Posted by Madison on November 2, 2007
So you don’t want to work until 62, 65, or 67? Many people are interested in retiring early, but do not know where to start. It is much easier to get there once you know how much you will need.
In general, to determine how much you will need:
- Calculate your yearly expenses in retirement.
- Multiply by 25.
- This is the total nest egg you will need to begin retirement.
This uses what is commonly referred to as a safe withdrawal rate of 4%. For example, a $1 million portfolio will provide $40,000 of income per year forever.
In general, this is a very simplified approach. If you’d like to more details, here are some of my favorite resources dealing with early retirement:
- Early Retirement forums discuss many topics including safe withdrawal rates.
- Firecalc is a calculator that can help you determine if you are ready for retirement and if your money will last.
- Retire Early Home Page has many articles including a great spreadsheet to download detailing year by year savings.
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It’s very important to remember that $40k in 40 years ( I’m 25 so that’s how far my retirement is ) will be worth very little. 3-4% inflation per year adds up in a HUGE way….
Withdrawing just $40k per year in the year 2048 will likely have you living in a box and eating ramen noodles every other tuesday. I’m still working on a big ol’ fancy spreadsheet that takes inflation into account.
Llama Money: Very good point. Inflation will have quite an impact over 40 years. We’re planning our retirement for much sooner so the impact won’t be as big. Try out the spreadsheet from REHP. It has a built in cell for inflation where you can choose the percentage.
Hey look at that. You just saved me a lot of time – I totally skipped over that link in your post. Thanks.
Great simple calculation, thanks. I had always sort of squirmed when I heard people talk about early retirement, thinking that they were being sort of selfish by not contributing to society. I envisioned a couple of 50 year olds sipping martinis on the beach all day! Now I know that view is totally wrong, and I have been enjoying reading more about the idea of becoming financially secure enough to quit a “normal” job and do what you love instead. Your site has been inspiring, thanks!