How much do I need to retire early?

Bryce: [00:00:31] Welcome back to another episode of Get Started Investing feed podcast, where we answer the most common money questions in an attempt for us all to become better investors. Now, if you are joining us for the very first time, a huge welcome. Thank you for joining the Equity Mates community and starting your journey of investing. We do strongly recommend that you scroll up and started episode one. Now we are licensed, but we are not aware of your personal circumstances. So all information on this show is for education and entertainment purposes only. Any advice is general advice. My name is Bryce and as always, I'm joined by my equity mate, Ren. How are you? 

Alec: [00:01:10] I'm very good, Bryce. Very excited for this episode. Key reason why we invest is so we have enough money for our future selves to have choices. And the ultimate choice that we make in life is when we stop doing what we have been doing for most of our lives. Working. 

Bryce: [00:01:27] Yeah. The ultimate. Yeah. It's where you have ultimate control of your time. 

Alec: [00:01:31] Yeah. Yeah. And so, so many people that listen to this podcast, so many people that are investing when they're young have this focus on fire, financial independence, retire early. You have been a noted, strong auto critic of the moment, but I reckon and it's commendable. I think you've grown a lot as a person over the past few years. We've been doing this show and you've gone from saying, I don't want to eat rice and beans. Time to pay a lot more positive about the fire movement.

Bryce: [00:02:06] Yeah, I mean, I've never been a critic of the end result. I've been a critic of the journey.

Alec: [00:02:11] Yeah. Anyway, so that's the question we want to answer today. How much money do I need to retire? And then how much money do I need to retire early? 

Bryce: [00:02:19] Yes. Well, what does retire early actually mean, Ren, to you?

Alec: [00:02:25] It means not having to work. Emphasis on having to. like you can still and most people that retire choose to, but they do it on their terms. 

Bryce: [00:02:39] So some people may look at it like I want to be able to retire from work and not work before they. Preservation age or before the age hit superannuation. But unlike you, it is having the choice not to have to work. And being able to decide when I wake up what I'm going to do today that doesn't rely on a paycheque. 

Alec: [00:03:02] So Bryce then the question becomes how much money do I need to be able to pack up my microphone and move to a farm? 

Bryce: [00:03:11] That's the dream, is it? 

Alec: [00:03:12] Well, I don't think I'm retiring in Sydney anytime soon. 

Bryce: [00:03:16] But isn't that part of the whole.

Alec: [00:03:17] Well, that's the discussion, isn't it?

Bryce: [00:03:20] Isn't that part of the whole idea of figuring out how much you need? How much do you need to retire early? Ren depends on a number of factors, and there's nothing new here. But firstly, it depends on, I guess, the age at which you want to retire. Like I'm 30. Fast approaching 32. Oh. 

Alec: [00:03:38] Just 30.

Bryce: [00:03:39] 30, 35. And a lot of people in the fire movement set a sort of goal of I want to be financially independent by the time I'm 40 or I want to be 45, whatever it is. So understanding the age you want to retire is a factor. Then you need to think about what type of lifestyle you want to live when you are retired. Do you want to be on a farm being a farmer, or do you want to be in the middle of Sydney living the city life? Then you also need to then figure out based on that what your expected expenses are going to be on a yearly basis and also what you think you can generate from the money you've saved in terms of investment returns, because that is crucial to being able to survive. 

Alec: [00:04:21] Yeah, definitely. And most of all, you need to figure out if you're going to have kids. Is the fire movement like, I don't have kids, but the fire movement feels like something that 20 year olds dream of big time before they realise how expensive Kids are. 

Bryce: [00:04:37] Start ripping on it. But if you want to go down this. 

Alec: [00:04:39] Oh no. But it's like I would love to hear from people in the fire movement who have kids and how that changed their numbers. 

Bryce: [00:04:46] Yeah, I'd also like to hear from people who are in their early twenties doing fire and how they've thought about it.

