海角大神

You鈥檇 be surprised how often I鈥檓 asked this simple question. It鈥檚 something on a lot of people鈥檚 minds, apparently. How much do I have to save up to be able to live off of my own savings?

It鈥檚 impossible to come up with an exact number, but we can come up with an estimate.

Figuring this out takes a little bit of math, so I鈥檒l walk you through some of the steps. First, let鈥檚 talk about assumptions.

Let鈥檚 assume that inflation is going to average 3% a year going forward. You can argue about that one all day long, but we鈥檙e using a rough estimate here. Similarly, let鈥檚 assume that you can invest in an index fund that will return 7% on average each year, but when you move to living off of your investments, you鈥檒l want to diversify into other investments, perhaps returning only 5% each year. We鈥檙e also going to assume you鈥檙e debt free.

The first thing you need to know is how much it actually costs you to live for a year. What are your actual living expenses for a given year?

The easiest way to estimate this is to request a statement from your bank for the year 2012 and total up all withdrawals from that account. That鈥檚 your total annual expenditures for a given year.

Now, add 20% to that total. For example, if you calculated your annual expenses as being $20,000, add another $4,000 to that total, bringing you to $24,000.

After that, take that amount and multiply it by 20. The 20 number comes from the 5% estimate for long-term savings mentioned above. That鈥檚 how much you鈥檒l need in the bank to reasonably live off the interest, starting right now. You would simply take out your living expenses each year and let the rest roll back into the account, protecting you from inflation.

So, if your target number is $24,000, you鈥檒l be shooting for $480,000. It seems like a lot, doesn鈥檛 it?

The next thing you need to know is what percentage of your living expenses can you save each year? Can you save 10%? 20%? 50%? The larger the percentage you can commit to each year, the faster retirement will come.

Let鈥檚 say you can commit to 40% of your living expenses each year 鈥� $8,000 in the example above.

After that, you鈥檙e going to want to fire up a . Using that calculator, you鈥檒l put in an $8,000 annual investment and leave the rest of the defaults in place 鈥� a 7% rate of return and a 3% inflation rate.

Hit submit with that calculator and you鈥檒l see that it will take 25 years to reach $480,000. (A quick note 鈥� this calculator automatically does the inflation adjustment for you.)

Bump it up to 50% annual savings? You cut the target date down to 22 years.

Seems painful to reach, right? There are still a few factors working in your favor.

First, you鈥檒l presumably earn more in future years. This will raise the amount that you will be able to put away each year, bringing the date of living off your savings forward. With hard work, you can bring that number well under 20 years and start heading for the 15 year mark.

Second, you get to choose the lifestyle you live. If you inflate your lifestyle with more spending, you push that date into the future. If you keep things low-cost in perpetuity, you鈥檙e off the grind even sooner.

Finally, this doesn鈥檛 have to be a full income replacement. It can just be an avenue to try lower-paying career paths, for example.

Always remember that lifestyle inflation and laziness are your two enemies when working toward a goal like this one. Every bit you inflate your lifestyle puts off the date you can just walk away from work, and the same is true for apathy towards your work.