How much money do you need to retire?

What does it take to retire? Does the 4% rule still work with current inflation? How can you diversify effectively to retire on time and have stable income during retirement? What is the safest way to retire? How much money do you need? paying off house, saving on bills, cutting expenses, what are your priorities? When it comes to retirement, you will probably hear about the 4% rule quite a bit. This rule states, “If you can live off 4% of your investments, then you can retire”. Saying that another way would be, “To retire you need to save 25 times your annual spending.” For example, if you spend $40,000 US dollars per year, that would be 4% of your required savings. To bring that up to the total required savings you would need to multiply $40,000 by 25, which is $1,000,000 dollars. The reason it’s 4% is because the ‘experts’ claim that you can expect at least 6-8 percent return on your investments, and then you must consider inflation which is claimed to be around 3% annually. If you make 8% on your investments, but inflation is 3% then you are really making 5% on your money. Each year you would have to spend a little more to still maintain a $40,000 lifestyle because of this inflation.

In the first year, you would spend $40,000 and the next you would spend $41,200 for the same goods and services, because inflation makes things cost more, so you need to have more money to live the same life. As you may be able to guess, life doesn’t work that way in most cases. We don’t typically increase our spending exactly with inflation, sometimes products we use are cheaper the next year, and sometimes they are much more expensive. I think the 4% rule is a good measure, however I think it is a little bit too aggressive for most people. There are many circumstances in modern times where this model simply doesn’t work. Also, maintaining a 6-8% return is quite difficult when bonds return 2% now. There isn’t a safe way to have these returns consistently. If you decide to follow the 4% rule while invested in the stock market still, you will risk the possibility of a massive decrease in your funds at some point. Think about if you had retired in 2008 using the 4% rule, with all your money in the market. If your expenses were $40k and you had $1M saved in the stock market, your investments would have likely gone down to 2/3rd of that, or around $650k.

According to the 4% rule, for 2008 and any bad years following, you would have to live on just 4% of the new sum of money. That amount would be about 26k. You would also have to live on that amount until the market recovered to its previous levels, which could take years. In 2021, we had very good market returns of over 20%, but inflation is looking to be nearly 7% or more this year. The real return would be 13% in that case, which isn’t too bad but it’s also not the incredible 20% that it seems to be. In 2022, we have had a stock market correction as interest rates are slowly rising. Meaning we are having higher than average inflation and the market is dipping at the same time. But the point of the rule is that you should have good years, and bad years. It should still average out to keep up with inflation and you should be able to live on the money forever. Would I take the risk of the 4% rule? The answer is yes, for me. However, if I did retire on the 4% rule, I would also ensure that I had a backup plan. If there was a recession right after I retired, I would do my best to pick up a part time job or a side hustle just to help cover some expenses while in the downturn of the market. I would also have my money invested in more than one location. Fine wine is typically uncorrelated with the stock market, so I may have a decent portion of my portfolio in that sector.

Having a paid off home, vehicles, as well as no debt also reduces your necessary expenses by a lot. The only thing you would need to pay for at that point is food and taxes. Hopefully in a market dip I could just cut back on extra spending and vacations and still live comfortably. The last thing I would do is try to have some form of assets that I could sell at last resort. Things like art, collectables, or a paid off rental property. Hopefully it wouldn’t come to that. You never want to sell things when the market is crashing, but it’s better to sell assets that you have just because you like them, then to sell your retirement nest egg that you are planning to use to pay for your retirement for the next few decades (meaning your stock portfolio, or rental income properties). I personally feel that having a paid off home is critical to retiring with the 4% rule. I would also try to have a little wiggle room in my spending so that I’m not maxing out that 4% every year, living right up to the maximum. If I needed to reduce my expenses from $40,000 to $25,000 per year in a recession like 2008, it wouldn’t be as hard if the house was paid off and a bonus if the cars are also paid off. That would primarily leave taxes, small bills, and food left to pay for which I’m sure we could manage living on 25k for a few years, but that would be unpleasant.

I personally will probably move to a 3% rule, meaning I would save 33x my income before retirement. I also plan to have a small income when retired, which helps more than most people think. Even a few hundred dollars a month can allow your retirement nest egg to last much, much longer and help keep you busy too. I hope you found this entertaining, these are some things to consider when planning your retirement. The 4% rule is a rule for people with no pension, no social security, no income, only their retirement nest egg. If you have any extra income the 4% rule would work much better. If you don’t have any of these things, I would highly recommend consulting a financial advisor to figure out what you would need to do to live a happy and comfortable life in retirement. Also plan for things to go wrong, don’t retire expecting everything to go financially perfect. Things break, hospital bills happen, it’s best to plan for the worst and hope for the best in my experience. Plan wisely. This is not financial advice, this is for entertainment purposes only, and is my personal opinion and experience. You can use these links to support this blog: https://join.robinhood.com/jefferc60 – Robinhood: Get a free stock! https://www.coinbase.com/join/christ_ggp – Coinbase: $10 of free Bitcoin with deposit of $100 https://www.gemini.com/share/6r78pl2e – Gemini – $10 of free Bitcoin with deposit of $100 🔎Disclaimer🔎 All content in this blog is for entertainment purposes only. I am not a professional financial advisor and my statements are not to be taken as instructions or directions. In no event will I be liable for any losses or damages arising from the use of content from any of my platforms, including, but not limited to YouTube, Blog, or any other social media. I reserve the right to change my opinions and entertainment content at any time. Please be sure to do your own due diligence!