Alec: [00:04:52] Yeah, it sounds like you just want to hear more from the communities. You hit us up through. 

Bryce: [00:04:56] Because I think seriously, like the difference. Working out your expected expenses if you're a single person for the rest of your life could be relatively straightforward. If you then bring in kids health emergencies like partner doesn't have any work for a while and you need to support them. There are so many factors that I think go into this. 

Alec: [00:05:18] Yeah, I think this is probably a good time to introduce a concept called The End of History Illusion, because a lot of the numbers that we're going to talk about now and there's some rules of thumbs and some calculators out there, but they assume that what your the plan you're making at 25 or for us at 30 is going to be the plan in decades to come, which is just not and this end of history illusion. So think about yourself now and think about how much you've changed over the past ten years. Think about Bryce at 20. Mowing lawns, selling summer days, sunglasses in Canberra. 

Bryce: [00:05:57] Pretty good Lifestyle. 

Alec: [00:05:59] And think about how much you've changed in the past ten years. And then think about who you think you will be in ten years. 

Bryce: [00:06:06] And really hard to do.

Alec: [00:06:07] But you're just people who just think they have changed, so realise they've changed so much over the past ten years, but don't think they'll change that much. They think who they are now is who they will be. 

Bryce: [00:06:18] Yeah, I actually think it's hard to think about who I was when I was 20, because I really think.

Alec: [00:06:22] Because you're embarrassed.

Bryce: [00:06:22] No. The state of thinking is like it's hard to actually go back and think about you can see it. You can be like, ah, but like, I think it's actually quite difficult.

Alec: [00:06:31] Well, I'll tell you how you were 20 because we're all mates. It was still all mates. But I think that's a really important thing to just keep in mind when you're making these plans. It's like build a lot of fat into the numbers because you're going to change a lot. 

Bryce: [00:06:45] Big time. Yeah. So those are some of the key factors that go into figuring out how much money you'll need. But then how do we actually figure it out? Rent? 

Alec: [00:06:54] Well, there is a somewhat controversial role in finance, but it is a useful rule. It is the 4%.

Bryce: [00:07:02] Rule very common. And really what it is saying is that you can safely withdrawal 4% of your savings, retirement savings, nest egg, whatever you've saved to retire. You can withdraw 4% of that each year without running out of money.

Alec: [00:07:20] So Bryce how we put the 4% rule into practice. We need to start by determining how much money we want to live on our annual expenses in retirement. And then you say, Well, that needs to be 4%. So at times that number by 25, because four times 25 is 100 and that gives me 100%. That gives me the retirement number I'm chasing. 

Bryce: [00:07:42] Interesting.

Alec: [00:07:42] So simple example. If I need $40,000 a year in. Retirement. Time's up by 25. I need $1,000,000 in my retirement account.

Bryce: [00:07:51] So that's to withdraw 4%. Is that to get a 4% return on that or to withdraw 4%? 

Alec: [00:07:57] Will you withdraw it? But then you expect that you are earning a return on the remainder. 

Bryce: [00:08:03] I did it the other way. 

Alec: [00:08:04] I was like, Oh, you just expecting like 4% dividend yield? 

Bryce: [00:08:07] Well, no, I was just like, I need 66,000 and I'm going to be retired for 50 years. So I need like three mil because I'm just going to withdraw. I didn't actually apply the 4% rule now that I think about it. 

Alec: [00:08:21] So what role did you apply? 

Bryce: [00:08:22] I just said I need 66, 66, 60 grand a year. So I needed to live for 50 years.

Alec: [00:08:31] Oh, so you just. 

Bryce: [00:08:31] Have just gone. 

Alec: [00:08:32] 60, 60. 

Bryce: [00:08:33] 65, 50.

Alec: [00:08:34] Oh, okay. That's not the 4%. No. So just realise that that's just like a satellite line. Which honestly is not a bad way of approaching it. Like there's a big margin of safety built in there because then you're not factoring in any advertisement. Yes. Yeah. And then, like, if investment returns and inflation net out, then you're okay. 

