Minimum net worth to retire in 30s

How much in the bank would make you feel okay about retiring?

My rule of thumb formula is you need:

2*max(0, home value - $1M)+$2M

(Taking home value as an indication of life style fwiw, I know not ideal but simplifying)

Anybody has feedback about my beautiful math formula? Maybe I'll publish it in a paper one day when I retire from stock picking....

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Comments (35)

  • Research Analyst in HF - EquityHedge
Jul 25, 2021 - 6:01am

hominem

If you have this convo with enough people, the  magic number always comes out to be around $10mm....and then when people hit it, then the goal post continues to move upwards in an endless cycle until you die. 

This is the right answer.

I have wondered why this is. Are people just endlessly greedy? Is it keeping up with the Jones's? Or is being moderately wealthy and retired not fulfilling? 

  • VP in S&T - FI
Jul 25, 2021 - 12:56pm

I think its a couple of factors and I don't really think its actual greed or any interest in how you can spend the money.    

1. If you get to that number in your early 30s you are killing it and its hard to walk away from the job that got you there when you are in your "prime".  If I have done this well so far you sort of start to think that as long as you exist in the seat and do the job that you will continue to earn a similar income.    

2. If you are this successful you obviously like what you do and get some sort of enjoyment out of it beyond money.  So I think that walking away and not doing too much would not be all the fulfilling.  The scoreboard is more addictive than the money.      

Jul 26, 2021 - 5:41pm

It's because it really isn't the money most successful people are after (satisfaction after basic necessities are paid off diminishes exponentially. Think flying economy vs flying first class vs chartering a private jet vs owning a private jet... benefits greatly diminish relative to cost).

What they're after is 1 of 2 things in my mind: either filling in a void (compensating to put in bluntly.... not in a negative way) or the act of working so hard left them with no hobbies and the act of finding one has just never been in their DNA.

Jul 25, 2021 - 1:39am

It was 5 million when I got out of college, and around 10 mill now as Hominem mentioned. Real estate, food, gas, etc. have all gone up 2x, maybe even more in the last 6-8 years in big cities. 

The only people i've seen retire in their 30s comfortably did something entrepreneurial or invested in high risk assets in their 20s (crypto, VC startups, wise stock picking etc.). A high salary and investing in passive index funds isn't going to get you there in your 30s.

By the time we get to our mid/late 30s, I'm sure it will be 20 million. 

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Sep 10, 2021 - 10:36pm

Wow that hit home, can I ask what do you invest in if not index funds? I am at a point where I have a high earning potential but I'm terrible at stock-picking so everything is going in index funds and I want to know if there may be a better way

Jul 25, 2021 - 6:04am

Depends on where you plan to retire and what kind of lifestyle you want. For example, an income of EUR 75k per annum would put you in the top 10% of earners in Spain. If you can generate a 5% return on assets and you have annual inflation of 2%, you would need EUR 2.5 million to generate your target income (inflation adjusted) without needing to draw down on your capital. The issue for the FIRE crowd is what do you do if, in year 2 or 3 of your retirement, the market crashes by 30% and your capital falls from EUR 2.5 million to EUR 1.75 million. Now you need to take more risk to achieve your income target. 

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Jul 26, 2021 - 5:27pm

"The issue for the FIRE crowd is what do you do if, in year 2 or 3 of your retirement, the market crashes by 30% and your capital falls from EUR 2.5 million to EUR 1.75 million. Now you need to take more risk to achieve your income target."

I think you have misunderstood how the FIRE crowd looks at SWRs (Safe Withdrawal Rates). There is an acceptance that you will spend principal as well as the interest over time. Historical scenario analysis shows that you can withdraw 3-4% indefinitely from a fully-invested portfolio with a very low probability of ending up with zero over a 30-40 year retirement. If you do have a 30% crash early on (this is know as "sequence of returns risk"), you have the choice of (i) continuing with your original withdrawal target or (ii) restarting the 4% SWR on the lower portfolio notional. History shows that (i) is probably still OK, given how markets function after a significant drawdown.

Jul 28, 2021 - 7:06am

Sure, but therein lies the issue for me, your cost base has to be flexible enough to deal with needing to keep your 3-4% drawdown rate regardless of your principal amount. I would be interested to see the % split between fixed/variable costs in the budget of a typical FIRE retiree.  

