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- To retire early and live comfortably on investment income from a taxable investment account, you need millions.
- We consulted Brian Fry, a certified financial planner and the founder of Safe Landing Financial, to run a simulation that estimates the lump sum an investor would need the day they retire to live on a target annual income of $100,000 a year or $65,000 a year, after investment income taxes.
- Although many early retirees continue to earn money after leaving their 9-to-5, these figures represent the minimum investment balance you would need to leave work and never turn back.
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Early retirement is having a major moment. Whether you’re 25 or 55, there’s a heightened allure to turning in your time card and exiting the corporate world for good.
But how much money does it really take to leave your 9-to-5 and never look back? It depends on several factors, including your lifestyle and how your money is invested, but generally you’ll need millions.
To figure out how much money someone would need to have invested when they retire in order to live comfortably on investment income until age 90, we consulted Brian Fry, a certified financial planner and the founder of Safe Landing Financial.
It’s worth noting that many early retirees continue to earn income after leaving their 9-to-5, whether through real-estate investing, blogging, or some other monetizable hobby, not to mention Social Security income for older retirees. The distinction, for many, is that in retiring from corporate life, they’re free to create their own schedule and pursue the projects they’re most passionate about without worrying about earning a paycheck.
Fry used a Monte Carlo simulation to estimate the starting balance someone would need in a taxable investment account the day they leave work to live on either $100,000 a year or $65,000 a year in dividends (fixed income from bond investments) and capital gains (income from equity investments), after paying taxes.
To run the simulation for a hypothetical retiree, Fry had to make assumptions about the retiree’s investments and tax treatments. A full list of these assumptions is available at the end of this post, but in short, he used JPMorgan long-term return estimates used for investments, a conservative 3% inflation estimate, assumed no state or local taxes, and did not factor in Social Security. The investments are assumed to be held in a taxable investment account, not a retirement account like an IRA or 401(k), since you can’t withdraw money from those accounts without penalty before age 59 and a half.
Fry notes that the Monte Carlo simulation has two clear limitations: The outputs are only as good as the inputs and it does not factor in the behavioral aspects of finance, or how investors react to swings in the markets.
"Investors tend to be their own worst enemy when experiencing investment losses," Fry said. "If you don’t have the time, interest, discipline, and expertise, it’s better to work with a fee-only certified financial planner that can tailor your investments to track to your financial plan."
It’s also important to update your financial plan yearly, or whenever you experience a significant life change, Fry said. For example, if the market had lower than expected returns in any given year, the investor would be advised to scale back spending, he said.
Below, check out how much you need to invest the day you retire at 25, 35, 45, 55, or 65, if your target annual income is $100,000 or $65,000.
Age 25: You need a starting balance of $6,000,000 to live off $100,000 a year
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If you leave your desk job at age 25, you’ll need about $6 million invested in a taxable account in order to live off $100,000 a year, after paying taxes for capital gains and non-qualified dividends.
The ideal asset allocation is 80% stocks (known as equity holdings) and 20% bonds (known as fixed income), Fry said.
Age 25: You need a starting balance of $3,800,000 to live off $65,000 a year
To live on $65,000 a year, an investor would need to start with $3.8 million in a taxable investment account the day they retire.
Again, the investments are held in 80% stocks and 20% bonds, which is considered an "aggressive" asset allocation, due to the age of the investor.
Age 35: You need a starting balance of $5,225,000 to live off $100,000 year
An investor who leaves work at age 35 would need over $5 million in their taxable investment account to be able to live on dividends and capital gains amounting to about $100,000 a year, after taxes.
The ideal asset allocation is 80% stocks, and 20% bonds.
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