Is It Enough To Be A Millionaire?

Becoming a millionaire feels like a lofty goal. It may even feel like something that's impossible to accomplish.

I became a millionaire at 31. When someone references between a millionaire, they are most often referencing having a net worth of $1,000,000 or more. 

What I want to talk about here is an entirely different question: Is having $1,000,000 invested enough to retire?

The short answer is, no - at least for most healthcare professionals earning a six figure salary.

How can anyone create $1M in investments?

The recipe for $1,000,000 invested is this: consistent savings rate + time + compound interest.

Let's assume you're a PA-C earning $110,000 per year. You start investing 15% of your gross salary at age 28, and continue this until retirement at 65. Here's what your portfolio looks like as you age:

How can you live off of investments?

This is a fundamental part of the equation, and one that's often poorly understood.

When you decide to quit earning an income and live off your investment portfolio, you're deciding to use a portion of it each year. So how much can you use without running out of money?

For those retiring at 65, the classic answer is 4%.

This means that having $1,000,000 invested will provide you only $40,000 per year to live off of. My suspicion is that this may be a lot less than you thought.

Most of the data behind this is relatively old, and there are plenty of critiques on the methodologies used. For example, the assumptions ignored fees and assumed a fixed withdrawal that ignored market conditions. In addition, it fundamentally is using historical returns to predict future returns (which may be flawed). 

That all being said, this old data tells us that if you withdraw 4% of your portfolio per year to live after retiring at 65 you are statistically unlikely to run out of money before you die. That's the goal, right?

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What if I want to retire before 65?

Vanguard's research department gave us some great data on this in their 2021 report on what a 50-year time horizon for retirement would look like.

Assuming retiring at 65 is a 30-year time horizon, this essentially means retiring at 45.

If you had an asset allocation mix of 50% stocks/50% bonds, a diverse portfolio of both domestic and international stocks, had total investing fees less than 20 basis points, and maintained a fix spending plan adjusted for inflation in retirement - you could withdraw 3.3%.

That means $1,000,000 invested could provide the early retiree $33,000 per year to live off of.

As you can see, early retirement means bigger nest egg required. 

What it ultimately comes down to is this: If you've been used to living on a six figure income, you are going to need more than $1 million to retire comfortably, even if you want to retire at 65. 

If you want to retire early, you need a bigger portfolio. This means investing more now and starting as early as possible.

If you're not sure how to get started, we are here to help.