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:
Expenses: After we’re debt free
Income Necessary | 2209 | Rental Income | 2800 |
Utilities | 300 | Mortgage | -1000 |
Gas | 300 | Expense (1.67%) | -46.76 |
Health Insurance | 232 | Vacancy | -233 |
Doctor | 50 | Net Gain | 1,520.24 |
Insurance | 100 | Net Gain Per Year | 18,242.88 |
Groceries | 400 | Yearly Income Needed | 8,265.12 |
Eating out | 200 | ||
Barber | 20 | ||
Hulu | 8 | ||
Hobbies | 300 | ||
Car/Holiday Savings | 300 | ||
*Total Per Year | 26508 |
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.
Investment Assumptions:
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 PLAN
The master plan, if you will:
Step 1a: Pay off all debt except our mortgage :-) 5-year debt free plan. 3 years until our Debt-Free Date! Easier said than done, right? See 2014 Q1 Debt Repayment and Net Worth Update.
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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Laurie @thefrugalfarmer says
Sounds like you’ve got a nice, conservative plan in place!!! Yes, it’s amazing how little you really can live off of if you try. We are in the same place. Once our debt is gone, the expenses will be around 3k a month, which is really not that hard to earn if you’ve got money coming from multiple sources. Best of luck to you!
[email protected] says
Nice! 3K a month sounds really manageable!
Deanna says
Hooray for having plans! It’s so nice to have something to work toward. Thanks for sharing.
[email protected] says
Without a plan, I am lost!
Josh Rodriguez @ CNA says
I’d love to see you retire by 40, and I’d love for your math to be flawless. However, I do see 2 flaws in the equation here. You’re assuming that you will be able to live off of the same amount of money that you can live off of now. The truth is, inflation rates will make that highly improbable. Another big concern would be the rental property income. I know you will have two of them going, and they should generate a decent income. Unfortunately, there are bad tenants out there, and few good tenants rent forever…they tend to buy. So at some point, there will be a loss of rental income for a couple months. Now, I know the 5% buffer should cover that, but if inflation ate that away, what would you have left? You’d have to eat into principal investments. I hate to be the bad guy, but in this scenario, I’d consider having a bit of a larger buffer. I’m not saying you need millions, but I would up your current number by somewhere around 200-300k. Still doable, just accounts for inflation.
[email protected] says
You are very right…my estimate is based on lots and lots of assumptions. You make really good points! I’ll have to reconsider a couple of things and probably adjust my numbers – thank for the advice!
Josh Rodriguez @ CNA says
My pleasure! I hope you’ll update us with what you find in a future post!!!
vanessa holburn says
Well, I’m 44 – and only just going back to work after about a 7 year kiddie break! I like the idea of switching careers throughout life though – as what suited you in your child free twenties is not going to be the same as what you wish for when you are in your fifties with teenagers! I’m not sure if you are really retired if you have rental properties – will you get someone to manage them or will you be responding to tenants needs etc? It’s nice to step away from the rat race though – good on you!
DC @ Young Adult Money says
Kudos to you for running the numbers! Before I respond I should say I’m a natural pessimist and skeptic, so take what I say with a grain of salt. I want to focus on one part of your budget that I think is totally unrealistic if we are talking about retirement, and that’s health insurance.
So you have health insurance listed at 232 per month. I’m assuming that’s all for premiums and nothing contributed to an HSA or designated savings for health care costs.
I think 232 is far too low a premium to expect for health insurance if you retire. First of all, if you did somehow find a premium of only 116 per month per person on the exchanges (and that’s where you will be shopping if you don’t have employer-sponsored coverage) you would have an incredibly high deductible and out of pocket maximum. I’m talking deductibles of $5k+ and out of pocket of $8k+, per person. If you ever have something happen unexpectedly (and it will, inevitably) you will be paying all the bills out of pocket because you won’t get anywhere close to your deductible unless you are having surgery or staying overnight at the hospital.
You also can’t control this expense by simply “being healthy.” Both my wife and I had completely unavoidable surgeries the past 3 years, maxing out our insurance three years in a row. We are young, work out 3-6 times a week, and eat pretty healthy. If we were on the exchanges we would have owed even MORE money than the thousands that we’ve paid.
I would set your monthly health insurance budget closer to $600-$1,000. That’s just a random guess, but it’s better to be conservative. Better yet go look at the plans on the exchanges yourself, then adjust for inflation plus a few % more because I don’t think anyone expects prices to decrease anytime soon.
Something to think about.
[email protected] says
I wondered when someone was going to ask about health insurance! Normally, I would 100% agree, but in this case, I do not. Here’s why: We have Tricare currently, and the hubs is planning to retire from the military, so we plan to keep our Tricare plan. Right now, we have a super low deductible (1,000 per year for the whole family), and our out of pocket costs are ridiculously low. For example, having our daughter costs us exactly $28 out of pocket for prenatal care, labor and delivery – the whole works. Currently, our premium is 205 per month plus 27 for dental. B
But, you made me think: I don’t know how the plan changes during retirement. Of course, I can certainly expect premiums to go up, as will the deductible, but I truly don’t know how much. Within the last 3 years, our premiums have only risen $10 per month, even in the wake of the ACA. It could be that the retirement plan does have super high deductibles, and we will definitely have to account for that.
Also, you made me consider something else: Currently our largest expense besides our premiums are my husband’s CPAP supplies and appointments. If he is falling apart this much at 23, OMG I can’t imagine how much more is going to go wrong!
Am I crazy for thinking our costs won’t be as much as you do?
Danny C. says
I don’t think you’re crazy. Even if you had to go to an ACA plan eventually, it is extremely beneficial for the early retiree as long as the income-based premium subsidies stay in place.
When you are no longer in the wealth building stage of your life, your expenses = your income, or close to it. If you can live on the $26k and need $8,300 from investments, even if the market does really well you still just take what you need and that would be your income for the year on paper, leaving the rest as unrealized capital gains. $26k would qualify you for a huge premium subsidy. I wouldn’t be surprised if it was less than what you are planning for.
Gretchen says
Good to know! I haven’t really done any looking into ACA plans (i supposed this makes me rather uninformed) because I am trying to avoid one like the plague!
DannyUK says
I really liked this article, thanks for sharing! (Not overkeen on the pop-up offering me a loan though!) #WinedDownWednesday
Jessica says
Well This sounds great! I may have to work some of our numbers. I’ll have to figure out what can generate income afar retirement for us b/c we have no rentals and honestly don’t want any…too many issues in our area with renters.
Thanks for sharing!
Found you on the craft dictator link up!!
Jessica from http://www.sparklesandglue.com
[email protected] says
Renting isn’t for everyone, that’s for sure!
Jill says
You have a great plan in the works. I admire your organization skills sand dedication to achieving the dream.
Thank you for stopping by the Thoughtful Spot Weekly Blog Hop this week. We hope to see you drop by our neck of the woods next week!
Even Steven says
Having a plan is the key, we all know that life is going to throw us a loop, but you were able to pay off a car and student loans, no reason to think that the plan is off, as you get closer you will realize your goal and probably want a little extra emergency fund, but everything else looks great.