you will want to fill.
One of the best solutions is to do something purposeful that also provides income in retirement. This activity can be as straightforward as being a Walmart store greeter for three hours a day. It not only feels good to help people find their way, but it's also nice to be part of a community.
The community aspect cannot be underestimated. Perhaps lockdowns have highlighted how important community really is. The desire to be a part of a greater group is why I joined a tennis club and a softball league. It is also why I became a high school tennis coach for 3-4 months a year.
You may wonder why people who come up with these retirement models don't talk more about the importance of purpose and community. The reason why is because these modelers hadn't experienced retirement yet when they came up with their models: they were all working.
I'm giving you perspective in real-time after not having a job for more than eight years. Withdrawing any amount of capital each year after spending 20+ years saving may be harder than lifting Thor's hammer.
Related: The Negatives Of Early Retirement Nobody Talks About
Example Of Using Retirement Goals On A Spectrum
After reading more about these three retirement goals, I wanted to share an example of how you can implement using this below case study from a reader. He shares the following financial attributes:
$155k – annual spend
$90k – annual income from a side hustle
$3,000,000 – net worth excluding house and 529.
Do you think that’s enough to retire comfortably?
Depending on age, this reader is very close to being able retire without much worry. Using the baseline retirement goal of 25X expenses, he would need a minimum net worth of $3,875,000 versus his current liquid net worth of $3,000,000.
However, his $90,000 a year side hustle is very significant income. If the side income is defensible, enjoyable, and has an equity component to it that can be capitalized, its value can be added to his existing liquid net worth to get closer to $3,875,000.
Alternatively, he could take his $155,000 annual spend and subtract $90,000 to get $65,000. 65K equals about $95K in gross income. Using my 20X income goal would mean he would only need a $1,900,000 net worth to retire comfortably.
By withdrawing 0.5% from his current liquid net worth of $3 million, the reader can add $15,000 a year to his $90K side hustle income and live off $105,000 for at least the first year post retirement. It's not the $155,000 annual spend he is used to. However, he can challenge himself for at least one year post retirement to try and generate more side hustle income and/or reduce his expenses.
A Plan Before Retirement
If I were the reader and wanted to retire soon, I would circle a date one year into the future. During the next 12-months I would:
- Save and invest a record amount
- Boost side hustle income
- Develop better relationships with my manager and HR
- Reduce risk exposure
- Strategize a severance negotiation
Getting a severance package could be the x-factor that makes retiring a no-brainer. If the reader can get a severance equal to at least 6-12 months of living expenses, that will significantly reduce downside risk and worry. Further, it will provide for a nice winning sensation that he will have left on his terms with money in his pocket.
Retirement Will Be Different Than You Imagine
However much you think you will need in retirement is likely not what you will actually need in retirement. Our minds never properly calibrate reality. And I've been living and chronicling my stages of early retirement monthly since 2012. Here are some things I would differently before retiring.
Personally, I found that I needed less money in retirement because there were so many free things to do. Further, once you retire, you don't have to save for retirement. However, after retirement, I had not one kid but two kids. Each were miracles. The amount of money I needed for both my wife and I to stay retired ballooned higher.
Whatever you think your retirement life will be like will probably not be what your retirement life will really be like either.
Before I left work, I imagined going surfing and snorkeling every morning in Hawaii. Then I envisioned I'd eat an amazing lau lau for lunch, take an hour nap, and go play tennis or golf in the afternoon. My body would be ripped, my skin would have a uniform golden brown color, and I would be free.
Instead, I'm still in San Francisco eight years later. I'm certainly not ripped either. My days are mostly spent taking care of my two kids and writing. I still play tennis and softball 3X a week, but it's a different life than what I had managed. Inertia is hard to break.
Expect an unpredictable journey. Don't think about these various retirement goals or “rules” as absolutes. Instead, think about them as part of a spectrum. Over time, your retirement goals and the amount of money you feel comfortable having will evolve.
Stay flexible in your beliefs. And most of all, please enjoy the journey!
Use A Retirement Planning Calculator
Another reader mentioned that the only way he gets clarity of his financial projections is to do a long-term cash flow forecast. He accounts for every dollar coming and going, which he says is useful with ad-hoc income such as income from alternative investments and ad-hoc costs such as a roof replacement. He asked me my thoughts on this approach.
It sounds tedious, but I agree that doing a long-term cash flow analysis with potential ad-hoc income and cost items is smart. But instead of doing so manually, I use Personal Capital's Retirement Planner, which was created exactly for this purpose. It automatically tracks your income and expenses. You can also add projections as well.
The tool is excellent because it uses real expenses and income that have been tracked for however long you've been using the tool. Then the tool compiles the data and runs it through a Monte Carlo simulation to give you a numerical and graphical data of your future cash flow needs.
Below is an output example of the Retirement Planner that shows what will happen if this 41-year-old keeps on saving and investing based on his usual amounts and retires at age 50. The Retirement Planner says he has a 99% chance of retiring just fine because his projected cash flow is $18,416 a month versus his desired expenses of $12,500 a month.
Your goal is to get that percentage chance of having a great retirement to be above 95% while also being conservative in your income and expense forecasts. Sign up for free and see what the Retirement Planner spits out for you.
Readers, what retirement goals do you have before you retire? What safe withdrawal rate have you followed if you have already retired? Did you find some part-time work to give you purpose? Was it hard to withdraw funds? How did your retirement life turn out versus expectations?
