Why don’t more people dream of retiring young? 

It could speak to how many people love their jobs, except that’s not true: 70% of people hate their jobs. More likely, most people just don’t think they can retire young says G. Brian Davis of SparkRental.

Fortunately, anyone earning the median U.S. income can retire young if they want. But it requires discipline – not many people want to forego things like driving the fanciest car possible or living in the best house they can afford.

There is no shortage of personal finance bloggers on the web who have retired young. Some of them are quite excellent too; check out MrMoneyMustache.com or Retireby40.org for some good examples.

“Yeah yeah yeah, cut to the chase already! How much money does it actually take to retire young?”

Glad you asked. Let’s take a look at safe withdrawal rates, how the good ol’ 4% Rule holds up in today’s economy, and how rental income changes the math on how much you need to retire young.

What Are “Safe Withdrawal Rates”?

It’s another one of those financial terms that sounds complicated. It’s actually pretty simple.

A safe withdrawal rate is what percentage of your retirement portfolio you can pull out every year, without running out of money before you die. The more you take out every year, the faster you’ll go through your money. Not exactly rocket science, right?

So, one variable you need to decide on is how long you want your nest egg to last. If you only plan on living for ten years after retiring, then you can burn through much faster than someone who wants their nest egg to last for 30 years, or 50 years, or indefinitely.

Which brings us to the classic safe withdrawal rate that you may already be familiar with: the 4% Rule of retirement planning.

The 4% Rule for Retirement: A Quick Refresher

Rewind to the ’90s and a financial planner named Bill Bengen ran an interesting study: he analyzed stock market data from the previous 75 years and found that if retirees withdraw 4.2% of their nest egg each year, mathematically their savings is nearly certain to outlive them. This became simplified to the 4% Rule: retirees can pull out 4% of their savings each year to live on, and their savings should last at least 30 years.

It’s worth mentioning that the 4% withdrawal rate applies to the first year. After that, you simply adjust the annual withdrawals to keep pace with inflation. That means roughly a roughly 2% per year increase in how much you pull out of your portfolio to live on.

Imagine the first year of your retirement yields average stock market returns. Say the stock market rises by 9%, and you pull out 4%, so your portfolio still sees a 5% rise in value.

In this average-year example, your portfolio still rises in value by 5%! You can live forever on that nest egg, right?

On paper, yes. The problem is the stock market doesn’t rise by a uniform 9% each year – it drops by 23% one year, and surges by 29% another year, and wobbles its way upward by 8% the next year. This volatility poses a threat called sequence risk: the risk that the stock market will crash within your first 5-10 years of retirement, depleting your portfolio to the point that it can’t recover, even after stocks rise in value again.

Fortunately, you have plenty of options for mitigating sequence risk. They share one thing in common: they’re all income-producing investments that don’t require you to sell off stocks in order to pay your bills. Options include rental properties (more on that shortly), dividend-paying stocks, bonds, private notes, crowdfunding investments, REITs, and any other income-producing assets.

Does the 4% Rule Hold Up in Today’s Economy?

Bengen ran his analysis back in the ‘90s. You may have noticed that a few things have changed in the economy since then – particularly interest rates being held low for basically this whole century to date.

That begs a few questions, such as:

“Does this 4% Rule even guarantee me those 30 years? It sounds like I could run out even before then!”


“What if I want to retire young? What if I want my nest egg to last 50 years, not 30 years?”

Excellent questions. First, you can take comfort in the fact that over the last 150 years, there has not been a single 30-year stretch when someone following the 4% Rule would have run out of money in under 30 years. Financial planner Michael Kitces ran those numbers, not me – rest at ease.

Kitces also calculated that you don’t have to reduce your withdrawal rate by much, in order to make your nest egg last forever rather than just a minimum of 30 years. Instead of following the 4% Rule for retirement planning, just set your initial withdrawal rate at 3.5%. Based on historical data, your portfolio should continue rising forever, because you’re withdrawing so much less than the returns.

And hey, most retirees use an asset allocation that only partially involves stocks. Bill Bengen assumed a 60% stocks, 40% bonds asset allocation. If you’re worried about a stock market crash, you can always throw your money in bonds. Or better yet, rental properties… but I’m getting ahead of myself.

How Much Do I Need to Retire?

Another use of the 4% Rule for retirement – or the 3.5% Rule if you want to reach financial independence young – is that it shows you how much you need to retire.

