I recently read an article on Daily Finance that posed the question of whether having one-million dollars was enough to retire.
For many, one-million dollars is perceived as being the classic bench-mark of finally having enough money to retire as well as a symbolic goal for finally “being rich”. But as you can expect, the article posed several questions about whether retiring on one-million dollars had become a myth. Would it be enough to retire or stop working altogether?
Where Does One-Million Dollars Get You?
Perhaps it’s a sign of the times that our expenses have gotten out of control. Or maybe our society just simply “thinks” they need too much to live comfortably. Either way, we can explore this situation a little further.
Let’s pretend you managed to save one-million dollars. For simplicity, we’ll ignore the whole “waiting until age 59 ½ requirement”. Also, we’ll assume a worst-case scenario and say you’re going to pay taxes on the money you withdrawal from it.
The classic system for living off your money is to keep it in the investment account and withdrawal some small amount each year; usually around 4%. If your account makes more than that, then great – it just goes back into the account and acts as a buffer against inflation.
Assuming we withdraw 4% from this account every year for living expenses, you’d have:
• $1,000,000 x 0.04 = $40,000 per year (or $3,333 per month)
Since we’re assuming a worst-case scenario and that this money is NOT tax free, let’s apply a standard 25% tax rate:
• $40,000 x 0.25 = $30,000 per year (or $2,500 per month)
What Do You Really Live On?
Some of you may look at $30K and say that’s plenty. But I’m also willing to bet that many of you may be thinking how you could ever possibly retire on that much money.
Maybe $30K doesn’t sound like a lot of money. But is it possible that it’s what you’re already living on?
I recently wrote a post on how your expenses during retirement may be different from what they are today. Consider that if you stop working, you may no longer have to pay such expenses as FICA (Social Security and Medicare) deductions, 401k contributions, IRA contributions, and other work expenses (gas, lunch, etc.). In addition, if you play your cards right, you’d hopefully also be at a point where you no longer have mortgage payments, car payments, and daycare expenses. Basically you may actually only need 50 to 75% of your current income. See my list and try it for yourself.
Your Individual Needs
So how much money do you REALLY live on? Is it closer to $30K per year? If you really wanted, could it be?
I am certainly not implying that we should all retire when we reach $1M and live off $30K a year. This exercise is intended to demonstrate that $1M may not be a myth for some people and that you may actually need less money than you think you do.
Consequently, if you save large proportions of your income, you’ll learn to live off of less money. When calculating how much you’ll actually need for retirement, you’ll find you don’t need as much as you’re making now because you can finally cease all this saving.
Just as the Daily Finance article concludes, each person’s situation is unique. I couldn’t agree with this more. Your ultimate decision to stop working all depends on how badly you want to, what sacrifices you’re willing to make to get there, and your plan to make your money last as long as possible.
Have you given any thought to how much you’d need to retire? What is the minimum amount you think you would need? Do you think one-million a myth for you?
Photo credit: One Million Ones by rasputin243 on Flickr