89 thoughts on “Reconciling Three Retirement Goals: 25X Expenses, 20X Income, 0.5% Withdrawal”
I’ve been enjoying reading through your blog for a while now and as I read through your book, I’m finding myself continuously returning to this same question…
My husband and I own a company (no employees). Would our gross annual household income be our “net pay” from the business or what the company grosses?
Thanks for supporting my book! If you don’t mind leaving a great review on Amazon or wherever you bought it, that would be great.
Regarding your question, I think it’s best to use operating profit from your business. It’s the cleanest line. So revenue minus operating expenses. But you can certainly use your net profit or salary as well to help calculate the net worth targets.
There’s no harm in using all of the variables. But using revenue is a mistake.
Very good article. My thoughts are that the SWR definitely needs to be reconsidered in the current interest rate and equity yield environment. The crux of passive investment valuation (beit bonds or equities) is yield. For bonds, the connection is obvious. For equities, it is not so obvious, but still applied. Refer to the Gordon model of equity valuation based on the value of future dividends discounted to present value based on inflation. At any rate, the laws of investing mandate that higher yield = lower valuation and lower long-term future growth. Given the current interest rate environment, bond valuations have only one way to go (down). If bond yields go negative, then it is better to hold cash. Equity values are getting close with the S&P 500 yield at about 1.65%. There is little room for the upside of either asset class. The tie in to the article is that a 4% safe withdraw in the current environment is irrational. 3% is even aggressive given bond and equity valuations. I’m targeting the lesser of 2% or my net financial assets divided by my expected remaining life expectancy. And that is based on not leaving anything to heirs. Now that means that I likely will not early retire, which sucks but is reality. Side note: Net worth of 25x expenses is great (I am very proud to have achieved that), but really just means you are financially secure. 20x income just seems arbitrary. .05% withdraw rate seems overly aggressive unless you are planning to live for another 200 years or want to leave a fortune to your heirs to blow on whatever.
I read your post thinking it makes a ton of sense that the interest rates being low are impacting returns on capital.
Have you seen the interview with Bill Bergen in MarketWatch that came out in the past few days? He seems to come to a different conclusion; the new safe withdrawal rate is 5%.
I’m not saying your .5% withdrawal rate is wrong but I’m curious about how you are reconciling his conclusion with yours.
If you have had four careers after retirement like Bill, and still make consulting money, you’re free to withdraw to 5% or higher rate if you want.
But for most people who retire without working (funny we have to say this) and don’t have a working spouse, a lower withdrawal rate is more pertinent in the initial years of retirement.
You’re right, the 4% rule is outdated. Bill Bengen just updated it to … 5%.
I just wrote about it on my blog.
According to Bill Bengen, the creator of the 4% rule, you’re looking at the low-interest rates environment wrong. Low inflation is one of the best things that can happen for retirees. Your portfolio holds its value much better with low inflation. You can withdraw more in this environment, not less.
Also, the old 4% rule is for the worst-case scenario. Only a few retirees will exhaust their portfolio after 30 years. Most will have a lot of money left over. The rule is very conservative. It’s still a good guideline. IMO, 0.5% is way overkill.
Lastly, do you really need to give $10 million to your 65 years old kids? By then, they should have made their own fortune. They need help when they’re in their 20s. I don’t see why I need to pass on that much money when I die, assuming I live until 95.
Joe – There is something you and Bill have that many traditional retirees do not. Gainful employment and a working spouse. At the same time, hopefully traditional retirees can access Social Security.
Bill commented on my Property Safe Withdrawal post that he has had 4 careers post retirement and is doing consulting. Please feel free to read his long comment to my many questions yourself. Therefore, of course he can raise his safe withdrawal rate to 5% or higher.
And of course, if you have a working spouse and supplemental retirement income from your site, which I fully encourage, then it is safer to have a higher withdrawal rate.
But if you don’t have multiple careers after retirement like Bill, a working spouse that provides income and subsidized health care, and supplemental retirement income, then it’s not an apples-to-apples comparison.
Here’s an exercise. Pretend both you and your wife retired in 2012 and you didn’t have the $420,000+ in blog revenue you reported since the start. Would you honestly withdraw at 4% or 5% for the first year or two? I think you’d say no based on your frugal habits. Instead, what you guys would do would be to try and make more money and/or spend less.
People in the finance community must remember we are living in different worlds compared to the majority.
Build your passive income, supplemental active retirement income, and convince your spouse to work for years after you retire, and THEN feel free to withdraw at a higher.
But if not, it’s best to keep working or be more conservative, at least for the first few years of retirement.
People love to comment on situations that they are not in, don’t they Sam?
My Husband and I are both in our early 40s with a net worth of ~ $2.3M (we started accumulating 10 yrs back only). Our total annual income is ~ $500k/yr (before tax) and and spending is ~ $60-65k/yr. no kids; house paid off. definitely a long way from 20X annual income or a 0.5% withdrawal rate yet. planning to retire in 2-3 years. Any major problem you see with this?
What is your target net worth in 3 years? Should be fine if you guys won’t have kids and have something else you want to do.
Thanks. Targeting ~$3.0M+ before retirement. One of us will have a pension plan from employer that we can start withdrawing when we turn 55 (not much, ~12k/yr). No plan for kids. Want to spend time in teaching underprivileged kids.
Cool. I think you guys will be fine at 50X expenses plus a lifetime pension. Further, I bet one one or two of you will find fun ways to make supplemental income as early retirees.
The thing to watch out for are massive bear markets that last for several years. This is why I encourage a low withdrawal rate the first 1-2 years of retirement. You just don’t know how you will react until you get there. So why not play it safe.
