How Much You Need to Retire Early When Income Covers the Bills

The number that keeps moving

If you've asked how much you need to retire early, you probably have a number in your head. Every time you get close to it, it moves. A bad market year or rising prices push the finish line back.

I ran this for a 56-year-old man with $900,000 saved, almost all of it in the stock market. He adds about $30,000 a year from savings, and his bills are $6,000 a month, or $72,000 a year. The 4% rule says he needs $1.8 million to cover that. If the market gives him 7% a year after inflation, close to its long-run average, he gets there in about eight years and stops at 64. If the market dropped 20% tomorrow, he might be working until 66. There's another way to figure the number, one that stays still and comes out a lot smaller.

Start with what your life costs without the job

He makes $130,000 a year. If he plans to replace that whole paycheck, the 4% rule says he needs $3.25 million. He would never stop.

He doesn't live on $130,000. About $30,000 of it goes into savings, and that bill disappears the day he stops working. About $10,000 more is Social Security and Medicare tax, which is 7.65% of a paycheck. No paycheck, no tax. So roughly $40,000 of his salary is money he doesn't have to replace. Add the cost of going to work, like the commute and lunches.

The one bill that gets bigger is health coverage. Stop before 65 and he buys his own until Medicare. KFF, the health policy group, puts the average benchmark plan for a 60-year-old with no subsidy at $15,914 a year in 2026, about $1,325 a month. What you actually pay depends on your income because of the subsidies.

His $6,000 a month already includes health coverage and some income tax. I'm leaving Social Security out. He's years away from being eligible, so if that check shows up later, it's a bonus.

Cover the bills with income

The 4% rule answers with a balance: build $1.8 million in stocks and sell a little every month for life. I answer with income-paying assets. I want the bills covered by money that shows up every month, and I don't want to sell shares to get it.

I learned this one bill at a time. I bought my first duplex with a VA loan, lived in the bottom unit and rented out the top. The payment was about $1,300 a month and the upstairs rented for about $950, so my housing cost about $350. It was the first time in my life I had money left at the end of the month, so I bought more. By the time I left the Air Force at 33, my rentals covered all of my bills, and that's what made leaving possible.

Rentals and private mortgage notes are my favorite income assets. But this man is 56 with a full-time job, and I'm not telling him to become a landlord. For him, I'd look at notes.

How notes change his math

A private mortgage note is a loan on a house. Someone borrows money to buy a house, the house backs the loan, and the borrower pays every month. The lender sits in the bank's seat, checks the borrower, the house and the paperwork once up front, then collects payments.

I'm not a financial advisor. I'm a real estate investor and operator who funds some of my own projects with private money and also lends on private mortgage notes, so I have a stake in this subject.

The Entrust Group, one of the big self-directed IRA companies, says mortgage notes often return between 8% and 12%. Using 10% for the math, a $50,000 note pays about $417 a month in interest. Each $50,000 he moves covers about $400 of his bills.

He can start now, while the paycheck still covers him. At $180,000 in notes, he has about $1,500 a month coming in, a quarter of his bills. He doesn't need that money yet, so the interest gets lent out again. At $360,000, it's $3,000 a month and half his bills are covered.

That's when he stops feeling stuck in the $130,000 job. He only needs $3,000 a month from work, which could be part-time or a job he likes more that pays less. I've lived this. I went about four years without a job, then went back by choice to remote work I enjoy in a different field. That's what stopping work means to me: the paycheck becomes optional.

At $720,000 in notes, the full $6,000 a month is covered. Then I'd add 12 months of bills in cash, $72,000, for a late payment or a note that pays off early while he finds the next one. That's $792,000, and he already has $900,000. At 8% it takes $972,000, and at 12% it takes $672,000. Every version is a lot closer than $1.8 million.

Why I wouldn't quit tomorrow

If it were me, I wouldn't. That puts about 80% of his money in notes with around $100,000 in stocks, and I don't like that mix. Notes never give you a raise. At 3% inflation, $6,000 a month buys about what $3,300 buys today once 20 years go by. The stocks are what keep up with prices, and they have time to grow because he never sells them to pay bills.

So I'd keep working and keep saving the $30,000 a year. I'd learn how notes work and buy a first one. If his money grows around 7% a year, he's at about $1.2 million in three years. Then he could hold $720,000 in notes, $72,000 in cash and $400,000 in stocks at 59. A bad market year is a bad year for the $400,000, and his bills are still covered by note payments.

The age matters for another reason. Most of his money is in retirement accounts, and at 59 and a half those open up without the 10% early withdrawal penalty. Where the money sits matters, too. A 401(k) at your current employer can't hold mortgage notes, and your own contributions generally stay in the plan until you leave the job or turn 59 and a half. IRAs can roll into a self-directed IRA, a normal IRA at a custodian that allows notes and real estate, where interest isn't taxed as it comes in and can be lent out again. Money in a brokerage account can be lent directly, and that interest is taxed as ordinary income, like wages.

The risks, plainly

Like every investment, a private mortgage note carries risk. Borrowers can stop paying, and then the lender has to foreclose, which can mean a stretch with no income from that note. The house pays the note back, and the money is committed for the term, so it's illiquid. That's why the plan keeps a year of cash, and why $720,000 doesn't go into one loan. At $50,000 apiece, that's about 14 notes across more than one borrower.

One more thing about that $417 a month. If a note is amortized, part of each payment is interest and part is your own money coming back to you. Only the interest is income.

To run your own numbers, start with your real monthly bills, minus what you save and what you only spend because you work, plus the health coverage you'd need if you stopped today. Work out how many notes it takes to cover a quarter of them, then half, then all. Add a year of bills in cash, and make sure real money is left over for growth assets like stocks. That total is your number.