Almost no one believes me when I tell them I plan to retire in a few years.

To those of us who know of the FIRE movement, to “retire” means to have enough money saved up to never have to work again—whether or not we continue to do so.

I don’t know why so many people refuse to believe a 30-year-old could retire, without even listening to the math first. There is no reason to assume a 60 or 70-year old could retire, just based on their age. If they haven’t saved enough money to cover their annual expenses year after year, then they can’t afford to retire. It’s exactly the same for the 70-year old and for the 30-year old.

When you can retire is really just a simple math problem.

It takes only a few minutes to do, and you can do it yourself. There is no magic number that any one person can tell you. You’ll hear a lot of catchy phrases thrown around such as:

You need 10x your annual salary to retire!
You need more than 1 million dollars to retire!

However, none of these catch-all statements take into consideration your unique situation.

So how much will you actually need to retire? The way to figure this out, is to find out how much you spend each year. A great way to do this, is to use Mint or Personal Capital (use my Personal Capital referral link to get $20 free), either which will link all your accounts together and show you all of your transactions. Both sites have graphs and year-end reports that you can look at to see how much money it really costs you to live per year.

If you don’t want to use one of these online tools, start writing down everything you spend your money on, and look at your credit card statements. Think of things like housing costs, insurance, food, entertainment; and calculate what you spend on each one.

Sometimes it’s easier to just look at an average month’s expenses, and multiply that by 12. If there’s a big expense you have once per year, you can add that at the end, or you can divide it by 12 to factor it into each month.

I’ll use myself as an example.

Housing: $1150/month
Car Insurance: $59/month
Food: $250/month (average)
Entertainment & Restaurants: $80/month
Gifts: $30/month
Pharmacy and household items: $50/month

Total: $1609/month

(Notably missing are utilities & phone bill. I pay for food and car insurance/registration/maintenance, BF* pays for utilities, gas for the car (negligent), and our family plan through Google Fi – which is about $60/month for both of us)

Travel: $5000 once per year
Prime: $99 once per year

(If you buy a new phone or computer once a year, here is a good place to factor it in.)

Total Annual Spending: (1609 x 12) + 5000 + 99 = $24,407

Now that we know how much we spend each year, it’s very simple to figure out how much we need to retire. Using the 4% rule, we only need to multiply our annual expenses by 25.


Annual Expenses x 25 = Amount Needed to Retire

$24,407 x 25 = $601,175


Notice how it’s not even $1 Million. All I need to retire at any age at my current level of spending is $601,175.

With the 4% rule, we can withdraw 4% from our net portfolio every year, without touching the principle AND accounting for inflation.


$601,175 * .04 = $24,407 (see the magic of that 25 number?)


Investopedia gives a good run-down of what the 4% rule is and why it works.

People forget to remember that the 4% is a conservative rule. It often means over-planning for retirement, so your portfolio could still outperform your expectations and you’ll be left with more cash than you need. The 4% rule protects you in most situations, as long as you stick to your annual budget.

Some people see this number and complain that they’ll need a lot more money because of inflation. However like I said, the 4% rule already accounts for inflation. Before panicking about “inflation” in your retirement plans, remember that as long as you follow the 4% rule, your bank account** will go up with inflation too.

Besides, it’s not even worth calculating out inflation-adjusted dollars when planning for retirement, because it doesn’t make sense to look at the numbers that way. It’s better to think of your money as purchasing power in today’s terms. Sure, in 20 years $600,000 will be several million after inflation, but you’ll only be able to trade that money for the same amount of goods and services as you could with $600k today. Your mindset of what something is worth only has the perspective of today’s dollars, so it’ll be difficult to conceptualize what those huge sums of money really represent.

The moral of the 4% rule, is that the lifestyle you choose is what will set how much you need to retire. Don’t want to work as long? Spend less each year, and you’ll need less to retire. Really want to live it up after working life? Save a bit longer to afford a bigger number. You have the option to live lean or to live fat. With that, it’s really up to how much you can save, and how long you’ll need to work to get there. Use the 4% rule to find your magic number, and save, save, save until you hit it.


Also notably missing is a line item for health insurance. My current employer covers 100% of my premiums, and I also live in a state that provides free insurance for those under a certain income level. The health care system in the US is too in-flux and complex to factor this into my calculations right now, but it’s something I plan to re-investigate in the future, and it may raise my annual budget a bit.

*BF is how I affectionately refer to my Significant Other

**Bank account is a metaphor for the portion of your net worth invested in the market; aka the amount you need to retire and stay retired. Also remember this will fluctuate year to year with the market—there will be down years. However, long term annualized, we can expect this to follow the same trend that makes the 4% rule possible.