Why do you need MORE money

Financial freedom - how much money do you actually need to stop working?

Effective provision | Saving sensibly

The 4% rule, financial freedom and why facts are better than dreams ...

During World War II, the whole world was wondering not IF but WHEN Great Britain entered into peace negotiations with Nazi Germany. But Winston Churchill stuck to his position that he would never negotiate with Germany and that he would fight and defeat the Nazis.

Despite this vision, Churchill knew that he should not turn a blind eye to the real facts. He feared that because of his charismatic personality, bad news might be kept away from him. Therefore, at the beginning of the war, he set up a department whose primary task was to deliver a complete report, including the brutal reality and facts, directly to him. Churchill didn't want to live in a dream world. “Facts are better than dreams” is a famous quote from him.

Facts are better than dreams ...

... could also not apply better to the topic retiring or retiring early. What Churchill did with his “brutal reality” department, this blog article should be for you when it comes to your retirement or your early retirement.

So let's start with the first big question ...

How much money do you need to retire?

There are different approaches and considerations here.

  • First option: Do we have a fixed age in mind that we want to retire with? Such as: “At 55 I have to have enough money to retire early. How much do I have to save for this now? " We already have this perspective in the article "How much do I have to save for old age?" illuminated. Another angle on the subject would be ...
  • Second option:“How much coal do I need to be able to retire early? Regardless of the time. " This is something that is circulating extremely heavily, especially on blogs in the United States. Let's take a closer look at this option ...

The 4% rule and what that means for your financial freedom

What the heck is the 4% rule?

You multiply your annual expenses by 25 and you get the amount you need to stop working.

For example, let's say your total annual expenses are $ 40,000. If you multiply this by 25, you get the amount you need to “no longer have to work” (40,000 € x 25 = 1,000,000 €).

That means:

If you have € 1,000,000 in a securities account, you withdraw 4% in the first year. So € 40,000. From the second year onwards, you increase your annual withdrawals by the inflation rate (at 3%, e.g. € 41,200 in the next year). And you can do that every year, because ...

Various studies from the 1990s have shown that 4% annual extraction works out forever. Hence the name “4% rule”. Your investment (your million) must of course not be in the savings account but must be invested “in the market”. Otherwise you will not be able to maintain the withdrawal rate.

But the 4% rule has a problem

It's constantly changing

A big factor is how much return you can get in the market. Leading pension experts now see the 4% rule more as a 2% rule - especially if you will live for a very long time (i.e. if you plan to stop working very early). This means that if you need € 40,000 a year to live (as in the example above), then you actually need € 2,000,000 and no longer € 1,000,000. We could continue to debate and analyze why 4% or 2% are correct ...

Most of the analyzes are also based on the USA - we have a different tax situation there than in Europe.

But I personally don't follow the 4% rule for "retirement planning" anyway

The main reason for this is that I don't plan to stop working at all. That means the approach itself is not that exciting for me, as it is not my goal to stop working at 38. My goal is to create a (working) life for myself from which I don't want to be “retired”. 😉

Nevertheless, it makes sense to know the concept of the 4% rule when it comes to financial freedom

Because for me the 4% rule is more an indicator of financial freedom. And that's something worth thinking about. It doesn't matter whether you use the 4% rule or something else. At first, forget all the mathematical calculations. The really tough questions are:

The first thing you should definitely consider is whether you want to retire early or not. Do you then no longer want to work - not a single day in your life? Or do you always want to do something anyway?

Can you live with a little uncertainty, or do you have to be 100% sure that you will never have too little money available? Do you want the most expensive cars and live in the luxury district of the city or do you definitely not need it?

These questions are the beginning to get a feel for what is necessary. The mathematical calculations are then relatively easy.

But what does financial freedom actually mean?

First of all: money is important.

Yes, even if you are one of those who think: "Money is not important to me ..."

I think this is bullshit because I don't define money as a number in an account.

Money can be all of that ...

  • More free time because you don't have to work (even if you enjoy doing your job)
  • Your children's top education
  • A meal in your favorite restaurant or award-winning restaurant
  • Tickets for your favorite band
  • A worldtrip
  • Donate to the local animal shelter or other donation to your favorite charity
  • Save a child's life in a third world country
  • But retire earlier or work part-time

… and much more.

Ok ... but really everything cannot be money

Of course, you can't buy yourself true love or friendship with it. But neglecting the issue of money is not a really viable option.

