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A Million Dollars is NOT Enough

by retirebyforty on July 25, 2011 · 75 comments

in early retirement, investing

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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%.

vanguard monte carlo calculator

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?

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{ 71 comments… read them below or add one }

LifeAndMyFinances July 25, 2011 at 3:59 am

This is why I don’t focus my energies toward collecting a lump sum amount for retirement. Rather, I am focusing on passive income (RB40, I know you are doing the same thing with your rental properties). I might only have $500k in the bank at retirement, but my residual income from investments will be more than enough to live comfortably! :)

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Jon -- Free Money Wisdom July 26, 2011 at 2:49 pm

Great idea. I am with you. I also do not want to sit idly by after retirement playing bingo. I want to be productive and I plan to use my productivity to still earn a side income. Who says when you’re 59 you become decrepit and unable to work? Work is good, God created it—and non-productivity is a waste.

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BeatingTheIndex July 25, 2011 at 4:01 am

That’s a tough one RB40 and you got me depressed with this $1 million dollars is not enough unless maybe if you $1 million is all in a taxable account. Then if it’s all invested in a dividend portfolio @3% yield you’ll get your 30,000 for a long time.

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retirebyforty July 25, 2011 at 9:45 am

It’s a lot easier to build up the 401k account because of the tax advantage. It would be great to have $1 million free and clear though. :)

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cashflowmantra July 25, 2011 at 5:27 am

Well first of all, thanks for the mention. I appreciate it.

If I were in the scenario you suggest, with $400,000 in taxable accounts, I would purchase investment real estate with cash and live off the rent. I would also take out some home equity as a cash flow cushion of $40-50,000.

Here in Indiana, I could get 4 single family homes for $400,000 and rent them for $900 per month minimum. Figure a 5% vacancy, 5% maintenance fund and about $3,000 for taxes and insurance leaving me with about $2250 per month profit.

That is better than the 5% yield and depreciation would help decrease the tax liability even more so than dividends which you didn’t consider in the $1,667 figure.

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retirebyforty July 25, 2011 at 9:49 am

That’s excellent ROI. The home price in our area is still pretty high. With 400k, maybe we could buy 4 condos and rent them out. I’m pretty sure we won’t make as much rental money though, probably around $700/month each.

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Richard Chew September 3, 2011 at 10:38 am

RB40, I am 62, retired in Calif. I never got positive cash flow in Calif. so I bought 5 rental homes in Fla and Michigan. About 4k net/mopnth income using my home equity in the amount of 330k. A 11 -14% return. You need to invest outside of your state to do so, that was my epitany. I manage them thought email, cell calls, and have them pay me at Chase bank and I just check for deposit on-line.
I semi-retired at 49, my wife worked and I did contract jobs (6 months) at a time so I took summers off. So I lived that way from 49 to 60.
I found out that I can now live on just our SS and a small pension. The rental income is just gravy and I don’t touch the 401k.
BTW, after I am gone my wife and my son have the cash flow forever.

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retirebyforty September 3, 2011 at 10:01 pm

That’s great! I’m quite nervous about investing out of state, but I will have to look into it more. 11-14% is great ROI. I think actual expense will be less than predicted as well.

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Nate July 27, 2011 at 4:04 pm

That’s a great strategy. If you were ok with leverage, you could put 50% down on 8 houses and just about double your return. More than double if you count the principle paydown and other benefits.

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Niki July 25, 2011 at 5:53 am

I don’t think a million is enough either. Luckily, we aren’t even close. :P One day!

I like your ideas to stretch it out. Fortunately for us, we’ll receive a pension when my husband retires from the Navy at 38. That will help until we reach retirement age.

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retirebyforty July 25, 2011 at 9:49 am

Oh yeah, I forgot pension! It’s so rare these day though.

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Richard Chew September 3, 2011 at 10:47 am

RB40, When I hit 60 I fully retired and found my expenses to be actually very low because I no longer have the desire to buy, as I’ve already have had so much (stuff and junk) The psycology changes as you get older and you come to that realization. I have a 12k/year travel budget thought. A wise person knows what he needs and not need so will not need anywhere near one Million.

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retirebyforty September 3, 2011 at 10:02 pm

12k per year is a very nice travel budget. We’ll probably have to shoot for a bit less than that. Your plan is working very well though, I’m encouraged.

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LLF July 25, 2011 at 6:46 am

Depending on where and how you live one million maybe enough. Where I am, 1 million is not enough.

