How Much Do I Need to Invest to Retire Early?
Here's something that you might not know: It only takes $500 a month to retire a millionaire (and that's if you started from scratch at age 35!).
If you started even sooner? It will take less than that to reach millionaire status by the time you retire.
But is $1 million enough to cover your expenses for all of your retirement? Just how much does it take to not only cover your retirement, but cover early retirement?
Let's break down exactly how much you'll need if you want to retire early.
Step #1: Understand Your Retirement Expenses
Many people overlook this step and expect that their expenses will remain relatively the same for the rest of their life. However, retirement can be a time of many financial changes:
In early retirement, you might upsize or downsize your home
You might travel more or less
You might spend less money caring for children in the home
You might spend more on medical expenses as you get older
Create a sample budget for your first year of retirement, and make note of any changes that might occur over the years of your retirement. Also, take into account inflation: your expenses will likely go up by about 3% every year between now and the end of your life. Make sure your budgeting expenses incorporate this element for each year before and during retirement.
Step #2: Calculate Your Retirement Number
Your retirement number can be calculated a few different ways, but it ultimately comes down to how much you need to be able to cover your expenses without working.
Option 1: Use the 4% rule to calculate how much you need to invest. For example, if you know that your living expenses in retirement will be about $120,000 per year, then you'll take $120,000 / 4% = $3 million. Once you reach $3 million, you can safely withdraw 4% (your $120,000) and never run out of money.
Option 2: Use a retirement calculator to find the exact balance that you will need to cover your expenses in retirement. I like Bankrate.com's free retirement calculator.
Option 3: Use a combined approach to cover your retirement expenses. Let's say you need to cover $120,000 in retirement expenses per year. You might save up $1.5 million in your investment account to cover half of these expenses, then create another income stream to cover the 2nd half.
Step #3: Understand WHY You Want to Retire Early
Retiring early often means making sacrifices when you're young to invest the extra cash up front. If you don't have a strong reason for your actions, you might find yourself burning out or resentful of your retirement plan. Before you start, reflect on why retiring early is important to you.
There are lots of tips and tricks that you can use to your advantage to make early retirement a reality. A great place to start? Watch my free 12 minute video all about how the stock market works.
