It’s a premise we’ve heard in songs and any number of written works. “If I had a million dollars…” It’s a great prompt—sometimes serious, sometimes humorous. I’ve decided to take a crack at my own entry into the million-dollar discussion!
I had the privilege recently of meeting a young person who shared their goal of retiring at age 30. I was struck by the ambition, shared by many in the FIRE movement: its mantra is “Financial Independence, Retire Early.” So here I am thinking about a million dollars. What I have to say is all about the numbers. Money and numbers are how we fund the life in which we act out our values, plans, and dreams.
Wondering what it takes to retire early? It’s not a universal formula, but we can take the idea of accumulating a million dollars of invested capital as a decent proxy. In this scenario, one has to be able to imagine someday living on, say, a $50,000 a year. But it also requires a willingness to endure the ups and downs of ownership. They are just part of any long ride in the markets. (And keep in mind it would take a far bigger number to retire on today’s low interest rates on stable forms of money!)
Two factors really affect the path to retirement. One is how we spend and earn along the way; the other is inflation.
First, because financial independence is all about our resources exceeding our needs—income exceeding outflow—reducing your needs is one way to get there sooner. The other side of the coin is finding ways to maximize your human capital in these working years, getting paid more for your labor. So the first best investment might be in yourself to improve your earning power. Fewer expenses, more income—more money to invest for retirement.
Second, inflation will affect how the path to retirement unfolds. Inflation risk is the extent to which our money loses purchasing power over time, so we have to take that into account as we plan for our future spending in retirement.
So let’s get back to the numbers. How much money would we need to invest each year in order to have $50,000 (in today’s dollars) as annual income in the future?
Let’s assume 3% inflation and 9% investment returns—neither of which is guaranteed—and 5% annual withdrawals in retirement. Starting from zero, we could be…
- retiring in 7 years by investing $129,782 annually ($10,815 monthly)
- retiring in 15 years by investing $51,529 annually ($4,294 monthly)
- retiring in 25 years by investing $23,999 annually ($2,000 monthly)
- retiring in 35 years by investing $14,349 annually ($1,196 monthly)
- retiring In 45 years by investing $6,982 annually ($582 monthly)
These numbers are just one way to slice it. If you could live in retirement on $25,000 of today’s dollars a year, for example, take those amounts above and cut them in half. If you would want $100,000 a year, then double the figures.
We don’t know the future, and these calculations are not the future. But it’s a place to start toward a plan.
Clients, if you want to sort out your situation—or help a younger person get started—email us or call.
Content in this material is for general information only and not intended to provide specific advice or recommendations for any individual.
All investing involves risk including loss of principal. No strategy assures success or protects against loss.
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