Do we really need $6,340,998 to retire?

Do we really need $6 million to retire? Have you thought about how much income you need after retirement? If you have, chances are you tried one of these online retirement calculators such as the AARP’s retirement calculator.  I used my old salary and it estimated that I would need at least $6,340,998 to retire at 40. (Mrs. RB40 retires at 60.)Unfortunately, I must confess that we haven’t reached that goal yet.  Try it out and share your number for fun, it’s just a guesstimate anyway. *Update* It looks like the AARP calculator returns different graphs depending on your input. If it shows a monthly budget, then click on the ‘Continue to Options’ button to see the lump sum.

The problem with these retirement calculators is that they usually assume you need around 80% of your pre-retirement income. The 80% is derived from the reduction in job expense and the removal of retirement saving. The calculators assume that most people put 10-15% into saving and then spend the rest of their paycheck. This might be a good assumption for the average North American family, but it is not a valid assumption for us. Over the last few years, we have lived on Mrs. RB40’s paycheck and invested most of my income.

A better way to estimate how much you need in retirement is to look at your monthly expenses as you get closer to retirement. Over the last year, I kept careful record of our monthly cash flow and confirmed that our expense column was much lower than our income. After I left my job, we still had a positive cash flow as expected. Mrs. RB40 also continues to contribute to her 401(k) and she aims to hit the contribution limit every year.

Expense reduction

Some of our expenses went down after I left my job. These are the expenses relating to holding down a regular job we touched on earlier.

  • Childcare – This is the biggest expense reduction we got from my transition to become a stay at home dad. We were paying $1,250/month for full time daycare previously.
  • Transportation – I drive about once a week now and fill up the tank about once a month. I didn’t drive all that much even when I was working so we saved less than $100/month here. I suppose we could sell the car to save even more money, but we are already just sharing one car. Perhaps if we really need to cut expense further, I would consider this.
  • Clothing – I haven’t purchased any new clothes since last Christmas. I haven’t worn long pants this whole summer except when we went to FinCon in early September and I wanted to look somewhat professional. Shorts and t-shirts are my usual attire nowadays and I’m quite happy with that.
  • Grooming – Sad to say that I’m saving on grooming. I shave about twice a week and I usually give myself a buzz cut now. It seems grooming goes out the window when you spend 99% of your time with a toddler.
  • Discretionary spending – Part of not having a regular job is the reluctance to spend money. We still eat out once in a while, but I’m much more hesitant to spend money unnecessarily.

Increased expense

  • Healthcare – We signed up with Mrs. RB40’s employer sponsored health insurance. This costs about $150 extra per month. We are very lucky that Mrs. RB40 likes her job and plans to continue to work in a traditional setting. Our healthcare cost could be much higher if we have to purchase a private health insurance.

All in all, we are doing fine so far even after leaving my job. As long as we maintain positive cash flow and invest the extra, we should be able to keep building our net worth. I have no doubt we will be better off 4 years from now. If you plan to retire early or to change careers, then save as much as you can now. If you can get used to saving 50% of your income, you will have many more options later on. Don’t be like the average family who spends all their income.

There is a great new website to help you manage your investments – Personal Capital. You can keep track of your income, expenses, and investments, all in one place. Personal Capital is geared for investors and have many great tools. See my review of Personal Capital and how they helped me reduce what I’m paying in investment fees.

Follow up post: Read about my favorite retirement calculator: FIRECalc


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Joe started Retire by 40 in 2010 to figure out how to retire early. After 16 years of investing and saving, he achieved financial independence and retired at 38.

Passive income is the key to early retirement. This year, Joe is investing in commercial real estate with CrowdStreet. They have many projects across the USA so check them out!

Joe also highly recommends Personal Capital for DIY investors. They have many useful tools that will help you reach financial independence.
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42 thoughts on “Do we really need $6,340,998 to retire?”

  1. I can’t resist a good old financial calculator! I got $2.1 million, although I want to look more closely at the social security calculator – my husband and I are both adamant that we won’t collect our monthly payments until we’re 70, to maximize those checks.