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  • Investment Manager in HF - Other
Jul 25, 2021 - 2:31pm

As others have said it'll depend on the person. The "minimum" is much lower than you expect as you can live relatively cheaply. The problem (as others have mentioned) is that if you get to that level that quickly you are probably a very work focused and motivated person that won't want to retire. Additionally, you are enjoying the lifestyle and rather continue working and enjoy luxuries than retire early. 

I thought about retiring (early/mid 30's) but I love what I do and enjoy the lifestyle I have (and have very reasonable hours). Additionally, the risk that things go wrong is higher. You can make it happen with a couple million and owning a house, but you have to be ok with a relatively "standard" living. 

Most Helpful
Jul 25, 2021 - 7:58pm

I'm 41 and am worth about 5 million - I started working in finance about 10 years ago after being in another field that pays way less. If I didn't have kids I would retire now (or actually like 3 years ago) - my lifestyle is not that extravagant. At this point I'm just continuing to work because I don't mind it that much and it would be nice to leave something to my kids when I die.

Once you hit your "number" work becomes a lot less stressful - I say what I want to who I want without caring about the consequences, and I'm putting in like 35 hour weeks, collecting high 6 / low 7 figs.

My biggest advice would be to avoid lifestyle creep and be grateful for what you have, instead of getting too focused on the competitive aspect of this business. A 4% draw on my 5 mill would fund a lifestyle twice as extravagant as my parents ever enjoyed, adjusting for inflation.

  • Research Analyst in HF - EquityHedge
Jul 25, 2021 - 8:59pm

Great points, and thanks for the advice. I hate to generalize but I think people who throw $10-$20M numbers are either people who have not seriously thought about it, have high expectations for life style, or just see the target too far that would rather kick it even further to make themselves feel good. Anyway, I agree with many people here that life style and greed are important factors, but my guess is that an annual draw of 200-300k from savings would be sufficient for most people to feel okay about retiring. That gives an indication of the target number.

Great point regarding work after hitting your target. If you like your job, don't have the feeling that you have to work, and are getting paid well, why not working after all.

  • Research Analyst in HF - EquityHedge
Aug 29, 2021 - 1:03pm

I actually kind of like your formula. Of course the easy answer is you need 5mm+ to retire but it all depends on life style and a lot of other factors. A family of say 4 *can* survive on 200k a year, so roughly 3-4mm would be enough to not worry for a long time.

  • Analyst 1 in IB - Gen
Sep 11, 2021 - 1:09pm

Am I wrong in thinking this number isn't nearly as high as some people are saying on here. Please correct me if I'm wrong in the math, but don't you need just enough to where an ~8% or so dividend yield would be sufficient? You don't care for growth in the principal at all right just that it doesn't erode. Therefore, let's say 8% dividend yield (I think you could honestly get a bit higher but let's just say 8%) and you want 200k of passive income every year that's only $2.5 million, right?

Is what I'm missing the risk of a market downturn where your principal would erode or dividends would be cut? Feel like I'm missing something

  • Analyst 1 in IB - Gen
Sep 11, 2021 - 2:03pm

How so? You could use NUSI for example a collared strategy ETF that yields ~7.5% sells the covered calls on QQQ index and also had a OTM put option for protection. During the COVID crash it went down only 11% versus the rest of the indexes down 30%+. Obviously the market has been good but NUSI has also appreciated in value too. 

There are various other covered call ETFs without the put option protection that you could mix in for higher yield as well. 

Sep 13, 2021 - 7:28pm

Interesting formula, not a bad approach actually. I remember reading early books on permanent portfolio strategies saying to keep your real estate exposure to 15% of your net worth (including your primary residence). That gets you to a number pretty quickly.

  • Research Analyst in HF - EquityHedge
Sep 14, 2021 - 8:13am

Interesting to look at it as a permanent portfolio strategy. Although I argue that it should be a little more conservative in this case. That 15% seems a bit low imo. That translates to ~7mm for a $1mm home which imo is much higher that necessary. Would a 7mil net worth justify say ~1mil *down payment*, maybe, but your actual real estate *exposure* could be much higher

Sep 15, 2021 - 9:27pm

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