What's the Minimum Retirement Savings Needed for Financial Freedom? (2024)

Have you ever thought to yourself: What’s the least amount or minimum retirement savings I could get away with?

Don’t be bashful about asking it. It’s a perfectly valid question to consider; especially when you think how little retirement savings most people actually have.

(In case you’re wondering, its $107,000 for Americans between the ages of 55 and 64 according to data from the Government Accountability Office (GAO).)

While the major media outlets would have you believe that you need somewhere between $2 and $3 million dollars, you might be pleasantly surprised to learn that you could possibly become financially independent and consider leaving full-time employment for a whole lot less.

In fact, if there’s one thing I’ve learned from reading the success stories of so many real-life early retirees (some of which you’ll meet in a minute), it’s NOT that you need millions of dollars, insider investment knowledge, or even a big-time high-paying job.

The real trick achievingfinancial freedom is to simply work on reducing your everyday living expenses.

In this post, I’m going to show you why minimizing your lifestyle costs could be the key to retiring on much, much less retirement savings than you think. You’ll also get some practical advice for how to reduce a few select expense categories, examining a few areas where you could be potentially saving more, and then look at how much that could possibly shave off of your nest egg target.

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How to Calculate the Minimum Retirement Savings You Need

In its simplest form, figuring out how much money you’ll need in order to retire can be reduced down to the following equation:

Your living expenses.

Every solid retirement plan starts with asking the individual: When I retire and no longer have employment income, how much money will I actually need to live on?

Close your eyes for a second and imagine what that life will be like. At the core, there will be your basic expenses for things like:

Housing
Driving
Eating
Medical coverage
Utilities
Taxes
Etc.

But on top of that there will also be “other” flexible expenses for things like:

Hobbies
Entertainment
Travel
Other ways you like to have fun. (… After all, what’s the purpose of retirement if you’re not going to enjoy yourself, right?)

From just one brief look at this equation, we can quickly see: The size of the nest egg you need to save is in direct relation to your living expenses. Therefore, if your goal is to minimize the size of your nest egg, then a good strategy would be to start by simply lowering your living expenses.

For example: Let’s say you believe your living expenses will be $60,000 per year. Using our equation above, you’ll need to save a nest egg of $60,000 x 25 = $1.5 million. But if you can change your habits and live comfortably on $50,000 per year, then you’d only need to save up a nest egg of $1.25 million.

Not sure if that’s really true? In just a minute, I will show you a few examples of some people who have leveraged this living expense – nest egg mathematical relationship to make their financial independence a reality.

25X (a.k.a. the safe withdrawal rate you choose).

In case you’ve never heard this one before, an easy way to calculate your retirement savings nest egg target is to take your living expenses and simply multiply it by 25. You can read all about why that is at this article here.

The 25X comes from something called the 4 Percent Rule safe withdrawal rate (SWR). This is a widely accepted rule of thumb in financial planning that says you should be able to safely withdraw 4 percent from your nest egg safely every year to cover your living expenses for at least 30 years.

(By the way, if you’re wondering how the number 25 and 4 percent are related, multiplying a number by 25 and dividing it by 4 percent (0.04) is mathematically the same thing.)

On a technical note, there are dozens of factors that could either increase or decrease the safe withdrawal rate you choose. For example,

If you plan to retire very young, you may want to drop your safe withdrawal rate down from 4.0% to 3.5% (or 28.6X). Here is some evidence why.
Or adversely, if you retire when the investment market is under-valued, you might be able to get away with a higher safe withdrawal rate of 4.5% (or 22.2X).

If you really want to know more about the 4 Percent Rule and how to interpret it, feel free to check out thismega-article I wrote herefor all the details. For the sake of simplicity, throughout the rest of this article we’ll use the 25X or 4 percent safe withdrawal rate in our examples.

Does This Equation Actually Work – For Real?

Yes! There are lots of real-life examples of early retirees who have reduced their living expenses and been able to successfully retire early using this simple strategy. Here are a few notable ones:

Jacob Fisker from Early Retirement Extreme (both the blog and the book) was able to retire in his early 30’s after get his living expenses down to just approximately $7,000 per year. This allowed him to save nearly 75% of his income and accomplish his goal in just 5 years. If we use the 4 Percent Rule to estimate how much his nest egg was at the time, we can conclude that with such low living expenses he only needed approximately $200,000.
Mr Money Mustache (aka Pete Adeney) famously preaches frugality and claims to only live off of $24,000 per year. This allowed him to retire by age 30 after only saving up $600,000 (25 x $24,000).
One of my favorite early retirement stories comes from the book “How to Retire Early” by Robert and Robin Charlton. It tells the tale of exactly how (in great detail) the two of them were able to go from almost no savings at all to a nest egg of $1 million in just 15 years by the age of 43! Again, using the 4 Percent Rule, this provides them with roughly $40,000 per year to travel the world and live freely.
After a bad day at work, Carl (age 38) made a vow with his wife Mindy that the two of them would retire in 1500 Days (or 5 years). Hence, they became Mr and Mrs 1500 Days from the blog 1500 Days. The goal was to take their current savings and quickly ramp it up to$1 million target. This was based on an estimation that they would need to cover $30,000 per year in living expenses plus a little extra for their children’s college. Through frugality, a lot of saving, and down-sizing their house, they were actually able to accomplish their goal just 3 years later.
Justin McCurry from Root of Good retired at age 33 after he and his wife reached a savings of just over $1 million. They continue to only spend between $32,000 to $40,000 per year (a little less than 4 percent).

