How Much Money Do You Need to Retire Early in 2023 (and How Real Estate Changes the Math)

Why don’t more people dream of retiring young?

It could speak to how many people love their jobs, except that’s not true: 85% of people dislike their jobs. More likely, most people just don’t think they can retire young.

Fortunately, anyone earning the median U.S. income can retire young if they want. But it requires discipline — not many people want to forgo things like driving the fanciest car possible or living in the best house they can afford.

“Yeah yeah yeah, cut to the chase already! How much money does it actually take to retire young?”

Glad you asked. Let’s take a look at safe withdrawal rates, and how rental income changes the math on how much you need to retire early.

Safe Withdrawal Rates

In traditional retirement planning, you start by deciding how much income you want each year in retirement. Note that your target retirement income doesn’t have any connection to your current annual salary. You can and should live on far less than your current income, maintaining a high savings rate to reach your financial goals faster. 

Once you know how much income you want in retirement, decide on a withdrawal rate: the percentage of your nest egg that you pull out every year to live on. 

The classic safe withdrawal rate is 4% — so classic, in fact, that the “4% Rule” remains the rule of thumb for retirement planning. If you want $40,000 in annual retirement income, you would therefore need a retirement nest egg of $1 million (4% of $1 million is $40,000). 

You can expect your money to last for at least 30 years, with a 4% withdrawal rate. If you want to retire young, use a 3.5% withdrawal rate, which should preserve your nest egg indefinitely. If you only need your retirement savings to last 20 years, you can potentially pull out 5% or more each year. 

Here’s a withdrawal rate calculator for planning how much you need to retire:

How Rental Properties Change the Math for Early Retirement

Say Heidi invested $50,000 apiece into four rental properties ($200,000 total investment). They rent for $1,000 apiece, and after subtracting out property taxes, landlord insurance, vacancy rates, maintenance and CapEx, Heidi is left with $500 apiece in monthly income. That’s $2,000/month total from the three properties, or $24,000/year in income from her rental properties.

Wait a second — Heidi just made over half her annual budget, but it cost her a fraction of what she would need if she invested in stocks. She invested $200,000 in rental properties, and it covers $24,000 of her $40,000 annual budget! The math just changed dramatically.

The rest of her nest egg (in her stock portfolio) only needs to provide the $14,000 difference. According to the 4% Rule for retirement, to safely withdraw $14,000/year she needs a stock portfolio of $350,000. But since she’s retiring young, she opts for a 3.5% safe withdrawal rate, which means she’ll need $400,000 in stocks to produce $14,000/year.

That puts her at $200,000 in rental properties and $400,000 in stocks, for a total of $600,000 invested to produce $40,000/year in income. Not a trivial amount of money, but because she invested in rental properties, she dropped her required nest egg from $1,142,857 to $600,000.

That’s nearly half as much as she’d have needed in stocks alone. Hot diggity dog! (Heidi can use 1940s expressions because she’s now a proud retiree.)

But she could actually reach financial independence with even less money, if she uses real estate leverage.

What the #%& are real estate syndications, and do they really earn 15-50% returns?

Leverage Changes the Math Even More

Heidi doesn’t want to pay cash for her properties. She buys them with rental property loans, at 80% LTV financing (in other words, with a 20% down payment).

Instead of buying four rental properties for $200,000 in cash, she buys four $250,000 properties by taking out loans. She makes a $50,000 down payment on each property.

Each property generates $1,250/month in net revenue, minus $630 for the mortgage, for a net monthly cash flow of $620/property. For all four properties that comes to around $2,500/month, or around $30,000 a year.

Heidi cut her cash investment in half, and now generates three-quarters of her annual revenue from rentals!

That leaves only $10,000/year of income that she needs from her stocks. Following a 3.5% withdrawal rate, that comes to $286,000 in stocks.

Wait a second Brian! It’s hard to find deals that cash flow that well!

Yes it is. But even if your rental property cash flow isn’t as strong as Heidi’s, you can still find rental properties that generate ongoing income better than stocks do. Try these tactics to find good deals on rental properties even in hot markets, coupled with these real estate negotiation techniques.

The BRRRR Method: Recycle the Same Down Payment

To accelerate your rental portfolio even faster, use the BRRRR method of real estate investing. The acronym stands for buy, renovate, rent, refinance, repeat; think of it as flipping homes, except instead of selling after renovating, you refinance and keep the property as a rental.

The beauty of the BRRRR method is that you can pull your original rental property down payment back out when you refinance. Thus, you end up financing 100% of your real estate investing costs.

You can then proceed to recycle the same funds over and over again, adding to your portfolio and passive income with each property. It’s the fastest and lowest-cash strategy I know to retire with real estate; it doesn’t just bend the 4% Rule, it throws it out entirely, because your income in retirement suddenly has no connection whatsoever to how much cash you started with.

Makes saving for retirement a bit easier, eh?

