How to Calculate Your Early Retirement Savings Goal
When planning for early retirement, one of the most critical steps is determining how much money you need to save to support your lifestyle without running out of funds. Calculating your early retirement savings goal requires understanding your expected expenses, factoring in inflation, and choosing the right withdrawal rate to ensure your savings last.
In this guide, we’ll walk through how to calculate your early retirement savings goal, taking into account your current expenses, future needs, and investments. We’ll also explore how real estate investing with mogul can help you grow your wealth and generate monthly dividends to support your financial independence.
Additional reading: How to Retire Early
Why You Need to Calculate a Retirement Savings Goal
Retiring early means you’ll need to cover your living expenses for several decades, potentially much longer than someone retiring at the traditional age of 65. This extended timeline makes it crucial to have a clear savings goal to ensure you don’t run out of money.
By calculating your early retirement savings goal, you’ll know:
- How much you need to save before you can safely retire.
- How long your savings will last based on your expected spending and withdrawal rate.
- What adjustments you need to make to your savings rate, investments, or lifestyle to reach your goal sooner.
Having a precise savings target provides clarity and helps you make informed decisions about your financial future.
Step 1: Estimate Your Annual Retirement Expenses
The first step in calculating your savings goal is to estimate your expected annual expenses during retirement. This includes both essential and discretionary spending. Here’s a breakdown of what to consider:
Essential Expenses
- Housing: Mortgage or rent payments, property taxes, insurance, and maintenance costs.
- Utilities: Electricity, gas, water, internet, and phone bills.
- Healthcare: Health insurance premiums, out-of-pocket medical costs, and prescriptions.
- Groceries: Food and household items.
- Transportation: Car payments, gas, insurance, public transportation, and maintenance.
Discretionary Expenses
- Travel: Vacations, weekend trips, and airfare.
- Hobbies and entertainment: Dining out, hobbies, sports, and cultural activities.
- Gifts and charitable donations: Any giving you plan to continue in retirement.
To calculate your annual retirement expenses, sum up both your essential and discretionary costs. For a more accurate estimate, use your current spending as a baseline and adjust it based on any lifestyle changes you anticipate in retirement.
Step 2: Apply the 25x Rule
Once you’ve estimated your annual expenses, use the 25x Rule to calculate your total savings goal. The 25x Rule suggests that you should save 25 times your annual expenses to retire comfortably and ensure your money lasts for the long term.
For example, if you estimate that you’ll need $50,000 per year to cover your living expenses in retirement, your savings goal would be:
$50,000 x 25 = $1.25 million
This rule is based on the assumption that you’ll withdraw 4% of your savings each year in retirement, which is considered a safe withdrawal rate that balances income needs with long-term portfolio growth.
Step 3: Adjust for Inflation
One critical factor to consider when calculating your savings goal is inflation. Over time, the cost of goods and services increases, meaning your expenses in retirement will likely be higher than they are today. To account for inflation, you’ll need to increase your savings goal accordingly.
For instance, if you plan to retire in 20 years and inflation averages 2-3% annually, you’ll need more than $1.25 million to maintain the same purchasing power. Use an inflation-adjusted savings calculator to determine how much extra you’ll need to save to offset rising costs.
Step 4: Factor in Investment Returns
The next step is to account for the growth of your investments over time. While you're still working and contributing to your retirement accounts, your investments will generate returns, helping your savings grow.
The average annual return for a balanced investment portfolio (stocks, bonds, and real estate) typically ranges from 6-8%. If you consistently invest and earn returns on your savings, you may be able to reach your goal faster than expected. Tools like compound interest calculators can help estimate how much your current savings will grow by the time you retire.
Step 5: Choose a Safe Withdrawal Rate
The 4% rule is a common guideline for withdrawing money in retirement without depleting your savings too quickly. According to this rule, you can withdraw 4% of your portfolio annually, adjusted for inflation, and still have enough money to last throughout a 30-year retirement.
However, if you’re planning on retiring early, you may need to adjust your withdrawal rate to 3-3.5% to give your savings more room to grow and account for the longer retirement period. Reducing your withdrawal rate ensures your money lasts, even if market conditions fluctuate or your expenses increase.
Step 6: Plan for Healthcare Costs
Healthcare is often one of the most significant expenses in early retirement, particularly if you retire before qualifying for Medicare at age 65. Consider these options for managing healthcare costs:
- Health Savings Accounts (HSAs): Contribute to an HSA while you’re still working to save for future medical expenses tax-free.
- Health Insurance: If you retire early, you’ll need to budget for private health insurance or coverage through the Affordable Care Act (ACA).
- Out-of-pocket costs: Include the costs of co-pays, prescriptions, and any ongoing medical treatments in your expense estimates.
Accounting for healthcare costs ensures you won’t be caught off guard by unexpected medical expenses in retirement.
Step 7: Build in a Safety Margin
It’s important to build a safety margin into your savings goal to account for any unexpected expenses, market downturns, or changes in your lifestyle. A good rule of thumb is to save an extra 10-20% beyond your estimated retirement goal to provide a cushion for unforeseen circumstances.
For example, if your original goal is $1.25 million, aim to save $1.375 million to $1.5 million to ensure you have enough to cover any surprises.
How Real Estate Can Help You Reach Your Savings Goal
Real estate is one of the most powerful investment tools for early retirees. It provides monthly income through rental properties, long-term appreciation, and valuable tax advantages, making it an excellent way to accelerate your savings.
With mogul, you can invest in professionally managed real estate projects with as little as $250, allowing you to generate monthly dividends while benefiting from property appreciation. Real estate can supplement your retirement savings by providing a reliable source of income that grows over time.
Here’s why mogul is a great option for early retirees:
- Low minimum investment: Start investing in real estate for as little as $250.
- Monthly dividends: Enjoy consistent rental income to cover your living expenses in retirement.
- Property appreciation: Watch your investments grow in value, adding to your overall wealth.
- Tax benefits: Real estate offers tax deductions like depreciation, which can reduce your taxable income and improve your cash flow.
By adding real estate investments to your portfolio, you can reach your savings goal faster and create a sustainable income stream for early retirement.
The Bottom Line
Calculating your early retirement savings goal requires careful planning and an understanding of your future expenses, inflation, and investment returns. By following these steps, you can set a clear target for how much you need to save and invest to achieve financial independence.
Investing in real estate through mogul can help accelerate your journey by providing income and long-term growth. Start building your real estate portfolio with as little as $250 and take the next step toward financial freedom.
Learn more: What is BRRRR in Real Estate
Disclaimer: The information provided in this guide is for educational purposes only and does not constitute financial, tax, or legal advice. Always consult with a licensed professional before making any financial or investment decisions.