How Much Money is Truly Enough to Retire?

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Whether you’re dreaming of retiring early or pondering retirement toward the end of a long career, you’ve probably wondered just how much money you’d need to have. The question of “enough” is an important one.

You don’t want to get to your target retirement age and find you’re short on cash. But the truth is that “enough” isn’t a number so much as it ’s a roadmap.

I’m going to talk about that roadmap and help you discover what “enough money” is for you. Once you know what “enough” is for you, I’ll help you make a plan to get “there.”

How to Figure Out Your Target Nest Egg

In simplest terms, you’ll have “enough” to retire on when your total portfolio of assets and passive income produces enough annual cash for you to live on. Below, we’ll explain how to determine the size your nest egg needs to be, how to tweak that number if it seems overwhelming, and then how to save for it.

Below, we’ll introduce you to a couple of tools to help you calculate what you need to be saving: the 25x rule, the 14x rule and the 4% rule.

How Much Your Current Balance Will Yield Annually: The 4% Rule

Having that target “enough” number is important, and here’s why: If you can save enough money so that you can live off the interest and capital gains from your investments, you essentially have “enough,” correct?

So, using some adjusted stock market annual return figures, you can determine how much money you need to have to live indefinitely. If you google “average annual stock market return,” you’ll get a variety of numbers between 7 percent and 11 percent.

Knowing the answer to this question is good, but you never want to count on “average” when you’re planning on covering long-term expenses. This is because most investment market returns aren’t guaranteed. For this reason, you’ll want to aim low in terms of your target return-on-investment (ROI).

So, to start with you’ll want to use an average ROI around the 4 percent rate. This will give you plenty of cushion for low or negative market return years and to cover inflation costs.

This is commonly called the 4% rule. The 4% number is derived from subtracting the average rate of inflation (3%) from the average stock market return (7% on the low end).

By using the 4% rule you give yourself plenty of cushion for financial surprises such as large medical bills or an economic crisis.

As an example, let’s say you have a portfolio with a balance of $1.25 million. At an average 4 percent ROI, you can consistently pull out $50,000 to live on and essentially never run out of money.

How Much You Actually Need Annually: Re-Examining Your Values

Is $50,000 a year enough for you to live on in retirement? That depends. Determining just how much is enough requires you to start by asking yourself some introspective questions.

Warning: these questions might not be the questions you thought you’d be asking yourself. When you first think about having enough money, you might think about having a life free of work.

You might also think about how, when you’re free of work, you want to be able to do whatever you want all day. Although some people find happiness in the pursuit of leisure, others discover that’s not enough for a fulfilling life.

Ask Yourself: What Kind of Life do I Want to Live?

There are two issues to consider when you envision retirement as a time to play around all day.

One is that you may eventually get really bored. The other problem with this line of thinking is that it will take you much longer to save up “enough” money for this vision.

In fact, if you’re budgeting enough for endless “play” money, you may never have enough. Why? Because “playing” can get expensive, depending on what type of playing you end up wanting to do. A better bet is to add a cushion in for extras as you’re figuring out basic expenses. Then, be sure to budget and save that extra money. This will help so that you’re not spending more than you had planned each month.

However, it’s important to remember that even adding a cushion doesn’t mean you can spend endlessly. So, as you think about what kind of life you want to live, think in terms of the following parameters.

How Much Money Do I Need to Cover Basic Needs?

I’m not talking “rice and beans” basic. I’m talking “comfortable but not lavish.” A grocery budget that includes a few dinners of steak or lobster each month, but also some pasta dishes.

A nice car that is in good shape — not a Lamborghini. A couple of modest vacations per year, as opposed to months spent traveling overseas every year.

The fact is that while “stuff” may bring you happiness for a short time, long-term happiness is different. Long-term happiness generally revolves around the people in your life — being with friends, family and loved ones. Or it revolves around your purpose in life. And you may not  require as much money as you think you do for that.

So, as you figure out how much cash you need monthly to cover basic needs, don’t think extravagance — think comfort.

What Kind of House Do I Want to Live in?

This question will vary for each person. The more house you buy, the more your monthly expenses will be. You may have to make some type of trade-off: Forego the mini-mansion in favor of having enough money to retire early. Many people decide to downsize housing in retirement anyway. Who needs a big house if you’ll be traveling a lot?

Or, you may decide the mini-mansion is high on your list of priorities, and that’s okay. You might want to have the mini-mansion and instead, rarely eat out or travel. Plan your expenses in the way that’s most important to you.

