So would I be able to retire if I had $1 Million?
You might think the answer to this question is pretty straight forward. After all, there’s no shortage of mainstream articles claiming that millionaire status leads to retirement nirvana.
Unfortunately the answer is “it depends”…like many other annoying answers to vague questions such as this one.
Not All Million Dollars Are Created Equal
In order to retire early or reach financial independence, you need to have stashed enough money aside to generate sufficient income from it. This money can be used for investments such as the stock market, bonds, real estate, crowdfunding, or any other income generating asset.
Most importantly, 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. As long as you still live in your home you can’t count it as an investable asset, 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.
You can’t talk about income needs without first addressing lifestyle expenses. I covered the various lifestyle expense packages in my recent post.
Here’s the summary of what my lifestyle expense thresholds look like. It may be useful for you to run a similar exercise so you can do a comparison of your own.
As a reminder, these figures are after-tax values
For my own early retirement or financial independence, I’m targeting either the Gold or Platinum Package at $52,500-$75,000 net per year. They’re my highest lifestyle expense packages, 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 a generic 25% 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 more desirable 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 package.
The Longer Answer
If I’m targeting a Platinum level lifestyle, the minimum amount necessary to indulge that level 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 the necessary returns to support that lifestyle.
Besides, the stress associated with managing those levels of 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 more years slaving away. This is counter to the Max Your Freedom philosophy, since I would be giving up my prime freedom years to accomplish that goal.
I’ve essentially given myself 5 more years to generate 20 Freedom years. This is a very aggressive goal, and the analysis above helps me focus on what I need to target over the coming years.
I”ll basically need between $1.5 to $4 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 the blogosphere.
It’s admittedly on the conservative end, and a fairly wide range. I see the lower end as the minimum entry point, with the high end the maximum cap.
Home Much Is Enough
This simple analysis also helps quantify the age old personal finance question of: “How much money is enough?” also known as the “one more year” syndrome.
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 50s/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.
When you step back and look at how the majority of the world lives, the amounts mentioned in this post are relatively astronomical. These targets should be classified as “wants” not “needs”, at least in my book.
Readers, do you have a target number for early retirement or financial freedom? Are you focused on investable assets or net worth? Do you suffer from one-more-year syndrome? How much is enough for you? Share your thoughts and comments below!