Say you’re following the 4% Rule. To know how much your total nest egg needs to be, you simply multiply your annual spending by 25. The reasoning is simple: 4% X 25 = 100% (your total nest egg). If your annual spending is $40,000, then you need a nest egg of $1 million, if you want to withdraw 4% ($40,000) in the first year of retirement.

Alternatively, if you’re following a 3.5% withdrawal rate, then you need to multiply your annual spending by 28.6 rather than 25. Why? Because 100% / 3.5 = 28.6. Using a 3.5% withdrawal rate, you’d need $1,142,857 to produce $40,000/year in income, rather than the $1,000,000 you’d need if withdrawing 4%.

Note that your annual spending is not the same thing as your current annual income. Treating the two similarly is exactly why most people don’t retire young: they spend nearly as much as they earn.

Sample Numbers & How Inflation Impacts Safe Withdrawal Rates

Let’s say Heidi wants to retire by 40, and she spends $40,000/year. As outlined above, she needs $1,142,857 to retire if she plans on a 3.5% withdrawal rate.

Imagine she reaches her goal of $1,142,857, and her portfolio is made up of all stocks. Say her stock portfolio earns her a moderate 7% return this year, or $80,000. She didn’t work a day all year but still made $80,000, which is great! That’s $40,000 more than she spent, so her portfolio grew.

“Whoa there, what about inflation?” 

In her second year of retirement, she adds 2% to her annual withdrawals. So instead of pulling out $40,000 in Year 2, she pulls out $40,800. In Year 3, she adds another 2% to account for inflation/cost of living increases and pulls out $41,616. And so on.

Meanwhile her stock portfolio continues to grow – at least when the market rises. Maybe the stock market crashed 18%. Or maybe it surged 26%. But over time, she’s pulling out far less than the average market return.

But Brian, it would take me FOREVER to save up $1,142,857! Aren’t there faster ways to reach financial independence and early retirement?

Glad you asked, because there certainly are. And not only do they help you reach FIRE faster, they also help you diversify so your entire nest egg isn’t based on stocks.

How Rental Properties Change the Math for Early Retirement

Say Heidi invested $50,000 a piece into four rental properties ($200,000 total investment). They rent for $1,000 apiece, and after subtracting out property taxes, landlord insurance, vacancy rates, maintenance and CapEx, Heidi is left with $500 apiece each month in profit. That’s $2,000/month total from the three properties, or $24,000/year in income from her rental properties.

Wait a second – Heidi just made over half her annual budget, but it cost her a fraction of what she would need if she invested in stocks. She invested $200,000 in rental properties, and it covers $24,000 of her $40,000 annual budget! The math just changed dramatically.

The rest of her nest egg (in her stock portfolio) only needs to provide the $14,000 difference. According to the 4% Rule for retirement, to safely withdraw $14,000/year she needs a stock portfolio of $350,000. But since she’s retiring young, she opts for a 3.5% safe withdrawal rate, which means she’ll need $400,000 in stocks to produce $14,000/year.

That puts her at $200,000 in rental properties and $400,000 in stocks, for a total of $600,000 invested to produce $40,000/year in income. Not a trivial amount of money, but because she invested in rental properties, she dropped her required nest egg from $1,142,857 to $600,000.

That’s nearly half as much as she’d have needed in stocks alone. Hot diggity dog! (Heidi can use 1940s expressions because she’s now a proud retiree.)

But she could actually reach financial independence with even less money, if she uses leverage.

How Leverage Changes the Math Even More

Heidi doesn’t want to pay cash for her properties. She buys them with rental property loans, at 80% financing (in other words, with a 20% down payment).

Instead of buying four rental properties for $200,000 in cash, she buys four larger rental properties by getting loans. She invests $100,000 of her own cash, putting down $25,000 on each.

Each property generates $1,250/month in net revenue, minus $630 for the mortgage, for a net monthly cash flow of $620/property. For all four properties that comes to around $2,500/month, or around $30,000 a year.

Heidi cut her cash investment in half, and now generates three-quarters of her annual revenue from rentals!

That leaves only $10,000/year of income that she needs from her stocks. Following a 3.5% withdrawal rate, that comes to $286,000 in stocks.

Wait a second Brian! It’s hard to find deals that cash flow that well!

It can be more challenging in the current market, however there are still some great investment properties out there if you are willing to be patient and do a bit of work. But even if your rental property cash flow isn’t as strong as Heidi’s, you can still find rental properties that generate ongoing income better than stocks do.