  2. I’ve done the basic analysis of withdrawal of 3.5%-4% to start and increase by inflation every year after that. What I had found is that covering every bill we have today (including 15 year mortgage, and healthcare payments), we’d need about $3M.
    Now, that would be significantly reduced after paying the 15 year note off, so I’m shooting for $1.5M first, and if we approach or exceed that, I may very well increase that to $2M.
    Although, I think we’d easily be able to live off that even in our current house without worry and travelling 1-2 times a year at $1M (with paid mortgage).

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  4. “If you can get used to saving 50% of your income, you will have many more options later on. Don’t be like the average family who spends all their income.”

    ill set this as my goal. so far we have managed to keep rent at 25% of our income, hubby just finished school and got a job offer 50% more that his old income, so im hopeful to achieve this goal very soon.

  5. It claims I need 4.8 million to retire. Maybe I’m missing something, but it seems like it’s estimating how much you’ll spend in retirement and assuming you must have that amount in the bank. Obviously I’m not going to save up 4.8 million dollars, convert it to cash and then live off it.

    It also seems to ignore that we’re saving 25-30% of our income, therefore living off much less than our income and supposedly able to continue doing so in retirement.

  6. These calculators are good for ballparking, but unfortunately they dont really account for many ways to reduce expenses like you pointed out. They use an american baseline that probably spends more than they earn (or close) every month, so they are telling you that you’ll need lots and lots of money.
    There are plenty of great ways to reduce expenses, and you dont have to wait until you retire to find them.

  7. I am blessed to have retired at 49(now 50)..wife is a few years younger than me and still works. We live off her take home income ($55k) which is conveniently the starting budget we are planning for in retirement. We plan to withdraw a little less than 4% of our nest egg ($1.6M) each year and increase the withdrawal amount each year for inflation. So far so good….love the freedom of being retired and having no debt!
    The keys to success were saving early, saving often, acting our wage, and not buying anything we could not pay for.

  8. Ha! “It seems grooming goes out the window when you spend 99% of your time with a toddler.” So true! I don’t know when I’ll get a decent haircut again..but it’s okay 🙂

    Those calculators don’t account for every individual situation. I like your approach much better.

  9. Those figures are insane, I think they are super inflated, the average person can retire on 1 million dollars saved, it all depends on the lifestyle you will lead once you retire. Hopefully most people will retire only when their primary mortgage is paid off, thus reducing expenses dramatically.

  10. Definitely something to look through when you are trying to plan for the future. What people don’t realize is that things like that cable TV or expensive phone plan can easily be replaced with less expensive alternatives (though you might have hinted at this in the post)-that’s just a couple of things that can help stash away more income.

  11. I save roughly 35%. I have used a variety of calculators and their assumptions are very general. When I retire again, I want to make sure my funds will last 30 years. I definitely do not want to return to work in my 80s. I will have my net income replaced with a combination of Social Security and a pension. My IRAs, brokerage and retirement accounts will satisfy my wants!

  12. I believe the starting point is your expenses, not your income. Problem is there is a big question mark about the biggest expense of all: health care. At the rate health care costs are being inflated (3-4 times the average CPI) who knows what they’re going to be when we retire?

    With the population bulge, Medicare will mathematically not be able to cover those costs. Who is going to pay the difference? And if we think we’re going to be healthy and avoid those costs, legislation is going to make us pay for the overweight smokers who don’t exercise. Those are the 20% who consume 80% of all health care dollars.

    Those people can’t afford their health care and the government can’t. This is not one of those doomsday rants: Obamacare was aimed at exactly this problem, and if there’s one thing we know about any government it’s those “taxes” only increase, especially if the shortfall increases.

    Maybe that friend of mine who bought a retirement house in San Felipe in Mexico is smarter than I thought…

  13. I filled out the calculator but didn’t see anywhere that it told me a portfolio size. It just told me annual numbers. Is the portfolio number hidden somewhere?

        • Hi guys,

          I looked over and could not find a total portfolio number either, however, I could figure it out by adding all the years they think I will live and the amounts expected each year. It says I can retire right now (I already am FI), but I plan on working for a little while longer and my husband wants to retire in 2.75 years so that he can collect a pension at 55. It did say that we could retire when he is 55 with a more extravagant lifestyle. I wonder if the portfolio number you got, RB40, includes what you will get from SS or not; do you know?

