I thought I need $7 million to retire but once I pay off my house, my spending will go down – do I actually need less money?
Financial independence and early retirement — FIRE — mean quitting the daily grind years before most. The goal is to save enough to live off investments, not a paycheck. You want to kick back in your 40’s instead of your 60’s. But it’s not just about piling up cash. It is essential to know your […] The post I thought I need $7 million to retire but once I pay off my house, my spending will go down – do I actually need less money? appeared first on 24/7 Wall St..
Financial independence and early retirement — FIRE — mean quitting the daily grind years before most. The goal is to save enough to live off investments, not a paycheck. You want to kick back in your 40’s instead of your 60’s.
But it’s not just about piling up cash. It is essential to know your expenses cold. Screw that up, and your savings won’t last.
You’ve got to pin down every cost — housing, groceries, insurance, whatever. A $1 million pile might feel safe, but if you spend $50,000 yearly, it will be gone in 20 years, especially with inflation.
The 4% rule for a safe withdrawal rate (SWR) — spending 4% of your saved-up stash annually — only works if you’re exact. If you spend $40,000 a year, you need $1 million saved. $60,000? That requires $1.5 million. Guess low, and you’re back working retail at 50. Crunching the details beats hoping you’ve saved enough.
In planning for FIRE — financially independent, retire early — it is essentially that you calculate your spending needs so that you don’t run out of money.
Yet don’t fall into the trap of false precision. You can’t calculate down to the penny what you will need, especially when relying upon stock market returns. You need to factor in a buffer so that you don’t outlive your savings.
Over 4 Million Americans set to retire this year. If you’re one, don’t leave your future to chance.
Speak with an advisor and learn if you’re ahead, or behind on your goals. Click here to get started.
24/7 Wall St. Insights:
How much do you really need?
This was brought to mind by a Redditor’s post on the r/ChubbyFIRE subreddit. While he’s not ready for early retirement just yet, he’s crunching the numbers and thinks he might not need to save quite as much as he originally planned. By coming up with a novel approach to calculating his mortgage payment needs, he can actually shave $1.3 million off his final figure.
The Redditor, who is 38, has $1.4 million remaining on his mortgage for the next 26 years. Using a recent high-spending year of $250,000 as his base for calculating his retirement years, he figures he needs $7.1 million tucked away. But a good chunk of that is taken up by the principal and interest payments on his 2.75% interest rate mortgage, or $6,400 a month.
He figured out he needed to set aside $870,000 that earned 8% annually to meet the mortgage payment over time. Using a more conservative 3.5% SWR, he would need just $5.8 million to retire.
Plan for the worst, hope for the best
Now I’m not a financial planner, so these are only my opinions, but it’s good the Redditor is trying to determine the exact amount he needs in retirement to meet his expenses, but the exercise also reminds us to not get caught in false precision. We still need to allow a buffer for bad times.
For example, he calculated his earnings returns as a constant 0.64% a month since he has a fixed-rate mortgage and he didn’t need to worry about inflation. However, what he didn’t factor in was that investment earnings rarely (read: never) grow by such precise amounts, especially over an extended period of time, and certainly not for 26 years.
The Redditor needs to factor in that there will be months, possibly years even, when the market underperforms and he is withdrawing more from his reserves. While bull markets always follow bear markets, he might be generating higher returns on a smaller balance so it will impact his final number.
Moreover, if the bear market happens early on, it could result in him needing to take out a higher SWR percentage and running out of money well before the end. If it occurred later, he might end up with extra money in his account. That’s obviously a better outcome than the other, but it underscores the need to take a more flexible approach to calculating your needs.
Key takeaways
The Redditor’s number-crunching is a solid start, but pinning retirement to a razor-sharp figure like 0.64% monthly returns is a trap. Markets don’t play that clean—some years tank, others soar, and 26 years won’t average out neatly.
A bear market early could gut his stash, forcing bigger withdrawals and risking a bust before the finish line. A late dip might leave cash on the table — nice, but not guaranteed. That’s why flexibility beats precision. Build in extra padding — say, 20% to 30% above the base need — to weather the rough patches. Multiple outcomes loom and a fatter savings buffer, not a fixed target, keeps the FIRE alive.
The post I thought I need $7 million to retire but once I pay off my house, my spending will go down – do I actually need less money? appeared first on 24/7 Wall St..