There’s a lot of discussion here as if FI = retirement and that it only happens when we’re past working years. Yes, we are in the most uncertain of times, but I’d like to re-introduce belief in the power of self / side hustle (Sam’s X-Factor) and the idea of risk/reward. There is still more than enough money in the world for those who can study / learn / develop / grow / hustle and who see FI as a way of finding personal freedom vs. retiring on a melting ice cube. I know we’re all in different situations here with different needs. That being said, the last time I checked, the money printers are going ‘brrrr’ and *significantly* more money is being printed every moment. I know all opportunities are not always equal, but you can manage luck with the same effort as you can manage risk, so creating the chances for having success has to be everyone’s job right now (and always during turbulent times).
I am very concerned that we’re headed into negative rates (we’re already there on a ‘real’ basis) and so we’re all going to have to get a bit more comfortable with some risk assets and its doubtful that FI will be a straight line objective, requiring a bit more flexibility as our financial system figures out what the next version looks like.
Just felt the need to mention that a ‘set it and forget it’ attitude is likely to fail in this environment to be provocative — AND FI is entirely possible when everything isn’t going up in a straight line.
Your posts always make me think Sam. Keep on keeping on. We do appreciate it.
I’m 31 years old and I have 30x my annual income and 30x my annual expenses. Can I be able to retire by the age of 38?
Can you live off 0.5% withdrawal rate of capital after retiring? Also this assumes u will not change your life in any way and that u will not have kids.
To me, retirement security means the wealth keeps working its way up, even after I stop working. Getting older and watching the money go down steadily would freak me out, especially wondering which would go first, the money or me.
30X Expenses (split between retirement/non-retirement funds, 36X if this includes house)
Passive income equaling 1.1X Expenses after taxes.
Minimal Withdrawals prior to RMDs (30 to 40% of 1X)
15% Reduction of Expenses (after retiring to a lower cost, and warmer, locale)
If I have all these spreadsheets right, and somewhat conservative estimates prove out (for example, I don’t have any provisions for reinvesting RMDs, might just hit 9 figure wealth about the time the RMDs stop coming entirely.
Of course, at age 115, that might be problematical.
Also, that close to the end of this century, the robots may have devalued all human monetary units to an even greater degree than inflation will or else, just my luck, replaced money with some other system entirely.
Have you started converting all of your net worth to Bitcoin to appease the future overlords?
How will the financial advisory market be disrupted? Knowledge is distributed on the internet. Trading fees are going to zero. Tax policy and special financial instruments are the only elements lefts to need a financial advisor. What solutions will drown out the major Advisor services raking in 1-2% fees on retirement deposits?
So if we go by your rules of thumb as a benchmark, we believe we are at that time to make some decisions. As always healthcare is the elephant in the room. However, we are empty nesters, 2 kids out of college and making their way (ages 30 and 26) (all college expenses paid) so it is just my wife and I. Wife and I are 57. Personal Capital indicates a 99% Success Rate (no recession scenarios) based on the many expense assumption we planned for and if we bake in the 2 recession scenarios as well putting us around 97% success rate. I would of thought it would of had more of an impact so I was surprised.
We live in the midwest, so cost of living is low compared to the east and west coasts. Home is paid for, no debt. NW (including home, ~$3.6MM) NW-Liquid Assets Only (2~$2.9MM). Does not include a small pension ($10K/annually) if I started taking today or if I delay to 65 (~16K annually) or SS for wife and I.
Our expenses over the last 3 years average ~$50K (Non-Discretionary Spend) and ~25K (Discretionary) or ~$75K annual spend x 25 = a need of ~1.9MM. Using my IRS Tax Statement – Average ~$145K over our working lifetime so income x 20 = ~$2.8MM. Withdrawal rate of .5 on $2.9MM is just $15K annually … not going to satisfy our ~$75K in expenses.
So your saying that if I don’t meet all 3 rules of thumb then I need to keep working or find a side hustle to generate $60K of income until we start our pension and SS which may be another 8 to 10 years to reach maximums of each?
Am I understanding this correctly Sam?
We’ve gotten into it on the subject of the 0.5% withdrawal rate in the past, but I’m still of the view that this is an unreasonable thing to promote for anyone who isn’t incredibly rich or in a job that both pays very well and they love.
To me, the concept of a 0.5% withdrawal rate and a 25x expenses “baseline” should not be discussed in the same article because they address two absolutely different financial profiles. An example helps:
Let’s say a couple has $100k per year of expenses. Let’s say they don’t just use your 25x baseline, but they blow it away and in fact double it to 50x. That means they retire with a $5 million retirement account.
Now, you’ve advocated that this couple should withdraw only 0.5%, leaving them with annual income of $25k. How does that work? To make the numbers work for their expenses, they’d need four times that amount of income, requiring either a 2% withdrawal rate (totally doable, in my view) or they would need to accumulate a retirement portfolio worth $20M, which is completely impractical for 99+% of the population–and something virtually no couple with a $100k/year lifestyle will be able to do unless they spend their lives earning gobs of money while not spending it, and what’s the point in that?
I know you’ve prioritized things like “legacy wealth” and passing on an estate equal to your starting point. I don’t share that goal in the slightest way, but that’s neither here nor there. If you can do it, great! Wish I could (without killing myself in a career that I hate), but I could only do that with a level of personal sacrifice that no sane person would make.
I’m just not sure I get the benefit of talking about the “baseline” (a challenging but achievable goal for many people) at the same time as we talk of a fulfilling retirement funded by 0.5% withdrawals, which is something hardly any person beyond the ultra rich could ever do. If I retire at 50 with $2M, I don’t see a lot of value in living off only $10k per year so that at age 100 I would have an account worth $3M (assuming the low end of your risk free 1.5% figure and a 0.5% withdrawal amount).
