Let’s just take a moment and think about the age old question of “How much money do I need to retire?”
Before we even bring a retirement age into the question, we’re just going to assume that you want to retire somewhere in the next ten years.
(Optimistic am I right?)
So how much money do you think you really need to retire and live a life that is not burdened on the worries of where your next paycheck will come from, how many hours you have to work to get it, and the stresses that come along with working a job that you hate?
To have to ability to live on this money for the rest of your life, never having to contribute to it ever again.
Is it 3 million dollars?
Is there even an amount of money that would let you do this?
Well, in short, the answer is yes. Definitely yes.
I can’t answer exactly what for you what this number will be because I don’t know your personal lifestyle habits or where you plan to live, but I can assure you that the number is probably a lot less than you think.
and the reason for that is compound interest.
Compound interest, often referred to as the eight wonder of the world, is the science of making your money make money for you. You are sort of building this snow ball (but instead of a snowball, its more of a huge wad of cash) that continues to get bigger and bigger as it rolls down the figurative hill towards retirement.
Compound interest is what turned common people like you and I into millionaires, and millionaires into mega-billionaires like Warren Buffett.
How compound interest can work for you
Before we go into the calculations of how to find your freedom number and using compound interest as a tool to help you retire early, I want to explain how it works.
I recently finished a book called Financial Freedom by Grant Sabatier and he explains how you actually need less money to retire at the age of 35 then you would if you were retiring at 65.
This is because if you choose to retire at the age of 35 with the freedom number that you will calculate shortly, then you will have 30 extra years of compound interest working in your favor rather than against you.
Did lose you?
Let me explain more.
Let’s say the average stock market return is somewhere between 7-8% adjusted for inflation, and when you retire, you want to withdraw no more than 4% from your portfolio in a given year.
The 30 years of withdrawing less than what you earn will allow the compounding effect to work in your favor so greatly that you would probably end up having more money than if you chose to retire at a later date.
Calculating Your Freedom Number
When thinking about your freedom number, this is the number that you will need to have invested in order to able to live on those returns for.. well.. forever.
So if we assume, as we did earlier, that you want to withdraw no more than 4% from your portfolio in any given year then that will be your starting point.
The next point is calculating how much money you will truly need or want to make you happy and comfortable in retirement.
You can figure this out by calculating how much you already spend on your monthly expenses and buffering a little bit if you feel that you are a little tight.
For me, my monthly expenses are $4,000 and I feel that I live comfortably, but when I am retired I would like to have $5,000 a month coming in.
Multiplying that by 12, then I would like $60,000 a year after taxes from my portfolio.
A simple equation to find your freedom number is this
$60,000 (annual expenses) / 4% (withdrawal rate) =
Now this may seem like a lot of money, but let’s compare this number to the number that a general retirement calculator would give you.
This calculator says instead you will need $8,000,000.
What a difference.
Now I know $1,500,000 sounds like an impossible number to achieve, but if you break it down into manageable goals, then you can be there before you know it.
By utilizing money-making opportunities that I will talk about in future blog posts, you can be on your way to be financially free as well.
Thanks for reading!
Make sure to find us on Facebook, Twitter, and Instagram @centennialinvestor for more content!
or, subscribe to this blog at http://www.centennialinvestor.com
Have a great day!