This seems to be the big question lately, “How much money do you need to retire?” According to my analytics, nearly 100,000 individuals are asking this question every month! Honestly, I don’t blame them for the continued search! First of all, the work environment is tough right now. For everyone that just wants to bag the job and be done for life, I totally get it. Second, knowing if you really have enough money to retire is pretty daunting. What about inflation? What if you get really sick? What if the market tanks and you lose half your money? How can you really know that you have enough money to survive for the next 2-3 decades of your life??
It’s time to stop wondering, and to start doing what you really want to do in retirement.
Can you retire? Let’s find out together.
How Much Money Do You Need to Retire? Two Main Methods
The reason most people ask the question this way (ie. how much money do I need to retire…?) is because they’re thinking about the first well-known way to retire: stashing away a big pile of money into a retirement account. But, there is actually another (perhaps better) way to retire, and that’s with rental properties.
- Huge nest egg
- Rental properties
While the stash of cash is the easiest way to put money away for retirement, it’s often the most difficult when it comes to knowing whether you really have enough. So how much do you need in either case?
1) The Nest Egg Method
Let’s say you’ve saved up a huge nest egg – like, $1.5 million. Congrats! But, like you’re asking…is it really enough? Well, that of course depends on how much you spend each year!
The well-known rule of thumb is to draw only 4% of your investment each year. This ensures that your investment will last for 25 years, even if you earn absolutely no interest! So, it’s a pretty safe play all in all. On $1.5 million, you’d be able to draw $60,000 a year. Not too shabby, right? Well…don’t forget about inflation.
Is 4% enough? Don’t forget about inflation!
That $60,000 sounds pretty good, but what about 20 years from now?
With an average inflation rate of 3.3% a year, that $60,000 will feel more like $30,000. Is that still enough for you to live on? If it is, great, go for it and have fun in retirement. If not, then you’ve got to keep growing your stash until you grow it to an amount that’s more comfortable for you.
Not sure how big to grow your nest egg now? This table should help:
For my wife and I…we’re targeting $5 million.
Why so much? You might ask…
Well, we’re 35 and probably won’t retire until we’re 55 or so. That means that our desired $80,000 draw per year needs to be more like $160,000 in 20 years (again…thanks to inflation…). Then, we’ll probably live for another 40 years, so we needed to bump up that $160,000 for a little cushion in those later years when every purchase is going to feel like a million bucks! (FYI, this is exactly why super old people still tip you with change instead a real money – it’s because back in the day, those coins were actually worth a lot!).
2) The Rental Property Method
Instead of stacking cash into a big pile and then living off of that for the rest of your life, the rental property method focuses more on yearly income. And, to be honest with you, this is my absolute favorite method.
When you were growing up, how much did it cost to rent a house?
And how much does it cost to rent that same house today? I bet it’s closer to $1,500 a month!
Why is that?
Because the cost of rents typically rise with inflation. After all, with each passing year it costs more to buy a house, therefore it should naturally cost more to rent one too!
Let’s say you own six rental houses and owe nothing on them (to keep the math simple…and because I love debt freedom, but that rant is for another post ;)). Each house nets you $10,000, which means your annual income is $60,000.
Fast forward 20 years…
What is your rental income now?
If you’re a decent landlord and you have kept you rents on par with inflation, your rent earnings should be $120,000 a year!
So what does this mean for you?
It means, once you’ve got the income you need in retirement, you don’t need to try to figure out the crazy inflation number and what that’s going to do to your pile of cash. You’re already set because your income will actually grow in retirement! As things get more expensive, you’ll be earning more!
Isn’t that a beautiful thing?!
So, once you get to that magical number where you can live off of your rental income, you can retire and not have to think about retaining a pile of money!
What’s Your Magic Number for Retirement?
So what about you? What’s your method to save for retirement?
- Are you piling up money in a 401k?
- Or, are you investing in rental properties ?
- Or, maybe you’re doing both at the same time!
Whatever the case may be, step one is getting started. Don’t wait another day! Then, once you’re started, you can decide which of the above methods is best for you and your future.
How much money do you need to retire? Let us know what your target is in the comments below!
My name is Derek, and I have my Bachelors Degree in Finance from Grand Valley State University. After graduation, I was not able to find a job that fully utilized my degree, but I still had a passion for Finance! So, I decided to focus my passion in the stock market. I studied Cash Flows, Balance Sheets, and Income Statements, put some money into the market and saw a good return on my investment. As satisfying as this was, I still felt that something was missing. I have a passion for Finance, but I also have a passion for people. If you have a willingness to learn, I will continue to teach.