I’m in absolute agreement. Sam’s 0.5% withdrawal rate aligns with a goal of maintaining a large nest egg in perpetuity. Most people expect to spend down their retirement fund. You can’t take it with you, as they say.
BTW, I retired in my early 40s in 2013. My investments have done remarkably well. Even with a few bad years in the future, I’m still ahead of the curve. My net worth keeps increasing faster than when I had a full-time job. I don’t live a lavish lifestyle but I’m still raising two young kids. At some point they’ll become independent, and my expenses should go down even more.
Sam. Am curious what’s your take on our situation. I am 50 and my husband is 51.
Here’s our annual income:
My husband makes $260K base, plus $130K bonus (been making this much bonus for the last 2 years, prior to that, it was closer to $20K per year)
I make $140K base, plus $35K bonus (been making this for the last 2 years, prior to that it was around $10K)
so, combined base is $400K plus variable bonuses over the last few years ranging from $30K to $165K per year.
We have net rental income of about $70K (after all expenses).
Our net worth is $6M (which includes 10 rental properties and our $600K paid off home).
We have annual expenses of $220K per year (which includes $100K for kids’ tuitions). Net spending without tuition is about $120K per year.
1 kid is a college sophomore and the other kid is a high school junior. What level of net worth should we really be aiming for?
25X expenses = $5.5 million
20X base income = $8 million
I would shoot for $8 million net worth before one or both of you decide to retire. Base income is really all you can account for. You’re not too far off, and obviously your expenses will decline post college.
Are you guys having fun at work? If so, continue. You guys are in the sweet spot for the ideal age of retirement if you still enjoy your work.
But if not, I’d retire once the kids graduate and do something else. Are there things you’ve always wanted to do but put off?
I’m having fun with my job. My husband has a pretty high stress job, so he’s not enjoying it as much. He would prefer to retire in 3 years once our older one finishes college. We have $300K in the College 529 saved up for the younger one so his college expenses will not be an issue. The goal during retirement is to move around and travel. We have homes in Italy, and the Philippines. So, the plan is to stay 1/3 of the time in each country, split our time between Italy, the Philippines and the US.
A perfect solution then! He retires in three years, and you continue to work.
I’ve been retired 5 years. Worked a little on and off. So far my portfolio has grown about $40,000, which doesn’t seem like much, but Schwab ran a retirement scenario for me which scared me to death! So I’m happy to be up, rather than upside down, as they had projected! They projected I’d spend a lot more than I am spending apparently.
My house is paid off, my Jeep is older but paid, so expenses are low. My fixed funds are gaining about 3.5 percent, which helps. I’ve never kept to withdrawing a certain percentage. I just took out for various needs that came up. I guess since I’m still gaining and not losing anything yet from principal, I’m doing ok for now!
I looked at 4% rule as an important milestone where after I hit it, I could lose my job and not really sweat it. After hitting that, I feel more relaxed and comfortable expressing uncomfortable opinions at work, challenging authority, turning down projects that are boring, etc.
I’ve paid off my house, so now the point where I’ll definitely walk away is when my post-tax accounts are shooting off enough dividends to cover a low-key lifestyle. For me that’s about 20K a year, at 2% yield. I’m close, but not ready to pull the trigger. I would not consider using this metric if I still had a mortgage, though.
Yes, great way to look at the 4% rule… as a milestone to be more free in action and thought.
It’s good to blend a bunch of different “rules” to see what makes the most sense. I’m sort of a 33x expenses, combined with dividing you investments by the number of years you realistically have left (using SS average for healthy non smoker). This puts in perspective how reasonable your budget is. Sprinkle in a post retirement fun side gig that throws off some cash and provides tax benefits, life is pretty good.
Not sure how to take this advice in my situation. Feels very unique and hard to map the right target. Me and my SO were fortunate enough to be earning rapidly increasing salaries in our late 30s, but our spend for a family of four in HCOL was only growing slightly YoY.
We are 40 this year and started thinking of RE, but applying the targets don’t work well.
Household comp ~ $1,100,000 (before tax), $650,000 (after tax, 401, etc)
Expenses (tracked since 2015) ~ 120,000 per year (growing at 5% YoY)
Liquid investments ~ 2,000,000
Other investments ~ 1,000,000 (401k, 529)
House paid off, however, property taxes where we live are extremely high.
Taking in account all the calculations and suggestions from FS, it seems that our target number would be anywhere between $3M and $20M.
I took a slightly different approach here – current cost of living $120k, +15k p.a. for medical since we wont have our job paying for it anymore, +20k to pay investment tax, +45k for college savings and other unexpected expenses putting us at 200k target and translating into 6M portfolio.
Would be great to get your perspective here.
What is your current net worth? A key factor missing in the analysis, unless I’m missing it.
The good thing is, your spend has been consistent w/ a family of four.. you’ve reached a “steady state” spend that can be used in your retirement with more forecast. I think bumping your expenses to $200K does make sense though and is realistic.
Therefore, the minimum liquid net worth to walk away would be $5 million. And yes, a $22 million net worth based on 20X would be ideal.
$1.1 million is a big household income. What do you guys do and how is that income split? I’d really try and last for as long as possible with that income and your expenses.
FS, thank you for your response. Below some of the additional details.
Current NW roughly:
1,200,000 in the fully paid house (primary residence)
2,000,000 in ETFs
1,000,000 in 401k, 529
200,000 in cash
Targeting 5-6M would be realistic in the next 5 years and walking away for a rat race that we’ve been after the grad school.
