A lot of people go through their lives doing what they are supposed to do. Get education, get a job, get married, make kids, retire and finally the inevitable. Most forget to live their lives amongst all these. What if someone told you that you didn’t have to do all these, or at least…some of these.
Recently, I asked a colleague what was the age that he wished to retire. His surprise was genuine when he said he had not given any thoughts to the matter since it was decades into the future.
On yet another occasion, I asked another colleague how much did he think was needed to retire peacefully. He scoffed and said ‘Probably in the millions’.
The two scenarios above kept making loops in my mind.
- Most people do not know that Retiring early is an Option.
- Most do not know how much they would need to retire.
For this article, let us concentrate on the second point. How much does one need to retire? Many financial geniuses, much smarter than I am, have answered this question with logical explanations and immaculate research.
Calculate the following
- Average Returns from Investments (usually stocks) per year.
- Average Inflation In your country of residence per year.
When One’s annual expenses are covered by the difference between 1 and 2 above, one can retire peacefully knowing that the funds will outlast one’s lifespan.
For example, in the USA
- Average Stock Market Returns for long term investment = 7%
- Average Inflation = 3%
So, if one’s annual expense <= 4% (1 minus 2) of their total investment, then they can retire comfortably knowing that their assets would outlast their lifespan.
hypothetically, if Tom spends 25,000$ on all his yearly expenses then he would need 25000$ to be the 4% interest that is generated every year. i.e he would need (25,000 *100)/4 to be the invested amount. Tom would need 625,000$ to retire.
What if there is a stock market crash? every crash has a corresponding rise. Historically, the stocks have always risen. 7% is the average gain in stock market in the long term. This involves not day trading and being in it for the long haul.
Add all the buffers you need but at the end of the day, all you really need is your annual income times 25 invested wisely in stocks. Happy Retirement Planning!