How much wealth do I need to retire early?
(2024 refresh)
In 2016, I did an analysis of how much money I would need to retire early.
My conclusion back then was that I would need $1.2M, and it would take me about until about age 45 to build up to that level of wealth.
As I revisited that analysis today, a few things stood out:
1. My assumed rate of return (3.5% annual) seems very conservative. e.g. from 2016 to October 2023 (o1's current knowledge cutoff), the US stock market has returned ~10.5% annually (o1, (a)) ...which is 4.9% annually after accounting for 30% to taxes and 2.5% inflation ((0.105 * 0.7) - 0.025 = 0.0485).
[2024-12-4 Update] A correspondent suggested that 30% to taxes is still too conservative, and 15% (or lower) is more calibrated. Assuming 15% to taxes kicks the annual rate of return up to 6.4% and trims a couple years off when I hit my target (from age 49 down to age 46).
2. The analysis assumes a smooth rate of earning & savings year-over-year. But my career and financial performance in the intervening eight years have been extremely nonlinear, and I expect similar going forward.
3. In fact, the 2016 analysis doesn't account for any market volatility whatsoever.
4. I essentially equated "retiring early" with Lean FIRE (a), i.e. generating enough investment income to support a modest lifestyle for one person with no dependents.
5. I didn't carve out a cushion for emergency one-off expenses; any emergency spending would have come from drawing down the principal.
6. I framed things entirely in terms of my retirement accounts. I now think it makes better sense to look at my overall financial picture (i.e. to factor in all assets and all liabilities).
I think the biggest issues here are the too-conservative rate of return, the not accounting for volatility, and the assumption of Lean FIRE when in fact I'm intending to raise children.
So let's run it again, taking my present-day portfolio as the starting point and considering my current financial goals!
How much money do I need to retire?
I'm intending to support multiple dependents and be the primary earner of my household, living in a West Coast US city.
Let's assume a household of four children & two adults wherein I'm the primary earner.
o1 estimates $10,225/month in expenses for this configuration (o1, (a)). Let's go with $11,000/month to give a bit of buffer.
$11,000/month * 12 months = $132,000/year to support my household.
What annual return can I expect on my capital?
As above, the stock market has been returning 4.9% annually after accounting for taxes and inflation. (My personal average return has been higher but let's use the market rate to be conservative.)
How much do I need to accumulate in order to generate $132,000/year?
With a 4.9% return on capital: $132,000 / 0.049 = $2,693,878
And let's add $500k on top to account for volatility and emergencies: $3,193,878
So I need to accumulate roughly $3.2M in order to generate enough money to support my household indefinitely.
Following a linear model, I'll hit that amount at some point between age 49 (if factoring in my current liquid & illiquid assets) and 55 (if only counting my current liquid assets). I had thought there would be a bigger delta between these two scenarios as my illiquid assets are currently a substantial portion of my net worth, so I suppose that's another data point evidencing the power of compounding!
The linearity of this modeling approach now feels a bit silly to me given the ups and downs of life, but it's nice to see that I'm still tracking well towards my financial goals even after their scope has expanded greatly.
And this recent observation (a) by the volcanic Max Novendstern seems relevant so I'll close with it here:
Around your thirties you get the resources to mentally retire or to double down
If you choose the former you lose your edge astonishingly fast and doom yourself to being mispriced for the rest of your life: your expectations are high, but your abilities no longer are
One of the simplest reasons Elon is so good at his job is that he chose not to mentally retire every chance he got