If you have a corporate job and plan to retire early… Is 1 million dollars net worth enough? Unfortunately, the quick answer is no, you can’t quit working entirely. I received a few emails from high net worth readers and their accounts are quite similar. (BTW, I love getting emails from readers so send me an email via the contact form anytime.)
Here is an example of a corporate guy/gal’s million:
- 400k in retirement accounts (401k, IRA, and Roth IRA).
- 200k in home equity.
- 400k in taxable accounts and other investments.
This is just an example, but I have seen similar ratio on other blogs as well. Most of my savings are in the retirement accounts too. I would hate to draw from these retirement accounts upon early retirement because we’ll have to pay penalties. Personally, I plan to leave my retirement accounts alone until I can withdraw without penalties at age 59 1/2.
From the 400k taxable accounts, we can invest them in a dividend portfolio. Let’s be generous and assume 5% yield. This only gives us $20,000/year or $1,667/month to play with. In the US, it’s quite difficult to live on $1,667/month, even if you are frugal and have no debt.
If you want to retire early and only have a million dollars, you’ll have to get creative.
Here are some options.
- Move to a cheaper location. If I lived in CA this is what I would do. I would sell my home and take the equity and buy a more affordable home out right in a cheaper location. If you are adventurous, maybe you can look into moving to a cheaper country like Costa Rica, Thailand, or Texas. ;)
- Generate side income. I’m working on this and encourage any retiree to do the same. You can explore your hobbies and passions to see if it’s possible to make a little money on the side. I believe this will make you happier in the long run.
- Put that 200k home equity to work. Refinance and take the cash out to invest. The interest rate is still very low now, but I think this is pretty risky move. There is no guarantee that you’ll be able to beat the interest rate.
- Take on a bit more risk with the taxable account. You can sell covered calls on the dividend portfolio. I haven’t done this yet, but it seems like a great way to increase yield. You can follow the link and read about it at Cash Flow Mantra.
- Draw down the taxable accounts. This would be my last option because I want to preserve the capital as much as I can. For example, if I retire at 39 1/2 then I have 20 years until I can withdraw from the retirement accounts with no penalties. If you are willing to draw down the capital, then you can increase the withdrawal rate to about $2,500/month. It’s a lot more feasible to live on $2,500/month than $1,667. Once we get to 59 1/2 then, we can withdraw from the retirement accounts which hopefully has grown much larger over 20 years.
I ran the 400k with $2,500/month withdrawal rate through Vanguard’s Monte Carlo simulator and got 55% chance of success. I put 60/40 stock/bond investment for this. That’s not great, but at least we’ll still have the other 600k and possibly social security to fall back on. BTW, if we stuck with $1,667/month withdrawal rate, the probability goes way up to 90%.
Do you have any other suggestions? What else can we do to stretch 400k over 20 years? Or a million dollars out over 40+ years of retirement?