Bryce: [00:08:56] But the 4% rule is saying 66,000 by 25 is 1.6 million. 

Alec: [00:09:04] So let me take a step back. The original study published in 1994 in the Journal of Financial Planning, if you want some light writing, found that people who retired between 1926 and 1976, found that they could withdraw 4% of their retirement fund each year, adjusted for inflation, and not run out of money for at least three decades. And then a second study, the one that is cited a lot, the Trinity study, came to a similar conclusion looking at a bigger data set from 1926 to 2009. So you can withdraw 4% of your retirement fund each year, which honestly and not run out of money for three decades. But thinking about the logic behind that, it's like, Well, yeah, if you just don't make any investment return, you withdraw 4% a year. That will last you 25 years. 

Bryce: [00:09:51] This is flawed. Yeah. If I'm 30, if I want to retire at 35 years of age in four years, less than four years, the 4% rule would suggest that all I and I need is 66,000 a year. Call it because that is based on the average weekly household expenditure for someone my age. That math is telling me that I just need to get a nest egg of $1.6 million and I'm sweet.

Alec: [00:10:16] So Bryce The key challenge with the 4% rule is that it was created and studied in the context of people retiring after a full working life. And the 4% rule was really about retirees with a 30 year time horizon. 

Bryce: [00:10:33] Borrowing in your sixties. 

Alec: [00:10:34] For the fire movement once more than 30 years sitting on a beach. 

Bryce: [00:10:38] Oh, big time.

Alec: [00:10:39] They want 50, to 50. Yeah, someone 80 years. So then God, shout out to them. We'll include this link in the show notes. They have published a study fuelling the fire movement, updating the 4% rule for early retirement. They've looked at people with a 50 year time horizon. Okay. Unfortunately, they haven't given us a neat rule. You know, like a 1% rule. Yeah. Yeah. But what they've said is that when looking at the 4% rule using their internal models, a fire investor with a 50 year retirement horizon only has a 36% chance of success of not running out of money over those 50 years. I assume that's what success is here. Yeah. Yeah. So, yeah, 36% chance of success. 

Bryce: [00:11:30] So if you're using. 

Alec: [00:11:32] The 4% rule over 50 years. 

Bryce: [00:11:34] But they haven't given what you should be plugging in. 

Alec: [00:11:39] No. Yeah. No.

Bryce: [00:11:40] So it really feels like if you're in the fire camp, if you're genuinely wanting to retire at 35 or 40, the best place to start is just do straight line.

Alec: [00:11:50] Yeah. And you're like, Yeah, yeah. 

Bryce: [00:11:51] And then you're like, okay, I've got. And what we mean by straight line is what we're talking about before. I want to be retired for 50 years and I need 60 grand a year. You're going to need about 3 million bucks with no investment return. And that's where you start.

Alec: [00:12:03] And like and just assume that whatever investment returns you make will net out inflation and hopefully you finish ahead. But that's just a margin of safety. Yes. That feels like a safe place to start. Yes. Makes you a number a lot more daunting, though. 

Bryce: [00:12:18] Well, let's speak of the number on the other side of this break rant, I'm going to tell you exactly how much I need to put away for the next four years to retire at 35. All right. So we're back answering the question, how much do I need to retire early? And we've spoken about the 4% rule, which is much more applicable to those who are very close to the actual retirement age and only need a window of about 25 or 30 years. 

Alec: [00:12:45] I mean, only that's the length of our lives. So it's still a considerable amount, still a big chunk. 

Bryce: [00:12:51] We're debating what to do if you're actually looking to retire well before and sit on the bench for 50 years.

Alec: [00:12:57] You say debate. You told me before the break that you're going to tell me exactly how much you need to put away to retire at 35. 

