Minimum amount to retire
Are there different approach to this problem? One I heard was, let's say if I have $800k, so if I invest in S&P500 ETF like VOO, it should have 7% gain per year on average. So that's $56k. But I heard it should be given a 1% buffer, so it should be 6%, meaning $48k. So suppose they are all in 401k Roth or Roth IRA, doesn't that mean the $48k is tax free, and what if I just need $4k to live on per month. Does that mean I can retire on this $800k? It may seem a bit counter-intuitive because I need to sell 6% of my asset per year, and that'd mean in 16 years, I would have sold every thing. But I suppose the assumption is that, it also appreciate 7% per year, so it should counter balance the selling -- is there something wrong in this thinking? Besides, are there other well known approaches? Such as buying QQQ instead of VOO, buying dividend ETF, REITs, or invest in bonds or tax free municipal bonds, or even buy annuities? Do they in general need a larger amount to retire? TC: 350k #retirement #FIRE #investment
Listen to brez. Your math is completely off (which is reasonable before reading up on the topic). I recommend earlyretirementnow.com and going through the entire thing if you're serious here
Search up "sequence of returns" risk. Market historically gave 10~11% CAVG (~7% CAVG after inflation) but that CAVG includes years with -38% and so on. Because of this nature, if you blindly take out 7% CAVG a year, you are f-ed. Imagine taking out 7% of your portfolio when market is down 38%. Ya, good luck. Because of this nature, the rule of thumb is 4% withdrawal rate (inflation adjusted each year) if you plan to retire for the next 33 years. About 3~3.5% for perpetual by historical returns. What you need to retire is simple. Calculate how much you spend in a month. Multiply by 12. Then do 100 divided by 3~4 (the rate you want to withdraw). Then multiply your annual expense gotten from multiplying your monthly expense by 12 to that divided result. For instance, say you spend $4k a month. Times it by 12 so $48k a year. Multiply by 29 so you need $1.4 million today to retire. Dividend ETFs are just forced tax triggers. Also, you end up missing up on investing in the best companies today like Google and Amazon. The 4% Trinity study withdrawal rate was done using US total market returns. The study fails to work in the stock markets of many other countries. There's no guarantees end of day. I would as general rule of thumb do 30 times whatever you spend a year. Say you only need $3k a month, you can retire today with around a million. Just make sure to factor in health insurance costs. That's what really kills retirement numbers. Bonds, annuities, insurances, etc. generally need a crap ton more money. It's a risk premium equation. Safer investments tend to give lower returns. If you have more money than you ever need, then it makes less sense to gamble on the stock market and instead maybe just hedge your investments to inflation. Living overall in a first world country with basic necessities is easy by yourself for most software engineers. The hard part is living in a nice neighborhood with a nice house with 2 kids and a wife. Especially in a hcol area. That's where the rat race sets in. A house alone might be 3 million which is like a 6 figure perpetual bond (makes you really wonder if buying the house is even worth it).
so you mean 4% take away of alright but 7% is not... I mean, if the market is down 38% like you say, taking out 4% isn't going to work either
It does by US market monte carlo simulation (using historical records). Just read up Trinity Study if you are curious. I think the number can even edge out to 5% withdrawal. Overall though, it's just a rule of thumb. The 4% number was shown to have worked fine through the great depression. There's no guarantees we won't have something far worse than the great depression. But in a reasonable world, I would strive 4% if I want to retire at 60 and 3.25~3.5% if I want to retire early. Just be willing to be flexible in life. And 4% works with a -38% year because you presume over time, the CAVG returns is close to 10% (historical returns). Just as compound interest screws you over downwards, it also helps you a lot in upwards market. Hence the numbers averaging out. Vast majority of time, 4% withdrawal puts you in a higher net worth than starting. It's the edge cases like the great depression which forces the number to be a bit more conservative. There's always possibilities of stagnant markets too (eg: Nikkei for a long time). But if that's the case, no one else is retiring anyways. If we have WW3 or some major climate change event, then oh well. Such is life. Just do annual expense times 30. Don't overthink. And remember, once you retire, you don't have to worry about saving. So a $50k passive income might actually feel like $80k and so forth.