Have you always been interested in how early retirement works then this video is for you
coming up hey everyone I'm Chris and welcome back to the channel where we talk about investing, real
estate and saving money to help you guys achieve financial freedom. In today's video we're going
to talk about early retirement and how to calculate the amount of money you need in
order to achieve that. The idea of early retirement is that you have a set amount of money invested
you're going to withdraw four percent annually and that money should last you for the rest of
your life and that's entirely possible but also I have to say early retirement isn't for everyone
it's not the easiest thing to achieve and it's totally acceptable if you still want to retire
at the normal retiring age of around 55 to 65 years old. Early retirement is just another way
of life and there's no right way or wrong way a common rule of thumb for early retirement is the
four percent rule that means you'll only draw four percent from your investment so that you don't run
out of money of course it differs from person to person depending on what your activities are
in early retirement like hobbies and travel so you have to adjust the four percent accordingly
however four percent is still a good starting point while calculating for your retirement
number the very first step is to calculate your annual spending and multiply it by 25 it should
include everything your utilities, housing costs, transportation costs, hobbies, gym membership, even
eating out and travel everything because you don't want to drastically change your lifestyle in early
retirement you want it to be the same right for me and my husband our annual living cost is around
thirty-five thousand dollars but I'm aiming for forty thousand dollars because it's just safer
and the more money invested the higher the success rate is in early retirement so that you don't run
out of money that means if you multiply that by 25 we need a million dollars invested with a four
percent rule we can safely draw forty thousand dollars per year even though we only need thirty
five thousand dollars the final amount should be invested in the stock market and it should
have a five to ten percent return every year you live off 4 percent from your investments but you should
always have an emergency fund available in case of a market crash or in case the market is down
I'll give you a very simplified retrospective example this chart shows the investment return
of vanguard's S&P 500 ETF VOO I chose this fund because it's a very safe fund with decent returns
it has an average yearly return of 13.09 percent per year if you're wondering how I got this number
I added everything and divided it by 10 and there are other numerous funds similar to this one
let's say I invested a million dollars into this fund but ideally my investments would be
in different stocks and different funds because it's safer that way but to simplify this example
I'll just use one fund. In 2011 with a 2.04 return that means i can only withdraw 20 400
and that's way below my yearly cost of living so this will be the year that I'm going to live
off my emergency fund. In 2012 with a 16.01 return that means my investment has grown 160 thousand
and 100 dollars however with a four percent rule I only need forty thousand dollars for my living expenses
so I'll only withdraw that amount and the rest will stay in the fund and will get reinvested
or I'll withdraw eight percent because I was using my emergency fund in the year 2011
and I need to put more money into it in the year 2015 it has a return of 1.32 so again it doesn't
cover my yearly cost of living but because the years prior performed so well I can actually still
afford to withdraw the 4 percent or 40,000 dollars because like I've said before this particular fund performs
an average of 13.09 percent per year so it doesn't matter that it's negative
4.47 percent in 2018 because the years prior will still allow me to withdraw the
four percent. A typical emergency fund should be at least three to six months worth of living expenses
so that in case of a job loss or unexpected events you'll protect yourself from long-term debt
however with early retirement it's quite different I'm actually aiming for three years worth of
living expenses sitting in a savings account so that I don't have to sell a single stock during
a recession that means on top of the one million dollars invested we're going to need 105 thousand
dollars sitting in a savings account this is a very simplified calculation about early retirement
there's actually so much more that goes into it like how much percent of your investments should
go into stocks and how much percent should go into funds, if you're interested in pursuing early
retirement a lot of research and planning should go into it to ensure your success rate and to
ensure that you'll never run out of money if this video piqued your interest about early retirement
do me a favor and hit the like button subscribe to the channel because this whole channel is my
journey to early retirement leave your questions down below and I'll see you guys next week
bye