And when doing so, think “big picture.” Is having enough money to live off of — and doing it faster — more important than having “stuff?” Then plan your monthly budget and pursuit of stuff accordingly.

What Kind of Cars Do I Want to Drive?

This is another important question you should ask yourself as you plan. We are a nation obsessed with automobiles. They’re pretty. And shiny. They’re fast. I get it.

But are they worth giving away your financial freedom for? The depreciation on a new and/or expensive car is astronomical.

I encourage you to read it and look at it from a numbers standpoint. Again, personal finance is personal. But your target “enough” dollar amount may require some sacrifices if you want to reach it in a timely manner.

Personally, I’m a huge car person. I’d love to have a classic car someday, like a 1969 Camaro or Mustang. But I love my freedom and my experiences with my family more than I love cars.

My current automobile is a 2005 loaded Chevy Suburban for carting the kids around. It’s in decent shape and runs like a dream, even with 240,000 miles on it. And I haven’t had a car payment in long, long time.

In your quest for financial freedom, you’ll need to determine what types of cars and living accommodations you want. Take all important (to you) factors into consideration and choose wisely.

What Do I Want My Purpose and Legacy to Be?

This, my friends, is what it all comes down to. Imagine you’re on your deathbed looking back at your life. Will you care about what type of house you lived in or the type of car you drove?

Or will you look back on the quality of the life you lived? How you impacted the people around you? The types of memories you helped create? How you made the world a better place?

These are the types of questions that need answering in order to determine your “enough” number and to determine how you really want to live life.

Do you want to be remembered as the dad who had a lot of stuff? Or as the dad who had a lot of fun with his kids?

Do you want to be remembered as rich but self-centered? Or as the man (or woman) who always gave back?

Do you want to spend your financially independent time solely fulfilling your own dreams?

Or would you rather spend your time helping the less fortunate?

These are the questions worth asking; the questions that will help you determine your ultimate “enough” number. At the end of the day, the joy you give to others and the difference you make will bring more happiness than any material item.

Don’t get me wrong: There’s nothing wrong with nice things, provided you can afford them.

But you can’t take them with you. And your ability to make life better for yourself and those in your circle of influence will make more of an impact on you than your stuff will. Use that information to get a realistic “enough” number.

Okay, I’ve shared what to think about as you determine your enough number.. Now let’s talk about how figure out that number.

How Much You Actually Need Annually: The 14x and 25x Rules 

So, you’ve determined your priorities in life. Next, you’ll need to come up with a monthly budget number. Determine what your estimated monthly expenses are once you’re retired. Don’t forget to include occasional expenses such as hair care, car maintenance and gifts. Estimate what you think you’ll spend annual on those items and divide that number by 12. Add that number into your monthly budget as well.

Yes, you will be guessing. Use your current expenses as a starting point and work from there.

Don’t forget to take into consideration what your new housing and other expenses will be.

The 14x Rule

Once you have figured out your monthly budget number in place, multiply that by 14. I know; there are only twelve months in a year. I recommend adding a couple of additional months’ worth of expenses as a buffer. We’ll call this the 14x rule. This way you’re accounting for things such as inflation and unexpected expenses.

So, let’s say your normal monthly expenses add up to $40,000 per year. Here’s how your target number math would work:

$40,000 / 12 = $3,333 x 14 = $46,662 per year

Or if your monthly expenses add up to $60,0000, it’d look like this:

$60,000 / 12 = $5,000 x 14 = $70,000 per year

So, you are essentially budgeting for 14 months each year instead of 12 months. This is just another way to add a financial buffer to your numbers.

The 25x Rule

One very simple rule of thumb to help you get started determining your “enough” number is the 25x Rule. It says you need to save 25 times your projected annual expenses to retire. Once you’ve hit that amount, you’re financially free.

So in our example, the next step is to take the annual amount you need and multiply it by 25. This will help you determine how much total cash you need to live on indefinitely.

There’s a reason we multiply by 25. It’s because that will be the number that will help you live off four percent annual returns and (hopefully) not run out of money. See this article in The Balance about the rule of 25 for more information on why we use this number. Using the 25x rule ensures your money should last indefinitely based on the stock market’s historical returns.

So, in the scenarios mentioned above, here’s how you’d get your target number.

$46,662 x 25 = $1,166,550

$70,000 x 25 = $1,750,000

Once you get to your target number, you can withdraw four percent per year, presumably without touching your target balance number. If your account earns on average at least four percent a year in return on investment (which is well below the historical stock market average) your balance should decrease slowly – if at all. Your primary withdrawal amounts should come from the interest and capital gains you’ve earned.