What do we learn from these success stories?

In each of the examples we gave above, do you notice a trend?

[Minimal expenses]

= [Saving a lot more]

= [Accelerated early retirement timeline!]

In other words, focusing on reducing your living expenses is almost like a double-ended benefit to helping you to reach financial freedom.

On the far end of the plan, you’re reducing your lifestyle costs which leads to lower needed costs in the future and a lower nest egg total.

But in the present, it also gives the ability to save substantially more of your income each month. You’ll be able to go beyond your peers who save only 10% and work your way up to a more impressive 25% or even 50% savings rate. And as you do, your nest egg will build up more rapidly helping you to reach financial freedom even sooner than might have originally planned.

One good thing really does lead to another!

How to Reduce Your Living Expenses

Okay! So if reducing your living expenses really is the key, the next question we should be asking ourselves is:

How low can we go? What kinds of things could we be doing right now to get our expenses as low as possible so that we would not need so much money for retirement?

Keep in mind that even amounts as low as $500-$1000 per month could translate into hundreds of thousands of dollars less that you need. Here’s a chart you can use to follow:

Therefore, to figure out where we can squeeze, let’s run through some of the typical expense categories and see where we can optimize and improve.

Mortgage:

Killing off your mortgage is one of the most sought-after goals you can achieve in the personal finance community.

Why? Because as you can see from the chart above, eliminating an expense of this size works out to hundreds of thousands of dollars you don’t need to save in the future! Consider if your mortgage is $1,000 per month. By paying off your house and not having this expense any longer, that works out to $300,000 less you need in your nest egg. Not to mention the fact that you can now declare freedom from the mortgage lender and the house is finally all yours!

So what’s the best way to pay down your mortgage?

Send in an extra $100 or $200 per month on top of your principal. Just that little bit extra can knock 5 to 10 years off the typical U.S. mortgage. Use this calculator to find out exactly how many years it could knock off of yours.
Refinance your house from a 30 year to 15 year fixed mortgage. You’ll save a TON in interest and greatly accelerate your payment timeline. I refinanced after one year and saved almost $100 per month.
Fight your property taxes. If they start to creep beyond a reasonable level, challenge them! I did and WON!
Consider moving to a more affordable house. Tired of cleaning your 2,500 square foot interior every week? Had enough of mowing your 1 acre lawn? Though it might seem kinda exciting at first to get a big house or car, after a while, it just becomes more work to keep up with – plain and simple! So why not consider down-sizing to something more comfortable with less maintenance? Not only will this likely cut down your mortgage costs, but it will also reduce your household expenses (as well as your time).
Move to some place with lower property costs. I live two county’s away from an area where a house the size of mine could easily cost double what I’m paying right now. Hence why I don’t live there!

Of course keep in mind that your housing costs never truly go down to zero. Even if you do accomplish that wonderful goal of paying off your mortgage, you still have to pay your property taxes and home owners insurance every year.

Note: Not sure if you should pay off your mortgage early or invest the money instead? Check out this article I wrote here.

Vehicles:

Like them or not, vehicles are one of the fastest depreciating things we own. According to The Nest, over the first three years of car ownership, a new car will typically depreciate about 45 percent. Ouch!

The only real way to win financially when it comes to cars is to:

Buy them with cash (or at least finance a portion of them for as little as possible)
If financed, pay them off quickly
Don’t lease
Keep up on the maintenance so that they don’t develop bigger, more costly problems
Shop around every two years or so for the best and most affordable auto insurance.

Travel:

Medical Insurance:

This is the tricky one. It seems like every time you turn on the news there is always some new debate about how and when medical care coverage will change.

Regardless, there will most likely be some cost associated with this topic. But remember: If you’re 65 or older, you can file for Medicare. If you’re younger than that, then check out this page for ideas on where to find good coverage.

Power / Heating:

Keeping an eye on the thermostat and not running the heat or air conditioner all the time are your best bets here. If you don’t already have one, install a programmable thermostat and set it so that you don’t use heating or cooling while you’re away at work or school. You can also lower the temperature a few degrees at night while you’re sleeping.

In addition, don’t use electric space heaters or gas fireplaces excessively since they will also drive up your power consumption costs.

Side note: Moving to a smaller house is one sure way to reduce your energy costs!

Phones:

An inexpensive family cell phone plan can be purchased these days for less than $100 per month. It can be even lower than that if you don’t upgrade your phone every time a new one comes out.