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Frank Urbaniak July 25, 2011 at 6:47 am

Enjoyed reading your article but unfortunately not even close to a million yet. I have an app that I use for my dividend investments that you and your readers may be interested in called the iDRiP app from the AppStore. helps to retire as early as possible.

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No Debt MBA July 25, 2011 at 7:15 am

You can use the 72(t) rule to avoid penalties. Basically you agree to withdraw a long series of payments and don’t pay penalties. You also won’t pay penalties withdrawing principle from a roth IRA. A large part of making $1mil work is how you place that money.

We could do $1,667 a month. It’s much easier without kids and in a low cost of living area where $200k would pay your house off.

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retirebyforty July 25, 2011 at 11:56 am

I would hate to dip into the retirement account before I hit 59 1/2. I’d rather spend a bit less now and have that as a back up.

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Brave New Life July 25, 2011 at 8:29 am

Using the 72(t) rule in the tax code, you can take money out of your IRA without penalty when you need it. Given this, you now have $800K to withdrawl from, not $400K. Now, if you run your numbers again you’ll find that with a 50/50 stock/bond split, you have an 85% chance of success at $2500/month.

Add in even some tiny side income, and you’re all set.

By the way, if you have no debt (including home), you should be able to live below $2500. My family of 4 is down to $2100/month after subtracting mortgage.

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retirebyforty July 25, 2011 at 12:00 pm

But now the 800k will need to last 45+ years instead of 20 though.
Are you planning to draw from your retirement account as soon as you quit working in a few years?
I agree that $2,500/month is definitely doable. That’s a comfortable life if there are no mortgage involve. :)

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Brave New Life July 25, 2011 at 1:21 pm

No, I’m not planning on drawing from my IRA when I retire in a few years. My hope is still to get my other income sources (dividends, real estate investments, passive online income, P2P lending) above what I’m spending. Right now that would require an overall 6% yield on taxable income, but since I’m saving at a 70% rate with 2 more years to go, that number should go down significantly. 6% is high, but combining reliable dividends and bonds with some riskier REIT’s and ETF’s, it’s not out of the question.

Since my online business also trickles in money with very little work, that number is probably more like 4%. Then I’ll still have the IRA to fall back on if the need arises.

By the way, when I said your chance of success was 85% above, that was for 40 years. I don’t think 85% is a high enough percentage when you consider what failure looks like, but it does show you are getting close.

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MoneyCone July 25, 2011 at 9:26 am

Moving to a cheaper location is actually a refreshing idea!

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Ginger July 25, 2011 at 9:56 am

I think the best idea is not to quite if you do not have enough money. Start cutting expenses and adding more to our taxable and retirement accounts (like your Roth). Cut your expenses until you are sure you can live on what you will bring in, in retirement then retire. Don’t retire, then try to figure out what to do. That makes no sense.

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Ginger July 25, 2011 at 1:05 pm

Sorry, I meant not to quit, not not to quite.

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Crystal @ Public Liability Insurance July 25, 2011 at 12:33 pm

I knew $1 million isn’t enough for us to live off the interest, so we are shooting for 2-3 times that much by 52. We’ll see if our plan works…

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Ginger July 26, 2011 at 9:15 am

Crystal, we are trying for 4 million by the time we retire, but we are young so we have a long time to get to that point. I think the closer you are to 65, the less you need because of social security and there is less time for inflation to affect your earnings.

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SB(One Cent At A Time) July 26, 2011 at 8:23 pm

I am sure crystal at your rate, you will achieve that by 42

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krantcents July 25, 2011 at 3:01 pm

Even a a million dollars in cash is not enough! Depressing isn’t it! If you took the cash and leveraged it with a mortgage to buy income property, it might work. I don’t know about you, but I do not want to collect rents in my retirement. The facts are you need more. This is one of the reasons why I will have a pension, Social Security, blogging income and savings.

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retirebyforty July 25, 2011 at 3:15 pm

Wow, you are set to retire aren’t you? I bet you would enjoy retirement a lot more this time around. You can travel and do all kind of philanthropy pursuits with the extra money.

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Andy Hough July 25, 2011 at 3:13 pm

I think a million would be enough for me. I plan to always be making money somehow though so that would change the equation quite a bit. I have several non-job sources of income and I don’t see any reason to stop them even if I’m retired.

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retirebyforty July 27, 2011 at 9:19 am

I think that’s the way to go as well. I’ll keep working to increase my non-job sources of income even after I leave my day job.

