How Much Do You Actually Need to Save to Retire Early?

Nat Eliason recently wrote a great article on the 75% rule for lifestyle creep and retiring – that you should invest 75% of your income increases if you want to keep your retirement timeline. There’s some great wisdom in there about controlling lifestyle creep, but it makes a big assumption that your lifestyle will cost the same after you retire. This doesn’t have to be the case, even if you don’t want to downgrade your lifestyle. Retiring opens up a lot of options and flexibility in your life that can be used to reduce your cost of living without giving up a lot of “lifestyle”.

So, I decided to figure out how much I might actually need to retire. There are a lot of variables, so this won’t apply to everyone. But you can follow the math and process to figure out what your number might be. Let’s start with a few constraints. I’m married, so this will be for 2 people. I’m generally a frugal person, but I don’t do anything extreme. I should be able to live comfortably and buy avocado toast once in a while. I also have no desire to leave the United States, so I won’t compare across borders, but you can almost certainly find cheaper countries to retire in if you do more research. Lastly, I don’t want to rely on Social Security Income since the future of this is not reliable and I want to be in control of all my money. If it does come through, this is all extra. 

Expenses in Retirement

I think people actually overestimate how much money they need to retire early. When you are making a solid 6 figures, it may seem crazy to try to live off of less than that, but once you take a deeper look, it starts to look much easier. Let’s look at what happens to your expenses when you retire:

Fewer Job Expenses: A job has its own expenses. You are actually spending some money to work. If you are commuting, you have transportation costs. If you don’t bring your lunch to work every day, you have eating out costs. These might seem trivial at first, but the dollars really add up. It’s not just the gas you put in the car — you might not need the car at all. No more registration, insurance, or maintenance costs that can easily be a few hundred a month. When both my wife and I were working, we both needed vehicles to go to our jobs. If we retired today, we could easily share one vehicle since we travel together most of the time.

Live in a cheaper area: Once you retire, you now have more mobility to live anywhere. You can choose to live in a cheaper cost of living area. The biggest impact is your housing. In many places in the US, you can find a 2-3 bed home for around $1000 / mo (rent or buy).

Taxes: The progressive income tax system takes more from those with higher incomes. Generally, the less you make, the fewer taxes you pay. So, if you double your gross income, the money that goes in your pocket is less than double. For example, for a married couple in CA, here is a rough estimate for how much you will be taxed at different income levels:

  • $60k, ~$10k taxes, ~$50k left over
  • $120k ~26k in taxes, ~$94k
  • $180k, ~$47k in taxes, ~$133k

Notice that when you triple your gross income, your take home pay only increases by about 2.5x! So, when you make less, you get to keep slightly more of it.

Housing: This is a big variable for retirement. Ideally, you would have your house paid off by retirement and you could strike off the mortgage from your monthly expenses. But this does not mean you should go out of your way to buy a house. If buying a house is more expensive than renting, you are spending extra money each month on housing that could have instead been invested over time. If you spend a big chunk of your retirement paying off a house in 30 years, you might very well have less monthly income than if you just rented the whole time.

If the cost of buying is the same or cheaper than renting, it probably makes sense to buy. But even in this case, it does limit your mobility somewhat, which also limits your opportunities. Best approach is to just plan for retirement based on your current situation. For me, that is renting, so I should budget for housing in retirement.

Kids: Again, another big variable in the retirement equation. If your goal is to purely retire as early as possible by any means necessary, you definitely shouldn’t have kids. But I’d encourage you to think deeply about what you want in life. Retirement is great, but giving up everything to get there often doesn’t bring the happiness that people are expecting. I’ve seen a fair number of people make decisions they regret later on.

Anyway, the point here is that kids are a big (but not unreasonable) expense. I would recommend most people wait until their kids leave the house before retirement. In that case, you can deduct another expense from your list. Either way, you should account for the cost.

Monthly Expenses

Alright, so let’s see where all this leaves us by making a simple budget. I hate budgets, but this is necessary to do the retirement math. Remember this is for 2 people since I intend to stay married through retirement.

  • Housing $2000
  • Utilities $300
  • Phone $100
  • Transportation $300
  • Health Insurance $1000
  • Food $600
  • Travel $500
  • Misc $400
  • Total: $5200/mo or $62,400/yr

This is a rather lean, but not extreme budget. It includes enough money for a decent house in anywhere but the most expensive cities. It includes a generous allocation for health care, which is going to be more expensive as we age. It even has room for a nice vacation or two each year. But it doesn’t have a lot of margin for extras or emergencies that come up – if your house floods or you decide you want a new TV. So you may want to pad this a little bit more depending on your risk tolerance. Or if you are comfortable going more extreme and living in a smaller house (tiny house?), there is definitely room downwards as well.

