Want to Retire Early? Here's How Much Money You'll Need

I remember someone asking me when I was about to graduate college what I would do after school. Thinking I was clever, I told them I planned to go straight into retirement. That was my catch-all answer for not knowing what I would do with the rest of my life. Thankfully, I got an internship, then some more education, and eventually a job.

I didn't have a real plan to retire early, but some people do. And more than a few are very interested in the idea. A 2021 Vanguard survey found that 22% of millennials want to retire before age 60.

But how much do you need to stuff under the mattress to make early retirement a reality? Because everyone's circumstances are different, there's no catch-all number to achieve an early retirement. But you can use a couple of formulas to help you figure out your ideal amount.

How much money you need depends on your spending

If you're looking for a quick formula to determine how much money you need to retire early, some people in the FIRE (financial independence, retire early) movement suggest saving 25 times your annual expenses in a retirement account, like a Roth IRA, or even in a traditional brokerage account.

For example, if you have $40,000 in annual expenses, your goal would be to build your investments -- including owning stocks in a brokerage account -- to $1 million. The second part of this strategy is to use the 4% rule when withdrawing your money each year. This formula says you should spend 4% or less of your retirement savings in your first year of retirement and then adjust for inflation in the following years.

Following this plan, your retirement money should last about 30 years if you follow the withdrawal rate very closely, according to Charles Schwab.

For example, if you saved $1 million for retirement, you would withdraw $40,000 in the first year to live off of. You would take out the same amount the next year, adjusting for inflation. So, if inflation was 2% in the second year of retirement, you would multiply $40,000 by 0.02 to get $40,800, according to Vanguard.

While the 4% approach is a good rule of thumb for retirement, Vanguard says its success rate declines the longer your retirement is. For example, Vanguard says the 4% rule has an 82% probability of success for a 30-year retirement but only a 53.7% success rate for a 40-year retirement.

Instead, Vanguard suggests a dynamic spending rule to make your hypothetical $1 million more likely to stretch to 40 years. Under the dynamic spending rule, investors start with the 4% rule but then increase or decrease spending based on how well or poorly the market is doing. For example, if you spend $40,000 in retirement the first year, but the market does poorly in your second year of retirement, you cut back on spending.

Using the company's dynamic spending formula, Vanguard says the probability of stretching your $1 million to last 40 years goes from a success rate of 56% with the 4% rule to 90%.

If you're looking for a more conservative approach to spending in retirement, Morningstar says a withdrawal rate of between 3.3% and 4% each year will help make your savings last as long as possible.

The tricky thing about retirement formulas

The thing to remember about retirement formulas is that there will always be expenses that pop up in retirement that you didn't plan on. It could be an expensive medical bill, replacing a car, or helping out family members. Additionally, inflation can significantly dent your retirement savings, causing your money to lose value over time.

So, no matter what formula you decide to use to determine whether or not you can retire early, remember that you'll probably have some unexpected expenses, especially if you have a longer retirement.

If you need help planning your retirement, it's always a good idea to talk with a financial planner. Or, if you prefer to do things yourself, some robo-advisors have retirement planning features built into them.