Updated: Oct 21
I followed the advice of ‘expert’ financial advisors. They often recommended retiring with an income of 70-80% of your annual gross income to have a comfortable retirement life. To do this, advisors frequently suggest saving 10-15% of your pre-tax income.
Rather than following this advice like a blind mouse, I ran some numbers for a hypothetical situation for ‘Jane Doe’ to check if this is possible.
It would be extremely difficult for Jane Doe to retire under these general rules, even if she had been super smart and had started investing at an early age of 22 years old to reach her comfy retirement life.
This is unrealistic. I’ve lost faith in the financial experts.
How in the world can anyone think they can retire saving only 10 to 15 percent of their annual income? Sure, you can rely on government pension to supplement your nest egg, but is that realistic especially when it’s 20+ years away? In my opinion, the future is too unpredictable, especially decades out.
To add to the confusion, after running a quick Google search, people arbitrarily throw numbers out like $1M to $10M as the magic nest egg for retirement. A more practical approach is to calculate how much savings you need to cover your annual expenses, for example, if you need $40K per year, and plan to live 54 years, then it crunches out like this.
You need $1.6M total to ‘retire’.
The biggest problem I have with this approach: you have to predict when you will die. With advances in technology and higher living standards, what if you lived beyond 100 years old?
It seems very confusing to know how much you need for retirement.
Simplifying Retirement Numbers
For the past nine years, I’ve been on this very focused path of buying enough real estate to replace my gross annual income. But, after watching several of my family members retire with much less than six figures a year, a light bulb switched on.
You only need enough income to fund your expenses for the rest of your life.
Now, my new path to retirement is this:
Buy enough real estate to generate income to replace your annual living expenses.
This is the holy grail, the rental income you generate must be consistent enough to live, play, explore and grow. Turns out that in my world, this is also a LOT less than 10K per month.
This realization gave me the courage to resign from my government job last year, well before I generated enough passive income to replace my salary.
Why Investing in Real Estate is the Easiest Retirement Plan?
It is much more achievable to save $60,000 to buy a rental property worth $300k, where the mortgage is paid off by someone else (i.e. a tenant), than it is to save that same $300K over the next 30 years.
Leverage is the key to real estate.
Sprinkle the seeds and the seeds grow into money trees. - Tracy Ma
And once the mortgages are paid, cash flow will keep flowing in as long as you own the rental properties.
You can forget about the famous ‘4% withdrawal rule’ because you never dip into the principle.
Your nest egg is protected as long as you have the properties.
The added bonus ― your real estate keeps growing, at least with inflation, while you receive rental income.
Using Real Estate to Get you to Retirement: A Simple Formula
If you plan to drink the real estate cool-aid like I have, here is a simple formula for calculating the number of rental properties you need to retire:
# of properties = your annual expenses/net rental income per property
Added bonus: you don’t have to think about how much money you need to save to retire.
More importantly: you don’t even need to think about when you will die.
If each of your properties generates $1000 in net cash flow per month (i.e., after you’ve accounted for property taxes, wear/tear, insurance, etc.), and you only need $40K to retire comfortably, then the number of properties you would need = $40K per year/$12K per year per property = 4 properties (after rounding up to the nearest whole property).
A rule of thumb is assigning 35%-40% of your rental income towards expenses. Therefore if you collect
$1700 in rental income, your projected cashflow is $1020 (because 40%*1700 are assigned to expenses).
That’s it. Only 4 properties!
What you really need to save for retirement
The secret key to a successful retirement is simple: figure out what you need and invest enough money to be able to fund your ideal lifestyle.
Figuring out how much you need to retire doesn’t have anything to do with your income now (unless you spend most of it and continue do that in the future).
But, life is winding road and sometimes chaotic things happen, add a buffer to what you need, too.
Achieving Five Levels of Financial Dreams
As we grow older and wiser, we have different needs and desires in life and in retirement.
Based on the book “Money: Master the Game”, by Tony Robbins, there are five levels of financial dreams based on your projected annual expenses to live. There is an exercise in this book that helps you plan for your future.
I’ve summarized Tony Robbins exercise to help you too: 1) understand yourself better 2) represent yourself more realistically 3) stimulate deeper thinking about the quality of life you are comfortable living.
Try starting out with 2 or 3 of these exercises below that matter to you now and build goals towards it.
What is the cost of your minimum acceptable quality of life for financial security? Simply put: how much money do you need to keep the lights turned on?
Typically, this is based on your annual expenses for mortgage, food, transportation, and insurance.
What is your magic number for financial vitality? Simply put: how much money do you need to pay for some indulgences above and beyond your minimum acceptable level?
Typically, this is your financial security number (step 1) + Half of: clothing, dining, and entertainment costs.
How much money do you need for financial independence? Simply put: How much money do you need to fund your current lifestyle?
What are your current yearly expenses to live? An accurate way is to track your expenses for several months and project how much you need annually.