The 4% Rule

Now that we have our estimated monthly budget for retirement, we need to figure out how much we need saved to generate this amount. The classic rule of thumb is that you need enough saved so that you can invest it conservatively and expect 4% in returns each year. So if we have $1M saved for retirement, that will generate about $25k each year.

Our budget is $62,400 yr, but we actually forgot a big expense – taxes! Because we will want to access our money before any tax-free accounts (IRA, 401k) are accessible, we need to add margin for taxes. The good news is that federal taxes at this modest income level are about 15% currently, and none if we live in the right state. So, that bumps up our annual need to about $73k.

Using the 4% rule for $73k means we need a total of $1.83M saved. Let’s round this up to $2M to give ourselves a bit of a buffer (roughly $500/mo extra).

How long will it take us to save up this amount? Again, there are a lot of variables here, but let’s explore what this looks like for an average person. Let’s assume you go to college, get a decent degree and start work at the age of 22. You start at an entry level salary of $60k/yr and invest 25% of your gross (before taxes) income. You receive a 4% increase in salary every year, and you continue to diligently invest 25% of your income. This means you are making over $100k by the time you are 36, and hit $200k by the time you are 53 (We’ll max the salary at that level to be conservative). You are investing all of this money in a total stock market index and averaging a return of 7% per year. Here’s how your total amount saved grows over time, thanks to the power of compound interest.

At this rate, you will hit the $2M target right about 50. The average retirement age in the US is 64, so you are already 14 years ahead of the curve. Here’s the important part: This is a very conservative plan – almost anybody in the US could do this and retire by 50. Even if your income is a bit lower, you could save a higher percentage to make the numbers the same. This income also isn’t limited to a single person. A dual income would easily hit these numbers, and likely be much higher. Retiring early isn’t just for the super wealthy or lucky people. 

Here’s the link to the spreadsheet so you can see the numbers. Make a copy and put in your own numbers to see the results.

Can we do better?

At this point, we’ve laid out a very attainable plan for most people to retire by 50. But can we do better? What if you want to retire with more money or retire earlier than that? Does it just come down to making more money?

Maybe, but I think there are other strategies. The 4% rule is not a bad place to start, but it misses a few important points.

The 4% rule assumes that you will not have ANY other streams of income in retirement. When you retire, you suddenly have a lot of time on your hands. Unless you plan to chill on the beach everyday, you can use this time to build a stream of income. It doesn’t have to be complicated. You could be driving for Uber a few hours a week or selling handmade blankets. Even a little bit of income offsets your monthly expenses.

Since your monthly drain is lower, you also need a smaller nest egg, which means you can retire sooner. In other words, if you plan carefully to build an income in retirement, you can actually retire sooner.

Of course, you might be saying that it’s not really retirement if you are still working. But the point is that you can work on things you enjoy – things that bring you energy and not things that drain you. Retirement probably isn’t a good word for this. It’s more like taking control of your time and energy.

We like to think of retirement as “work really hard for 30-40 years” then suddenly stop. But this means we are burnt out after 40 years, and then have nothing to do. Instead, think of retirement as a transition. Work hard for maybe 20 years, get enough to have a baseline income, then work on building simple income streams to supplement. Not only do you get control of your life sooner, but you will still be relatively young and have the energy to build something for yourself. Waiting until you are 65 will make that much more difficult.

Going back to our earlier scenario, we decided that we need $2M total saved, which gives us $6700/mo in retirement with the 4% rule. We reach this amount at age 50. But what if we retired at 46 instead? This leaves us with $4,700/mo less. That means we need to be able to generate $2k/mo on our own to break even. Or adjust our lifestyle to reduce our expenses by that amount.

Alternatively, we could keep working our day job until 60, and we would have over $4.5M saved up, enough to generate $15k/mo. Perhaps having this much wealth is worth it to some, but for many, time becomes more important than money. 

Wrap Up

The takeaway is that it is better to optimize your time than your money, but money is a powerful lever to get control over your time. You need to decide where you want to spend your time and what is most fulfilling. There is no one right answer for everyone. If you are enjoying your day job, there is nothing wrong with working it until you are 65. But if you are just working it to get by, you can probably leave it much sooner than 65. 

With a few lifestyle changes, you probably don’t need as much saved as you think. A couple can comfortably retire with $2M. Building up this wealth is much easier than it seems. With a consistent investing strategy, most people can hit this number by age 50. And building up a small income stream as you transition to retirement will give you more flexibility to leave even sooner.