Do I really need $1.3 million?
I started this draft quite awhile ago now and since that time I tripped across this piece on early retirement math from Mr. Money Mustache (may his whiskers forever remain crumbless). MMM explains the concept better than I ever could, so please go read the whole thing.
My own story begins in my early thirties when I was having a conversation with a financial adviser. My simple question was “What do I need to do to retire by 40?” The concept that is now “pretirement” hadn’t occurred to me yet. At least not as clearly. I just knew I didn’t want to HAVE to work after that point. That was the goal I’d set and I was going to figure out a way to get there.
So I sat looking at this adviser, pen poised above my notepad, awaiting the wisdom about to come forth. The answer came back in the form of a question: “Do you have $1.3 million saved up?” This adviser spends every day dealing with folks investing hundreds of thousands of dollars, even millions. The fact I could even get a meeting was amazing. So it was pretty understandable that she looked at me with an expression that said “Why am I wasting my time on this lazy loser?” (Little did she know I was working 16-hour days at the time.)
She saw my look of dismay and hopelessness and immediately softened her response. “It really depends on how much you need to live on,” she said. “And you need to think about inflation. And health care costs. Do you think you could live on less money?”
Her math was unassailable. To have a passive income approximating a reasonable salary, say $4,000 or so, and a safe yield in the 4% range, that’s about where you end up. But that conversation in a way is where my journey toward pretirement really began. Because I realized then that I COULD live on less.
First of all, I knew I’d be mortgage-free. I was living in a smaller house and was close to being able to pay it off even then. And certainly by 40 would be easy. Secondly, I was naturally frugal and was making good income. I just needed help figuring out the plan. Much of that changed as I grew older and became accustomed to life’s finer things. That doomed me to more years of working. Then the big economic collapse happened and much of my net worth evaporated.
Nevertheless the seed was planted. Complicated spreadsheets were created slicing and dicing income and expenses many different ways. All of them told the same story: The comfortable floor for my monthly costs was somewhere between $800-$1,500, mostly depending on how cushy I wanted my life to be. Inflation was definitely an important consideration, but did I really need $4,000/month? Something seemed amiss.
Now I’m not saying I would mind having $4,000 rolling in every month. Far from it! I’m just saying working for idiots for 30 more years wasn’t worth it.
So after much reevaluation, I decided the best path was a severe cost-cutting strategy, while adding on part-time work. So the goal now is $1,200/month, or $288,000 invested. (Worth noting that I already bring in more than that passively via a rental property on paper. Unfortunately unpredictable expenses and renters have made that too shaky to rely on for income. So I’m working on restructuring that now.)
I know I’m a broken record, but I have to repeat again, that for me $1,200 per month isn’t REtirement, it’s PREtirement. I won’t be dipping into my retirement funds and I still plan to work part-time while I stay home with my son. I may even end up going back to corporate America at some point just to speed things along or to keep myself entertained. The point is the freedom, not the goal itself. If I accidentally end up working for some lunatic like I did at my last job, I’ll be free to leave and never come back. That’s freedom. That’s wealth.
I’ll likely keep working at least part-time until I at least reach the $2,000 per month income level. That’s around half a million invested. Still a long way off for me but a far cry from the $1.3 million I was told I needed all those years ago.
What do you think the right number is to reach pretirement?