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Kanwal Sarai - Simply Investing July 25, 2011 at 7:42 pm

Another option would be to have both the retirement accounts and investment accounts (800K in total) in quality dividend paying stocks. Earning an average dividend yield of 3.75% would result in $30000/year in dividends which is the same as $2500/month.

You can live off the dividends and never have to touch your capital, so no need to worry about a withdrawal rate.

Also dividends increase over time, your 3.75% yield will grow to 4%, 5%, 8%….thereby increasing the amount of cash you can live off.

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retirebyforty July 27, 2011 at 9:21 am

Dividend portfolio is a great way to generate passive income. The tax is lower than earned income and I think it’s one of the safest way to invest in the stock market. However, if we still can’t access the 400k from the tax protected account unless we use the 72(t) rule…

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101 Centavos July 25, 2011 at 8:05 pm

One million by itself would not be enough, but it would be a nice cushion. With a paid-off house on a small productive homestead, part time consulting, and dividend income from the invested portion, it could be done.

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retirebyforty July 27, 2011 at 9:22 am

I think you’re set! ;)

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Dana July 26, 2011 at 12:52 am

Moving to cheaper place is surely a way to make a million dollars in enough for retirement. Beside cheaper life expenses, will be cheaper the investment expenses also.

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Hunter July 26, 2011 at 8:14 am

Making the move to a cheaper location could really stretch your resources. I would also look for a LOW Tax location. Taxes seem like they will inevitably rise in the near future and a good tax strategy could make a huge difference.

Watch out for those Required Minimum Distributions on your retirement accounts too.

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retirebyforty July 27, 2011 at 9:23 am

I don’t mind moving at all, but Mrs. RB40 hates moving. I think when we both quit working, she would be a bit more receptive to moving to a cheaper location.

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Financial Success for Young Adults July 26, 2011 at 8:15 am

I’d have to agree with Derek. I’m saving for retirement by building passive income vehicles. If I tried to save 1 million dollars for retirement, like you say, it won’t be enough. And it would likely be in stable accounts that wouldn’t throw off enough passive income.

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retirebyforty July 27, 2011 at 9:24 am

I know you are shooting for 5M. It’s not going to be easy, but if anyone can do it, it’s you. :)

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Squirrelers July 26, 2011 at 9:32 am

Regrettably, I totally agree with you. A million would be a great accomplishment for many Americans but it just isn’t enough.

People are spending as if we are in the pension age. Really, retirement is all on us. I suspect that Joe Sixpack out there has no clue how challenging his retirement is going to be.

Live within your means, and save, save, save…and save more. Earn a solid rate of return, don’t lose money. And diversify income streams!

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retirebyforty July 27, 2011 at 9:25 am

This is why many retirees will have to work part time. I think this is not really a bad thing though. It keeps people more active and productive.

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Nate July 26, 2011 at 12:19 pm

I think $1M would be plenty if you are willing to make a few changes or try something else. I personally feel that real estate is the best vehicle for early retirement so that’s what my strategy will focus on.
(please don’t flame me for my hypothetical advice to a hypothetical person!)

1) Sell the house and move to the midwest where you can buy a house for half that amount and put the other 100k in your pocket.
2) With the taxable accounts, you could loan it, secured by real estate, to other investors and get between 7-14% depending upon the types of loans you want to do. This could generate between $2300-$4600 per month. This would probably be enough to live on for a lot of people.
3) This is the part that will offend most people: cash out the 401k and pay the taxes/penalties. With the remaining 200k, plus a little extra, buy a 32 unit apartment complex in Texas. You should be able to get at least a 15% return which would work out about $2500/mo, most of which is tax-sheltered due to depreciation.

This plan could generate $2500/mo in tax-sheltered income and $2300-$4600 in taxable interest income for a total of $4800-$7100/mo. That’s more than enough to live on for any frugal person in the midwest and would also give you enough to reinvest to maintain your standard of living.

If I was in the above, enviable, situation this is precisely what i would do.

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retirebyforty July 27, 2011 at 9:29 am

I don’t think #3 is realistic. Can you really get a 32 units apartment for 2-300k? I’ll have to check the online listing.
I know a 32 units building cost multi million dollars around here, but maybe they will be more affordable in Texas.

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Nate July 27, 2011 at 2:18 pm

You can’t get one if you pay cash but 200k is enough for a downpayment and some repairs if you got the complex for < $30k a door.

I don't own any apartment units so I'm using the figures of my mentor but property is certainly a lot cheaper in Texas!

