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I am currently looking into options for earli(er) retirement. Naturally, I dont want to be close to bankruptcy, so I am building a portfolio for that. Question is: what amount do I need in the bank to ride off into the sunset without any worries about my financial security?

Thing is, logically, that each year/month you work less, you need two things: 1.) money to live from in this year (because there is no income), and a pension to make up for the "lost" pension that you wont get because you did not work in this specific year.

For a scenario, lets consider the following example: I want to retire in year t1, where my state funded pension expects me to retire in the year t2 (regular year for my retirement).

So the underlying question is: How much money do I need to retire t2-t1 years early without a "smaller" pension?

Easy answer: The amount that I will spend in the t2-t1 years PLUS the amount of pension I "lose" due to not working in these t2-t1 years.

But actually, its not that easy.

  • First off, you dont know how old you will get to be - are you calculating 20 years? 30? 40?
  • Second, pension plans are (in some countries) adjusted for inflation or linked to the increase of the average salary. So you dont "lose" the absolute amount, but actually more (for each year)
  • Third, there is inflation that needs to be accounted for
  • Also to be considered: private / company pension plans that might exist

Now, looking into this matter, you quickly stumble upon the "trinity" formula, according to which you can annually withdraw 4% of your investment without it getting smaller. According to this, for a "self-paid" pension of 1.000 €/$/x monthly you'd need 300.000 €/$/x

While it is a different question if and how you can acquire this kind of money and if you can live off that, it has the nice side effect that (assuming everything goes according to plan), your children will inherit a nice sum of money after you kick the bucket.

But so far I could find, this ignores any existing pension plans and so on. So for someone with a BIG bank account and no pension plans from state or employers but children for whom you want to leave something behind, this might be the go-to thing.

Now, is there a formula that accounts for the following things:

1.) existing pension plans 2.) variable amount of money that you expect to be "left" in "the end"

etc?

All I could find so far are simple plans that do not account for either of these option.

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  • Taxes will also be a significant factor, especially if you are in a higher tax bracket when you are working vs. when you are retired. Jun 26, 2020 at 19:31
  • Sure taxes are a significant factor, so is health insurance. But those are all factors dependent on where you live.
    – Xenonite
    Jul 14, 2020 at 14:39

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