I’ve really been digging how Retire by 40 can always find a new spin on financial freedom. Their article from a couple of days is a great example: Can You Retire With 5 Million Dollars?

I would have never thought of that idea. That seems like an absurd amount of money for most people to retire on. It’s almost like asking if anyone would want a million dollars… the answer is going to be “Of course!” I read everything that Joe writes at Retire by 40, but this title made me curious why he picked such a high number.

It’s a very good article, but as Joe writes, “accumulating $5 Million isn’t exactly normal.” You typically need a high paying career (or two) and that typically comes with a lot of lifestyle inflation.

It reminds me of these stories of bankers barely getting by on a million dollars a year. Taxes cut the million to around $600,000, and mortgages in Manhattan and the Hamptons aren’t cheap. Throw in private school for 3 kids at around $40,000 a year each and it’s easy to see that money disappear.

That’s an extreme example, but you get the idea. There comes a point when the question, at least for the 1% (or 0.1%) almost becomes legitimate.

But you (most likely) and I aren’t those people. Joe recommends tracking your expenses (we both use Personal Capital) and using the Rule of 25. That means once you know what you spend in a year you can multiple it by 25 to figure out how much of a nest egg you need to retire. For Joe, the annual number is $55,000 which means he should have a nest egg of $1,375,000. (For math nerds and personal finance junkies this Rule of 25 is just flipping the Rule of 4% on it’s head.)

Now this doesn’t factor a variety of other factors. For example, if you have real estate property (which we do), it might be possible to generate $15,000 a year from that. Suddenly that $55,000 becomes $40,000 making for a more manageable nest egg of $1 million.

You also need to invest the money properly. I find this risk tolerance calculator from FinMason to be a great tool for that.

And while Joe says you probably shouldn’t include your primary residence in the calculation, I think it’s fair to calculate your expenses assuming your mortgage will be paid off. (You are going to have your mortgage paid off in retirement, right?) For many people, that’s their biggest expense. There’s still taxes, insurance, and maintenance on the home, but eliminating the mortgage payment is a big deal.

Personally, it’s been a couple of years since I tried to calculate the numbers. When I eliminated expenses that should eventually go away in retirement (child care/college, mortgage payments, electricity (via paying off our solar panels)), I was surprised how little was left. The bulk of it was car ownership. And by that time, we’ll probably have robot Uber drivers which could make owning a car unnecessary.

The calculation is almost flipped upside down for us as the rental property income should be enough to cover our retirement expenses. Of course those retirement expenses were based on necessary expenses and didn’t include any cushion. They also didn’t factor in any money for fun. That’s why I say the calculation is “almost” flipped.

On the other hand, rental income is only one small part of our overall retirement income plan. If you have enough income coming in, you may not need to draw down on investments at all.

To close this out, the retire on $5 million question isn’t a very good one for almost anyone reading this. Instead it is better to figure out what you can retire on. And while many people believe in getting a big nest egg and drawing down on it, keep an open mind towards other income streams that can continue in retirement.