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Jeff @ Sustainable life blog July 26, 2011 at 12:30 pm

If a million is not enough, consider looking into investments that provide a cash flow, such as dividend stocks or rental properties

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Everyday Tips July 26, 2011 at 5:13 pm

A million is not what it used to be, that is for sure! I would retire if I had a million in cash and just a few years until I could access the 401k though.

I would love to have huge amounts of passive income, but I am definitely not there yet!

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SB(One Cent At A Time) July 26, 2011 at 8:23 pm

can’t you head to Carribean and live happily ever after?

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Spruce Up Your Finances July 26, 2011 at 8:50 pm

I am in the same boat as you as most of my savings are in the retirement funds as well.
One million nowadays means nothing especially if the bulk of it is from assets that you can’t even touch yet (retirement) and non-liquid as in the case of the real estate equity.

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Broke Professionals July 27, 2011 at 11:37 am

All the online calculators say we need 7-10 million to retire, so I stopped checking when we can retire :) But I do agree 1 million might not be enough to retire in the US. If we had to we will def. move to a different country. 1 million would be great in a lot of countries.

We are trying to see I can retire in a couple of years with just the online income (health care will be taken care of by husband’s employer). We have to do the detailed calculations.

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retirebyforty July 27, 2011 at 8:16 pm

Most of the online calculators are flawed because the main number they look at is your income. If they take income – saving as a starting point and then use 60%, the nest egg would look a lot more achievable. I think side income is the way to go as well.

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Justin @ MoneyIsTheRoot July 27, 2011 at 1:11 pm

Home equity is a difficult # to use when considering your retirement “savings”…since ideally you will have paid off your home and will no longer incur mortgage debt, meaning you will never borrow on that home equity.

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Evan July 28, 2011 at 11:26 am

Maybe a Million dollar nest egg is not enough if you are trying to retire at 40, but comparatively speaking a million dollars is a lot more than what most people have. So how is it ever done?

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retirebyforty July 28, 2011 at 3:11 pm

If I’m 60 now then a million dollars is definitely enough for us. I think a lot of current retiree still have pension and social security cushion so they won’t be hurting as bad as we’ll be when we get old. It’ll be interesting to see how people our age will retire with no pension, less social security and not a lot of saving. My guess is our generation will have to keep working part time to pay the bills or move in with the kids. :)

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Kevin M July 28, 2011 at 7:23 pm

I’d also take a close look at being agressive in funding a Roth IRA. If a million dollars won’t be enough–and it probably won’t–having tax free income will be critical.

The other issue is inflation. It will cost you more to live at 80 then it will at 70, and with other retirement plans you’ll be forced to deplete your assets with required minimum distributions (RMDs) beginning at age 70.5.

Roths have no RMDs so you’ll be able to keep growing your assets until you decide you need the money. A retirement that will span 20-30 years needs some serious long term planning.

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retirebyforty July 29, 2011 at 1:48 pm

That’s a great ip about Roth and RMDs. I didn’t know that and it’s a great way to defer withdrawal. I contributed to Roth 401k for a few years and when I leave my job, I’ll convert it to Roth IRA. $5,000/year contribution to Roth IRA is just too low.

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Jen @ Master the Art of Saving July 28, 2011 at 11:31 pm

I think it’s totally possible to do, it just depends on what kind of lifestyle you want. If the house is already paid off that knocks out a large portion of most people’s expenses. I don’t see a luxurious lifestyle, but maybe a nice comfortable one.

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youngandthrifty July 28, 2011 at 11:33 pm

$1 million is definitely not enough, especially if you live in a city like Vancouver where the average house is $1 million. Also if you have kids (like little RB40) to fund for their education.

I think the strategy you have (e.g. purchasing real estate/ fourplexes) is great.. it’s more about the cash flow than the amount, personally for me at the end of the day.

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retirebyforty July 29, 2011 at 1:52 pm

Little RB40 can get loans and scholarships. :D Just joking, we’ll fund his 529 as much as we can. It’s all about cash flow for us too. If I can pay the bill at the end of the month without having to dip into saving, then we’ll be set for retirement!

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Young20sProfessional August 5, 2011 at 1:23 pm

Came across this article while browsing the web. There is one critical flaw, though this should be encouraging to your retirement plans.

If you assume you can get by with $2,500/month, and your $400k investment portofolio generates 5%/annum. You technically only need to borrow $833/month. This creates a 100% success rate using the simulator.

