I was inspired to write this by a recent assertion from a slew of articles that claim that $1 million isn’t enough to retire and to be quite frank I believe this to be balderdash. It is absurd to me to think this way. Even with the basic 4% rule one could easily move to a mid to low cost of living area and live very comfortably. Of course inflation is a huge problem but with the right investments this can be relatively mitigated. Of course I do concede that trying to raise a family with a supposed $1 million nest egg for what could be 40 years might be impossible but the $1 million is still the gold standard for passive income gains leading to retirement.
1 . Bonds and the 4% rule: The four percent rule is famous it basically means that a 4% return is the supposed bare minimum that one can almost always expect from investments. And just as it so happens low risk investment grade bonds generate this kind of return. In fact for the past 8 years the average AAA, AA, and A level bonds have hovered in the 3 – 4.5% range. Which would produce about $30,000 to $45,000. Not living the high life per say but more than enough to save and live comfortably in low cost areas.
2. Junk Bonds: For the more ballsy people out there junk bonds are like corporate bonds and really any other bond in general but with a higher rate of return. Don’t be fooled by the name, it just a moniker given to corporate bonds below an A rating from Moody’s and Standard and Poor’s bond ratings. In fact an informed investor can pick good companies and see returns that are in the 5.5 -6.5% range, yielding $55,000 to $65,000 for an $1 million portfolio annually. Allowing a person to pick more high cost areas.
3. ETF’s: For all my passive income gurus, this is the paramount investing option. Mainly for the reason it is as easy as opening a brokerage account, waiting 5 days and making maybe 5 clicks with a mouse. But seriously, the average return of the S&P 500 is about 11% annualized, meaning a $1 million portfolio can produce $110,000 in gains annually. Believe it or not this is more than enough to live on in high cost of living areas like New York or Los Angeles.
4. REIT’s: Now this one is for all my real estate fans. REIT’s offer the returns of real estate while also offering the passive income that ETF’s or bonds do. You simply have to find some REIT funds to invest in and you’ll be rolling in those sweet gains in no time. In fact, the average return of a REIT has outpaced the S&P 500, bringing in a 12% gain. This means that your $1 million dollar portfolio will yield $120,000 a year. This would put you in the top 10% of all earners in the United States for literally doing nothing.
5. Living cheaply: This is switch up from the other items on this list but making 12% on your $1 million won’t mean anything if you keep losing money year after year. Try to learn some budgeting techniques and curb your spending habits. It’s great to splurge once and a while but I am not sure I could think of anything more embarrassing then having a fat stack of cash and then whittling it down to nothing because you had to have that cup of coffee every morning, or that totally necessary Lamborghini you had to have.
To be honest it’s not that hard to make the decision retire early on a relatively obtainable amount of money, at least in theory. The real hard part is staying disciplined and managing expectations of what your retirement will look like. You might not be going on river cruises every other week, and you may not be taking surprise trips to Tokyo, but you won’t be dealing with you moronic boss either. The key is to find enjoyment in thing that don’t cost you a lot of money.