Note that these calculations don’t take into account that your expenses may change in later years. Depending on how you choose to spend your money on future health care expenses, and on other potential life changes, you may need more or less money as the years progress.

Some ideas for covering for future expenses could include building up a large health savings account balance or building your next egg larger to accommodate for future living expenses. Another option could be to plan on downsizing your home and using those funds to pay for additional expenses.

How to Get to “Enough”

Now that you know how much money you want to save, you’ll need a plan to get there. Amassing enough money to put yourself in a secure financial place won’t come without effort. Basically, there are three steps to amassing enough:

  • Earning sufficiently
  • Spending efficiently
  • Investing efficiently

If you can get your ducks in a row in these three areas, you’ll put yourself in a position to reach financial independence.

Earning Sufficiently

Some might tell you that you can get wealthy on any income. This is largely true. Multi-millionaire Ronald Read never worked a high-paying job. His main job was as a janitor. Yet he died at age 92 with an $8 million fortune.

However, it’s pretty well-known that the guy basically never spent any money. He used safety pins to hold his coat together instead of buying a new one. He chopped his own firewood to heat his home.

If you’re committed to that kind of frugal living to get to your “enough” number quickly, good for you. Most people aren’t, and that’s okay too.

It’s important to be careful not to sacrifice too much current quality of life in the quest for financial independence. You don’t want to alienate all of your family and friends while you lock yourself in your home reaching millionaire status.

A better option might be to increase your income. You could get a second job or a side hustle, save and invest all of that income, and then live off of your main job’s income.

Other options are to look for a higher-paying job or sell some stuff like that new car with the high payment or that gaming system. Work to increase your income so that you can reach your goals faster.

Spending Efficiently

Spending is another problem that hinders people from reaching financial independence. Before I started tracking my family’s spending, we had no idea where our money was going.

Spend-tracking changed our family’s financial life. It enabled us to have a real-time picture of where our money was going.

Having that picture gave us two benefits:

  • It allowed us to make quick course corrections when spending was out of hand.
  • It allowed us to have a list of what we were spending money on so that we could spot expenses that were not in line with our values.

Value-Based Spending

Value-based spending is the process of analyzing your spending to see if it truly lines up with your financial goals. When we started looking back at monthly expenditures, we found lots of such expenses, including hundreds of dollars a month spent on random drive-thru food runs, restaurant visits and excessive grocery bills.

Changing course and spending more thoughtfully allowed us to save more and pay off debt. This is called spending efficiently.

If you want the best chance of reaching the point where you have enough money, closely examine your expenditures. Reroute them to be more intentional in helping you reach your financial goals.

Investing Efficiently

Investing efficiently is another part of having enough money. In order to make at least a 4 percent return on your money, you’re going to have to take some risk.

With high-yield CDs averaging around 1 percent interest, a bank CD won’t cut it. Unless, that is, you’re okay with having $2 million in the bank and living off of $20,000 a year.

You might need to put some of your money in the stock market, in real estate or in business ownership in order to gain ample returns. This will take some work on your part. You’ll need to do your research and educate yourself on the different investment options, and on your risk tolerance level.

We aren’t investment professionals here at Well Kept Wallet, so read some of the more popular books on investing. Or talk with a trusted investment professional to learn more. And note that nearly all investments come with some kind of a risk of loss of your initial investment.

Recommended Reading: You Can Retire Early! Everything You Need to Achieve Financial Independence When You Want It

The Most Difficult Part

Your “enough money” number depends largely on you and what you want out of life. Accumulating that number of dollars so you can live independently of a job (if you choose to) involves work.

You’ll need to discover your true priorities, which takes some time and effort. After that, you’ll have to make a solid financial plan to get to your goal number.

Potentially the most difficult part of amassing enough money to be financially independent is that of sticking with the journey. You’ll likely have periods where you’re sick and tired of living on a budget or of side hustling to earn more.

This is normal. You might need to take off a month — or six months — from your plan in order to recharge. Or, you might need to find extra strength to push through those burnout periods.

When this happens, go back to your “why.” Revisit the reasons why you want to have enough money to be financially independent. If they’re strong reasons, they’ll give you the strength to continue on toward reaching your “enough” goal.

How much money is enough for you? And more importantly, do you have a plan to get there? We’d love to hear your thoughts on our Facebook page.


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