        • It seems if I will have enough, it tells me the number, but if I change the assumptions so I won’t, then it only tells me the annual amount I am short.

  14. I imagine you don’t need that much if you have money coming in. Jacob from ERE actually stopped by my site recently to leave his thoughts on income in retirement. Very interesting.

    I save on shaving as well– I can’t grow any facial hair haha!

  15. I’m currently saving about 20% of my income as non-consumption (I wouldn’t say for retirement per se). My intention is to more than fund my retirement (and some substantial lifetyle increases) through active trading. Investing isn’t really part of the equation.

    So far, so good.

  16. That’s a huge number. I have been talking to Mrs. 20s about going extreme frugal to live on just her income, but she doesn’t like that idea. Last month, was an average month and it was only $500 over her income (without considering my income), so we aren’t too far off. It will have to wait until she finishes school. Grad school really ruins my early retirement plan. 🙂

    • You guys are getting there. I’m sure once she’s done with school, she’ll get a raise and be able to cover the whole expense.

  17. AARP says I am ready to go, which is good since I retire in 10 days (age 39). A couple years ago I went on a rampage, questioning my every bill. Did I need a home phone, cable, magazine subscriptions, fancy cars? The answers were almost always no. I am not yet done with my purge…but I have direction and a plan to get where I want to be over the next three years. Making these cuts drastically reduces your monthly overhead while reducing the income required to sustain your lifestyle.

    • That’s something I keep talking to DW about (cutting land-line and cable). As for magazine subscriptions, we get about 8-10 of them free for a year through our RecycleBanks.
      And I have to second RB40’s suggestion. Make sure it’s sustainable.

  18. My wife and I are in our mid-30s, both engineers. We have an income of ~$500,000. We have total savings (retirement + non-retirement) of ~$2,500,000. My estimate is that we need ~$4,000,000 of accessible money to retire early.

    We currently split our income roughly in thirds: 33% go to taxes, 33% go to savings, and 33% go to spending. So assuming our lifestyle stays constant, we need ~$165,000 after-tax in today’s dollars.

    I generally hear that 4% is a ‘safe’ withdrawal rate. 4% of $4,000,000 gets us to about where we need to be.

    Of course if we cut back on lifestyle, we could save more, and we could retire sooner. And of course “early retirement” implies some other, perhaps diminished, income stream. So that helps too.

    • Wow, you are doing so well! I bet if you put your numbers into the AARP calculator you’ll get something absurd like $30,000,000.
      I’m sure you’ll reach $4M soon. It’s much easier once you have a big nest egg to build on, right?

  19. I agree it’s a good idea to work through the numbers yourself rather than taking the advice of some calculator. How can the same advice apply to everyone’s different situation? I like the idea of looking at your specific expenses and seeing what kind of income level you will need in retirement to be able to cover those expenses. Also should build in a little bit of a cushion for the unexpected. One thing I do worry about is the high cost of healthcare and as we age we need more and more of it typically. Another expense that will hopefully be lower in retirement is housing. I plan on having my mortgage paid off by the time I retire so I don’t have to worry about that expense.

  20. What a coincidence. I mentioned the absurdity of these online calculators in my post this morning as well. I agree with you, looking at our needs/wants and then working backwards to figure out the amount needed to support that level of expenditure is a far more useful exercise and a better way of keeping sane. 🙂

    • It’s insane. The reality is most people can’t save that much money. They just have to adjust to having less income.

  21. I really need to calculate all of this stuff and come up with solid numbers. I do save a big chunk of money in Roth Ira and 401k retirement accounts. This means in retirement I hopefully wont be saving for retirement, paying payroll taxes or paying much, if any income tax. I do plan on diversifying my tax strategy in a regular 401k and taxable investment accounts as I get closer to retirement.

  22. I love the idea of living off one income and saving the other. I really hope to get to that point in the next year or two. Of course, on my end it’s not 50/50, it’s more 60/40 but saving 40% of our total income would be a great improvement to saving barely 5%!


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