How much money do I need to retire?

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How much money do I need to retire?

Ask most people how much money they’d need to retire right now, and they’d probably say more than a million pounds. But in fact, the actual figure may be significantly lower – remember: running The Millionaire Marathon is about adopting the millionaire mindset, not spending lavishly on useless crap for the rest of your life.

As you’ve probably gathered by now, the key to being able to retire early for the average Joe is bearing down massively on one’s expenses whilst investing the difference in real assets that produce passive income. But how much passive income do you need to retire? And what amount of capital will you need to save & invest in order to produce that income?

The rule of 25

Most Financial Independence hacks agree on the rule of 25, which essentially means financial independence is achieved once you have accumulated capital equal to 25 times your annual expenses. This is based on a ‘safe withdrawal rate’ of 4% per annum, which is generally agreed to be a safe level based on historical statistics.

So, let’s assume Joe needs £20,000 a year to get by. That means he’d need to accumulate £500,000 in capital. Not a million pounds – but still a hell of a lot of money!

The hidden costs of work

That may seem insurmountable for many. But there are other factors to consider as well. Maybe Joe has expenses that will disappear or reduce significantly once he’s quit his day job. Commuting is the obvious one. It’s a huge expense for many, and yet it is often wholly a prerequisite of work. Let’s say no longer needing to commute shaves off £2,000 a year from Joe’s annual passive income requirement.

But what about the less obvious costs of work – the ones that Joe doesn’t associate with work, but that he pays for nonetheless, because he ‘deserves’ it after a hard day at the office?

I’m talking about the meals out, the drinking and the status-symbol purchases etc. that are there in order to ameliorate the monotony of modern working life. Those will at least be reduced significantly once you’ve found new meaning in your life. Let’s assume this reduces the annual income requirement by £3,000.

And let’s not forget that many of us will continue to work part-time instead of bringing our working lives to a complete halt. Let’s assume Joe has a side hustle or part-time job that will bring in £5,000 per annum.

The light at the end of the tunnel

With all this in mind, Joe’s real passive income requirement could be significantly lower than what he might think. In this example, the actual passive income requirement has been reduced to £10,000 per year, which has cut the size of the ‘freedom fund’ down to £250,000.

That’s still a lot of money by any measure, but assuming savings of £10,000 per year and a 6% return, that capital could be accumulated in 16 years – eminently achievable for someone working a moderately well-paid job and living a frugal lifestyle.

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