How Much Money Do You Need To Retire At 55 – Note that I said INVESTED, not SAVED, because it assumes you have a marinade in the stock market, earning an average return of 7% over the long term.
Linked to this, is your personal financial score… that is your net worth divided by your expenses, if your PF score is 25, you are financially independent.
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How Much Money Do You Need To Retire At 55
If you want to be super conservative, you can make this 25X rule a 30X rule, just to be DANG sure you have enough saved.
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Pre-Tax. For all intents and purposes, this is PRE-TAX as if you were receiving salary or gross income.
You have to pay taxes on it, you are NOT invested in certain areas and you can reduce the tax.
For example, if your investments are in your TFSA or Roth IRA, these are tax SHELTERED investments, and you won’t pay taxes when you withdraw the money.
But if your money is in an RRSP or 401K, those are tax-deferred investments, so you’ll pay taxes when you withdraw the money.
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In Canada, we also have a thing with dividends – we can take up to $50K in dividends and only pay about $200 in taxes.
Dividend income is one of my investment goals/strategies – Mini Project: Dividends and this is my list of dividend stocks to watch for Canada and the US
It works even for early retirees because they just need to manage their income/cash flow a bit, but generally they are fine with this valuation at 25X your income.
It already takes into account the FUTURE value because of the 4% withdrawal rule, which already has 3% inflation built into it. Read below.
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It assumes that people can safely withdraw 4% of their investments in retirement, without affecting or damaging their capital to the point where they could *GASP* run out of money.
We assume a long-term return of 7%, and with inflation also assumed at an average of 3%, 7 – 3 = 4%.
Therefore, you will leave enough money in your investments to cover the inflation (3%), and you can safely withdraw 4%.
Maybe here and there you might have to pick up work in the meantime to sort things out if needed, but honestly, it’s not an issue.
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If you don’t have enough in dividends coming in to cover your living expenses (THIS IS IDEAL!), you have to put away your investments every year.
My partner has already retired, and is starting a new career path as a professor (or so he says, who knows), and every time he has to pay the bills , he picks up a stock or two, and sells some of it, and uses that money.
If he had dividends coming in, he could literally just take the dividends instead of reinvesting them, and keep that money alive – that’s really my plan.
So the PF score calculation I mentioned above by taking your net worth divided by your expenses, is just a way to see if you’re on track in terms of savings.
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But for real retirement savings, you need to take what you have invested (not your car, your house, your anything, but real money in the market), and use that in this calculation.
Unless you plan to sell your home to release the capital so you can use that money to live (eg $600K house, selling for $800K and rent), I would personally take your house, your car and any assets you don’t look like. STORY or drop this calculation.
My current net worth is $900K. Only about $382K is invested in the market, getting that 7% long-term interest growth.
This means, if my goal is $50K a year in income, I have about $868K of investments/savings to go. O_o
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Since my house and car are paid off, it means I have lower monthly expenses, and I can just plow whatever I invest into, which means I can throw about 85% of my net income every month into an investment, and not worry about a damn thing.
Now, if you’re okay with selling your home as part of your financial retirement plan, you can add it to your account.
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Sometimes, I review my net worth journey and then, my money journey, going from being in d
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Also, I am in no way a professional investment advisor or money manager. I am just a woman who loves money, talking about money, and making money. All opinions expressed on this blog are personal and for entertainment value. Take them with a grain of salt and always consult a professional when in doubt. of your life. This is something that not many people understand and that is why I am so passionate about sharing that this is an option.
We’re diving into the final part of my three-part series on how to retire early. If you haven’t seen the first parts make sure you check them out – how to get into the FI/RE mindset and how to find your savings rate & reduce spending. Today we are talking about how much money you need to make and that is invested to be able to retire. Let’s talk money honey!
The simplest formula and the one I actually used when I first calculated my number is:
You might be wondering why 25? That number comes from the 4% rule from the Trinity Study. It was a study of retirees’ portfolios based on historical stock market data that showed how much money they could withdraw from their retirement portfolio and not run out. money safely. They decided that 4% was a safe withdrawal rate where you could stay off your nest egg and not run out of money.
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For early retirees, some play it safe because we have a longer timeline than the retiree. They use the formula:
That means you could make a safe withdrawal rate of 3%. Check out this chart from the Early Retirement Now blog, which basically visualizes the data from the Trinity Study and explains how they arrived at the 4% rule.
Okay, I lied! I know I said you would never run out of money, but actually according to this, there is a 1% chance that you will run out of money based on their study. This assumes your retirement investments are 75% stocks / 25% over a 30-year horizon. The odds, however, are definitely in your favor.
This is good news! However, since we are early retirees here, we have to look at more than a 60 year horizon. If you use the Trinity Study and the 4% rule to determine your FI/RE number and safe withdrawal rate (SWR), your portfolio will only be 85-89% successful, assuming 75% + have in stock.
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To offset a potential failure at a 4% SWR, many early retirees continue to pursue hobbies that make them some money — hobbies that don’t feel like work. . It’s easier to make money doing things you enjoy, especially when you have a lot more time to devote to your craft.
If you really plan on never working again, a 3% SWR might be a better target for you. You can see on the chart that even by being as conservative as a 50%/50% stock portfolio, you still have a 100% chance of success with the 3% safe withdrawal rate.
Once you’ve calculated that number, you’re going to add any large one-time expenses. For example, if you want to pay for your child’s college or you want a really nice wedding, you would include that. Take this example:
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($50,000 annual spending * 25) + ($250,000 university tuition * 2 children) = $1.75 million for early retirement What about inflation?
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I always wonder if it is responsible for economic inflation, and the answer is yes. Assuming the average market yield is 10%, you are going to subtract inflation. So stock market growth 10% – inflation 3% = 7%. If you are withdrawing at 3-4%, much lower than that
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