The dream is to never work because you have to. It’s to work because you want to. You should not have to wake up at 7:00am, get ready, and go to work for the next forty years. Forty years is an eternity. You should be in a position where you want to do those morning routines. That is the life that everyone should have. No matter who you are. Then, the golden question becomes this. How much money is enough to retire on?
I am not retired yet. I’ve been working for only four years now, meaning there are more years ahead of me to be in the workforce. However, I already thought of a number to hit so that I can turn in my 2 weeks notice. The number is $500,000. It is not a grand number to hit and nowhere near the traditional definition of “rich”. However, it works very well for me. There is a mathematical calculation that went into my retirement number.
Finding Out How Much Money is Enough to Retire On is Extremely Personal
I’ve read tons of great personal finance bloggers who hit 7 or 8 figure net worth mark or are working towards it. Great, more power to them! Key thing to remember is that everyone’s expenses are completely different. My number is so low compared to others because I live life very cheaply. All in, my expenses are around $25,000 using after-tax dollars.
It certainly helps that I live in a low cost of living city. Texas is one of the best states to live in from a personal finance perspective. By far. I make six figures and have very low expenses for me to stay alive and exist. I love it. Therefore, I personally do not need millions of dollars for me to live on and enjoy life. Five hundred thousand dollars is more than enough for me to fund my $25,000 a year lifestyle.
What really helps is that a great chunk of my spending over the past four years has been fixed. Meaning, I had to buy it one time and it will last me for 5 – 10 years. There’s no need for repurchases or rebuys. My car was purchased for $10,000 cash and there is no need for monthly payments.
I plan on driving that thing into the ground before considering buying another car. My memory foam bed, including the frames, was purchased for $350. Kept it for 3 years and counting. My dining table was purchased for $250. Kept it for 2 years and counting.
Due to the fixed nature of my expenses, there isn’t a need nor desire to purchase more of it. Meaning, during retirement, no additional expenses to account for in those categories!
The Math
Reading my number of $500,000, a lot of people are going to think that I plan on living on ramen noodles. Nothing could be further from the truth. Here is the math that’s worked out. We all know that historically, stocks return an annual 7% per year.
As of 2019, up to $39,375 of long-term capital appreciation gains are not taxed if you live in the USA. With a $500,000 nest egg, it will generate an average $35,000 annual income over the next 40 years using a 7% equity return rate. That is more than enough to pay off my $25,000 lifestyle. Additionally, a $35,000 untaxed income is equivalent to $41,500 in gross-income. More than enough for me to live on!
What’s even better is that I include fixed expenses into my $25,000 annual expenses calculation. Meaning, my expenses can only go lower year over year the more I spend on fixed expenses in a given year. Truthfully, I had already bought a lot of them already that’ll last me through years.
Therefore, I only need to take care of my immediate need expenses. Things like food, water, rent, insurance, gas, and more is all I need to pay for. Also even then, I will also be making some money during early retirement, protecting my financial future even more. When I asked myself how much money is enough to retire on, I was pleased to know that it wasn’t that much. In fact, I’m already halfway there!
You Don’t Need a Large Nest Egg to Retire On
We are bombarded with lives of the ultra-rich in every day media in America. It’s not uncommon to read Mark Cuban buying an ocean-view house at Laguna Beach for $19MM. Or Jeff Bezos paying $165MM for a Beverly Hills mansion. That’s what we all think of when we think how much money is enough. An 8 or 9 figure dollar house.
Nevertheless, that should not be your personal number to hit before you decide on early retirement. Mark Cuban and Jeff Bezos are not a part of the top 1%, which is hard enough on its own. They are part of the top 1% of the top 1% of the top 1%.
These special breed of people enjoy the hunt more than the reward. Money is just a consequence to them and their real motivation is to see how far they can do. Is it possible to be at their level and even rewarding? Absolutely. However, it’s a huge headache to get to their levels.
They are not role models to look up to when figuring out how much money is enough to retire on. They are not even the exceptions to the rule, they are the ultra exceptions to the rule. Furthermore, making more money is an endless journey. Even if you make a trillion dollars, you can always make more money. It’s up to you to decide if you want to take that journey or if you want to quit, relax, and put the brakes on the pedal at some point.
Remember, the goal is to live life the way you want to. If buying a $165MM home is what you want to do, I say go for it. However, if living life on your terms without having to deal with the outside world if you don’t want to appeals to you, I recommend you realistically come up with a retirement number that works just for you.
