If you're asking how much do I need to retire, that question doesn't have a number in it. Here's a version that does: what does it cost to build $3,000 a month of income after Social Security has done its part?
The average Social Security check is $2,071 a month. The average household over 65 spends $5,119 a month on housing, food, healthcare, insurance, gas, an ordinary lifestyle. Social Security covers about 40% of that. The other 60%, roughly $3,000 a month, has to come out of what you've saved.
Your gap probably isn't exactly $3,000. Two Social Security checks in a married household make it smaller, maybe closer to $1,000 a month, and retiring early before Social Security starts makes it the whole $5,000. Subtract from your bills the dollars that show up without you selling something, and what's left is your gap.
The standard answer costs $900,000
$3,000 a month is $36,000 a year. Under the 4% rule you withdraw 4% of your savings in year one, then give yourself a raise for inflation every year after. To get $36,000 in year one at 4%, you need $900,000 saved.
That number wasn't pulled out of thin air. It comes from running a 4% withdrawal through the worst 30-year stretches American markets have ever produced and finding that the money still lasted. You get two things for the price. An annual raise that keeps up with prices, which matters because at 3% inflation $3,000 of bills today is about $4,000 of bills in ten years. And protection if you retire straight into a terrible market.
Here's the cost. All $900,000 sits in the market, and your grocery money comes out of it. This month's spending gets priced by whatever your shares are worth on the Tuesday you decide to sell. In a year the market drops 30%, you're selling more shares to get the same $3,000. Run your numbers through a retirement calculator and success comes back around 87 to 92%, so there's a 1 in 8 to 1 in 12 chance the money doesn't last. The price tag is $900,000 with a job attached, because you decide every year how much is safe to take.
A bond ladder needs $800,000
The second method takes the market out of the equation. A bond ladder means individual bonds held to maturity, and a bond fund won't do this job because its share price moves every day like anything else. Buy a treasury bond and hold it, and it pays interest on a schedule and hands back your principal on a set date. A ladder is several of these with maturities spread across the next several years, so something is always coming due and reinvesting at current rates.
The 10-year treasury is paying about 4.7% right now. Blend in the shorter rungs, which pay a little less at the moment, and the whole ladder gets you about 4.5%. To produce $36,000 a year at 4.5%, you need about $800,000. The money arrives whether the market is up, down, or closed for the week. You're not selling shares to buy groceries, and there's nothing to time.
So the ladder does the same job for $100,000 less. That extra $100,000 in the stock version is what buys the annual inflation raise, and the ladder doesn't give you one. The interest you collect in year one is the same interest in year 15, and year 15 groceries cost a lot more. Put $800,000 in and $800,000 comes back out.
What private mortgage notes pay, and what they cost you
Somebody buying a house needs money to do it, and instead of a bank they go to a private individual who makes the loan. It gets written down as a promissory note, secured by a lien on that property and recorded at the county, which is the mortgage. The borrower pays every month and the person holding the note collects it. That's the entire arrangement. It's the income side of real estate without owning the real estate, and the work is done up front.
Why does anybody pay a private lender when banks charge less? Speed and timing. A bank takes 45 days and wants two years of tax returns. An investor buying a house at auction has ten days to close and loses his deposit if he misses it, so he'll pay a higher rate for financing that fast.
The industry generally reports rates on private mortgage notes somewhere between 8 and 12%, depending on the market, the loan type, the terms, and the borrower. Take the middle of that range. At 10%, producing $36,000 a year requires $360,000 of capital. A typical note might run anywhere from $30,000 to $200,000, so that's four or five of them, each secured by its own house.
The rate is only half the story. That money is locked up for the loan's entire term, and you can't sell a note the way you'd sell a stock, so it's the wrong place for money you might need next month. Borrowers also stop paying, which is why the homework up front matters. As long as the property has enough value in it, you can foreclose and recoup the money when it sells, including the missed payments and the attorney fees.
The mistake is asking one asset to do both jobs
Side by side: $900,000 in stocks under the 4% rule, with inflation protection included; $800,000 in a bond ladder; $360,000 in notes. Same monthly income, and the most expensive version takes two and a half times as much capital. Stocks historically produce closer to 7 to 10% over long periods, and the withdrawal rate is 4% because of volatility.
Laid out that way, the cheapest one looks like the obvious pick. I don't think it is. All three assume you put every dollar into one place, and that's the part to change. Say you do have the $900,000. Put $360,000 into notes, which covers the whole $3,000 gap with payments that arrive every month, and leave the other $540,000 in stocks with nothing withdrawn. Picture a year the market drops 30%. All in stocks, you're selling shares at those prices. Split up, the $3,000 still shows up and the $540,000 sits until the market comes back.
Note income is flat, the same problem the bond ladder has. That's what the stock side is for. When the $3,000 gap turns into a $4,000 gap, you fund another note out of what those stocks grew. Every $1,000 a month of gap runs about $300,000 the 4% rule way and about $120,000 in notes.
You've split the portfolio into an income bucket that pays the bills and a growth bucket that hedges inflation. The trouble starts when you ask one asset class to do both. Stocks are a growth asset that was never designed as a paycheck, which is why the industry needs Monte Carlo tests and the 4% rule to work out how much you can safely sell. Notes and bond ladders don't grow.
How I run mine
There's no split that's right for everybody. It depends on your gap, on how long the money has to last, and on how much market you can watch without flinching.
This isn't theoretical for me. I was in the military for 14 years, bought rental property during that time using VA loans, and got out four years ago, so I know what it's like to live off your investments with no paycheck coming in. I still buy affordable rental homes in Ohio and sell them to families on payments, and I hold private mortgage notes, which is less work than being a landlord. The notes and the rentals cover my bills, and the stocks sit in an index fund where I leave them alone.