I want to retire early with 1 million dollars.
That statement has a nice ring to it, huh?
I don't think I've worked with a client yet that didn't want to retire early, or wouldn't be ecstatic if they had a $1 million portfolio.
But as most of us already know, $1 million isn't what it used to be.
This article from USA Today makes the bold claim that $1 million isn't enough to retire nowadays.
Look, $1 million is A LOT of money, but to stretch that out for the rest of your retirement is tough. It's even tougher with lower interest rates.
The article states, “10 to 12 years ago, when people earned a lot more on their investments, $1 million could generate $70,000 to $80,000 a year in retirement income. But with interest rates as low as they are, that's not really feasible.”
Sure, there are ways to make the most of out your short-term investments, and there are intriguing options like Peer to Peer Lending that can yield decent returns, but they don't magically guarantee an early retirement (Learn more about the top peer to peer lending network in our Lending Club Review and my review of Prosper).
So the question remains: Can you really retire early with 1 million dollars?
Early Retirement Case Study
What I didn't realize about having to answer that question is that pretty soon I would be put to the test.
I was referred to a new client who was looking to do just that.
He and his wife were looking to retire early. He’s 56, she’s 57. While he liked his job, the physical demands were taking a toll on his body. He just didn’t feel he could make it that much longer, so he was looking for a way out. Before he came into the appointment, I knew that he had roughly $1 million, but even I know that $1 million isn’t enough, especially for somebody who is over six years out from collecting their first social security check.
Needless to say, I wasn’t very optimistic that I would be giving him the green light that he’d be able to retire early. But by the end of our second appointment when we were going over the financial plan, all that changed.
After we went through The Financial Success Blueprint (this is our unique financial planning process that my firm offers), I was able to share the good news:
They had a 92% probability that they would be able to accomplish their goal of retiring early.
I can still remember the reactions from both of them. The husband had the same surprised look as a first-time father learning that he’s getting ready to have quadruplets instead of one child. The wife, on the other hand, had tears rolling down her face. They weren’t tears of sadness, but tears of joy that her husband could actually walk away from the job that was causing him overwhelming stress.
As what I told my clients and as I tell most people who want to retire early, it’s not something that I am at all comfortable with. I would prefer that my clients work at least until they’re 62 to draw some sort of retirement check. Having the social security check puts much less stress on their retirement portfolio to produce their required monthly income check, but despite wanting to tell the client that, no, they can’t retire yet, they need to wait; the numbers don’t lie.
What makes this couple different? How were they able to retire at the age of 56 with $1 million and have a 92% chance of success at doing so? Let’s break it down.
For the first three years, they were going to need to pay out of pocket for medical insurance, so we estimated that they would need a total of $70,000 for insurance and income. After their first four years, we had planned that they could live off approximately $48,000 a year, and we would inflate that by 3%.
With this calculation that I like to tell all my clients is that when we factor in a 3% rate of inflation, that never goes away. That means when the clients are in their mid-80s, the plan will be assuming that they are spending $80,000 a year in retirement.
The reality of that actually taking place is slim to none. I have very few clients that could spend that amount of money, even if they wanted to. Obviously we have issues like long-term care and medical costs, but with Medicare, they are informed of long-term care insurance, and we can usually take care of that.
This couple likes to travel, and had a few adventures already planned in their first couple of years of retirement. They plan on purchasing a new car, a motor home, a cabin, some four-wheelers, and of course, they have the additional cost of travel. These were all factored in with the plan to make it as realistic as possible.
Assets and Liabilities
Most of the client’s assets were tied up in a pension plan that would give them the ability to do a lump sum distribution and roll that into an IRA. They also had a 401(k) in which they had accumulated roughly $250,000. In addition to the pension and the 401(k), the couple had also purchased two triplexes that they were currently paying down. They had some equity in the properties, but they weren’t cash flowing yet, and weren’t estimated to cash flow for another nine years. The husband had also done some outside consulting, and with that had accumulated an investment account with roughly $120,000 in it.
Obviously having the assets is huge, but the determining factor that allowed my clients to retire early was this; additional income. My client had become an expert in a position at his current employer. With that brought opportunities to consult for his company and other companies. Because of his expertise, he’ll be able to do consulting that will net him approximately $30,000 per year. He’s confident that he’ll be able to do this for at least four years, if not six, which could stretch him until retirement. The best part is that the consulting will allow him to do some traveling with his family, and he’ll be able to work on his terms.
