Update: This article somewhat outdated I as truly entered early retirement some time ago.
It’s been more than a year now since I left my job. Life is good, there is little stress and spending time with my family is great. Some people assume I’m retired and for a while stopped arguing otherwise.
Not this time though, let’s argue for a minute. Why is it that I’m pondering going back to work? Is it money? well… yes and no. I’m still a millionaire and as a matter of fact my portfolio is slightly larger than it was the day I quit. So is there no dire need to go back to work? No not dire but inevitable at some point.
You may ask if can anyone really retire on one million dollars? The answer depends completely on your situation. It all depends on how much you spend and what you bring in (in our case return on investments). The conservative estimate is 6% (Dave Ramsey will tell you it can be 12%). So if you have a million dollars that provides a 6% return and you take out $50,000 a year (your living expenses, then at the end of the year you’ll have 1,000,000 + 6% = 1,060,000 minus $50,000 = 1,010,000. That means you’re investment will keep providing your livelihood and keep up with inflation.
Can I retire on a million dollars? The short answer is no but lets explore the somewhat longer answer. Theoretically, if I had a million dollar and had it invested in the stock market then yes, I could retire based on:
- The returns I’ve seen over the last 17 years (approximately 8%)
- The expenses we current live with which is approximately $65,000.
Inflation catches up and money runs out. as you can see in the graph above, stock accounts would be depleted by 2047. I’ll be pretty old and at that time and the house would be free and clear. Money could be freed up by dipping into that. It could be retirement but not a comfortable one.
This is all of course theoretical. Yes I have a million (and then some) but… not all of those investments are in after-tax accounts.
I have about half a million in stock, a similar amount in 401(k) and some additional investments like land and property. I cannot ignore that half of our portfolio is tied up in our pre-tax accounts. That’s a good thing you might say, right? Who wouldn’t want that kind of money in their 401(k) at 44? I’d be with you if you’re planning on retiring at 65 or maybe even at 59.5. When you want to retire young, you have to deal with all that money being tied up till the legal withdrawal age.
This changes the narrative of the theoretical million dollar portfolio. I actually only have access to half of my portfolio and granted it doesn’t have to last me all my life, it does at least 14.5 years. It takes that much time before I can withdraw penalty free. Sure there are loopholes to getting to your money out earlier but they all come with strings and risks attached.
If we look at the same million but allocated as is, the graph looks much less promising. Yes my 401(k) will grow nicely to over 1.6 million by the time I can withdraw but my after-tax accounts will run empty in 2025, over four years short of getting access to my 401(k).
I’m close to 45, a millionaire but the numbers for early retirement just don’t add up.
What is one to do? Well, the initial goal and plan was to become a millionaire in 10 years. That plan saw its successful conclusion some time ago. For many that kind of money can represent financial freedom. For us it doesn’t, our current annual expenses outpace the income we get from our portfolio.
It is time to hatch a new plan: Financial Freedom. What does it look like? It involves going back to work. If that is full/part-time, freelance or W2, I don’t know yet.
Over the next couple of weeks and months I’ll hatch my plan on what it means for us become financially free and what it will take to get there.
I’ll keep you posted.
In the meantime if you want to share your story of early retirement or your plan to financial freedom.
Good luck turning your financial goals into reality
Thank you for this post.
Way too many retirement articles talk about how much money you “need” to retire but then make no distinction between pre-tax (i.e. 401K and pension) money and post-tax money. And the difference is huge! Never mind the 8% growth assumptions and old school advice about your money doubling every “n” years.
Days long gone I’m afraid.
And as you point out, the issue of 401K money being somewhat locked in is another twist. Of course you can make withdrawals with a 10% penalties so you could call that the cost of doing business and model it accordingly. Not nice but another possible path to never having to work ever again.
Thank you. Being in the middle of it, I can’t seem to ignore the little details of how much you really need. I’ve been reading up on how to get money out of the 401(k) early and penalty free and although there are a few options (the recognized ones of “equal payments” and not so recognized Roth IRA conversion ladder) all of them seem to be with risks and strings attached. Not giving up on the retirement completely but at this point I do need to keep my options open.