As far as income goes, we are both in a senior positions within consulting field. This means really burning 70-80 hours a week and sacrificing sanity and family time. Not sure it is sustainable for more than a few more years.
Maybe start with one person pulling back and spending more time at home for the benefit of the kids and then the other spouse follows a year or two later?
You’re going to make the most and accelerate your net worth the most quickly in your 40s. Working at least another 5 years seems like the prudent move.
Do you have kids though? I have found that I am more than willing to give up any amount of income or wealth to spend time with them before they go to school full-time. But that’s just me.
I have a belief I can always make back money that I missed out on. But there’s never a way to make up for lost time.
Related: Career Or Family? The Most You Have To Sacrifice Is 2-5 Years
Maybe buy some rental properties before you retire so you can use your employment income to qualify for mortgages.
Lenders love employment income, so you’d get an amazing interest rate.
Just make sure you don’t have a bond allocation in any of your investments.
So I think it’s official that you’re now the last of the legit FI bloggers. Congrats on dominating a space that once was filled with several very good writers (including yourself) who for the most part have dropped off the face of the earth. It occurred to me that almost anyone can write about FI when the market is in bull mode, but it takes another level writer to make blog magic after the market crashes 30% +/-.
One thing you keep saying about people who are retired have a different perspective about retirement got me to thinking about my own situation. I “early retired” when I got out of college to tour in a rock band. It was a great decision for me because I got to live out a lot of my childhood dreams, but it also opened my eyes to how banal and unfulfilling all that free time can be. By the time I was 30 I un-retired and dove deep into the working world and never felt that work was a burden or that I should “retire early” from it. I was more interested in creating wealth that would give me the freedom to do what I wanted vs doing nothing. Doing nothing while retired is just as dumb as it sounds.
I know it’s not easy to do, but I would recommend that anyone who is thinking of retiring early try to get a leave of absence from work for at least 6 months to a year just to see if retiring early is what you really want. Most humans are not wired to sit around on a beach all day getting drunk or sleeping until noon waking up just in time to see Drive-ins Diners and Dives for 16 hours.
Am I the last of the FI bloggers? I don’t think so. Perhaps I’m just consistent, regardless of the weather. I still enjoy regularly thinking about why things are the way they are and how things might change. It’s an endless fascinating topic really.
You are a lucky one to have found meaningful work for a very long time! And perhaps you were able to do so because you were able to sow your oats for a while after college.
I’m wondering what the safe withdrawal rate would be if treasury rates dropped to zero?
0% Ron. As I’m sure you’ve well aware, the Japanese haven’t been able to retire for decades….
My spouse is works for the state of California and is eligible for a six figure pension, supplemental health care and COLA adjustments. I will have a ~50k a year pension with health care and COLA adjustments also.
How do we figure how much to save 20x-25x annual expenses? Seems excessive considering our pensions. I get it nothing in life is a guarantee, so is there a strategy better suited for our situation?
A six-figure pension is MASSIVE. Congrats! You guys have hit the lottery.
If your expenses are below your total pension, then you can forget about these retirement rules.
Working for government can really pay off!
See: How To Calculate The Value Of Your Pension
Thank you for the quick reply! I would like to follow up. If not a finite number, what are some of the things you have experienced in retirement that you look forward to spending on? Having capital to jump on an investment opportunity I imagine would be your #1. Leaving an estate for your children also I assume. That house in Hawaii will come someday for you guys!
I value your prospective as you are living through retirement currently. We imagine the typical food, travel and healthcare expense. After reading this post I think there will be a lot more that emerges (hobbies etc.) for us in retirement. Perhaps, helping our children with down payments for their house. Only time will tell.
Lastly, should we use the 0.5% withdrawal rate for calculating the value of our pension?
There is always an investment opportunity, but it’s not a priority anymore. Preserving capital and growing it in a steady manner is more important now.
I spend my money freely on food, sporting equipment, housing, travel experiences, vacation experiences, and homes. I really love spending money on living in a nice place.
0.5% for calculating the value of a pension is too aggressive.
How does managing living expenses fall into this?
I think that’s a crucial aspect of this scenario vs just trying to invest more.
Example: There is a big trend over the last 12 months of people with means leaving California because of the taxes, policies, and living conditions. Their money is going a lot further at their destinations as well as their quality of life improving.
Uprooting one’s life to save money is likely something someone who focuses on savings, not income generation. That’s fine, but it’s more a scarcity mindset vs an abundance mindset (25X expenses proponent vs 20X income).
I personally don’t know anybody who has left SF. But I do know a lot of people who are focused on income generation who have bought more property this year for their family.
The people I see on social media who left to a places like Texas were struggling in San Francisco already. They made the rational move and that’s great.
” a scarcity mindset vs an abundance mindset”. This line hit me. As someone who thinks of escaping the bay area, I constantly struggle with the constraints of scarcity. Gah! shift in perspective is sometimes the most important skill. Agility of thinking. Thank you for the reminder.
Assuming a 0.5% withdrawl rate, 3% inflation rate, and 0% investment returns, it would take 66 years to burn through your nest egg. Let’s say 95% of people retire at age 50 or older. Then they would have to live until 111 to spend down their nest egg. I think a 1% withdrawl rate makes more sense for people that don’t need to pass on their wealth.
Sure. Do what’s best for you. Are you withdrawing at 1% now?
Most parents I know want to pass down enough wealth equal to the estate tax threshold, whatever that is at the time of death.
