Why I Disagree With Financial Samurai on This Recommendation

Financial Samurai is one of the personal finance blogs that I enjoy reading the most. I like that Sam, the blogger, makes me think hard and provides valuable knowledge that helps solidify our investment strategy. I have nothing but praise for Sam’s work, but a recent particular recommendation–that I disagree with–motivated me to comment and ultimately write this post.

On the post, Achieving The Two Spouse Early Retirement Household, Financial Samurai provides great insightful advice for spouses to achieve early retirement and this is the part of the recommendation that I’m in disagreement with:

“Finally, instead of an income target, you guys can also consider a net worth target to achieve before both of you leave the workforce. My recommended net worth target is 20X gross household income.”

For full disclosure, I’m not a financial advisor, so this is based on my own experience and is for discussion purposes. Please, do not misconstrue this information as financial advice. 🙂

Income target

Financial Samurai recommends a net worth target based on household income instead of an income target. Before we get to that, let me tell you that I have a strong dislike for retirement recommendations based on actual income. The financial industry’s recommendation to “shoot to replace 70 to 80 percent of your pre-retirement income” doesn’t bode well for retirement income needs because it’s missing the most important piece of information from a future retiree:

their spending habits.

Basing retirement needs on income does nothing to anyone that is saving above the average personal savings rate, which hovers around 5.7% in the U.S.

Net worth target based on household income

I feel that Financial Samurai’s recommendation of having a net worth of 20X gross annual household income would discourage many people from retiring early. I know Sam plays more on the cautious side of personal finance, but I think it’s a number too high to shoot for, and probably unnecessary for someone that has a high savings rate. It goes back to the saying that “it’s not how much you make, it’s how much you keep”.

Net worth target based on annual spending

I love retirement recommendations based on annual spending. When I first came across the FIRE concept, it seemed simple to comprehend. To withdraw 4% from your portfolio, save 25X your annual spending, and you’re done saving for retirement. To increase the chances of your portfolio lasting a lifetime, you can save more and withdraw a smaller percentage.

4% annual withdrawal rate = safe withdrawal rate

3% annual withdrawal rate = perpetual withdrawal rate

What determines how fast you get to retirement?

Your savings rate.

The different ways to calculate retirement needs lead to various outcomes

Let’s illustrate how a couple, with a savings rate above average, can come to very different conclusions on the wealth they need to achieve to retire, depending on the calculation they use.

Scenario 1: replace 80% of income

Juan and Mary work in office jobs and have an annual household gross income of $175,000. They heard the conventional wisdom that they need to plan to replace 80% of that income in retirement. So, they’ll need to shoot for a retirement income target of $140,000 ($175,000 x 80%) based on this method.

Scenario 2: Accumulate 20X their annual household gross income

Financial Samurai would recommend that this couple shoot for a net worth target of 20X their annual household gross income which amounts to $3.5 million, before they leave the workforce. ($175,000 x 20)

They’d feel discouraged  and confused on why they’ll need so much money because they only live on $55,000 a year. See the disconnect?

Scenario 3: save 25X annual spending for retirement income needed

If we use the FIRE community-preferred method of saving 25 times annual spending and plan to withdraw 4% a year from the portfolio, then they’d only need approximately $1.4 million ($55,000 of annual living expenses x 25), in income-producing assets. Even if you add in an extra sum of $500,000 to buy a house to live in, you’re still far from the $3.5 million recommendation.

If you want to retire and never have to touch your principal, then you can save some more and aim for the perpetual withdrawal rate of 3%. (Linking Financial Samurai here again, 🙂 I told you that I enjoy his stuff. ) This couple would then need approximately $1.8 million to be able to withdraw 3% annually from their portfolio. ($55,000 of annual living expenses x 33.3). Telling them to accumulate $3.5 million in net worth is like telling them to stay stuck in their jobs past 65. That’s not early retirement.


As you can see, there’s a big difference in each of the calculations! Even with a 3% withdrawal rate, they won’t need to accumulate $3.5 million to retire. A 3% withdrawal rate is bulletproof. That portfolio would last forever. I’m sure that Financial Samurai readers have high savings rates because these people love to save money and invest, moi included. You just can’t have one without the other. So they’re definitely in the Juan and Mary’s camp.

What do you guys think? Which calculation method do you use? How much would this couple need based on their annual income and spending? What would you base their retirement number on?

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Mr. Enchumbao

Mr. Enchumbao retired at 44. He worked for 13 years at Vanguard, primarily as a Communications Project Leader in the Institutional Division, helping people save for retirement.

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4 Responses

  1. $1.4M vs $3.5M, what’s the big difference? 🙂

    Yes, I am under the assumption that we shouldn’t touch principal and should leave some of our wealth to help other people once we are gone. Healthcare costs, medical costs, a downturn in the markets have a great way of making money DISAPPEAR.

    Everybody is lulled into a bull market. I’m preparing for less smooth scenarios.



    • Just a few pennies of a difference. 🙂 I’m assuming that healthcare and medical costs are estimated in the projected expenses when calculating amount needed to retire comfortably.

      A more conservative withdrawal of 3%, described above, barely touches principal. Thanks for stopping by! I enjoyed reading your article, it provides great advice overall.

  2. aperture says:

    Hey Enchumbao – nice succinct review of SWR. It seems like this is a topic that can be endlessly mined for new perspectives because (1) it is all about looking into the crystal ball to predict the future and (2) everyone’s response to the unknowable future is different – some want a really big life raft, while others are happy with water wings and swim lessons. Personally, I am interested in frugality as a means of preserving the planet and financial independence as a means of preserving my own sanity. Thus, I am OK with a 4% SWR knowing that I may need to flexibly respond to adverse sequence of returns. Besides, I do not plan to spend my retirement looking at daytime TV. I look forward to developing my hobbies and one of the greatest acclamations I can experience is having someone pay me for something I made or did for pleasure.
    I have one little rant: It seems like EVERYONE is stating it as a known TRUTH that US equities will have lower returns in the next 30 years than they did in the last 100 years. I agree that it is reasonable to predict this from the high valuations on equities. But so many are prediciting this that I think most have forgotten that the truth is no one knows what will happen next. This is what makes it all so exciting and fun to be alive. Best wishes.

  3. Hi Aperture,
    Yes, if there is one sure thing about the future is its unpredictability and the best we can do is prepared to be flexible with the withdrawal rates in retirement. The assumptions are usually based on a retiree never making another dollar but you’ll be doing it the right way by staying active.
    I stay diversified to lower risk so I’m not too concerned with the lower returns predictions. It’s like the song “Don’t worry, be happy”. Keep saving and investing and the future will take care of itself. Great comment! Thanks for stopping by!

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