If you decide that you don't care about "money" and therefore you don't care, it means that you don't care about some of the most important things in the world. Yes, money really isn't everything. But it can improve or enable pretty much anything.

And that's exactly why I find the 4% (or 2% 😉) rule an exciting approach

Not to retire early. But to know how much would actually be necessary to actually do what YOU want at any time. When you achieve financial freedom, YOU decide what to do. Not your boss, your job, or anyone else.

Your entire life changes when you achieve "financial" freedom

It doesn't matter if you love your job and want to work until you are 70. Or whether you want to retire early. The moment you gain financial freedom, your life changes.

The economy is changing and you lose your job? No matter.

Do you want to reorient yourself and do something different? Nothing is stopping you from doing it.

Above all, you decide yourself about your time and how you spend it

That's probably the best thing about financial freedom. Because you can't really buy time. You cannot “save” it. But through financial freedom you get your time “back”.

But the million (or more) from above seems very difficult to achieve, doesn't it?

Well, first of all you should think about how much expenditure you actually have per year. € 30,000? More less? Of course, the more or the less you spend, the higher or lower your personal “goal” will be.

Let's take € 18,000 in expenses (that's € 1,500 a month) and thus € 450,000 as the goal.

With this calculator you can approximate how much you have to save. Just type in different numbers and periods. In the long term, a result between 4-6% p.a. is not unrealistic, by the way.

These are the facts discussed at the beginning of the article. It is better to live in reality than in a dream world.

But there is one thing you shouldn't forget

The numbers mean you'll never have to generate any income again. For me personally, as already mentioned, that's not a goal.

Thus the necessary number is automatically smaller.

By the way, I have a cool “arithmetic trick” for you in this context

We looked at a monthly savings rate above. But what if you already have assets that you want to use for your goal?

Let's say you inherited € 200,000 from an unknown aunt - sounds like a SPAM email, doesn't it? 😉 Now you are wondering how long it will take you to double the whole thing and almost scratch the € 450,000.

You just take 72 and divide it by your assumed annual return

That is, if you calculate 5% per year, then you simply divide 72 by 5 ...

That means in that case in a little over 14 years you would have doubled your investment. The game then continues, of course: In another 14 years, the € 400,000 will double again. In about 28 years you would have € 800,000 (with an average interest rate of 5% per year).

To find out how you should invest your money, take a look at our article on the 3-pot system of investing.

The path to individual financial freedom can be varied

Nobody forces you to use the 4% rule and then actually stop working. I mentioned above that I personally have no plans to retire early.

Maybe you do like me.

Or maybe you are now investing a lot of time in your job as an employee in order to quickly get into high salary regions

Your goal is to save as much as possible and then reduce your working hours in the foreseeable future. Graphically, the whole thing would look roughly like this:

Here you simply create a large reserve so that you don't work so much afterwards. You may even only work part-time. Your reserves will continue to grow anyway. Because you will have to take practically nothing after you continue to earn money (even if it is significantly less than before).

Or maybe you choose the “classic” way

You work in a “normal” job, with normal hours. Your goal is not to cut hours early or to retire early. Of course you want to have enough money later, but don't stress yourself now.

With a high savings rate, you can still gain financial freedom early. The path probably looks like this:

Or maybe you're doing something completely different

You work full-time for a few years and then either reduce your hours significantly or do not work at all for a few months. This is not possible in every industry, but it is also not unthinkable.

There is no optimal or right solution. Only what is right for you individually.

One more thing about the 4% rule ...

So you can use the 4% rule as a positive psychological barrier

You are faced with the following purchase decision ...

Super expensive extra on a car? Ask yourself the question:

  • Do i really need this? What if I throw that into the “financial freedom” pot? What do I prefer - at some point no longer having to think about money or that extra something?

Incidentally, that doesn't mean that you should think about a € 5 purchase. If you've read more of us, you know that we see it as an absolute waste of time.

For me personally, the 4% rule is simply there to have a rough value in my head that informs me of my status with regard to "financial freedom".

Just knowing this number and having the concept in mind can serve as a positive psychological barrier to impulse or “senseless” purchases.

No matter how you want to achieve financial freedom, whether and how you want to retire early or what you think of the 4% rule ...


And that's exactly what this article should be for you, among other things. In addition, it should be a little nudge that encourages you to think about financial freedom or your finances in general ...

Author: Florian Märzendorfer

Indian food fan, financial planner & co-founder of FiP.S.

Hates beach vacations & hates comma rules.