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retirebyforty August 5, 2011 at 2:36 pm

What are you talking about? The point is you don’t want to borrow $833/month. This will totally screw up anyone’s retirement. If you need $833/month, it’s better off delivering pizza than borrowing.

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Young20sProfessional August 5, 2011 at 1:25 pm

Let’s also assume you actually had $1,000,000 of income to be used at your disgression, @5%/annum that creates $50,000/year… which is more than enough to live on if your house is paid for

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retirebyforty August 5, 2011 at 2:38 pm

The point of the post is that $600,000 out of the $1M is not accessible if you retire at 40.

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Kevin@RothIRA August 31, 2011 at 5:29 pm

With people living into their 80s and 90s you have to wonder if early retirement is even doable! It’s one thing to have to cover 20 years or more of retirement by exiting the workforce at 65, but quite another to cover 35 years or more from, say, age 50.

There has to be a plan to continue accumulating and growing assets even well into the traditional retirement years. Having a business and continuing to fund retirement plans has to be part of the mix. (A Roth IRA can be funded even past age 70 1/2, and as long as people are living now, that may be completely necessary!)

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retirebyforty September 1, 2011 at 9:51 am

It’s going to be difficult to support 35+ years of retirement. We’ll have to work part time and generate other form of passive income. I don’t know how regular people will be able to retire. I guess we all will make it work somehow.

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bobby February 1, 2012 at 7:00 pm

Start a business that requires capital but not excessive hours from the proprietor in a sector that has been a hobby or personal interest. For example a car dealership or real estate agency. A million may not be enough to exist off of passive income but is it enough for a semi-active income?

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retirebyforty February 1, 2012 at 9:25 pm

I agree with you! I think it is enough as a cushion so you can work part time doing something that you like.

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ppd September 2, 2012 at 8:44 pm

i agree $1M is not enough, even in cash account. Dont forget, passive income such as real estate still requires one to pay off the investment and that will eat into the income you are generating. Even with investments having net positive cash flow, uncle sam will require you to pay taxes on your passive income. Then, lets not forget the biggie which is inflation. A million bucks today earning 3.75% is great til you realize that inflation is running at 2.5% -3% over the long haul historically. Basically you are left with between 0.75% and 1.25% of income after putting the rest aside to offset the ravaging inflation effect…. So. $12,500/year is hardly enough to live on even with a house fully paid, cars fully paid, etc.

A more likely scenario now days (presuming need for money to last 45 years, then die broke) is $1.5M-$2M cash and $0.75M – $1M in tax deferred accounts. Having a primary residence fully paid off is a good addition to this. The variance is depending where in the USA (or world) you live, ie, high cost geography vs low cost geography

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JT January 10, 2013 at 2:33 pm

I’ve often thought of how to gain access to my tax deferred accounts before 59 1/2 without paying the early withdrawal penalty and have come up with this scheme:

Assuming the tax deferred account is a brokerage account that allows stock trading, try to find the worst stock investment ever and buy it in the tax deferred account. Then immediately turn around and put on the exact opposite trade in the taxable account (short the stock or buy puts). If you picked right (which is a big if) the deferred acount will go down in value and the taxable account will go up an equal amount. I accidentally did this in reverse for 6 months when I bought puts in the taxable account to hedge my IRA. The IRA went up but my hedge lost money.

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Nightvid Cole February 10, 2013 at 1:15 pm

A million not enough to retire? Are you kidding me?

In some parts of the country like Detroit you can buy several entire apartment buildings outright for a few hundred grand. Collect rent from 40 or 50 people, and still have 200,000 or 300,000 left over to leave in 401k in stocks. And zero debt, you can sell your home and move into one of the apt units and pay yourself rent.

http://www.loopnet.com/Michigan/Detroit_Apartment-Buildings-For-Sale/

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Tim September 19, 2013 at 9:28 pm

You can draw from your retirement account before 59 without
Paying the 10% penalty. You just have to do the formula
And take the same amount out every month based
On your life expectancy.

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Jamison September 23, 2013 at 5:07 pm

I retired last year at the age of 29. After working 7 years I fully paid off two condos in California, total cost $275k. I rent them both, and after taxes/HOA fees I make ~$1,000 a month. I live on the beach in the Philippines, my rent is ~$300/mo for a nicer place than I own in CA. I spend $300/mo on food, $100/mo health insurance, $300/mo on misc items (repair surfboard, beers, domestic travel, dating). I also have 25k in a 401k for emergencies. The property values/rent and 401k out perform inflation.

One million dollars is far more than enough. I did it on 300k net worth, live like a king.

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