Every time I read an article stating we need $5 million, or even $3 million, to be able to retire, I immediately call “BS”.

Why? Because retirement means different things to different people and is based on individual situations.

For example, your idea of retiring early may be to continue working, but not for someone else. With money out of the equation, you could free up 5 days per week to pursue entrepreneurship. Someone else may want to stop working completely after retiring.

Also, you may want to “retire” in 8 years in a low cost of living area while your best friend is content retiring in 30 years in a high cost of living area.

As you can see, retiring and the associated wealth you need to retire is not a one-size-fits-all model. So, when I see statements telling us that we need $5 million to retire early, you know why I’m skeptical.

However, based on conversations in the Financial Independence/Retire Early (“FIRE”) community, I fear many people will not have enough money to live the life they want.

The flaw I often see is people focusing only on how much money they need invested to cover their own retirement expenses. This may be the amount people need for financial independence, but it shouldn’t be confused with your financial freedom number.

If you quit your job before hitting your financial freedom number, you may regret it later.

Follow along to learn the difference between your retirement number and your financial freedom number. I’ll explain the difference and how to calculate both of them in this article.

So, how much money do you need to retire early and achieve financial freedom?

First, when I say “money” in this situation, I’m talking about your total invested assets. These assets include your money in checking & savings accounts, 401K, IRA, stock investments, bonds and other investments. This is important because these are technically the accounts you’ll be withdrawing funds from to cover your expenses once retired.

Second, the amount you need depends on the lifestyle you want for you and your family. It also depends on any other financial goals you have, such as paying off all debt or paying for your children’s college.

This second point is the focus of Step 1 of the financial freedom framework, which is to define your goals & desired lifestyle. If you haven’t done so already, go back and read Step 1 – How to set financial goals and live your dream life in 3 easy steps.

That article will help you define the lifestyle you want for you and your family. You’ll have clear lifestyle and financial goals after working through that post.

You can then use those goals to continue Step 2, which is to determine how much money you need to achieve financial freedom and retire early.

For now, let’s work through an example to calculate how much money you need to retire and achieve other financial goals.

How to calculate your financial freedom number in 3 easy steps

Complete the 3 steps below to calculate how much money you need to retire early and achieve financial freedom.

1. Calculate the investments needed to sustain your lifestyle expenses in retirement
2. Add up the amount of money you need for other financial goals
3. Calculate your total financial freedom number

Let’s tackle each of these steps one-by-one using an example.

1) Calculate the investments needed to sustain your lifestyle expenses in retirement

To calculate your retirement investments, there are two variables you need to know. First, you need to determine your annual retirement spending. Second, you need to select a safe withdrawal rate (SWR).

You can easily calculate the amount of money you need to retire by using the formula below.

Retirement Investments Needed = Annual Retirement Spending / Safe Withdrawal Rate

If this is all new to you, don’t worry. I summarize each of these below.

Retirement Spending

Your retirement spending is the equivalent of the expenses you’ll incur each year during retirement. It should not be based on today’s spending. For example, if you pay-off your home mortgage in 8 years, but retire in 10 years, then you’ll no longer have the mortgage expense in retirement.

Some common things you should include in retirement spending that oftentimes get missed are (a) any taxes you expect to pay including Income Tax and Property Tax, (b) potential healthcare expenses, such as the portion of health insurance premiums paid by your employer today that you’ll have to cover yourself, and (c) any travel plans you have during retirement.

For this example, let’s assume our retirement spending will be $68,000 per year including taxes.

Safe Withdrawal Rate

The safe withdrawal rate (SWR) is the percentage you can pull out of your retirement investments without the risk of your investments drying up in the middle of retirement.

The last thing you want to happen is to deplete your investments by pulling out too much money each year. To safeguard against that risk, you need to select a SWR that provides enough income to cover your retirement spending, but also leaves enough money in your investments to keep growing and cover inflationary costs.

Thankfully for us, academics performed detailed statistics and analysis during the Trinity Study to determine a safe withdrawal rate for the general population. Their findings suggest using a 4% safe withdrawal rate, also known as the 4% Rule.

With any study, there are assumptions and various caveats. If you want to learn more about the 4% Rule, I suggest reading this post by the Mad Fientist and this one by The Balance.

In an over-simplified and “non-PC” view, I like to think of the 4% Rule in the following way. Assuming your investments are in the stock market, your investments will go up and down along with the market. History tells us our investments will go up 7% to 8% per year over the long run and that inflation is approximately 3% per year, on average. Subtracting 3% from 7% to 8% leaves us with 4% to 5% to withdraw. Of course, there are risks if you draw down in a year the stock market is down, but that’s built into the 4% SWR and why we shouldn’t withdraw more than 4%.

Retirement Investments Needed

Now that we know our retirement spending and safe withdrawal rate, we can easily calculate the amount of money we need in retirement investments.

Using this example, $68,000 divided by 4.0% equals $1,700,000 of investments needed to retire.

Easy enough, right?

If you’re looking for a tool that helps you calculate these numbers, then I recommend using this awesome retirement calculator. It provides more details, such as your retirement age and other neat metrics!

2) Add up the amount of money you need for other financial goals

The above helped us calculate our retirement number. But, is that the same as our financial freedom number? I don’t think so!

From what I read in the FIRE community, most people think their retirement number is the only thing they need to achieve before quitting their job. My prediction is that many of them will have regrets later on down the road if they don’t calculate and achieve their total financial freedom number.

The retirement number only accounts for the expenses, or retirement spending, you need to cover during your retirement. If you have other financial goals to achieve, then you need to add those on top to determine your financial freedom number.

Some of these other costs may be paid for before or after you retire. If they will be paid after you retire, then add them to your retirement number. If they will likely be paid for before you retire, then you do not need to add them to your retirement number.

I recommend outlining all of the other major financial goals you want to achieve. Then, assign a dollar amount to them, which you expect to pay for after you retire early.

For example, below is an example.

• Pay off remaining student loan debt: $40,000
• Eliminate remaining vehicle debt: $10,000
• Eliminate remaining home mortgage debt: $200,000
• Pay for children’s future vehicles: $40,000 (2 kids x $20,000 each)
• Fund children’s future college: $250,000 (2 kids x $125,000 each)
• Pay for children’s future weddings: $60,000 (2 kids x $30,000 each)

Based on this example, the total amount we need to achieve our other financial goals is $600,000. And, that doesn’t even include any funds you may want to cover to care for elderly parents if they’re unable to provide for themselves.

One thing I want to call out is that you don’t have to include some items in this list if you want to account for them as continuing expenses in your retirement spending.

A perfect example is your home mortgage. You can include your mortgage payments in your retirement spending, which will be reflected in your retirement investments needed. If you do that, then you won’t need to add it on top. Or, you can leave mortgage expenses out of your retirement spending estimates and add the principal amount owed as of your retirement date.

3) Calculate your total financial freedom number

Now, all of the hard work is done and you can easily calculate how much you need in investments and savings to achieve financial freedom.

Your financial freedom number is your retirement number plus the total of your other financial goals.

In the example we’ve been using, our financial freedom number equals $2,300,000. This is the sum of our $1,700,000 retirement number plus our other financial goals of $600,000.

If we focused only on our early retirement number, then we’d be $600,000 short of having the funds necessary to live the life we want, which includes a better life for our family.

This is exactly why I want you to focus on your total financial freedom number! That’s the amount of money you need to retire early.

Comment below if you have any questions or other suggestions when calculating your early retirement number. I’d love to hear your thoughts!

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