5 expert tips to calculate the 'retirement number' that will let you leave the workforce for good

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  • There are many popular rules for determining your “retirement number” like the 25x rule and the 4% rule.
  • Whichever formula you use, it’s crucial to make sure you factor inflation into your calculations.
  • Advisors also suggest overestimating your needs in retirement and investing accordingly.
  • Read more from Personal Finance Insider.

Retiring early sounds great in theory, but it requires more than just a sincere desire to quit your job. You need to have a financial plan that is flexible enough to get you through hard times and a contingency plan for unexpected disasters.

After all, you won’t automatically qualify for a do-over if you retire in your 40s and run out of money in your 50s, 60s or 70s. And, what about planning for the next big recession — or healthcare costs that never seem to go down? 

With that in mind, many people wonder which calculations are best at determining whether or not you have enough cash to retire early. Do you need a specific dollar amount, a percentage of your annual spending, or something else? I reached out to financial experts with this question.

1. Using the 25x rule

Andrew Latham, managing editor at SuperMoney, said his favorite method for calculating retirement money is the 25x rule. The calculation is quite simple — all you have to do is multiply the annual income you think you will need in retirement by 25. 

“So, if you estimate you will need $80,000 per year when you retire, aim to save $2 million,” he said. 

He added that he also supports the 33x rule for savers who want to be on the conservative side, since it assumes a 3% withdrawal rate. With the 33x rule and a target income of $80,000 per year, an early retiree would want to save $2.64 million before they leave their job.

2. Using the 4% rule

According to financial planner Elena Ladygina, the 4% rule is another widely accepted formula for calculating a 30+ year retirement fund.

Using the 4% rule, an retiree with $1.8 million saved for retirement would plan on withdrawing $72,000 per year to live on. 

However, she added that this approach is not bullet-proof and may require adjusting — especially for early retirees who plan to spend 40-plus years or more not working.

“Given the current environment, savers may want to lower their withdrawal rate based on their expected returns and individual circumstances,” said Ladygina. “For example, an early retiree could strive for a future withdrawal rate of 3% or 3.5%.”

3. Plan for 80% of your current income in retirement

It can be hard to imagine exactly how much you’ll need every year after you retire. Financial advisor Hutch Ashoo of Pillar Wealth Management said a good rule of thumb is to expect you’ll need 80% of your current income every year if you want to maintain your standard of living. 

This formula is based on the premise that you’ll be able to eliminate some of your expenses after you retire. 

“You’ll no longer need to save for retirement, and you’ll likely spend less on transportation and other work-related expenses,” says Ashoo.

4. Don’t forget to account for inflation

Financial advisor Melinda Satterlee of Marathon Wealth Management says she considers two main factors when helping clients plan for early retirement — their planned monthly spending, and how much stable income they have in retirement like Social Security and pensions. 

However, she added that it’s crucial to understand future value, inflation, and rates of return as well when determining if you have enough to retire. 

For example, your future spending will definitely be impacted by inflation, so you have to use a formula that accounts for that amount instead of today’s dollars. You also have to be realistic about your annual returns, or how much your money will grow until you’re ready to retire.

Satterlee says that, for most people, assuming a 7% annual return before and during retirement and a 3% inflation rate each year can help you get close to your desired retirement number.

5. Overestimate your needs

Financial planner Jeff Rose of Good Financial Cents said that based on his experience working with clients who want to retire early, far too many people underestimate how much they actually need. 

“With more time in retirement, there are too many factors that could impact their day to day needs,” said Rose. These factors include inflation, medical issues, market fluctuations, and more.

Because of this, he suggests adding 25% to whatever “retirement number” you’re shooting for. So, if a client is striving to save up $2 million based on the 4% rule, he thinks they should strive to save $2.5 million instead. Rose added that someone retiring before the age of 45 may want to shoot even higher. For example, striving to save 30% to 50% more than you think you need.