How much do you need to retire?

“Am I ready to retire?”

This is a question that many people ask themselves when they are thinking of quitting a job and wishing to travel the world for the rest of their life. When I say ‘them’, I’m kind of referring to me. 🙂

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The Rule of 300

The Rule of 300 is basically an explanation of having a 4% safe-withdrawal rate (SWR). The 4% SWR is a guideline for a sustainable rate of spending during a 30-year retirement. So, if you have $1.2 million invested, you could take out $48,000 during the first year. That provides you with $4,000 per month.

The Department of Statistics Singapore highlighted in their Household Expenditure Survey 2012/13 that on an average, a family spends $4,724 per month. That means a family’s annual expenses is $56,688 ($4724 x 12). To make sure that they have enough to retire, we need to multiply this amount by 25 which brings us up to $1,417,200.

Now, they are able to withdraw 4% of this $1,417,200 portfolio in their first year which is $56,688. They can then divide this money up by month to derive $4,724 per month (notice that this is the same amount we started with).

You’re probably thinking, ‘Would I run out of money in my investment portfolio if I keep withdrawing 4% each year?’ A study using data from the past few decades shows your investment portfolio will not run dry if you maintain a conservative withdrawal rate of 4% for 30 years. It is important to note that past performance doesn’t necessary represent future performances.

As time goes on the portfolio balance will continue to increase as the markets increase. The question is, what allocation should your investment portfolio be so that when utilizing the 4% SWR, your portfolio balance should never bottom out. So this means that if you had 300 times your monthly spending at age 20 it would last forever. It would work equally as well for someone retiring in their 40s, 50s or 60s.

What do you need to do to retire early?

  • Take control of your expenses. If you can reduce your annual expenses, your SWR would much lesser and it would be much easier to achieve your investment portfolio size.
  • Focus on increasing your monthly saving ratio. If you diligently put your monthly savings into your investment portfolio, it will grow and reward you in time to come.
  • Eliminate debt. Growing your investment returns is useless if your debts are holding you back.

So let me ask you now this, are you ready to retire?

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