Why You Can’t Retire On $2 Million
October 28th, 2009
Email this article to a friend
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.
October 29th, 2009 at 6:42 am
Good luck getting a relatively safe return higher than 5%. Anything over 4% during the next 5 years (maybe longer) will come with gobs of risk attached, and a relatively safe 4% might even be difficult.
October 29th, 2009 at 7:20 am
@ Chad, well, you’re just talking about the next 5 years or so, which is hopefully a small part of one’s retirement. Although having 5 sluggish years in the beginning of retirement must be a downer.
What is your 5 year prediction for the global stock market, weighted by market capitalization?
October 29th, 2009 at 8:37 am
I don’t have a number I’m looking for the market to hit, but broader themes I play.
For instance, I’m going to mostly stay away from U.S. companies over the next few years because:
- U.S. banks are still a complete mess and nothing has been done to prevent them from doing the same things that got them in this mess in first place.
- There are still large numbers of houses that will be going into foreclosure over the next 2 years…maybe even longer, but I can’t predict that far ahead.
- Our massive national debt and up coming deficits are going to be so massive the government will have to create very high inflation and significantly lower the value of the dollar. If the government/Fed misses their target we might even see deflation, which is rare but in some ways worse than inflation.
- There are no signs employment will be picking up (though this is usually a lagging indicator).
- China, though they maybe creating a bubble themselves, still has a lot of room to grow internally.
- Peak oil is real and most natural resources are limited, but demand is still climbing.
All of this leads me to significantly reduce my U.S. exposure and focus on commodities and to a lesser extent foreign companies. I may even do some currency trading if I feel bold enough.
There will be pieces of the U.S. economy that do well, such as manufacturing (weak dollar will help), but overall our purchasing power will decline and weaken our economy.
By no means am I arguing that I’m taking the safe route. To be honest I’m not sure there is a trully safe route like there has been in the past.
October 29th, 2009 at 8:37 am
That might have been a little more than you wanted…sorry.
October 29th, 2009 at 2:49 pm
Hey Hunter.
Good point here. Big money isn’t as big as it seems as first. We usually first have the thought that something will cost a set amount, but then there is upkeep, future expansion, side purchases, purchases to protect it, and so on. Real costs are way higher than we like to think, because it makes our goals look even further out of reach.
A person with two million dollars and a set plan could then be very well off, while a person wanting ten million dollars to show off will last a ridiculously short amount of time.
I like your point about creating value regardless of condition. There is always something to provide.
October 29th, 2009 at 11:25 pm
@ Chad, don’t apologize, that was great info.
@ Armen, I think anyone intending to show off is very likely to get into trouble. They’ll either go bankrupt or turn to shady methods to keep the income flowing.