How Much Do You Need to Retire?

     This question is one of the top 10 financial questions everyone asks, even though it's the wrong question to be asking. Ya should be asking “How much do I need to stop working?” or “How much passive income do I need to stop working?” Let's get to the complicated answers.

If you came for a quick number so you can get on your way, you’re not going to get it. You may as well go to the deli and get a number because that would be quicker. So many people say ”Oh, yeah, just get, like, $1,000,000 and live off that and you’ll be fine,” which that answer is a Sub-Brick IQ answer because there are so many more variables. First, we need to answer a question to answer your question.

     How much do you NEED to make a year? How much is the minimum you need to stay alive? Say your house is paid off. You pay $150 a month for car insurance, it's $200 for groceries, and we’ll say another $725 for other expenses. We end up with $12,900 in annual expenses. We’ll just say it's $13,000. Now we need to figure out how to support that number while at the very least keeping a NEUTRAL balance. The first thing I think of is the SPY ETF. You are probably sick and tired of me referencing the SPY ETF, but just hear me out. SPY has an annual dividend payout of 1.3%. That means if you take that million dollars and put it all into SPY, you get a free $13,000 every year, while your money increases by around $100,000 in appreciation. There, question answered, everyone can go stop reading now. All they need is a million dollars and one ETF. Unfortunately, there is more you must learn and keep in mind. To start, you don't want to live off $13,000. A better goal would be the average American income, which is around $52,000.

     Let’s say you equally invest $1,500,000 into SPY, QQQ, DIA, VOO, and VYMI. The average dividend payout combined for those would be 2.142%, which is $32,130. You need to understand $32,120 is free money, meaning money awarded to you by the companies for just being a shareholder, so that’s the type of free. It’s a good amount of money on its own, especially since your minimum cost of living is low. Then you have your average return from 1/1/2021 to 1/1/2022 which is 20.89% or $313,350. So to get $52,000 from $1,500,000 you take your dividends and about 1.5% from your annualized returns. There you go!  You have made $52,000 while having an increasing balance. Investing your money is significantly better than saving.  I'll explain why.

     Let me start with insurance.  You see, when you buy an ETF or any security, you have exchanged money for an asset that can vary in price. So if you buy an asset and we get hit with a recession and the market tanks, you have left yourself defenseless while also fortifying yourself financially. If you “lose” 20% of the value of your account, on paper you lost money. But in reality, you haven't because you haven't sold yet. So if you have $10,000,000 invested and the market tanks by 20%, it becomes worth $8,000,000. Since you haven't sold and then two years later the market recovers by 28%, your money then becomes $10,800,000 since you still kept those assets. Now instead, if you put that same money in a bank and we got hit with a recession, you just lost your money – gone, reduced to atoms, vanished.  If you put $10,000,000 in a savings account and the bank fails, your cash is only insured by the FDIC up to $250,000. That means you lost 97.5% of your money with nothing more than a “Welp, Shit outta luck” from the bank owner and the FDIC. Then you’ve got to fight inflation.

Inflation in America from 1971 to 2021 was 3.8%, according to the 2021 American Funds ICA guide. So that is the number you should be trying to outpace with any investment. Luckily for you, stocks over the same period give an average return of 10.9%. And what are ETFs made of? Publicly traded companies. That means the general market's performance will affect the ETF's performance.

     Those two reasons alone are why you shouldn't stash money away but instead invest it. Then simply watch that money grow over a decent period

     So the short answer to how much do you need to retire? It depends on how much you spend. The less you spend, the easier it is to calculate.  The more you spend, the more tedious it will be to calculate. The real questions are: “How much do I need to stop working?” and “Where do I need to put my money so it works for me?” My advice for both: put your money into REITs, ETFs, and other diverse funds and let that money grow. So take a day and just plan out how much money you need, where are you going to put your money, and what is the projected growth of that money so that way you know how much you need to retire.