My current rate is 1% of the principal per year, although fortunately investment returns are not 0% :)
Sounds good to me! And their strategy is to withdraw more or build up withdrawal credits during good times To smooth out consumption during bad times.
Just to clarify here, you are claiming most people should (or are) basing their retirement planning decision on having saved and passed down $11.1 MM to their kid? If that is not the case and would agree this only applies to a very small subset of well off people, then that seems to reinforce the 0.5% is a bit of a lofty benchmark using the scenario JeffD just proposed. I actually agree with most of the statements made in this article (that most retired people generally avoid or should avoid touching principle for at least a while and the 25x is very dated) but the statement made here is a bit out of touch.
Whatever the estate threshold is at the anticipated time of death. The range is $1 – $11.58 over the past 20 years. Households will spend and save accordingly as these thresholds chang.
I think perhaps you are not aware of a large portion of the population who want to build perpetual giving machines to charitable organizations and leave enough money for their children to not starve but not enough to not doing nothing.
Do you not want to leave some sort of legacy when you pass? What is your current retirement situation?
So to clarify on the 0.5% withdrawal rate, you are counting 0.5% of your capital. You are not counting any dividends or investment income. The investment income is “extra” money which can be well over 0.5% of your capital.
Thanks for all the thoughtful posts. Two questions:
1. Isn’t the 25x times rule a little dependent on age? I would not be comfortable retiring using the 25x rule in my 30’s or 40’s but if you are in your 50’s and you can start to consider some future contribution from social security the risks go way down that you will not run out of money. Your thoughts?
2. I have found the only way to have clarity of financial projections of my own personal situation is to do a long term cash flow forecast. This makes you account for every dollar coming and going and is particularly useful with ad-hoc income such as income from alternative investments like a forestry harvest. It is also a good discipline for ad-hoc costs such as a roof replacement that are not always budgeted for appropriately. What are your views on this approach?
1) Yes. Agree. The older you are, the safer it is to retire with 25X expenses. I would not retire before 50 with less than 25X annual expenses though. If you do, again, it’s about generating supplemental retirement income.
2) Agree. I use Personal Capital’s Retirement Planner, which is the best for doing future cash flow analysis. The tool uses exactly what you’ve been spending and saving and runs the data through a model to give you a numerical and graphical forecast. I can add this in the post.
Your story of what we think will happen versus what actually happens during retirement, particularly an early one, reflect what I’ve been experiencing through various staycations and time off this past year. I typically travel during my time off from work and wanted to retire early to have more time to travel. Not being able to travel this taught me what it’s like to spend more time at home, and I found that I actually missed my job!
In reality, I have no absolutely no desire to travel full-time. I like going away for a few weeks, then coming home. I love having more time with family and friends, but they have their lives too, and people are often busy. The more time I had, the less I accomplished. And I missed my connections at work, both with colleagues and patients. This past staycation taught me that working part-time will eventually be ideal for me. Plus, it hedges against the bets of running out of money simply through retiring early (I wrote about this experience this past week).
Like you said, I don’t want to live like a pauper. I’m 41 and enjoy living a good life. I’m not a spendthrift, but I don’t want to worry about every dollar I spend or whether or not a huge unexpected expense will reduce my SWR for years to come. Your idea of 20x income vs. 25% annual spending is wise, and it’s probably why I keep increasing my financial independence number – I’d rather have more than enough than just barely enough. And I realize my spending could shift drastically at some point post-retirement.
Anyway, thanks for your insights on post-retirement life. My dad retired early, my mom did not. My dad was ready to leave, my mom was not. That said, they planned their retirement well and have nothing to worry about. I’d like to do the same and prefer to model their plan. After all, I’m not working this hard and saving this much to live a reduced life just to shave some years off work. Just to reiterate, I am NOT a huge spender. I’m actually quite frugal and enjoy a relatively simple life. But I value stability and living in a safe neighborhood too much to risk cashing out early when I don’t actually NEED to.
Glad to hear about your parents Katie.
Yes, life is one great big DISCOVERY! We imagine we want a certain lifestyle, but only when we actually get to experience it do we really know what we really want.
Hence, a key message is for everyone to stay FLEXIBLE in thought and action. It was a little bizarre to see some people get so upset about my 0.5% withdrawal rate proposal without recognizing that times have changed.
The reality is that the best way to learn is through experience. I can only share my experience and other people’s experiences on this fun journey.
Sam – my vision of retirement is moving from employee to entrepreneur. I will consider this more seriously when my home is fully paid off. I plan to buyout estates and resell items through eBay, auction houses, etc. What metrics would you consider if your goal is to ensure you do not destroy your families financial stability in the process? I currently work in a well paid financial services job but feel I will be approaching burnout in the next 5 years and would like to change gears. I would like to remain anonymous so please do not post my email address (I don’t think you do but just in case)
It’s a fun journey many have taken, including myself to a certain extent.
I would ring fence your capital into a stable/conservative bucket post retirement. Perhaps you take 80% – 90% of your capital for retirement and keep it safe. Then take 10% – 20% of your capital and invest it in yourself/your business.
This way, worst case, you’ll always be good.
Or, you can invest your retirement income/dividends in your business and see how that goes.
I also don’t know anybody who retired with 25X their annual expenses who is truly living their best lives.”
I’m surprised you haven’t come across the folks at retireearlylifestyle.com or the author of “Cashing in on the American Dream: How to Retire at 35”. Both call it quits from careers in 30s at 25x expenses net worth.
Hi Sam, if my index fund value increased 40k in a year and I sold 40k worth of the fund to cover my expenses, is it considered “touching the principal”? Or is it considered “0% withdrawal”?
