Personal Finance

I have a small family and just a little less than $1 million saved - how do I determine how much I'll need to finally retire?

Kristin Hitchcock

Published: November 12, 2024 11:41 am

24/7 Wall St. Key Takeaways:

• Trying to reach your financial goals while also having a higher-than-average spending rate is challenging. Often, getting ahead means cutting spending. 
• Retiring early requires a disciplined approach, but it is achievable. 
• Also: Take this quiz to see if you’re on track to retire ^(Sponsored)

Recently, I read a post from a Reddit user who was wondering about their goal to retire early. The poster hopes to retire early and achieve financial freedom sooner rather than later, with the specific aim of retiring by the time they’re 50. 

(I’ve covered early retirement previously. For more strategy advice, read my previous advice to a 30-year-old couple looking to retire at 50.)

However, they also want to enjoy life and spend quite a bit annually on travel and other optional expenses. Currently, they’re having a hard time seeinghow they’ll reach their goals. 

Let’s take a closer look at their situation and what others can learn about balancing a rich lifestyle and early retirement goals. 

Doing the Math

Anytime you have a financial goal, it’s important to do the math. 

This user calculated a rough FIRE number of $4M based on an estimated $160K in annual expenses. They based this on the “25x rule,” which we’ve talked about before and involved multiplying your annual income by 25. 

However, it’s important to consider future potential costs, too, which this calculation doesn’t always take into account. For instance, healthcare costs often rise with early retirement, as the retiree will no longer be on their employer-sponsored health insurance. 

This Redditor’s spending is high by any means. They spend around 9K a month on things like school, plus 21K on travel and 28K on food annually. These higher-than-average expenses can really get in the way of their retirement goals, and I highly recommend taking a look at these expenses and making potential cuts. 

Right now, their goals seem very far off. However, if they could cut back on their spending, it may be much more doable. 

Leveraging Their Inheritance

The poster does mention an inheritance, which will be around $1-2M. However, I don’t recommend relying on an inheritance to meet financial goals, as inheritances are never set in stone. All sorts of wacky things can happen, so I don’t recommend relying on that cash. 

Relying on windfalls to reach retirement goals is not a strategy. While they can be helpful when they happen, windfalls are never guaranteed. 

DIY Investing vs. Financial Advisor Fees

The poster mentioned moving away from a financial advisor due to the high fees. This is one area where they feel they could cut costs. Financial advisors can provide valuable insight, but their fees can become substantial over time, especially for those planning on sticking with them for a decade or more. 

DIY investing using diversified index funds can be effective. Combining VTI (total stock market), small-cap funds, and perhaps bonds for stability can mimic the effect of a managed portfolio while lowering fees. 

However, this requires a certain amount of personal know-how and a willingness to stay on top of your investment. 

Focusing on Growth-Oriented Investments

If this poster wants to reach their financial goals, they’ll need to achieve pretty high growth. Currently, the Redditor’s assets are spread across 401(k)s, IRAs, a VUL life insurance plan, and stocks, totaling around $840K in liquid assets. I recommend taking advantage of these tax-advantaged accounts for compounding gains. 

That said, early retirement does require accessible funds, too. It’s worth allocating more to a brokerage account to make sure you have a “bridge fund” to help you through early retirement before these tax-advantaged accounts will be accessible.