How much does it take to retire?

The primary theme of this blog is how to live off your retirement assets. But first one needs to accumulate enough assets to retire. So, for my inaugural post, I’ll address how to determine how much you need to retire. This can be quite a complex topic which I’ll come back to many times but lets start out with some generally accepted rules of thumb.

The 4% rule of thumb represents the maximum amount you can withdraw from your retirement portfolio for all expenses and have you portfolio last throughout retirement. First, calculate how much income you need to fund your desired lifestyle. Lets assume you need $40,000 per year to meet expenses. Then divide that number by 4%, in our example $40,000/0.04, and you arrive at the total amount of assets you need to begin your retirement. In our example, that works out to be $1 million dollars. Alternatively, you can take your annual desired income level and multiply it times 25 and arrive at the required level of assets.

The 4% number is known commonly as the safe withdrawal rate (SWR) and is calculated in a couple of different ways. One way is using long term historical returns of stocks and bonds using various allocations of  stocks and bonds. Another way uses computer simulations (monte-carlo methods) to simulate potential future returns under different scenarios. The withdrawal rate is normally adjusted for inflation, using the historical CPI, and the retirement period is assumed to be approximately 30 years. While there is a lot of discussion to be had on the details here, and I love these details as you will see, that can push you to either higher or lower withdrawal rates,  a 4% SWR is a good starting off point. A great summary of withdrawal rate from retirement portfolios can be found here.

A 4% SWR is what I used to determine my retirement needs and what drove my decision to finally take the leap in early 2010. But I do use it as a rule of thumb and a general planning tool. My plan is flexible and I’ll adjust to the reality of the situation if needed.

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15 Responses to How much does it take to retire?

  1. Randy in Florida says:

    First I applaud you for sharing your knowledge with those who are interested and capable/interested. Are you suggesting the $40k per year appears adequate to finance The Journey as you have described it here?

    • libertatemamo says:

      Randy, thanks for the comment. I was using the $40K to make the numbers easy but it also happens to come close to my budget for the year. I’ve seen all kinds of budgets on my RV adventure. For example, I met a couple who spent an average of $7/night all of last year for camping fees! And then I’ve met people in half a million dollar RVs that only spend their nights in private campgrounds at $30+/night. Personally, my wife and I are currently spending just above $40K/yr, everything included. I target to make enough income from my investment portfolio to cover expenses plus a buffer, just in case. Hope that helps. Let me know if I can answer anything else.

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  3. Croft says:

    Thanks for explaining your 4% rule. It ties in with what I have been subconsciously doing. We retired 11 years ago at 55 and enjoy a combined pension of a little over $60K. We also have a “rainy day fund” of mutual funds. We drew out of the fund to cover some extensive dental work one year and to buy a new(er) motorhome on another. Each of these withdrawals were well over 4% but most years we take nothing out of the fund. I always thought that if I limit withdrawals to average no more than 4% we will be fine. We are managing to do that and the fund is holding it’s own and even gaining some so it is almost back to where it started. We live in Canada and spend 6 – 7 months a year in the motorhome, the last three winters in Mexico. This year we will be in the Southeast USA so it will be interesting to compare the differences in costs.

    • libertatemamo says:

      Hi Croft. Thanks for the comment. With your withdrawals being intermittent and you being frugal and holding them to 4% or so when you do need them is great and should ensure it lasts for a long time. If your pensions are fixed, and not adjusted for inflation, I’d just keep an eye on that. I’ll be posting on the effects of inflation later on.

      We currently are RV’ing in Tennessee. As far as costs go, fuel prices are lower than out west. State park and national forest fees are about the same. Food prices are similar. So, we haven’t noticed a big diff in cost in the SE. We are spending the winter in Fl this year and the park fees there during the winter are definitely higher than what we we paying out west. Enjoy your travels.

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  9. VallAndMo says:

    Hello WheelingIt,

    Amazing post, thanks for taking the time to write it.

    We are in the process of making a very detailed plan for our retirement, and we also reached a very similar result. We don’t know how you found the 4% number, but in my case We figured it from an 8% APR on mutual fund investments minus 4% annual inflation.


    Vall & Mo.

    • libertatemamo says:

      Val and Mo, thanks for the comment. The 4% rule, known as the safe withdrawal rate (SWR) was first made famous in a 1994 paper by financial planner William Bengen and is based on historical stock and bond returns going all the way back to 1926. You can read the original paper for yourself here. . I refer to his work a lot on the blog. If you do a search on SWR on the blog you’ll see all my posts related to this topic. Best of luck with your plans. Hope I can provide some insight along your way.


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