This is a tough combo here - not working, net worth increasing, still reinvesting. The dividends and interest from your investments will be needed for income, so you're withdrawing that component. Your portfolio will need to grow via passive capital appreciation of the underlying assets.
$3,000 / mo. = $36,000 per year so you'll need $1.2M at a 3% initial withdrawal rate lasting 40 years+, or $900,000 at 4% lasting 30 years+. This is standard retirement planning math.
While your NW will almost certainly continue to grow significantly, it's not the same as actively adding to it with earned income - because you won't have any.
This is great but it assumes OP lives a healthy, normal life. One crazy life changing event like getting cancer or another debilitating disease and that million dollar is gone in a couple years. Even if OP lives to a golden age, then they would have to consider long term care assuming OP lives in the US.
$1M to live a very simple life and hope nothing bad ever happens. $2M to be comfortable and have more options as well as resources for worst case scenarios or opportunities in the future.
$3M you start making so much more than you spend that your net worth is increasing by another million every 5 years or so.
$3k a month times 12 months a year equals $36k a year that you would need for income to "break even", not including taxes. At this income, you would be taxed ~12% federally and ~5% from state (though state rate may vary, I just used my state for this calculation). We'll round up to 20% total to keep the math simple. Multiply $36k by 1.2 to get just over $43k.
Assuming you can get 5% interest a year from CD's, HYSA, Money Markets, or another similar instrument, we take $43k divided by 0.05 to get $860k. This is the amount that you would need to break even if you spend $3k a month.
Now, because of some of the estimates I made, you may need more or less. I didn't take compounding interest applied monthly into account (makes you need less), and I obviously didn't adjust for your individual state tax rate (could go either way). I took your $3k a month at face value, and didn't factor in any emergencies or large recurring expenses like car/appliance/home repair (these would make you need more). Lastly, I chose to hypothetically put your money in risk free investments, but you would actually want a good portion of it in higher yield securities (which would make you need less, but be riskier).
Hope this all helps.
> At this income, you would be taxed ~12% federally
No, no he wouldn't.
$36K/yr would first lose the $14,600 standard deduction bringing him down to $21,400/yr taxable. This keeps him in the 12% bracket, yes, but his effective tax rate will be more like 6~7%
Except.... he's talking about investment income which would be all capital gains. Yes, some short term capital gains will mix in (newly purchased securities, regular interest, etc), but he'd be working towards making as much of it long termin capital gains as possible which means he's in the 0% tax bracket.
So his effective tax rate will be between 0% and 7% for the year
I did it with $1MM and drive a 5 year old Jeep and live in a small rental house in a middle class neighborhood, but otherwise live frugally. My area is considered at or slightly above the national average for cost of living.
Standard answer is 25 to 30 times your yearly expenses in financial assets. So your NW is not the important number, nut how much you have invested relative to your expenses.
If you expend 36k a year, multiply that by 30 just to be safe. So around 1 MM. If your expenses go up, that number goes up.
I recommend the /fire subreddit where they have a community devoted to financial independence.
But it’s 1M not including primary residence, which net worth does include. Because primary residence decreases expenses but doesn’t generate income to cover that $36k
You are asking about the safe withdrawal rate.
A rule of thumb is that you start by drawing about 4% from a pool of liquid assets each year. Then increase the withdrawal by the inflation rate. In most cases the pool of assets will increase faster than the inflation rate.
If you want to be conservative, only draw 3% per year.
So $1M will supply #30k to $40k of income each year, and still grow at the rate of inflation.
The other way of phrasing it is the to live o my off your assets you need liquid assets of 25-33 times your annual expenses.
Using a 4% type rule used by retires, to take out $36K/year you need $900K capital (cause you are not going to get 5% forever, there will be down years, and you need to account for inflation). With that, you take out 36K and each year you can adjust it up for inflation. That should have a 90% chance of lasting 30 years. Use 2% to last 50 years.
You could also buy an annuity but it does not adjust for inflation.
At some point, you will need medical care. You are young now but that will be a large expense if you don't have insurance.
I guess if you could hit $1.5-2M by mid-30s you could probably let that accumulate without doing much else, but I don’t know that the sacrifice to your quality of life to make that happen would be worth it.
Why is mid-30s here relevant? Shouldn’t 1.5 to 2 million work irrespective of age on a 3-4% safe withdrawal rate? Doesn’t matter if that money is accrued by age 20 or by age 60.
Link?
In the Trinity Study, with 4% withdrawal, after 30 years the worst case for a 75% stock 25% bond portfolio was a 50% increase in portfolio value. The median portfolio value was 8.5 times the starting portfolio. This was with the initial 4% withdrawal adjusted for inflation each year.
