How much money do you need to retire?

When you find yourself asking this question, I assume you mean how much money you need so you never again have to generate outside sources of income beyond your investments and investment income (e.g., interest and dividends)?

I’ve been asked this question many times in person, and so today I give you an answer in writing.

First off there’s good news and bad news.

The bad news is there is no such thing as one, big, blinking bright light retirement number that once you reach, it’s all flowers and balloons and candy and retirement from here on out. Because personal finance is personal and thusly your retirement number is unique to you. And because life is fluid and circumstances change, which means *your* retirement number might vary over time and you’ll have to make mid-game adjustments.

The next best thing is a number you can use as a compass of sorts, as a North Star to help guide you on your journey to avoid working for the man or the woman. And the good news is such a number exists. And you can use it as your North Star to approximate your way towards retirement. The number is derived from what I call the **Chocolate Retirement Formula**:

25 x your yearly expenses = Chocolate Retirement Number

**Which means you need to accumulate an amount of money that’s equal to 25 times your yearly expenses. When you’ve achieved that figure, at that point you can “retire” (I put in quotes because remember life is uncertain and nothing is guaranteed, particularly in investing).**

For example if your yearly expenses are $10,000 per year, then you need $250,000 to retire because:

$10,000 x 25 = $250,000.

If your yearly expenses are $50,000, you need $1,250,000.

If your yearly expenses are $100,000, you need $2,500,000.

And so on and so forth.

### Trinity Study

The Chocolate Retirement Formula comes from a seminal paper titled Retirement Savings: Choosing a Withdrawal Rate That Is Sustainable written by three finance professors at Trinity University in San Antonio, Texas. For which the paper is commonly referred to as the Trinity Study.

And the focus of the Trinity Study was to look at “the historical success of various withdrawal rates from portfolios of stocks and bonds.” Success defined as outliving your portfolio. Meaning, the authors sought to determine at what annual withdrawal rate(s)—given 1) an investment time horizon and 2) a certain asset allocation between stocks and bonds—would you not deplete your retirement funds during your lifetime?

And they concluded that **25 times your yearly expenses** gives you a good probability (but no guarantee) of outlasting your retirement savings.

If you’re skeptical of this 25x Chocolate Retirement Formula, you should be. In a world as uncertain as investing, you can only arrive at such a formula if you make assumptions. And the Trinity Study 100% made assumptions, which I’ve yet to discuss.

And so let’s get into it: what are the main assumptions behind the Chocolate Retirement Formula?

### Three Big Assumptions of the Chocolate Retirement Formula

#### Assumption 1: Savings are Invested in Market

The assumption is *your savings are exposed to Market*. That is, your money is invested in some asset allocation between stocks and bonds.

And the probability of success (i.e., not running out of money) is impacted by 1) your investing time horizon (e.g., for how many years will you be in retirement?) and 2) the makeup of your asset allocation (e.g., 75% stocks vs 25% bonds or 80% stocks vs 20% bonds, etc., etc.).

#### Assumption 2: The Future Looks (Kind of) Like the Past

The authors of the Trinity Study analyzed portfolio success rates under a number of investment scenarios during the years 1926 to 1995. And what would have happened to the funds of a hypothetical investor whose:

- Retirement lasted any 10, 15, 20, 25, or 30 year period between 1926 and 1995
- Portfolio withdrawal rate was from 3% to 12%
- And asset allocation was composed of 100% stocks, 75% stocks - 25% bonds and vice versa, 50% stocks - 50% bonds, or 100% bonds.

And after running the numbers, an annual withdrawal rate of 3% would have predicted a 100% portfolio success rate (i.e., you wouldn’t have run out of money under any scenario). And 4% not too far behind.

The assumption is, however, that in order for a 4% withdrawal rate to make any sense for you going forward, *future market conditions are somewhat similar to the market conditions the authors studied*.

You might be thinking this is a big assumption. And it is. Because past performance is not a guarantee of future results by any stretch of the imagination. That’s why it’s one of the Three **Big** Assumptions of the Chocolate Retirement Formula. And that’s why the “25 times” yearly expenses figure is a *rule-of-thumb*, not a hard and fast rule. Therefore, if you plan to structure your financial life around a Chocolate Retirement Number, be aware there’s no certainty Market will, over time, trend upward.

And the only way I know how to protect against this is to invest in yourself and in skill development because that way, even if something happens to your investment portfolio, you can tap your skills portfolio and do something of value.

#### Assumption 3: You Live on a 4% Annual Withdrawal Rate

The assumption is *while living off your Chocolate Retirement Funds, you withdraw 4% of your funds each year to cover your spending needs during that year*.

Why 4%?

Remember, the Trinity trio set out to answer the questions:

“

What is a reasonable withdrawal rate from a portfolio for purposes of planning retirement income? Or stated differently, what withdrawal rate is likely to be sustainable during a specified number of years?“

And they determined 4% to be considered more or less the “safe withdrawal rate” at which you can pull money annually from your portfolio over a 15 to 30 year period and not deplete your retirement funds.