As powerful as it is, just be careful that your properties still cash flow well after refinancing to pull your money back out. Use extremely conservative numbers when you run the numbers in a rental income calculator.

Real Estate vs. Stocks for Retirement Income

So wait, why doesn’t Heidi buy nothing but rental investments for her retirement income then?

Diversity, for one reason. Do you really want all your financial eggs in one basket, when the entire income for the rest of your life is on the line?

And if we’re being honest, rental properties are not 100% passive income — they require some work, even with the best landlord software available (cough).

Diversifying your assets also gives you multiple options for withdrawing funds. When Heidi’s stock portfolio has a bad year, she can avoid selling stocks by drawing more money from her rentals. She can postpone repairs, and offer incentives to retain tenants who are thinking about moving to reduce turnovers.

Like stocks, Heidi’s rental investments may have a bad year, perhaps caused by vacancies or high repair costs. Or they may have had a great year with no repairs or vacancies. The important thing is that she’s properly calculated her average costs.

With her diverse investment strategy, Heidi can simply draw more money from her stock portfolio. In good years, she can even invest more money in her stocks!

Heidi can also invest in bonds, to add stability to her portfolio, but keep in mind that bonds suffer from inflation losses. If the inflation rate runs hot at 4%, and her Treasury bonds pay only 3%, she actually loses 1% each year. Rental properties don’t have that problem, since rents rise alongside inflation (more on hedging against inflation here). It’s why I replace bonds with real estate in my own portfolio, which says nothing of the higher annual returns you can earn on real estate. 

For a better grip on how real estate and stocks counterbalance each other well, read this breakdown of real estate vs. stocks for retirement income.

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Staying Flexible with Retirement “Lifeboat Strategies”

When you retire young, you have a long retirement ahead, and anything could happen.

You may find that you spend more money than you expected in retirement. With so much free time, you may want to travel more, or spend more on entertainment. And then there’s healthcare in retirement, which can be expensive without employer-sponsored health insurance plans.

Young retirees should look for ways to keep both their spending and their incomes flexible. Why not work part-time doing something fun? Or, for that matter, work full-time at a job you find fulfilling and meaningful?

You could do freelance work, offer coaching and mentoring, or consult for growing companies. Or start a business! In addition to my rental income and having launched SparkRental with Deni, I do some freelance writing for fun and to invest more. My mother tutors for extra income for investing and travel.

Many of these flexible jobs allow you to live anywhere, too. You could earn money flexibly even as you save money on alternative housing and travel the world!

For that matter, you can also reduce your spending through house hacking. But if you want to reach financial independence and retire young, be prepared to get creative in reducing your spending and maximizing your income and investments.

How Much Money Do You Need to Retire: 2023 Sample Numbers

Imagine you want to retire on $5,000 per month, or a $60,000 annual income. Here’s how you might go about combining several sources of income:

• • Rental Properties: $2,500 (you could recycle the same $50,000 down payment in a series of BRRRR strategy deals to build this up)
  • Real Estate Crowdfunding: $1,000 (requires $150,000 invested, if you averaged an 8% return)
  • Stock Dividends: $500 (requires $133,333 invested for a 4.5% dividend yield)
  • Withdrawal of Growth Stocks: $500 (requires $171,429 invested at a 3.5% withdrawal rate)
  • Municipal & Corporate Bonds: $500 (requires $120,000 invested at a 5% rate of return)

That comes to a total of $624,429 invested. More, if you leave cash tied up in each rental property. But the point is that it doesn’t take millions of dollars to reach financial independence or early retirement. 

Once you reach classic “retirement age” in your 60s, you can add Social Security income as another stream. Your individual retirement account (IRA) or employer-sponsored retirement plan can help too, once you reach 59 ½. But neither helps you retire early. 

You can use an HSA as another tax-sheltered retirement account as well, with no age limits on withdrawals. But it comes with lower annual contribution limits than traditional retirement accounts, and you can only use withdrawals to cover medical expenses.

Try out our free financial independence and early retirement calculator to run the numbers combining several income sources, at different investment returns. 

Final Thoughts

Real estate helps you break the 4% rule in retirement planning. You only have to worry about safe withdrawal rates for your paper assets like stocks and bonds — not your real estate assets that generate ongoing income. 

Of course, real estate comes with its own risks. Before counting on real estate income in retirement, make sure you know how to mitigate risk as a landlord or investor. But by investing with real estate leverage, you can easily reach financial freedom young, and perhaps even retire by 40!

As you set your own retirement goals, check out this case study of a woman who retired at 30, this woman who quit her day job in her 20s, or this man who quit his job within 18 months of starting to invest in land.♦

How much money do you need to retire? What mix of assets do you have planned for your retirement portfolio?

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About the Author

G. Brian Davis is a landlord, real estate investor, and co-founder of SparkRental. His mission: to help 5,000 people reach financial independence by replacing their 9-5 jobs with rental income. If you want to be one of them, join Brian, Deni, and guest Scott Hoefler for a free masterclass on how Scott ditched his day job in under five years.

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