The 4% Rule – How Much $ You Need to Retire

I first heard about the 4% rule from a post by the notorious Mr. Money Mustache. If your money is invested in the market and your returns average 7% per year minus 3% for inflation, you’ll have 4% average returns. This is the amount that you can safely withdraw from your investments yearly, without depleting the initial balance. Essentially, you can live off the investment earnings forever.

First, determine your yearly expenses. Let’s say you spend $25k per year. In order to live off your investment income in perpetuity, you have to multiply this $25k by 25, which equals $625k. So, once your investment portfolio equals $625k, you can retire. You can quit your job the next day and never work another day in your life. $625k x 4% = $25k per year.

Building $625k in investments isn’t going to happen overnight. This could take 10-15 years, depending on how intensely you save and invest your money.

This all comes down to relatively simple math. The ultimate key is saving as high a percentage of your income as possible. The higher your salary, the easier this is to do. So, the best thing you can do for yourself is to figure out a way to increase your income as much as possible.

Let’s say your gross yearly salary is $70k and you are able to save 40% per year ($28k). Your net yearly pay would be roughly $53k after taxes. This would give you $25k to live on for the year. This doesn’t include any bonus income or tax return money. You can use these to boost your savings and investments even more!

To figure out how long it would take to retire, I like to use the Dave Ramsey Investment and Retirement Calculator.

In this example, it would take 12 years to retire, assuming you have not saved a penny in your life until 30 years old. If you can earn more money or invest more money, you could increase this amount significantly.

Money is a psychological game. You have to take your brain out of the equation. It is the only thing that can stop you from achieving early retirement aside from losing your job.

Auto-investing is the answer. If you know you need to invest $2,333 per month, cut it in half and invest $1,166 per paycheck through an auto-investing strategy.

Pay yourself first!

Set all bills to auto-pay. Personally, I have one bank account that I use for bills, rent, and investments. I have a separate bank account for cash spending. This way, I always know what I can spend because everything else is automatic. I don’t have to think about it.

This will take a long time, so patience is key. Just set it and forget it. Don’t touch the investment account and you will get there. 12 years of consistent saving is a lot better than 40 years or more at a job you may or may not like. Once you’re financially independent, you may find work you actually enjoy and the money won’t matter.