How much is enough? This is a great question and a lot of folks smarter than me have tried to do the math. Most people in the FIRE community use the rule of 25 or 33, depending on how early you plan to retire. This rule states that you should take your expenses and multiply that number by 25 to figure out what your financial independence number should be. So if your annual expenses are $50k per year, 50000×25=1,250,000. Now, don’t get me wrong, this is a lot of money. But consider what this number will look like with taxes and a 2-3% inflation rate over 25 years. Nobody knows exactly what the future holds so we must rely on data from the past.
The next formula you should be aware of is the 4% rule. This rule states that if you use the rule of 25 to achieve your FI number, you can safely withdrawal 4% of your retirement savings and never run out of money. This rule is also referred to as the Trinity Study in the personal finance and FIRE community.
Now I am going to go out on a limb here, so bare with me, and keep in mind that these are just my opinions. Please research on your own and draw your own conclusions.
The rule of 25 is a great target, but can I retire on less? That was a rhetorical question, but feel free to ask yourself the same. Personally, I feel pretty confident that I have kept my lifestyle such that I could, but each person needs to evaluate their own situation. With respect to the 4% rule, I feel like this is a bit conservative, but may be designed that way to insure success. Based on the market conditions of recent years and inflation rates, my personal opinion is the safe drawdown rate is somewhere between 5-7%. I look forward to testing this theory out someday myself. As I stated before, do your own research and draw your own conclusions.
Disclaimer: I am not a licensed financial planner or tax expert. Any views expressed are my own and based on what I have learned on my financial journey. Please do your own research before making important financial decisions.
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