I’d consider that not touching principal.
Why must one wait til retirement to live a happy, full life? To do what you want to do? Except when my two children were in grade school, I did whatever I wanted with the family. We traveled. I didn’t waste money on a $60,000 truck or buy the most expensive house I could buy.
Of course I spent all my money, which you would not have approved. But now at 71, I don’t spend money. My children have children and they don’t have time to travel.
I am glad I spent my money when my children lived at home. We have wonderful memories. Now I spend my money on lab work.
Old age sucks if you are retired or not. Spend on the family and enjoy. Old age is just old age.
Sorry about your old age Charles. Hopefully your kids still appreciate you and will still call and visit.
I really like how you started by explaining how 25x expenses is the baseline and how then going to 20 times income and explaining how they differ. I can see how people can be tempted to cheat using the expenses method and then run into trouble down the road if that’s the primary factor they use in their retirement planning.
I love to plan so I like how you laid out all three goals to really think about retirement planning methodically and thoroughly.
Very smart post. Thanks!
When to retire early (or retire) at all, interesting question well I’m not there yet and I think that it will always depends on individuals.
As far as I’m concerned my target is when my passive income covers my yearly expenses and some (say 10-20pct) in a good year I can just make more $ and down year Hopefully my extra covered me. No withdrawal as there’s always something coming up. Finally I like real estate as part of my passive income so over the years I can either refinance and significantly reduce my expenses or just pay more extra payments in good years. All in this is just the safest to make sure than when you pull the plug from your work you’ll be covered…. how much safety is enough for you to make sure you can retire depends on each respective people and risk appetite. At say 4pct return which is way more than conservative this gets your 25X rule well. I’ve been averaging low double digits returns for the last 5 years so hopefully can pull out before the 25X goal is reached…. of note this excludes in the calc the equity in a home. Purely calculating how much $ covers me….
Great to see many people out there retiring early, gives us a goal and encourages us to push! I am maybe 5/6 years away from it.
Look Wade Pfau PHD says the SWR today is around 2.5%
.5% is insane and poor advice
The goal at or near retirement is to avoid a scenario of a major loss-SORR
Nowadays there are ways to increase income with a bit more risk like preferred, hi yield stocks, agency and corporate bonds, munis, etc
Remember about thinking about these three goals as being on a spectrum. I respect Wade’s opinion, and I hope he continues to have a long and lasting career that makes him plenty of money.
However, I’m sharing perspective after more than eight years of post work life. I’m pretty confident that Wade‘s views on retirement will change once he actually experiences retirement. This is one of the key messages in my post about how real life is different from models.
Bill Bengen’s perspective changed and he decided to have “four careers after retirement and make money currently as a 4% rule consultant.”
Please share with us whether you have retired, and if so, what withdrawal rate are you practicing. I think it’s great to understand different perspectives and see how different people live their retirement lives. Thanks.
You know how much money you need in old age? Enough to buy a urn. That’s it.
I always love your optimistic comments Charles!
Sam, the IRS will force you to make a 4% withdraw in your 70’s on your 401K, therefor the .5% you are peddling is misleading.
Stewie/Rob/Willie, you have to be flexible in thought and think about various situations.
If the required minimum distribution is by age 72, that’s a relatively late time to start withdrawing. Therefore, 4% or much greater amounts may be warranted, especially if your health isn’t that great. But if you retired at 50, you would have had 20+ years where a lower SFR was relevant.
Finally, don’t forget net worth composition. If your 401k was equal to 5% of your net worth, even if you started drawing 5% at age 60, that’s a 0.5% withdrawal rate if you leave the remaining 90% untouched because you’re earning supplemental retirement income.
Hope you are enjoying 61 and you get to collect SS soon.
I was fortunate enough to be offered a Roth 401K later in my career which i maxed out. The Roth and my brokerage accounts are mine, not a tax lien for the government, therefor allowing me to take out what I want and when I want . I agree with your advise maxing out your 401K, people just need to understand that a traditional 401k/IRA is a piggy bank for the government. I will be delaying social security until 70, I have a military retirement and have a large brokerage account I set up when I got my series 7 in 1989., all my commissions went into my account and has compounded nicely over the decades.
I’m not retired. I just know the future and feel I know more about retirement than you even though you have worked for eight years.
I don’t think stocks and other real assets go down, so I’m not afraid of sequence of return risks.
Cool. You gotta do what’s right for you. It’s great you have so much confidence in knowing the future. This is one of the reasons why I’m not worried about people’s finances. People have the knowledge and the confidence to do the right thing b/c everything is rational.
I would rather listen to someone who has actually experienced retirement instead of just as research on retirement. But I guess it’s fine because it’s like listening to a professor teach without having first-hand experience. This is really common.
The problem with Wade and other PhD types is that they don’t operate in the real world. If you have a nice cushy job and you’re going to get a nice pension, which a minority of people in America good, I don’t think you really have that much credibility talking about retirement.
I think it is all in the planning and preparing for a low SWR at retirement and I don’t find a goal of .5% to be insane at all. My wife and I both have had solid careers. I retired about 5 years ago and decided to work with startups for equity rather than salary as a part-time gig in retirement. My wife continues to advance her career and for now, plans to work another 5-6 years.
In our careers, we stayed with Fortune 500 companies, in large part, for the benefits. We both were able to max out retirement accounts, take advantage of deferred compensation plans, obtain options and RSUs and have full pensions when we turned 60 and maxed out SS at 70. As a result, our plan is to have a 0% SWR because we will have enough other income sources to cover our expenses and can continue to invest our nest egg rather aggressively and have it as a safety net for emergencies and other contingencies. By the time my wife retires, our mortgage will also be paid off.
