How can one tell when they have enough money to retire? This is a question that is highly personal and varies from individual to individual. There is no magic number even though society would have you believe that 65 is that magic number. It could very well be 45 years old, 75 years old, or never depending on your situation in life. One way to tell when you have enough money to retire is what I like to call the never-ending surplus method.
Let’s say that a person spends on average around $75,000 a year. This includes the house payment, car payment, travel expenses, vacations, going out on the weekends, paying for the kid’s college tuition, et cetera. Let’s also say that this same person has a retirement account valued at $500,000. More importantly though he consistently earns a 10% yield from this account. This comes out to be $50,000 a year. If he were to retire now and live off of this yearly return, then he would have to cut back his quality of life by $25,000 a year.
Instead, he could continue to work, save, and invest until he had a portfolio worth $750,000. At the same 10% return, he would now earn $75,000 a year. At this point he could retire and live life per usual. However, his wealth would not be increasing, and any disaster would put his retirement status in jeopardy. Suppose he decided to save until his portfolio is valued at $1,000,000. Again, at the same 10% return, he would now have $100,000 in yearly income. He could spend $75,000 a year as he usually does and reinvest the extra $25,000. The next year he would have $1,025,000 and earn $102,500. If he reinvested the additional $27,500, then the next year he would have $1,052,500 and earn $105,250. At this point the gentleman could easily retire.
As you can see, every year he has a surplus that gets reinvested. This causes every subsequent year to have an even larger surplus than the year before. This “never ending surplus” method is a great way to know when you can retire, and the best part is that once you retire you are still growing your overall net worth rather than watching it decline! Over a period of many years using this method, one would be able increase their own quality of life several fold or continue to enjoy watching their net worth skyrocket. The longer one uses this method the larger the surplus becomes every year. The hardest part about using this approach is achieving the very first surplus. After that it takes care of itself.
This is currently my financial goal. I am in the very early stages as I have yet to reach my maximum quality of life that I would prefer. Therefore, my spending each year will increase for some time. Once it levels out, I will be able to focus on the next step which is continuing to build my portfolio until it provides me with a surplus over my regular spending. At this point I will be able to kick back and relax. I will no longer be selling my time for a paycheck, and I can do whatever I want. I can theoretically kick back on a beach and monitor my stock positions. I could open and close new positions as I sipped on mojitos or as I relaxed at the resort poolside. The never-ending surplus would not only allow me to retire, but also allow me to continue growing my wealth to ensure the future prosperity of my family.