How much money do you need to retire? That’s the golden question in the FIRE community. We’re all very busy accumulating lots of money to be able to retire early, but how much is lots of money exactly? Let’s find out!

It’s All In The Withdrawal Rate

Recently I wrote an article on the withdrawal rate (long article warning!). In it, I have tried to figure out if the 4% safe withdrawal rate from the Trinity study is still valid. Probably not, was my conclusion. But no matter what withdrawal rate you pick, the rate is a very important part of the total amount of money you need.

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Consider a scenario where you need to spend 20,000 per year to keep living like you do now. Using a 4% withdrawal rate you would need a total amount of 500,000 (20,000 / 0.04). Now if you double the amount you spend to 40k, the goal of your nest egg rises equally. Thus, we can conclude that the withdrawal rate is the factor here that determines how much money you need.

That’s why, in my Early Retirement Calculator, I’ve added the withdrawal rate as one of the six variables.

How Much Money Do You Earn?

It’s important to know how much money you earn. Not right now, that’s not a factor to determine how much money you need to accumulate. It drives how fast you’ll be there, but not how much you’ll need.

No, what I mean is that you want to know how much money you earn after you retired early. That’s right, I’m assuming here you will keep earning active income after you retired.

The reason is that people that have enough drive to achieve financial independence, are unlikely to sit still after they leave their job. Most early retirees have small side hustles going on, and that can drastically impact the amount of money you need to retire.

Also, this money is very tax-efficient. For example, in The Netherlands you don’t pay income taxes on the first 6-7 thousand euros you make in a year. Now personally I spend about 21,000 per year, which gives me 525,000 as a target amount using the 4% withdrawal rate. However, if I’d make 6,000 per year in active income, I would pay no taxes on it, and need to fund only 15,000 from my investments. The amount I need to withdraw that is only 375,000!

Social Security, Pensions

The same as with active income during retirement, if you will receive any social security or a pension when you retire you will need less money. The math here get’s a little bit more difficult, I will not go into too much depth here in this article.

But basically if you want to retire early (say at 50) and you know you will get a pension and/or social security, you might need way less money that someone without this additional income.

Say the pension payments start at 65, you only need to bridge 15 years plus an amount to top off your pension income. This lowers your goal amount significantly. It plays a major role for older early retirees, if you plan to retire extremely early (<35) any pension scheme might be so far out it doesn’t matter anymore.

Conclusion on How Much Money You Need

So the amount of money you need depends on the amount you spend right now and the withdrawal rate you’re going to use. Also, active income during retirement plays a large role as do any potential pension or social security benefits.

In my early retirement calculator I only counted expenses and the withdrawal rate as a factor. This was partly because I’m lazy and didn’t want to over complicate the calculator. The other part was because I try to retire rather early (40) so I personally don’t count any pension income.

If you want to use the calculator while counting in some active income, you can lower the spending number by the after tax active income you’re expecting to generate during retirement.

How much money do you need to retire?