How much do I need to retire early?

Fear of the unknown is powerful. We all know it is impossible to predict the future with absolute certainty, and the farther out you try and predict the less certain your conclusions.

If you retire at 35, how can you be certain you won’t be in poverty when you are 80? Luckily the academic world has come up with a benchmark that makes your predictions easier.

The Trinity Study

The idea is simple: Given a bucket of assets, how much can you withdraw each year and not run out of money? For the gory details, read the original paper.

For stock-dominated portfolios, withdrawal rates of 3% and 4% represent exceedingly conservative behavior. At these rates, retirees who wish to bequeath large estates to their heirs will likely be successful. Ironically, even those retirees who adopt higher withdrawal rates and who have little or no desire to leave large estates may end up doing so if they act reasonably prudent in pro- tecting themselves from prematurely exhausting their portfolio.

The simple answer is 4% a year from a portfolio of 75% stocks and 25% bonds.

How did they come to this? The authors ran simulations on historical data from 1926 – 1995, looking at 30 year periods and following the results of pulling out 3% to 12% of funds annually.

Be flexible to increase your success

One of the often cited limitations to the trinity study is that the formula was applied in a rigid manner. If you slightly reduce your spending in down market years your odds of success are much higher.

A 4% Safe Withdrawal Rate (SWR) also doesn’t take into account any sort of side income. Again, being flexible could be key. Maybe after a down market year you hustle a bit, which means you don’t need to take as much from your savings. Small adjustments like this can make a major difference in the long term.

Do the math

Need $40K a year to live on? $40,000 / .04 = $1,000,000

Reduced your expenses to $30k? $30,000 / .04 = $750,000

Ninja like frugality run in your blood? Can you live on $20K a year? $20,000 * .04 = $500,000

Again, this is assuming **no other income** for the rest of your life.

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10 Responses

  1. Notice the incredible positive effect that reducing your expenses has on the size stash required to retire. In my case, after some concerted and creative effort, I managed to reduce my annual basic living expenses from $26,000 to $15,000. That reduced the required size of my retirement stash by $275,000. And that got me to earlier retirement 9 years sooner.

    The math works like magic.

    • Mr. Frugalwoods says:

      It’s a virtuous cycle. Spending less means you need less AND are saving faster. Magic is a good way to think about it 🙂

  2. Mary says:

    Hi there – I fantasize about a similar plan. I am wondering if you have a plan for health care. Excuse me if you have already posted about that…I have not read every bit of your blog. Thanks and good luck!

    • LoveAddict says:

      On the Healthcare point, if you do retire at 33 you won’t qualify for Medicare for another 32 years. Are you thinking you can take advantage of healthcare programs for the economically disadvantaged because your draw rate will keep you below the poverty line? It seems if you’re run rate is less than $20K, you could qualify for Medicaid.

      On the 4% rule – There’s quite of bit of evidence that the 4% rule is bogus and frighteningly risky:

      By the way, have you considered that you came of “Investment Age” so to speak during the 3rd longest bull market in history? It’s all sunshine and rainbows so far, watching your 401K and other portfolios trend upward year after year. Did you have any exposure in 2008? I would like to hear about your contingency plans.

      • Brittany says:

        I almost never comment on these things but I just had to mention that Medicaid has both an income and an asset component. The only way to qualify for Medicaid is if you have a very low income and an extraordinarily low asset level. Now, it will depend on your state but all states require such a low amount that even a second old car could put you over. And yes, it does count retirement accounts. >_<
        *Sorry for butting in on an old comment!*

  3. Aron says:

    Love your website. I can only assume that you read Mr. Money Mustache. Very similar article from him:

    Keep up the good work.

  4. Jordan says:

    Very insightful. The 4% puts things more in perspective than saving $10 per paycheck for example.

  5. Paula says:

    If you really had to have as much money to retire as articles say, most people would die on the job. We retired earlier than planned. My husband got Parkinson’s and I lost my last job in the recession. Our home was paid for, he had both a pension and a 401k with a company match. There are ways that expenses go down in retirement, if you are simple people who enjoy being at home. Living in a state with relatively low cost of living helps. I believe in the traditional “three legged stool” of retirement finances—part social security, part pension, part savings. Unfortunately, a lot of the corporations people are working for no longer believe in that pension leg of the stool. I always say we could have done better and we could have done worse. We have everything we need and feel fortunate, despite not having the huge amount of money people say is necessary.

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