Again, this is possible because of planning and because of certain choices we made along the way and at least in our situation, I would consider it good advice not to have to rely on any SWR, or at the very least, a low SWR.
Although I am lying on my couch waiving my hands at some of things you write, your posts make me think. I pause, think and then agree with certain points :) X25 expenses is just a milestone. It means you can switch to a more fulfilling career and “risk” getting lower pay. In all honesty, I have yet to meet someone who retired early on the 4% rule and is not generating money somehow (if not immediately then after 1- 2 years).
Now, regarding the X20 income thing. Personally, I would need to work a high stress high income job until my mid-40s to reach it. Not the end of the world I guess. I have doubts though regarding my ability to survive “corporate America” until then :)
You don’t need to work a high stress job to achieve a net worth equal to 20 times income. You would just need to get a net worth equal to 20 times your income, regardless of how much you make and what career you have. It’s independent, and follows whatever career you’ve got.
I’m glad you also recognize that no early retiree is withdrawing 4% a year, and is not hustling to try to make extra money.
Enjoy the couch!
Sometimes I wonder if people say they could retire once they can get to a swr of 4% because it makes them feel safe and then they continue to work because their job is “optional.” But the reality, like you mention, is that people don’t really retire even if they can do the 4% SWR because they don’t feel quite ready.
How would you calculate what is needed in this scenario:
155k – annual spend
90k – annual income from a side hustle
3,000,000 – net worth excluding house and 529.
Do you think that’s enough?
You’re very close! The $90,000 a year side hustle is very significant income. What is that side income, and is there an equity component to it which you could sell off or capitalize and value? If so, that value can artificially boost your net worth to come closer to 20X income.
You could take $155k – $90K = $65k. 65K = about $95K gross X 20X = about $2 million.
So if your side hustle income is enjoyable, and defensible, and has an equity component to it, but actually, you’re probably good to go.
Not retired yet! To be clear, YOU are clearly very smart. I was just talking about one the the three rules (I really like 20x income and think that is brilliant, personally). I love your writing on real estate – definitely has motivated me to do more e/rentals.
I was just trying to frame a “safe withdrawal rate” differently. I agree many retirees don’t touch principal for years, at least those reading your advice. But folks who want to retire after accumulating 100 years worth of expenses – half your level – can probably feel pretty darn confident in my opinion they aren’t going to outlive their money.
Do you agree cash is more beneficial (or relatively less harmful) in the low interest rate world? I also think low interest rates lead to higher asset prices – and potentially more of those opportunities you talk about like earlier this year (when you were spot on!)
I used to abhor cash and minimal rates of return, but looking at a scary 10-yr market outlook – and negative interest rates unlikely – seems much more attractive (relatively) now.
I could be very wrong in this approach btw. I’m sure many flaws (or, one could have missed this year’s huge rebound with the exact same logic). I just think the role of cash is improved in a low interest rate world and would be curious if your thoughts re:cash have changed at all (seems like no?)
Sorry for the novel.
For clarification do you mean .5% plus dividends? So if you’ve got $1.5M, it’s $7500/yr plus whatever dividends? We could actually be talking about $40,000 if you consider that same $1.5M? Thanks!
Good question. Strictly speaking, I’m saying 0.5% withdrawal a year from your retirement accounts, even if your dividends yield more. In other words, out of a $1.5 million portfolio, you’re using $7,500 a year even if it may be producing $30,000 a year. The remaining $22,500 gets reinvested.
However, you can certainly withdraw 0.5% + dividend income to fund your retirement. If the dividend yield is 2%, your withdrawal rate would be 2.5%.
Depending on what age you retire, I think it’s worth starting your withdrawal rate as small as possible or 0% to encourage retirees to find something meaningful, fun and new to do. I’m not talking about full time, stressful work. But something that provides purpose.
Also.. the 10-year bond yield is at ~0.7% now… so you can follow that withdrawal rate during the initial few years. Once you’re comfortable living without a steady paycheck and know what you want to do, feel free to withdraw more per year if necessary.
To me, 0.5% is dumb unless you want to leave a legacy. Throw all the money in a bank account and you can live for 200 years on it.
Once you get to 30x expenses, you can live for 30 years on the money (although inflation will eat away so stasging under the bed isn’t a good idea).
It seems to me the is a “zero lower bound” type issue at play.
The role of cash is probably a lot higher now in low interest rate world. Intuitively, the penalty for holding cash is less and thus we should hold more.
Sam – like the writing and you have been good at coming up with rules. The 200x time is silly, but I’m struggling to find ideas on how much to increase cash or the role of cash in brave new world. Any thoughts?
No problem thinking it’s dumb. If you are retired, can you share when you retired, what your withdrawal rate was and whether you decided to earn supplemental income? The most consistent feedback I’ve found from earlier retirees is that they don’t end up touching ANY principal for years.
I use cash primarily to feel comfortable and pounce on investment opportunities like we saw with stocks and real estate in March-April 2020.
I’m in a similar situation. I have 30x my annual expenses. 2/3 in cash. 1/3 in cash flowing real estate. I’m very conservative. The 1% loss in value of my cash this year is worth not jumping in and buying inflated assets in my opinion. However, if inflation gets to or exceeds the targeted 2%, my compounded losses on the cash will become significant. No one can time the market but I do feel we are due for a correction in most asset prices.
So you are timing the market yet acknowledge no one can…