Bryce: [00:13:04] I'm going with the number 66,000 a year in expenses, because that is just based on the average expenditure for a single person my age. What you take into. 

Alec: [00:13:14] Well, a few things. First of all, you're not single. 

Bryce: [00:13:17] No. 

Alec: [00:13:19] Second of all, you live in the middle of Sydney. Yes. And third of all, you don't own a house? 

Bryce: [00:13:24] No. So I completely agree that that 60,000 is probably. It's not realistic. 

Alec: [00:13:30] You would pay 66,000 in rent? 

Bryce: [00:13:32] No, it's not. It's not realistic, but it's the average straight line method. I need $3.3 million by the time I'm 35 to comfortably sit on a beach for 50 years. So I need to be putting away assuming I've got nothing now. I need to be putting away $825,000 a year for the next four years to retire. 

Alec: [00:13:54] Wow. All right. I guess fire is not on the cards for you. 

Bryce: [00:13:58] It is not on the cards for me, friend. But I think at the end of the day, there are plenty of fire calculators out there that can tell you, you know, based on what you expect to spend, how your investments are and what you expect to be your investment return. And it'll probably give you a much more realistic number. 

Alec: [00:14:17] So I think just to close out this episode, we had a look at some of the big retirement organisations from around the world and what they say you need to spend in retirement. So the Association of Superannuation Funds of Australia estimate that couples who retire around 65 spend $66,725 a year. So that was pretty similar to what you were saying. Or for single people, $47,383 a year. The UK Pensions and Lifetime Savings Association estimate a couple would need between 30 and £50,000 a year in Canada. A 2015 study by BMO found that retired Canadians spend 28,000 a year. Things are good in Canada, I guess cheap in the US. The US Bureau of Labour Statistics report that the typical retirement age American spends $50,000 a year. But you know what? All of these studies assume.

Bryce: [00:15:17] You're retired and you've paid off your house and you've. 

Alec: [00:15:20] Paid off your house. 

Bryce: [00:15:21] Your expenses are like a bell curve with your age. Your when you're middle age is probably peak expenses. Yeah. Kids paying off the mortgage, travel, etc.. Early in life, you kind of covered your parents helping out. You're at uni, you don't have massive expenses as you get older, expenses peak and then as you head towards retirement and hit retirement, your expenses start to come down. So if you're looking to retire early, think about that. Factor that in.

Alec: [00:15:48] So. Well yeah I mean for me that's that's the thing It's like I am not even going to consider this concept of fire until I am at least on the property ladder. And I'm 30, I'm almost 31. I'm not on the property ladder. So for me, yeah, that's.

Bryce: [00:16:03] A dream state. 

Alec: [00:16:04] That's a sad note.

Bryce: [00:16:08] If you are on the fire journey, we would love to hear from you. I'd love to hear about how you're thinking about your expenses over the next ten, 20, 30, 40 years, and how you're factoring that into your fire number. 

Alec: [00:16:18] And what have we missed? 

Bryce: [00:16:20] What have we missed? 

Alec: [00:16:21] No, like, I want them to tell us what we've said. 

Bryce: [00:16:23] Yeah, exactly. Yeah, please. So reach out. contact@equitymates.com. We'd love to hear from you. Come on the show and continue the conversation. Help us understand a little bit more about how we can get to that retire number. 

Alec: [00:16:36] Well, Bryce, we set out to answer the question, how much do I need to retire early? And I think we have finished the episode by asking the question of the audience. But I think that in itself there is an answer that there's not a clear number, that it's like once you hit this number, you're you're sorted because things change so much, who you are changes what you want, changes how you live, where you live changes. But it feels like getting to a million in your savings account and your super account is a good place to start. 

Bryce: [00:17:07] Great place to Start. We'll leave it there. Please leave it. Five star review if you can. We would really appreciate it, but otherwise, Ren, we pick it up next week. 

Alec: [00:17:14] Sounds good.