So you want to retire ASAP! But you don't know what is the least amount of money needed to retire comfortably is. The last thing you want to do is retire, then have to go back to work because you ran out of money!
The least amount of money needed to retire depends on your expenses, alternative income streams, and your willingness to pick up extra side jobs here and there.
However, let me share with you what is the bare minimum amount of money necessary to retire early according to the government. The government sets the federal poverty levels by household size. From there, we can calculate the retirement portfolio size necessary.
The Least Amount Of Income Necessary To Retire
Let's look at the official Federal Poverty Level (FPL) in the chart below. The baseline federal poverty level is under the 100% column.
If you make $12,140 or less as a single person, you are living in poverty in America. If your family of four makes $25,100 a year or less, your family is also living in poverty and so forth.
The FPL chart below is used to calculate which households in America are able to qualify for healthcare subsidies under the “Affordable Care Act.” In other words, if your household makes less than 400% of FPL, you are considered POOR ENOUGH to gain subsidies instead of contribute extra to help other Americans.
Given the government has a wealth of data and experience, one can conclude that the bare minimum income to live in America is between 100% to 200% of FPL. The less debt you have in retirement, the easier it is to live closer to 100% of FPL.
The household income levels between 300% to 400% of FPL seem comfortable as long as the household doesn't live in an expensive coastal city like New York or Los Angeles.
For example, a couple with two kids making between $75,300 and $100,400 is going to be able to live a decent lifestyle in the heartland of America like Des Moines or Kansas City.
I've been aggressively investing in the heartland ($810,000 worth of investments) through real estate crowdfunding because there is a multi-decade demographic shift inland. Valuations are much cheaper and net rental yields are much higher. Technology allows people to work more remotely.
You can check out Fundrise and its various real estate offerings for free. They were founded in 2012 and are the most established platform with the most innovative offerings in my opinion.
The Smallest Investment Portfolio Size Necessary To Retire
Given the Federal Poverty Limit of 100% to 200% is the bare minimum amount of income needed to retire, let's look at the bare minimum portfolio amount needed to produce the bare minimum income.
The least amount of money necessary to retire early is a combination of income and wealth.
To retire or retire early (<60), you need a large enough after-tax retirement portfolio to generate income to cover your basic living expenses. You cannot tap your IRA or 401(k) in most circumstances without penalty until 59.5.
Therefore, if you plan to retire before 60, the below chart shows the bare minimum investment portfolio amounts necessary by household size and withdrawal rates.
In order to retire early and live on a household income equal to 200% of FPL and a conservative 2% rate of return or withdrawal rate, you will need to amass $1,214,000 as an individual and up to $3,374,000 for a household of six.
If you are OK with living on just 100% of FPL and expect a conservative 2% rate of return or withdrawal rate, then you will only need to amass $607,000 as an individual and up to $1,687,000 for a household of six.
If a couple wants to have two children and earn up to 200% of FPL in early retirement, they need to amass between $1,004,000 to $2,510,000 in their after-tax portfolio based on a 5% to 2% withdrawal rate and so forth.
Given the 10-year bond yield is at ~2%, I wouldn't withdraw or expect a return of more than 4% from your after-tax retirement portfolio if you want to stay retired. A 3% withdrawal rate or expected rate of return is a more responsible percentage.
Bottom line: If you want to live on the bare minimum in retirement, you need between $250,000 – $1,700,000 in your retirement portfolio, depending on household size. If you'd rather live off 200% of FPL, then simply double the amount to $500,000 – $3,400,000.
There are people who are willing to live near abject poverty to retire!
Sample Retirement Budget
Here's a sample retirement budget for a family of three I put together living off 200% of FPL, or $41,560 a year in gross income. The household nets $3,115 a month and requires a portfolio of roughly $1.4 million to fund their lifestyle.
The biggest cost in the budget is rent. If the household would have purchased and paid off a home years ago, their rent cost would likely decline to $500 or less to pay for property tax and maintenance expenses.
With $1,600 more a month in free cash flow due to a paid off mortgage, this household of three should live quite comfortably in retirement in most places around the country.
Given both parents are retired, it behooves the family to move to a lower cost area to make their investment income go farther. Geoarbitrage opportunities have never been easier.
Once you get to 60, you can start tapping your 401(k) and other tax-advantageous retirement accounts. Once you're over 64, you can also start collecting Social Security. In the meantime, there's no reason why you can make extra money on the side to supplement your investment income.
A Simple Retirement Life Is Nice
The key cost in retirement is usually housing expense and medical expense. If you can pay off your mortgage, it doesn't cost that much to lead a comfortable retirement lifestyle. Just make sure you have healthcare insurance to prevent catastrophic loss.
Now you know the least amount of money necessary to retire early and likely not run out of money. To be sure, I suggest signing up for Personal Capital and running your cash flow and investment portfolio through their free financial tools.
Below is an example of what their Retirement Planner spits out for me using their algorithms. I have a desire to spend $12,500/month in retirement at age 50, and my investment portfolio is projected to produce $18,415/month income.
Your goal is for the Retirement Planner to show that you have at least a 95% chance of achieving your retirement cash flow goals. If not, you can always lower your desired retirement spending.
I've used Personal Capital since 2012 to track my net worth and help me reduce investment fees. As a result, I feel very confident about my financial future, especially given I retired in 2012 at age 34. I encourage you to stay on top of your finances.
Retire Early Through Real Estate
Real estate is my favorite way to retire early 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 eFunds. 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.
About the Author: Sam worked in investing banking for 13 years at GS and CS. He received his undergraduate degree in Economics from The College of William & Mary and got his MBA from UC Berkeley. In 2012, Sam was able to retire at the age of 34 largely due to his investments that now generate roughly $310,000 a year in passive income.
Financial Samurai was started in 2009 and is one of the most trusted personal finance sites on the web with over 1.5 million pageviews a month.
The Least Amount Of Money Necessary To Retire Early is a FS original post.