There are three retirement goals to shoot for in order to comfortably walk away from your day job and remain retired. They are:
Accumulate 25X your annual expenses Accumulate 20X your annual household income Be able to live off a 0.5% annual withdrawal rate
Instead of viewing these retirement goals as at odds with each other, view these retirement goals along a spectrum. They were all introduced at different times in history to address different economic conditions.
Let’s review them one by one and see how they can apply on your financial journey.
Retirement Goal #1: Achieving 25X Your Annual Expenses
The baseline retirement goal is to build a liquid net worth equal to at least 25X your annual expenses before you retire. A liquid net worth excludes the value of your primary residence.
If however, you can generate income from your primary residence by renting out rooms, then I suppose you can include your primary residence’s value in your 25X calculation.
25X is the inverse of 4%. 4% is the longstanding safe withdrawal rate that has been espoused since the mid-1990s. I believe the 4% rule is outdated, which is why accumulating 25X your annual expenses is the minimum net worth amount to achieve before retirement can truly be considered an option.
Accumulating a net worth equal to 25X your annual expenses is the easiest goal, but it is also the most aggressive goal to live off. The reason why it’s the easiest goal is because expenses can be reduced to more easily achieve the goal.