Federal Reserve data found that American families had accumulated an average of $333,940 in retirement accounts as of 2022. Additionally, a recent survey from MassMutual found that the average retirement age in the U.S. was 62 — but that 48% of retirees left the workforce earlier than expected. Are you gearing up to leave the workforce, as well?
If you want to retire early, we will review how much you need to have invested before you can stop working and live off investment income.
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25 Times Your Annual Expenses
“In the FIRE (Financial Independence, Retire Early) community, you will often see people quote their FI (Financial Independence) number,” said Jay Zigmont, PhD, CFP and founder of Childfree Wealth. “Most commonly, the FI number is based upon the safe withdrawal rate of 4%.”
Proponents of the FIRE movement believe in drastically reducing their expenses while trying to save money and prioritize investing. The goal is to save 25 times your annual expenses to retire and then tap into the 4% rule, where you withdraw 4% or less per year from your accounts. It’s important to point out that the 4% rule assumes that your spending increases proportionally with the inflation rate and that you have a balanced portfolio consisting of stocks and bonds.
To calculate the amount you need to quit your job, you’ll have to add up your current annual expenses and multiply them by 25. So, if you have $40,000 per year of expenses, your number will be $1 million. This is the rough math; you may need to adjust your financial plan based on your desired lifestyle.
Zigmont elaborated on this strategy for quitting your job early. “This is based on research looking at what percentage of your income you can take out of a 60/40 portfolio and have a low likelihood of running out of money over a 30-year period,” he explained. “In the old-school world, they called the FI number ‘F-You’ money because you can tell your boss what to do with your job (i.e., quit).”
Experts generally agree that you should aim to accurately estimate your expenses so that you can quit your job with a high degree of certainty that your bills will be covered so that you don’t have to return to the workforce.
Zigmont added, “Remember that the safe withdrawal rate assumes a 30-year retirement, so if you stop working in your 30s, you’re likely to need more money to stop safely.”
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Living Expenses as a Percentage
“A more straightforward way is to establish the percentage of current living expenses that you would like your investments to replace,” shared Adam Ferrari, the CEO of Phoenix Capital Group. “For example, if you need your investments to cover 80% of your pre-retirement income, this is the amount your portfolio must yield each year.”
This strategy will depend on what kind of returns you expect from your investments and how rampant inflation is, which are variables out of your control. However, the goal is to build your investment portfolio up enough so that your investments can cover 80% of your pre-retirement income so that you don’t have to worry about handling your bills. As always, you may want to work with a financial advisor to create a customized plan based on your living situation.
Dollar Amounts Between $1 Million and $3 Million
“Most financial advisors consider a realistic savings goal before retirement to be somewhere between $1 million and $3 million if you have a properly diversified portfolio constantly generating returns,” stated Ferrari.
Depending on how you set up your portfolio and your expected expenses once you leave your job, you can quit when you have anywhere from $1 million to $3 million saved up to live comfortably. However, you’ll want to consider factors like inflation, life expectancy and healthcare costs when deciding how much is enough to leave your job.
Ferrari added, “Again, the specific amount will vary based on geography, intended lifestyle and investment strategy.”
Determining How Much You Need To Quit Your Job
“Exactly how much you need to have invested before you can stop working and enjoy the income from your investment depends on a number of factors, including your chosen lifestyle, what your living expenses will be and what proportion of your savings is in savings and what proportion is in investment products that make you a regular income,” noted Erika Kullberg, an attorney, personal finance expert and founder of Erika.com. “You could be conservative but planning to spend more, or, anticipating pricey post-retirement activities, you might need a larger nest egg or to parlay investments into income-producing assets such as real estate or dividend-paying stocks of companies.”
As always, there isn’t usually a simple solution for quitting your job. The amount that you need to invest will also change depending on your plans, as if you end up starting a business or generating any sort of income once you quit your job, you could likely get away with saving less.
Ferrari concluded, “How much you need to save in order to stop working and begin living off your investment income will be highly dependent on the lifestyle choices you make during retirement, as well as your expected expenses.”
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This article originally appeared on GOBankingRates.com: Here’s How Much You Need To Invest Before You Can Quit Your Job and Retire Early
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