If you really want to get frugal, FaceTime Video / Audio and other WiFi calling options are free over your Internet connection.

Oh, and one more little money saving nugget of advice –feel free to skip the insurance plan.

TV / Internet:

Traditional cable is a thing of the past …

Ditch it and step into the future with the world of streaming TV instead.

What’s that? It’s where you use your internet connection to watch local and regular TV channels as well as movies and other premium shows (throughNetflix, Amazon Prime, YouTube, or any number of cool apps).

We made the switch and have been saving a TON of money on cable ever since! Plus, we have more options to choose from!

What do you need to get started? For starters, a TV and a reliable Internet connection. If your TV is already Wi-Fi ready, then lots of these apps will already be available to you. But there are also any number of inexpensive streaming devices that can help you to do the job. Click here to read more about it.

Food:

When it comes to groceries, the key here is planning. If you throw things away every week, then something is wrong. Sit down and make a list of all the meals you’re going to make. Then go out and buy only those items that you need.

As for eating out, keep it to once per week. Set a limit for yourself; such as no more than $10-15 per person. Order a sandwich instead of an entree, and water instead of a soft-drink. Also consider foods that you can share, such as pizza or a family size salad!

Entertainment:

Being entertained doesn’t always have to mean spending money. Some of my favorite times are when we go for walks, play a sport with the kids, exercise, or do a local activity within our community.

Are There Other Ways to Retire on Even Less Savings?

Yes!

So far we’ve only assumed that all of your retirement income is coming straight from your nest egg. But that’s not always necessarily the case.

In reality, your retirement income could come from any variety of sources. As long as its reliable, then it means you could shave your nest egg down even further.

Example:

Let’s say you believe your retirement income willbe $40,000 per year. But you’ve got other sources of income that will provide a steady, reliable $10,000 per year. Now your nest egg target only needs to be $30,000 x 25 = $750,000.

Great! So now we have another variable we can add to our equation that will reduce our retirement savings down even further.

But what might these other source of income be?

Part-Time Employment:

Just because you’re “retired” doesn’t mean you have to sit on your butt and never work again.

Perhaps you worked in an office most of your career, but you really loved playing music. Maybe now in retirement you could teach music on the side!

That’s the beauty of retirement. You CAN work if you want to – especially doing something in a field that you really enjoy. And if that part-time work produces even just a little bit of extra income, that can have a really powerful reduction on your retirement savings needs.

Social Security:

Are you expecting to receive Social Security right around the time you plan to retire? If so, let’s say that you plan to need $4,000 per month for living expenses and $1,000 per month will come from Social Security. In that case, your retirement savings only needs to produce $4,000 – $1,000 = $3,000 each month (or $36,000 per year). That drops our retirement savings target down from $120,000 to $900,000; a reduction of $300,000!

Other ways to make money on the side:

Additional retirement income could come from any number of legitimate sources. Another common example are folks who own rental properties. Again: $500 in net rental income could equal out to $150,000 LESS that you need to save for retirement!

We’ve got a ton of other cool ways you could be earning money on the side on this page here. Check them out for yourself and find one that suits you the best!

Build Your Own Retirement Savings Plan

Want to really see how your expenses relate to your retirement savings? More importantly, want to get an idea of how long your retirement savings will last? You can do both (as well as a whole lot more) using a free retirement planning tool like the one from Personal Capital.

What's the Minimum Retirement Savings Needed for Financial Freedom? (7)

The thing I like about this calculator is that it goes beyond just crunching some nest egg savings target. Instead, it gives you a forecast based on thousands of Monte Carlo simulations to let you know how solid your plan is. Furthermore, because you link it to your actual retirement accounts, the values that it uses are your REAL savings which are always being updated in real-time. It’s one heck of a tool for being free to use – I’d recommend to definitely give it a try!

Take-Aways

What's the Minimum Retirement Savings Needed for Financial Freedom? (8)

If you’d like to explore any of these topics on retirement planning more thoroughly, then please check out my book “How Much Money Do I Really Need to Retire & Achieve Financial Independence?”, available in both digital and paperback.

In this book, we cover the topic of retirement planning from a variety of angles. We’ll look at everything from reducing your living expenses to how safe withdrawal rates can be leveraged to help you need less savings.

Regardless, the take-away should be clear. If you truly want to be financially independent, don’t chase after the illusions of earning as much as a VP or becoming some kind of investment wizard. These are talents acquired by only a very select minority of the population.

For the majority, there is a much, much more attainable goal sitting right in front of you. If you learn how to do more with less, then financial freedom is an option at any income level. The math works out the same whether you are a high income or low income earner.

The challenge, however, is all in how you get there. Just like taking care of our bodies and becoming more healthy, exercising some discipline when it comes to our spending is the first step to a successful path towards financial independence. Master this and you will have overcome the hardest part of the journey!

Readers – What’s the least amount of money you believe you could comfortably live off of? How much does this reduce your retirement savings goal by?

Photo credits: Unsplash, Pexels