More from GFC, Below
Based on the client’s Risk Score (if you don’t know what your Risk Score is you can find out more here), we’d allocated the client to be invested in a 50% stock, 50% bond portfolio, which is generally a good starting point for any retiree. Please note that the returns used in our financial planning software use historical returns. As you can see based on the screen shot below, the allocation included 35.75% domestic equity, 14.25% of international equity, and the rest split up amongst the international fixed income, aka bonds.
With this particular client, we used one of our model portfolios that incorporates Asset Lock, which is a nice feature that allows investors to lock in any market gains. In addition, we used a portion of the client’s bond portfolio, and used an annuity that offered a guaranteed income rider to have protection.
So what did that really mean, a 92% success rate? What our financial planning software does is that it takes all the data that we’ve entered in, their assets, their liabilities, their investment strategy, their income, and then we run 1000 different simulations taking into account market fluctuations, interest rates and various other factors. Based on all those simulations and the data provided, the client will have a 92% chance of success. Typically I tell clients if we can get in that 80% to 85% range, then we’re sitting pretty good. Anything greater than 85%, especially 90%, then I’m that much more confident.
In this particular client's scenario, they have a 92% chance of success that they will not run out of money until the clients turn the age of 90. Once again, we’re assuming that at the age of 90 that they are spending a large sum of money each year.
For the 8.4% of the simulations that didn’t work, the average age of the shortfall was 71. I find this interesting, because with most of my clients that retire early, I explain to them that in the beginning is when most of the spending occurs. I like to use the analogy of a caged pet being set free, so that all they want to do is run. It tends to be the same thing with retirees.
Once they retire from their job, they’re set free and all they want to do is go, go, go, go and travel and see new things. In the first five years is when most of the spending occurs. After the thrill of traveling wears off, then they tend to stay around the home more and travel much less, which also means that the spending lessens as well.
For the fact of the average shortfall at 71 is typically when the spending has already started to decrease, I feel it then also increases the probability of success for my clients.
How Did They Make it Work?
Giving my client the golden ticket and telling them that they can retire early is something that I would rather not do. In this day and age, there are so many different factors that can impact us during retirement that I typically feel much more comfortable telling them to postpone it as long as they can. However, with the nature of my client's job environment and the amount of stress that came along with it, combined with several other factors, I felt like I would be able to share the good news.
Once again, here’s how they were able to make it work.
- They had a good amount of savings. Even though $1 million isn’t what it was 10 years ago, it still $1 million. They benefited from having a very cushy pension, but the fact that they were also putting money in their 401(k) and had other investment accounts outside of work made early retirement a possibility.
- They had no debt. This is HUGE. There is no way that they would ever be able to retire early if they were still carrying any type of debt. To their benefit, their home was paid off, they had zero car loans, and they had zero credit card debt. Having no debt opened so many more possibilities, and allowed them the chance to retire early.
- They are smart with their spending. Any couple that has no debt approaching retirement have to be smart spenders. While this couple enjoys spending quality time with their family and traveling, they did so very frugally. They don’t eat out a lot, they don’t wear a lot of designer clothes, and they don’t drive new cars. They live simply, but more importantly, they appreciate the things that are most important to them, which is family.
- They had additional income sources. The 401(k), the pension and the outside investments wouldn’t do it alone. The fact that my client had the ability to offer consulting after retirement was another big piece of the puzzle. Without the consulting, there was no way that he would be able to retire at this age. I stressed the importance of making sure that he was 100% certain that he would be able to have a consulting gig for at least four years post retirement; otherwise the success rate would drop considerably.
- They had other assets outside of their 401(k). We already talked about the pension, but another contributing factor was the rental property. Even though it is not cash flowing now, there is no reason that it wouldn’t cash flow once the property was paid off. In the area that we live, it’s not hard to find renters for this type property, which could be more difficult for someone living in a metropolitan area. Having these additional assets, or as I like to say, having multiple buckets, gave these clients that many more options.
- They put together a plan. As the quote says, failing to plan is planning to fail. There is no way you could ever retire early if you didn’t sit down with some type of financial planner to help you accomplish your goals. By my clients going through our unique process of the financial success blueprint, we were able to take a comprehensive look at their entire situation and run several different scenarios to see which made the most sense. What wasn’t demonstrated in this case study is that we actually ran three other different scenarios, changing a few of the key metrics to see which scenario played out best. For the client, retiring at the age of 56 while having the outside consulting income proved to be the most successful.
Are You Prepared For Financial Success?
Many people don't take the necessary time to plan like this couple did and that's why many people can't retire when they want. If you're not 100% certain how your financial plan is check out my unique process The Financial Success Blueprint.