We all dream of a life free of the stresses of work and money concerns. A life where we can spend our time how we wish without the burden of working for the weekend or toiling to the next paycheck. Many hope for this for themselves for retirement, while others hope to achieve this even earlier.
We spend hours researching passive income, investment strategies, and how much money do you need to never work again because we want to be able to put our working days behind us once and for all. With the state of the economy in recent years, early retirement has increasingly felt like a seemingly elusive goal. And even, in some cases, timely retirement appears to be more out of reach than it was just a few short decades ago.
If you have a goal to retire comfortably at an early age or attain a passive steady income that could transform your daily life from work-oriented to leisure-oriented, this could still be a reality if you are willing to put in a bit of effort now and reap the rewards later.
Is Early Retirement Less Attainable Than It Used To Be?
Before America fully recovered from the Great Recession of 2007-2009, the country was hit with the enormous economic blow of the COVID-19 pandemic. Understandably so, many Americans are more unsure than ever before as to when they will be able to retire.
The outlook might feel grim for those who were negatively impacted by the financial fallout of the pandemic and the recession before it. Yet, that does not mean that people have given up on their hopes.
There is even an entire movement surrounding the aspiration of retiring as early as your 50s or even 40s to pursue passion projects or travel. The FIRE movement, which stands for “financial independence, retire early,” focuses its ideology less on the ability to stop working and more on cultivating the financial freedom to choose how, when, where, and for whom you want to work.
Being financially independent enough to never have to work again is a task that could require tremendous effort meaning more work upfront. But those who have already achieved financial independence in this capacity claim the effort to be well worth it, especially if one has ambitions for their life that go beyond the office.
How To Calculate the Money You Need to Never Work Again
Suppose you would like to better understand how feasible this kind of financial freedom is for you. How exactly do you calculate how much money you legitimately need to never work again?
Gaining enough wealth to stop working altogether cannot be boiled down to an easy one-size-fits-all calculation. There is no magic number of however many million dollars you can point to as enough for a nest egg; the closest you might be able to get is a rough estimate that may change over time.
The 4% Rule
A standard answer given by personal finance gurus when asked how much money one needs to save to retire is 25 times what you plan to spend in a year. This has been termed the 4% rule because most financial experts say that your withdrawal rate should not be more than 4% of your retirement portfolio per year during your retirement.
To use this calculation, you need to determine what your average annual spending will be when you are retired. This number can vary greatly from person to person, and also unforeseen circumstances need to be considered in that average number, as well as taxes and healthcare costs that aren’t covered.
Potential Issues With the 4% Rule
The 4% rule doesn’t necessarily apply as a catch-all as plenty of potential issues could pop up, leading you to a lump sum that isn’t accurate to your possible retirement needs. For example, your annual spending could be far from the average household, or what you expect to spend could change significantly when you are retired.
In addition to differences in spending patterns, your investment portfolio could differ greatly from investments that work well with the 4% rule. Your asset allocation and market conditions could affect the accuracy of a 4% rule calculation.
And finally, your retirement length could differ from the assumptions underlying the 4% rule. The 4% rule is built on the belief that your retirement will last 30 years. But this estimation could be way off base if you are retiring early or starting your retirement late.
Using Passive Income to Your Advantage
One of the best ways to gain financial independence and decrease the labor required for your living expenses is to create multiple passive income streams. Passive income allows you to have a steady stream of money coming in with minimal work.
Some common forms of passive income that are perfect for retirement:
Dividend stocks, which regularly distribute a portion of the company’s earnings to investors, are an excellent avenue for passive income. Investing in dividend stocks typically have less returns risk than growth stocks and will diversify your portfolio by adding in different mixes of investment.
Investing in rental properties could set you up with long-term passive income that lasts you into retirement. Although you need to be positive you can manage the upkeep for long-term rental properties before deciding to earn money in this way, as there is a decent amount of costs and labor involved.
If you’re not sure that investing in long-term properties is for you, you can try your hand at short-term rentals like renting out a room or using a platform like Airbnb.
Another passive income option is peer-to-peer lending. This involves a bit more risk but can result in substantial growth through the interest you charge.
Several online platforms, like Lending Club and Prosper, match investors with borrowers who want an alternative to a traditional bank loan.
Best Tips for Saving for Retirement
Saving for retirement can seem like an incredibly intimidating task. Still, it can feel miraculously more manageable if you break it down into bite-sized adjustments you can apply to your daily life.
There is a wealth of information out there about how to best go about retirement planning, far more than we can fit into one article. However, we can offer a few of the most common tips agreed upon by most experts.
No matter what age you are when you start your retirement planning, these strategies for wealth-building are recommended by most financial planners to ensure you have enough savings for a nest egg that will have you living comfortably when you hit retirement age:
Eliminate Your Debt
According to every financial professional you ask, it is a non-negotiable requirement that you pay off all of your debt before entering into retirement. And the sooner you pay off your debt before retiring, the better, as any of the money you put towards your debt can be rerouted to build on your savings.
When you are early in the process of saving enough money for retirement, it’s essential to equally invest your efforts in both saving and paying off your debt. Your debt should not comprise the money you set aside for retirement spending.
However, you should prioritize your high-interest debt, like bad credit online loans, over everything else, as the longer you take to pay it off, the more money it costs you. Once those have been taken care of, you can equally divide the money you save for retirement and spend, minimizing debt.
Adjust Your Current Budget
Having a comfortable retirement savings with ample annual spending money requires a fair amount of sacrifice in your current financial life. This is especially true if you wish to retire early.
Contributing more money towards your savings and your investment portfolio means adjusting your current living expenses to spend more frugally so as to save more. You can get creative with how you cut down the money you spend on monthly expenses on transportation, household utilities, food, and housing costs.
You can also put more money aside by increasing your income through side hustles or high-return investments. You could even do this through various forms of passive income, some of which you could keep going once you stop working in retirement.
Investment income could be the thing that makes all the difference in your quality of life in retirement. Investing in the stock market can be intimidating for most people. Still, if you start early enough, you can take your time to get comfortable with the market to better understand how you might want to use it to your advantage for wealth building.
Once you feel more familiar with the stock market, you can begin to buy stocks in greater quantity and make moves to develop a portfolio large enough to provide you with enough money to never have to work again.
Take Advantage of Any Workplace Plan or Match
If your workplace offers any kind of retirement plan or company match on contribution, you should save as much as the amount the company is willing to put forth.
To get the most out of your plan, contribute as much money as you are allowed to your 401(k) or 403(b). Taking advantage of your company match makes it possible to double your contribution without added money or effort.
Use Retirement Savings Tax Credits
When filing your income taxes, be sure to claim retirement savings tax credits. If you are a lower- or middle-income taxpayer, you can claim up to 50% of your retirement plan contributions as a tax credit.
The current income limits for this tax credit are $51,000 for heads of households and $34,000 for single filers and married couples filing individually.
Open a Roth IRA
If you qualify, open up a Roth IRA and put as much money as you are able towards that every year. This will maximize your savings as contributions to a Roth IRA grow entirely tax-free, and the growth is exempt from capital gains tax.
Adding any kind of IRA account to your personal finance toolkit could make a difference in your net worth once you hit retirement age.
A Comfortable Retirement Is Worth the Effort
Realizing how much money you need to never work again can be intimidating to say the least. It might feel like a far-off goal that will be a struggle to reach. But, as with most things in life, acquiring however much money you need to retire is all about consistency and discipline.
If you watch what you spend and focus on building long-term wealth, you should find yourself in good shape when the time comes for your retirement. Financial freedom can be a reality in your life if only you are willing to put in the effort to get it.