The other day, I heard some people talking about their dreams of winning the lottery. They decided they’d really need to win the big money, because if they only won $2 million or so as a lump sum after taxes, that wouldn’t be enough to retire.
Their reasoning was that if they got 5% interest on $2 million, that would be $100,000 a year of taxable income. But that’s like a normal salary, not enough for the lavish retirement they have in mind. So how can you retire on only $2 million?
Aside from the ridiculous odds of winning that much money in the lottery, their logic isn’t quite right. You can get more than a 5% rate of return, and also you’re not limited to spending only the returns (you can spend the initial $2 million too).
But the basic idea is right: what may sound like a lot of money isn’t so much when you need it to support your big spending plans for the rest of your life.
Whenever someone asks if $x is enough to retire, the answer is always no. Because if you were planning to live within your means and spend money at an indefinitely sustainable rate, you wouldn’t have to ask.
If you have to ask, what you’re really wondering is “Since my desires will expand completely out of control with my unrestrained greed and carelessness, is this so much money that I can’t possibly screw it up?” No, it never is.
I remember when Michael Vick got his 6 year, $62 million contract in 2001. Everyone wondered how he could possibly spend it all. Aside from the obvious fact that you don’t have to spend it all, I didn’t see any reason he couldn’t run out of money if he wasn’t careful. Oprah had recently spent $52 million on a single house.
Fast forward 7 years. He had lost his salary and endorsement deals because of the dogfighting scandal. And the bills continued to pile up: steep lawyer fees, 6 luxury homes, and living expenses and 10 cars for friends and family. With no other options, he filed for bankruptcy.
Your retirement could last longer than you think, and you probably won’t have close to $62 million to take you through it. So how can you prevent this from happening to you? It’s pretty simple, actually.
1. Be frugal. It might not be fun and sexy, but it’s by far the most important tip for becoming and remaining financially independent.
2. Don’t stop earning money in retirement. Earning money comes from creating value. Why do you need to stop creating value at a certain age? You might want to change the way you do it, but you don’t need to shut down completely.
Keep these tips in mind, and you can live indefinitely with no savings at all. Ignore them, and no amount of money will ever be enough.