So would I be able to retire if I had $1,000,000? Like many broad questions such as this one, the answer is basically…it depends. Don’t worry, we’re going to get more specific than that in a minute, but first we need to narrow down the type of million dollars we’re talking about.
Not All Million Dollars Are Created Equal
In order to retire or reach financial independence, you need to have stashed enough money aside to be able to generate income from it. This could be money put into investments such as the stock market, bonds, real estate, or any number of income generating assets. Basically the amount of money available (in this case the hypothetical million dollars) needs to be the investable kind.
This is different from your net worth, which may include money that’s not available to generate income, such as an emergency fund, tuition for school, or even the equity in your house. That equity is not available while you’re still living in it, although paying off your mortgage early frees up a ton of cash. If your goal is early retirement, I would also exclude your tax-advantaged retirement plans, such as your 401-K or IRA, since you want to leave those alone until you get to retirement age.
So now that we know the type of million dollars we’re talking about, we can move on to the amount needed.
Unfortunately a million dollars for me, may mean something different to you, so to narrow it down even further, we need to first address lifestyle expenses. If you haven’t read my post yet on lifestyle expenses, you should probably do so before reading on…
As a reminder, here’s the summary of what my lifestyle expense thresholds look like. It would be useful for you to run a similar exercise so you can do a comparison of your own.
For my own retirement or early financial independence, I’m targeting the Platinum Package at $75,000 net per year as my goal. It’s my highest lifestyle expense package, and I feel that buys me and my family a fairly luxurious life. Of course if things go sour, I can always downgrade my lifestyle package all the way down to Bronze, which is my absolute minimum. In that scenario, I’m confident I could find any type of job to keep my minimum lifestyle funded, or rely on less investable assets.
Back To $1 Million Dollars
So what kind of lifestyle would $1 Million dollars in investable assets buy me? To answer that question, I ran a very basic analysis which factors in both the different lifestyle thresholds covered earlier, as well as overall investment returns needed. The table below summarizes the analysis.
The left hand column shows the different lifestyle thresholds as explained earlier. I added a new column which shows how much gross income (before taxes) is required to achieve the lifestyle expense threshold. In this case I used 25% as the tax rate, but this depends on your particular situation.
The right hand columns are based on three levels of risk tolerance and/or expected returns. The assumed values can be debated, and your particular risk tolerance or expectations around returns could vary. I tend to be more conservative, so I feel like what I have reflected in the table above is fairly reasonable.
The Short Answer
Based on this table, I can indeed retire with $1 Million dollars ($1,056,000 to be precise). That amount buys me a Bronze Package lifestyle, with a low risk profile for my investment. I could also upgrade to the Silver Package, and even the Gold Package, but both would require more risk tolerance and exposure.
One thing the analysis has made clear, is that the desired Platinum Package is out of reach given the return assumptions in my model. I would either have to be content with the other lifestyle packages, or would need to increase my investable assets to “purchase” the highest upgrade.
The Longer Answer
Since I’m targeting a Platinum level lifestyle, the minimum amount I need to enjoy that type of luxury is $1.5 Million dollars ($1,538,462 to be precise). Given the current low interest rate environment, and record high equity markets, I would be fairly exposed chasing those returns. The stress associated with managing those returns doesn’t sound very appealing to me.
I could lower my expected returns to reduce the exposure, but that could require as much as $4 Million dollars. I’m fortunate to have a job that could make that number a reality, but that means spending >20 years slaving away. This is counter to the philosophy of Max Your Freedom, as I would be giving up my prime freedom years to accomplish that goal.
If you recall my post on the Freedom Phase, I essentially have 5 years to position myself for 20 Freedom years. This is a very aggressive goal, and the analysis above has helped me focus on what I need to target over the coming years. I will basically need between $1.5 to $2 Million dollars to truly claim financial independence.
My timeline is obviously self imposed and I have plenty of flexibility in extending the transition time or adjusting my risk tolerance, but this targeted range feels reasonable. It also aligns closely to what I’ve read across various sources.
Home Much Is Enough
The other answer this analysis has helped me quantify is the age old personal finance question of: How much money is enough. It’s clear from the worksheet that $4 Million in investable assets is plenty of money to live a relatively low risk, platinum level lifestyle. This number should act as a cap on any personal ambitions I may have relative to net worth.
It should also keep me honest by ensuring that I don’t rationalize working well into my 60s and beyond on the count of wanting to make more money. In theory any amount above $4 Million is effectively wasted on my household, and should be used more productively elsewhere in society.
That amount is ridiculous to even contemplate when you factor in how the majority of the world lives. I would hope that if I were to ever score big someday and find myself with more money than that, I would remember this analysis and find a better use for the extra cash.
As many successful people will tell you, the first step in accomplishing a goal is to write it down, and track it regularly. I’m willing to bet this post will be a good motivator for the next few years.
If you want to conduct your own lifestyle and retirement analysis, you can download the simple calculator I used and run your own scenarios. Simply click on the FREE download below and enjoy. Please note that I will also add you to my subscription list so you can receive any other updates, check your e-mail to opt-in. You can unsubscribe at any time, I hate spam as much as anyone!
Report back what your target number is in the comment section. How much is enough for you?