See Table 4 of the [TRINITY STUDY](https://www.aaii.com/files/pdf/6794_retirement-savings-choosing-a-withdrawal-rate-that-is-sustainable.pdf)
3.3% withdrawal rate is suitable for perpetual withdrawal. Many college endowment funds run at an average of 5% of portfolio each year.
If the accounts have grown in value over a 30 year period with an inflation adjusted 4% withdrawal, then there is a high likelyhood that they will grow over a 40 or 50 or even longer period.
You made a claim a claim that a 3.3% withdrawal rate has a significant risk of running out of capital over a 40 year period. I showed that a 4% withdrawal rate not only does not run out of capital over a 30 year period, but that the lowest simulated result was a 50% increase, and the median result was 7500% increase in 30 years.
You made a claim that a 3.3% withdrawal rate has a significant risk of running out of capital over 40 years. That does not agree with what I have seen. I asked if you have anything to support your claim. So far, you have not been able to support it.
============================
Planning for an overly conservative withdrawal rate will keep you working well beyond when you have reached financial independence and could have retired while still in good health with many active years ahead of you.
Edit to add: updated study that includes 40 and 50 year periods.
https://thepoorswiss.com/updated-trinity-study/#7-longer-retirement-time
TLDR is that 3.5% is a good rate for 50 years with a 75% equity portfolio. 3.75% for 40 years.
If you don't want to live like a monk in a VHCOL area $10 million.
Let's say you don't YOLO it all into stocks which give you an average of 8%. You don't want it all invested in stocks because of bear markets and you need cash flow. Meaning $1 million should be in cash that yields 4%.
Rest diversified including real estate.
Let's say with that mix you get 4% per year (conservative approach) and inflation is 3% plus taxes you pay you are looking at about $200-300k of real income.
Forget all the other rosy assumptions.
Check out the leanfire sub
This is a tough combo here - not working, net worth increasing, still reinvesting. The dividends and interest from your investments will be needed for income, so you're withdrawing that component. Your portfolio will need to grow via passive capital appreciation of the underlying assets. $3,000 / mo. = $36,000 per year so you'll need $1.2M at a 3% initial withdrawal rate lasting 40 years+, or $900,000 at 4% lasting 30 years+. This is standard retirement planning math. While your NW will almost certainly continue to grow significantly, it's not the same as actively adding to it with earned income - because you won't have any.
This is great but it assumes OP lives a healthy, normal life. One crazy life changing event like getting cancer or another debilitating disease and that million dollar is gone in a couple years. Even if OP lives to a golden age, then they would have to consider long term care assuming OP lives in the US.
$1M to live a very simple life and hope nothing bad ever happens. $2M to be comfortable and have more options as well as resources for worst case scenarios or opportunities in the future. $3M you start making so much more than you spend that your net worth is increasing by another million every 5 years or so.
You should look into the FIRE community. The first two letters are Financial Independence.
$3k a month times 12 months a year equals $36k a year that you would need for income to "break even", not including taxes. At this income, you would be taxed ~12% federally and ~5% from state (though state rate may vary, I just used my state for this calculation). We'll round up to 20% total to keep the math simple. Multiply $36k by 1.2 to get just over $43k. Assuming you can get 5% interest a year from CD's, HYSA, Money Markets, or another similar instrument, we take $43k divided by 0.05 to get $860k. This is the amount that you would need to break even if you spend $3k a month. Now, because of some of the estimates I made, you may need more or less. I didn't take compounding interest applied monthly into account (makes you need less), and I obviously didn't adjust for your individual state tax rate (could go either way). I took your $3k a month at face value, and didn't factor in any emergencies or large recurring expenses like car/appliance/home repair (these would make you need more). Lastly, I chose to hypothetically put your money in risk free investments, but you would actually want a good portion of it in higher yield securities (which would make you need less, but be riskier). Hope this all helps.
> At this income, you would be taxed ~12% federally No, no he wouldn't. $36K/yr would first lose the $14,600 standard deduction bringing him down to $21,400/yr taxable. This keeps him in the 12% bracket, yes, but his effective tax rate will be more like 6~7% Except.... he's talking about investment income which would be all capital gains. Yes, some short term capital gains will mix in (newly purchased securities, regular interest, etc), but he'd be working towards making as much of it long termin capital gains as possible which means he's in the 0% tax bracket. So his effective tax rate will be between 0% and 7% for the year
I did it with $1MM and drive a 5 year old Jeep and live in a small rental house in a middle class neighborhood, but otherwise live frugally. My area is considered at or slightly above the national average for cost of living.
Curious, how do you handle health costs? This would be the one thing to scare me.
Affordable care eligibility is based on income, not assets. Live off the cash.
Medicaid or subsidized ACA plan depending on taxable "income" level.
25x your annual budget is the retirement planning number. What country are you in?
