How Much Money To Retire by 40?
For years, I have been obsessed with the idea of retiring super young, but disregarded the idea because it seemed like the massive amount of money that I would need to acquire was beyond reach. Anyone ever felt like that?
But, when I sat down and actually figured out how much money it would take to retire by 40, to my surprise it wasn’t as bad as I thought! In figuring it out, I used a couple of assumptions:
Net Gain Per Year
Yearly Income Needed
*Total Per Year
Basically what all of that says, is that if we have 2 rental properties bringing in $2,800 per month together, minus expenses, and assuming our household expenses are as listed above, our yearly requirement for income from investments is $8,264.12. Of course, we will be living off the rental income as well, bringing our total income for the year to $26,508.
My investments will generate a 7% return each year.
I will live off of 4% of my investments each year (excluding passive income).
*Update: I will live on 2% of my investments each year plus rental property income
If I assume that I am returning 7% each year, but am only living on 2%, that leaves me a 5% “buffer” of sorts to either cushion me against inflation, a year with less returns, or to grow my pot of money :-) See how that works?
Next question – How much money do I need to live on per year? My April Budget Update post detailed our current monthly expenses. Basically, with the debt we currently have, our monthly expenses are $3,496.33, or $41,955.96.
However, if we were to pay off our
cars ($34,487.96), credit cards ($2,481.57) (PAID OFF!), the personal loan ($11,304) and Student Loans ($15,400), (see 2014 Q1 Debt Repayment for the most recent figures) our monthly expenses would be $2,209.00 per month, or $26,508.00 per year!!!! That’s a crazy big difference, right?
*UPDATE: If we pay off all our our debt (excluding 1 rental property mortgage) and have 2 rental property incomes, our total investments only need to be $413,256.00!!!!
The number went down from when I first did the calculation, but consider this: There are several things we could cut out of our retirement budget (see hobbies and eating out), and we could also take more than 2% from our retirement savings each year. I used 2% becuase I am leery of the 4% rule, and 2% gives us a huge buffer! Additionally, our investments could perform better than 7%…who really knows?
Most people think that you need millions and millions of dollars to retire, but obviously that is not the case! We are paying off debt to reduce the amount of money that we need to retire, but even if we kept our current debt, we would still only need $1,048.890.00 – just over a million dollars!
When I saw that number, I breathed a sigh of relief! We can do that! Yes, it is a big goal, but it is much more doable than several million dollars!
With that being said, The Big Guy and I need more than just $413,256.00 to retire. We have to pay off our current debt, which totals $102,934.23. Add that in and we have a grand total of $516,190.23.
Can it be done? That’s what you are thinking, right?
Think about your own situation. Are these numbers close to where you are at? Does my total seem doable, or does it seem just as unattainable as the million dollar total that “the experts” give?
The master plan, if you will:
Step 1b: Cut our expenses wherever we can to help the debt payoff process, and to be able to live on less once our debt is paid off. See 14 Ways to Save on Utilities, 10 Free St. Louis Family Activities, and How to Have a Frugal Easter!
Step 2: Move. Either sell our house for a tidy little profit, or rent it out.
Step 3: Continue to invest $2K per month (freed up because we are debt free) plus all passive income for 13 years.
Now, this is a very simplified plan, but according to my math, we will have about $601,146.43 in the Money Pot to allow us to retire when we turn 40! This number only includes saving $2,000 per month from our regular income, and does not include anything passive, like from a rental property, or form this blog! I am super comfortable with this number and the buffer that it will provide us against the inevitable unexpected expenses.
Additionally, the plan is to rent out our current house in 5 years, and to develop 2-3 more rental properties to generate some passive income over and above the income from the Money Pot.
What do you think? Doable? Can you find flaws in my logic or math? I would love to hear your thoughts!
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