If you’d like to see this in action, take a look at the Retirement Nest Egg Simulator by Wealth Meta. This is a nifty tool that calculates whether you would outlive your portfolio, just as the Trinity Study aimed to do.

The following is a hypothetical retirement plan that consists of:

- A $500,000 Chocolate Retirement Number
- A 4% annual withdrawal rate, which means you live on $20,000 per year
- A 50 year retirement
- And an asset allocation of 80% stock and 20% bond

And the results from the nest egg simulation suggest you’d have an 89.9% chance of outliving your funds. And that’s assuming you don’t earn *any* more money in retirement. Imagine if you did earn some extra cash.

(If you can’t view the results in the page, you can see them here.)

And to bring this full circle, consider once again the Chocolate Retirement Formula:

25 x your yearly expenses = Chocolate Retirement Number

Suppose you spend $10,000 per year. Meaning you need $250,000 to retire. How does the 4% safe withdrawal rate come into play?

Well, what’s $250,000 multiplied by 4%?

Take a second.

It’s $10,000. That is, $250,000 x 4% equals $10,000. And what’s $10,000?

*Your yearly expenses*.

Which means 4% of an amount of money that’s equal to 25x your yearly expenses *equals* your yearly expenses! And therefore, so long as your money is invested in Market and paying you interest and dividends and compounding, according to the Trinity Study, you can effectively retire at a 4% withdrawal rate once you’ve accumulated 25 times your yearly spend.

### Two Corollaries of the Chocolate Retirement Number and 4% Safe Withdrawal Rate Rule-of-Thumb

1: *You know how much money you spend in a year*.

This doesn’t mean you have a budget, per se. But it means, *you know how much money you spend in a year*. Because, in order to calculate your Chocolate Retirement Number, you need to know what your annual expenses are.

I think most people don’t know what their output is, which is poor strategy. You’re a business, whether you like to think of yourself in that way or not. And a business that doesn’t know how much money it spends is probably going to fail.

If you do know what your yearly expenses are, you’re special. And you can go ahead and compute your Chocolate Retirement Number.

2: *The less money you need to spend, the faster you can retire because the lower your Chocolate Retirement Number is*.

And so it follows that if you live an expensive lifestyle, you make it harder on yourself to retire.

Just pretend you’re two people at once. You’re the boss (person 1) of an employee that’s also you (person 2). And if you lead a high spending life, that means boss you is saying to employee you: ‘*Hey employee, you need to work harder and longer—much longer—because you need to maintain your current spending levels. Wait, what’s that I hear? You don’t want to go into the office today? Remember the spending dipshit. You need to earn so you can have financial freedom—at some indefinite point far out into the future if ever*.’

Boss you is a dick.

If you’re a cooler boss, boss you might say to employee you: ‘*You know what employee, you deserve the best in the world. But you might want to stop and think about what it is that really makes you happy. Is all your spending making you happier and more vibrant and energetic and effective? Is your spending activating beast mode? If you truly, honestly, from the bottom of your heart think it is, then cool. Party on. As in, work on. I won’t micromanage you. But if not, if there’s anywhere your spending might not add value to your life, maybe you can limit that bit of spending and make it easier on yourself to retire or at least get out of this shitty job or just have an ounce more of freedom and flexibility*.’

Boss you gets it.

I don’t have anything else to say about the Chocolate Retirement Number at this point in time. Other than remember the 4% safe withdrawal rate rule-of-thumb and the “25 times” rule-of-thumb are just that, rule-of-thumbs. And investing requires subtlety and flexibility and planning. And don’t expect anything. Don’t expect that once you’ve built up your net worth to 25 times your expenses, that the game is over. If you arrive at your Chocolate Retirement Number, congratulations. But your work is not over. Markets and life are volatile, and you need to be prepared for such volatility and protecting your downside. And which is why the best investment you can make is not in stocks and bonds, but in yourself and in learning new skills. Because so long as you’re building up your skill stack, you increase your chances of being able to do anything in any economy, bull or bear market. And thereby immunize yourself from the event that your Chocolate Retirement Nest Egg doesn’t hold up.

Caveats aside, when you do reach your Chocolate Retirement Number (25 times your yearly expenses), yes! It’ll taste scrumdiddlyumptious.

Notes:

- I am not a financial advisor. And nothing here should be taken as investment advice, but rather as content for informational and educational purposes.
- Retirement Savings: Choosing a Withdrawal Rate That Is Sustainable by By Philip L. Cooley, Carl M. Hubbard and Daniel T. Walz (original Trinity Study)
- Trinity Study (Wikipedia)
- Trinity Study update (Bogleheads)
- The 4% Rule: The Easy Answer to “How Much Do I Need for Retirement?” (Mr. Money Mustache)
- Wealth Meta’s Retirement Nest Egg Simulator — nifty tool to help you determine if you’ll outlive your retirement savings.