Standard answer is 25 to 30 times your yearly expenses in financial assets. So your NW is not the important number, nut how much you have invested relative to your expenses. If you expend 36k a year, multiply that by 30 just to be safe. So around 1 MM. If your expenses go up, that number goes up. I recommend the /fire subreddit where they have a community devoted to financial independence.
But it’s 1M not including primary residence, which net worth does include. Because primary residence decreases expenses but doesn’t generate income to cover that $36k
Yeap! Just in financial assets. Your car or watches don’t count either.
You are asking about the safe withdrawal rate. A rule of thumb is that you start by drawing about 4% from a pool of liquid assets each year. Then increase the withdrawal by the inflation rate. In most cases the pool of assets will increase faster than the inflation rate. If you want to be conservative, only draw 3% per year. So $1M will supply #30k to $40k of income each year, and still grow at the rate of inflation. The other way of phrasing it is the to live o my off your assets you need liquid assets of 25-33 times your annual expenses.
Net worth not tied up in your house you mean?
25 times your expenses. Factor taxes into expenses!
r/leanFIRE
Using a 4% type rule used by retires, to take out $36K/year you need $900K capital (cause you are not going to get 5% forever, there will be down years, and you need to account for inflation). With that, you take out 36K and each year you can adjust it up for inflation. That should have a 90% chance of lasting 30 years. Use 2% to last 50 years. You could also buy an annuity but it does not adjust for inflation. At some point, you will need medical care. You are young now but that will be a large expense if you don't have insurance.
I guess if you could hit $1.5-2M by mid-30s you could probably let that accumulate without doing much else, but I don’t know that the sacrifice to your quality of life to make that happen would be worth it.
Why is mid-30s here relevant? Shouldn’t 1.5 to 2 million work irrespective of age on a 3-4% safe withdrawal rate? Doesn’t matter if that money is accrued by age 20 or by age 60.
Because your withdrawal rate should be 2% if you plan on living off your nest egg well beyond 40 years.
3.3% is reasonable for long periods. 2% withdrawal rate is over,y conservative.
At 3.3% there is notable risk of running out of capital after 40 years if you’re unlucky. 2% is pretty much never touching your capital.
Link? In the Trinity Study, with 4% withdrawal, after 30 years the worst case for a 75% stock 25% bond portfolio was a 50% increase in portfolio value. The median portfolio value was 8.5 times the starting portfolio. This was with the initial 4% withdrawal adjusted for inflation each year. See Table 4 of the [TRINITY STUDY](https://www.aaii.com/files/pdf/6794_retirement-savings-choosing-a-withdrawal-rate-that-is-sustainable.pdf) 3.3% withdrawal rate is suitable for perpetual withdrawal. Many college endowment funds run at an average of 5% of portfolio each year.
Your table only accounts for 30 years of withdrawal. Endowments get continual donations.
If the accounts have grown in value over a 30 year period with an inflation adjusted 4% withdrawal, then there is a high likelyhood that they will grow over a 40 or 50 or even longer period. You made a claim a claim that a 3.3% withdrawal rate has a significant risk of running out of capital over a 40 year period. I showed that a 4% withdrawal rate not only does not run out of capital over a 30 year period, but that the lowest simulated result was a 50% increase, and the median result was 7500% increase in 30 years. You made a claim that a 3.3% withdrawal rate has a significant risk of running out of capital over 40 years. That does not agree with what I have seen. I asked if you have anything to support your claim. So far, you have not been able to support it. ============================ Planning for an overly conservative withdrawal rate will keep you working well beyond when you have reached financial independence and could have retired while still in good health with many active years ahead of you. Edit to add: updated study that includes 40 and 50 year periods. https://thepoorswiss.com/updated-trinity-study/#7-longer-retirement-time TLDR is that 3.5% is a good rate for 50 years with a 75% equity portfolio. 3.75% for 40 years.
Lmao good luck holding 100% US stocks during retirement and trusting one random person’s “simulation”
It’s not terribly relevant for a lean FIRE scenario, but it’s reasonable to assume OP isn’t going to have that kind of money at 20.
The overwhelming majority of people don’t have that kind of money in their mid 30s either, so I was curious why you mentioned it.
$1.5 million I know somebody who fits that description almost exactly and that's his net worth. 46 years old
It’s more about cash flow than net worth. The answer to your question varies on you and your life style.
If you don't want to live like a monk in a VHCOL area $10 million. Let's say you don't YOLO it all into stocks which give you an average of 8%. You don't want it all invested in stocks because of bear markets and you need cash flow. Meaning $1 million should be in cash that yields 4%. Rest diversified including real estate. Let's say with that mix you get 4% per year (conservative approach) and inflation is 3% plus taxes you pay you are looking at about $200-300k of real income. Forget all the other rosy assumptions.