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
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.
Lifestyle Expenses
Unfortunately, a million dollars for me may mean something different to you.
You can’t talk about income needs without first addressing lifestyle expenses. Be sure to calculate your fixed expenses and extra expenses to get your income needed. And don’t forget to consider where you want to retire when determining how much you need every year.
For my early retirement or financial independence, I’m targeting $75,000-$100,00 net per year (after taxes). These are my highest lifestyle expense packages, and I feel that buys my family and me a reasonably luxurious life filled with vacations and a modest home.
Of course, if things go sour, I can always downgrade my lifestyle package down to a Bronze minimum level for me, which is my absolute low of $40,000 annually to live off. In that scenario, I’m confident I could find a job in a low cost of living area 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 in investable assets at retirement buy me? To answer that question, many people use the 4% rule to say that $1 Million in investments would afford $40,000 a year for 25 years. But let’s face it, many of us want to be financially independent for more than 25 years and the 4% rule doesn’t account for the rate of return your investments will continue to make during your retirement.
I ran a fundamental analysis that factors in both the different lifestyle thresholds covered earlier, as well as overall investment returns needed. The table below summarizes the analysis (including inflation and 25% tax bracket for simplicity; not including social security or pensions). It may be useful for you to run a similar exercise so you can make a comparison of your own here.
35-year retirement with a 7.5% rate of return
| Years of Retirement | Income required at retirement | Taxes | Total withdrawal | Rate of return during retirement | Expected rate of inflation | Total investments needed |
| 35 | $40,000 | $10,000 | $50,000 | 7.5% | 2.9% | $879,759 |
| 35 | $50,000 | $12,500 | $62,500 | 7.5% | 2.9% | $1,099,699 |
| 35 | $75,000 | $18,750 | $93,750 | 7.5% | 2.9% | $1,649,549 |
| 35 | $100,000 | $25,000 | $125,000 | 7.5% | 2.9% | $2,199,398 |
40-year retirement with a 7.5% rate of return
| Years of Retirement | Income required at retirement | Taxes | Total withdrawal | Rate of return during retirement | Expected rate of inflation | Total investments needed |
| 40 | $40,000 | $10,000 | $50,000 | 7.5% | 2.9% | $926,062 |
| 40 | $50,000 | $12,500 | $62,500 | 7.5% | 2.9% | $1,157,577 |
| 40 | $75,000 | $18,750 | $93,750 | 7.5% | 2.9% | $1,736,365 |
| 40 | $100,000 | $25,000 | $125,000 | 7.5% | 2.9% | $2,315,154 |
The Short Answer
Based on this table, I can indeed retire with $1 Million. Well, a little more, to be precise ($1,099,000). But that only buys me a Bronze Package lifestyle ($40,000 a year), with a low-moderate risk profile for my investments (rate of return 7.5%). Of course, I could also upgrade to the Silver Package ($50,000), and even the Gold Package ($75,000), but both would require more risk tolerance and exposure for a higher rate of return (15-20%) in the stock market to still retire with $1,000,000.
This analysis has made clear that the more desirable Platinum Package is out of reach (given the return assumptions in my model anyways). So I would either have to be content with the other lifestyle packages or increase my investable assets to “purchase” the highest lifestyle package.
The Longer Answer
If I’m targeting a Platinum level lifestyle ($100K after taxes), the minimum amount necessary to indulge that level of luxury is 2.2 Million dollars ($2,199,398 to be precise) for a 35-year retirement. Given the current low-interest-rate environment and record-high equity markets, I would be somewhat 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. So for now, I will keep adding to my investments and building income through my side hustles.
Of course, I could lower my expected returns to reduce the exposure if I wanted, 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 working my time 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 mostly given myself ten more years to generate 40 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 need between $2.3 to 4 Million dollars to claim financial independence, truly depending on my risk tolerance and timeline.
My timeline is 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 with 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 as the maximum cap.
How 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. But 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 upper 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. I look forward to the days when I can afford to give and live like no one else.
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!
Guest Post By Theresa Bedford. Theresa is the founder of the blog, In the Game Investing, where she teaches professional women how to manage their money and investments. She has been featured in Go Banking Rates, Your Money Geek, Christine Michel Carter, Corporate Quitter, and more.