How Much Money Do You Actually Need to Retire?

by: James Altucher
When people discuss “the number”, i.e. the number they need to easily retire and continue their lifestyle they usually miss the entire point. The reason you are wondering what the number is, is because you are looking for the bare minimum you need in order to purchase your freedom from the slavemasters of corporate America.
If you want to live in Manhattan and have a house in the Hamptons then you aren’t really looking for the Number. You’re still willing to be enslaved in order to achieve small incremental advantages over the overwhelming benefit of personal freedom.
So I’m going to make some basic assumptions:
A) You want personal freedom above all else. Which doesn’t mean you’re willing to live in a homeless shelter. You want some basic conveniences and fun in life. But you’re willing to forgo extreme extravagances.
B) You aren’t going to send your kids to college, as I’ve written about in the provided link.
C) You don’t need to own a home. B and C are usually the biggest expenses people have outside of the luxuries (see E).
D) You’re between the ages of 35 and 65. Above 65 or lower than 35 your Number goes down considerably. Above 65 and either you are cutting back on some basic lifestyle choices or your probability of living another 30 years goes down so you can more easily dip into your base savings. Below 35 and you can make it all, lose it all, and have fun making it again.
E) You don’t want to buy art, planes, extra homes, etc.
So now let's work bottom up:
Housing (and Car) costs
If you live anywhere in the country other than directly in the middle of a major urban center then $3000 a month should be enough for rent and another $2000 for utilities, car payment (lease, don’t own).
For instance, if you want to live one hour from NY here’s a 4500 square foot house with a pool for $3000 a month.
So you never need to spend more than $5000 total on living and car arrangements and you can live anywhere in the country with minor exceptions (80th and 5th Avenue, Manhattan, for instance).
And you can probably do this fully furnished so you don’t have to splurge on furniture. My above article explains why to own rather than rent but basically, if a refrigerator breaks or a pipe bursts, not your problem (or costs).
Allocate another $3000 a month for food. I’m being super generous here but let’s say you are a family of four and you like to eat organic and all four of you are obese, knock yourselves out.
I assume $5000 a month, or $160 a day roughly. This takes care of all eating out, movies, books, culture, getting tango lessons, buying clothes for kids (at Walmart (NYSE:WMT) or Target (NYSE:TGT) – you can get label brands now).
I’m going to be very generous here and say $48,000 a year or $4000 a month for vacations. You can basically take a vacation a month (hey, you’re retired so why not). And if your kids need an extra pair of shoes, take $100 out of your vacation money that month.
Total per year:
$17,000 a month times 12: $204,000 a year. Let's round it up to $210,000 (an extra $500 a month for miscellaneous).
If you can make 10% investing per year (or about 5-6% after taxes) then you need $4mm in the bank.
However, I think most people need significantly less:
A) If you are the type to make $4mm and you are in your 30s, 40s, or 50s you probably won’t be completely inactive. Consulting, speaking, writing, angel investing, should be able to generate some income. Every extra 50k you make after taxes per year (as long as its consistent each year) means you can reduce your Number by $1mm. So if you can scrape together an average of $100k per year then your number is $2mm
B) If you are willing to risk riskier municipal bonds that generate 7% after taxes (or any other riskier investments) then your number goes down to $3mm (and then down to $1mm if you can make $100k consistently per year after that).
C) If you can use your Fun allocation for vacations (or if you don’t really take vacations) then your number goes down by a million.
Combine A and C above and your number goes down to $1-2mm, particularly if you are relatively young, healthy, and able to generate some consistent income per year. Note: the key, though, is to stay out of a 9-5 job where you have to work in an office, attend meetings, and say hi to people you don’t really like that much.
What investments should you make for a relatively easy 5-7% after taxes?
Pioneer Municipal High Income fund (NYSE:MHI) currently yields a tax free 7%. Other than a severe dip during the financial crisis when all closed-end funds were sold by hedge funds that were liquidating, the fund has maintained a price of 15, give or take.
MFS High Yield Income (NYSE:CMU) also yields 7.5%
Also worthwhile, find stocks that might not be yielding 10% now but have a history of raising their dividends so that eventually you could possibly get much higher than a 10% yield on your initial investment. Eli Lilly (NYSE:LLY) is one that comes to mind since LLY, with a 5.2% dividend currently, has a history of increasing their dividends every year since 1967. McDonald's (NYSE:MCD), which just raised their dividend to 3.25% but has raised their dividend every year for 29 years and still has all of China to look forward to getting addicted to their fries.

Or you can piggyback Warren Buffett (from BRK.A) by buying the highest yielding stocks that he’s also buying:
  • Glaxo Smith Kline (NYSE:GSK) 4.4% yield.
  • M&T Bank (NYSE:MTB) 3.7% yield
  • Home Depot (NYSE:HD) 3.1% yield
What do you do have to watch out for after making “the Number”? More on that in a future article.

Disclosure: No positions