How Much Money You Need to Never Work Again

If you ask what’s the most common goal of investing and personal finance management, it would most likely be to reach financial independence – and that’s exactly what we’re talking about here.

It should be noted that financial independence differs from financial freedom in one important way. Financial freedom is a thing that very few people achieve. It basically means you have enough money to do whatever, and I mean whatever you desire to do.

Financial independence, on the other hand, means that you can maintain your current lifestyle without a regular active income and live on your investment income instead.

Being financially independent gives you the freedom to retire from the workforce early, and do the things you really want to do.

But how much money does it actually take to become financially independent and never work a day in your life?

As with practically all money-related questions, there’s no single right answer to this one either.

How to Calculate Your Financial Independence Number

How much money you need to never work again depends on your age and lifestyle. The younger you are and the more lavishly you live, the more money you need.

Therefore, the first thing you must do is to take note of your expenses to take a closer look at your spending habits and see how much your lifestyle is costing you.

Track Your Living Expenses 

Since it all depends on your lifestyle, you need to have an accurate picture of where your money is coming from and what you’re spending it on.  

The best way to do this is to take note of all (and I mean ALL) your expenses for a couple of months.  It’s also best to add a little buffer for unexpected expenses since there are always some expenses that will surprise you.  

The idea of this whole exercise is to find out how much money you need to maintain your current lifestyle – so there’s no point in sugarcoating it since it’s all for your benefit.

After you’ve tracked your monthly expenses, you need to calculate how much investments you’d need to keep that lifestyle up.

Note that I don’t talk about savings but investments, which are two different things. We’ll talk about why you need investments instead of savings later on.

The 4% Rule 

The most common way to calculate how much money you need to never work again is to use the 4% rule.

It’s based on a study conducted by three professors from Trinity University who examined different withdrawal rates from different types of portfolios. The idea was to find out how long it takes for an investment portfolio to run out over different time periods.

They used a lot of different scenarios, but for some reason, it was the 4% withdrawal rate that stuck with personal finance folk. Since you can review the specifics of the study yourself, I’ll only summarize the most important things here.

The bottom line is that if you have a 100% stock portfolio, and you withdraw 4% from it for 30 years of retirement spending, there’s a 98% chance that your portfolio will not run out. In other words, there’s a 2% chance of failure.

For a 50/50 portfolio (50% bonds and 50% stocks), the success rate with a 4% withdrawal rate for 30 years was 96%.

As logically follows, the higher your withdrawal rate, the lesser your chances of succeeding.

How to apply the 4% rule 

Since 4% is a great working number, let’s use it to calculate a couple of examples.

In the U.S., the average monthly expenses for singles are around $4,300, so let’s use that number as our monthly budget. Therefore, our yearly budget would be approximately $52,000.  

With this budget, you would need $1,300,000 to be able to keep your yearly withdrawal rate at 4%.

Now, let’s further imagine your time frame is 40 years. You’re retiring early at the ripe age of 50 and live to be 90. With a portfolio of 90% stocks and 10% cash, your success rate would be 82%.

This is, of course, just a crude example, but it gives you an idea about the amount of money you need to become financially independent.

You can use this retirement nest egg calculator to play around with different numbers to see what fits your situation the best!

Remember Inflation

One major thing to consider is that you have to consider inflation when calculating your yearly 4%. For example, if you had one million dollars and you’d withdraw 4%, it would be $40,000.

Now, let’s assume that the yearly inflation rate is 2%. This means you have to increase the amount you withdraw by 2% yearly to accommodate for inflation.

Therefore, in the second year, you would need to withdraw $40,800, $41,616 in the third year, $42,448 in the fourth, and so on.

If you don’t account for inflation, you won’t be able to pay for your lifestyle with the $40,000 as time goes on.

Luckily, your stock investments should offer you a return that’s higher than the average inflation rate. 

Financial Independence, Retire Early (The FIRE Movement)

One concept that’s usually included in this type of discussion is FIRE.

The FIRE movement is about minimizing your expenses and maximizing your yearly income to retire before you’re 40.

Considering the fact that most of us join the workforce in our twenties, it leaves us around 10-20 years to earn enough money to last for a lifetime. This would, in theory, mean that you’d withdraw 4% of your savings yearly for about 50 years or so.

Needless to say, these numbers don’t add up for most people.

Now, I have nothing against starting to invest early and creating wealth at a young age, far from it. It’s just that retiring in your 30s or 40s is an unrealistic retirement strategy for most people who start with very little.

Saving vs. Investing – Why You Need Investments to Never Work Again 

Savings and investments may seem like they’re the same thing but make no mistake – there are some major differences between the two. It’s worth noting, though, that ‘retirement savings’ as a concept usually covers both savings and investments.

When we talk about savings, we usually talk about the money you have in your bank account. What’s typical for savings is that they have next to no returns and will be eroded by inflation over time.

Investments, on the other hand, should provide you with a return that exceeds the average inflation rate. In other words, investments maintain and increase their real value.

Investments also tend to last longer when compared to just having money in your bank account because they continuously generate returns and can offer you passive income.

Not to mention the fact that wealth building without investing can be considerably difficult. So, if you’re aiming for an early retirement, investments are most likely a must.

If you’re new to investing, you can check out my beginner’s guide to long-term investing to get you started. In addition, there are always financial planners and other professionals you can consult.