If you want a very rough estimate: if your housing costs represent 25% of your monthly expenses, then multiply your housing costs by 4 to get your total monthly expense. Multiply your total monthly expenses by 12 to get your annual expenses.
If you plan to retire at 65, remember to exclude childcare and housing expense from your total annual expenses (assuming you have a paid off house and no kids in the home).
What is your magic number for financial freedom? Simply put: How much money do you need to live a more indulgent life?
This number is having enough money to afford 2 or 3 extra luxuries on top of your yearly expenses to live. Luxuries may include extra vacations, buying a boat, or having a second home.
Financial freedom = Financial independence (level 3) + 2 or 3 extra luxuries
On a more practical scale, financial freedom could also mean having enough money to pay for major expenses. Imagine what could go wrong during retirement that would stress test your retirement fund. The unexpected sometimes happens, like kids moving back home, increased medical bills, or moving into a retirement home.
Financial freedom = Financial independence + 2 or 3 major expenses
What is your magic number for absolute financial freedom? Simply put: How much money do you need to fulfill every one of your dreams?
This is financial freedom plus doing whatever you want, whenever you want, within reason. This sounds attractive, and a may be the level that people instinctively want to jump toward, but think hard about it.
Bringing home $250K annually may be incredible, but realistically is that really what you want? How long will it take you to get there? Retiring with $250K per year at 70 doesn’t have the same effect as $100K per year at 35.
Comparison – Moneysense Recommendations for Retirement
For comparison, double check if your annual expenses are comparable to the average middle-class couple. According to Moneysense, the average middle-class Canadian couples can live comfortably on $42,000 to $72,000 a year ($30,000 to $50,000 for singles), assuming no mortgage or child costs. Your estimate for ‘expenses’ is more realistic if you are already living like you are near retirement now.
Breaking it Down into Baby Steps with Rental Income
The prospect of buying enough real estate may seem daunting and intimidating to cover all of your expenses. What is more doable, and more motivating, is to break it down into baby steps.
Consider building up your cash flow and paying off your expenses – one item at a time.
For example, when I started making $150 – $200 in cash flow from my first rental property I was happy because it felt like I was getting new clothes for free every single month.
After buying a few more properties, the cash flow covered all of my utilities and clothes.
After renting out my secondary suite in my home, the cash flow also paid for my mortgage. All of a sudden, achieving Phase 3 in Tony Robbin’s financial dreams – “financial independence’ was absolutely possible.
Each baby step brings you closer to freedom.
Blueprint for Using Real Estate for Retirement:
Leverage your skill set to find ways to build up your savings so you can buy more cash flowing real estate. As you build up your rental income, see what expenses you are covering and cross them off your list ― you will start feeling a sense of accomplishment.
Celebrate those small wins, even if they are not life changing. You are building meaningful progress towards your financial dream.
Keep tackling those expenses by tagging a purpose to every income you generate.
With the power of patience, your mortgages will get paid off, and the cash flow you generate from keeping 3 or 4 properties should be enough to pay for A LOT of your expenses.
A Roadmap to Early Retirement:
When we think about retirement, we are often in love with the idea of freedom. You get to pursue life passions and choose what you work on, whether it’s a business or training for a race. Money isn’t part of the equation.
That said, working also brings a sense of fulfillment, productivity, sense of accomplishment, social interaction etc. You may start yearning for these things in early retirement. So I encourage you to figure out what you want to ‘retire’ into. Early retirement doesn’t mean you will never earn another dollar. In reality, you will probably still be working, but on your own terms.
To help you plan for ‘early retirement’ adjust your calculations with side income that bridges the gap until full retirement. What businesses or jobs are you happy to take on, even if there is no security, pension, or large pay?
For me, early retirement meant leaving my full time government job to pursue work that made a difference and a large impact, including starting this blog and consulting.
Retiring off Real Estate the Right Way
Now I’d be lying if I said investing in real estate is easy. Owning real estate takes a lot of work to start up; there is a huge learning curve to do it right; and, you need money.
There are three phases to get over:
1) Learning to do it right. There is a huge learning curve to start investing in real estate
2) Building it as a business with systems, and processes to operationalize it
3) Having the mental power to stick with it. You’ve made a business by investing the right way with proper risk management strategies and making it profitable over long periods of time through good and bad times, so now you just have to maintain it and watch it grow.
Most people don’t want to be landlords, and a lot of people have a hard time saving a large down payment for the first property. Also, rental income is not guaranteed. It is not a guaranteed annuity. It is not a government pension, nor a bond. It involves risk. But, the risks can be reduced if you build your real estate business the right way, conduct your due diligence, properly screen tenants, maintain your property and make it profitable.
Before jumping into real estate investing, double check that this strategy works for you. And if it does, here’s a built in road map for you to continue on your journey to retirement. Take some time to digest it, tweak it to align to your life and make it yours.
Check out below for more articles and videos about investing real estate.
1.) Be the Smartest Investor Mom or Dad!
Am I missing anything? How are you building your retirement plan, what investment vehicles do you use? Comment below.