Can you retire with 5 million dollars? For most people, the answer would be – Heck yes! I’d retire in a heartbeat! Using the 4% safe withdrawal rate as a guideline, the annual income will be around $200,000. That’s more than most people make every year and it should fund a very comfortable lifestyle. However, accumulating $5M isn’t exactly normal. You’d probably need to be in the top 1% to reach $5M in net worth. That’s about $430,000 per year in household income. Here are some of the top income earners:
- Executives of large companies and public institutions. Eric Barron, the president of Penn State University, made over $800,000 last year.
- Highly paid professionals such as surgeons, lawyers, and investment bankers. A highly experienced anesthesiologist can make up to $500,000 per year.
- Business owners.
- Entertainers, sport stars, and other celebrities. P Diddy was #1 in 2017 with $130 million of income. Beyoncé made a bit less at $105 million.
These people tend to be very successful and $5 million isn’t out of reach for them. I did a little internet research and it seems people who reached pentamillionaire status aren’t quite as ready for retirement as you’d think. By the way, there are over one million families with more $5 million in 2017. That’s a sizable number.
Take my poll at the end of this post. 41% of voters think $5 million isn’t quite enough to retire on. That’s over 3,000 people which is much more than I expected.
*I wrote this post in 2016 and I updated it for today. It is spring break this week so I’m being a full time stay at home dad. That’s the benefit of being a stay-at-home dad/blogger. I can take a step back when I need to spend more time with RB40Jr. I hope you have a great spring break too.
A Spending Problem
One issue with earning the top 1% in income is that you spend like you’re rich. Which you are, but it probably isn’t sustainable. You can’t make that much income forever. Last time, I used a profile of a Canadian couple who was having a rough time after the main breadwinner was laid off from his $300,000/year job. This time, I’ll use an example from Financial Samurai. Sam just published a post about how much it costs to live in an expensive city – Why households need to earn $300,000 a year to live a middle class lifestyle today. Here is the expense spreadsheet.
This family barely has anything left after tax, deduction, and expenses. The only significant savings they have is their retirement and home equity. They are maxing out their 401k contributions every month. Nice job on that front. However, this family will be in huge trouble if one of them loses their job. It is unbelievable how close to the edge this family is living. $300,000 of income doesn’t go very far in San Francisco, New York, and other expensive cities. At this level of expense, this family will need about $5 million to retire. I don’t see how they’ll get there with this saving rate.
Personally, I think this family can reduce their monthly expenses quite a bit. If they set their sights on FIRE (financial independence retire early), then I’m sure they can get rid of the Volvo XC90 and drive a cheaper car. Their food expense also seems very high to me. There is a lot of room for cut back on this budget. However, regular people are living for today and they aren’t thinking about financial independence. That’s why I’m trying to spread the word about FIRE through Retire by 40.
Okay, that’s enough about the rich people and their first world problems. If these households can’t figure out how to live like normal people, then they will have to deal with the consequences. For the rest of us, we need much less than 5 million dollars to retire. Here is how to calculate your ball park FI target.
- Track your expenses
- Take your annual expense and multiply it by 25
- Add some margin if you have expected expenses such as kids or long-term care.
RB40 household example
- Our annual expense is about $55,000.
- $55,000 multiplied by 25 = $1,375,000
- Margin: $125,000 for college
So we’d need about $1,500,000 of investable assets to have a good chance of a successful retirement. You probably shouldn’t include your primary residence in this calculation.
Currently, we have over $1.5 million invested and I’m pretty comfortable with this. However, this isn’t quite enough security for Mrs. RB40. She needs a bit more margin and that’s one of the reasons why she isn’t quite ready to retire yet. (Besides, she likes her job). Here is my opinion on our net worth in 2018.
- $1.5 million – Barely enough to FIRE. We’ll probably be okay, but we need to have some backup plans. I’ll continue to blog and hustle to make some income. At this level, Mrs. RB40 won’t feel financially secure.
- $3 million – Comfortable FIRE. This gives us some margin for errors. I wouldn’t have to worry much about generating active income. Mrs. RB40 will feel financially secure enough to pull the cord and retire early. We could withdraw 3% and that’s pretty much foolproof. You can see the analysis below.
- $5 million – We’re rich! $5 million is more than enough. If we can keep our lifestyle inflation reasonable, we will have a good base to build wealth for future generations or donate it to a good cause.
RB40 household with $3 million
I logged on to my Personal Capital account and used their Retirement Planner to see how we’d do with $3 million in savings and spend $90,000 per year. There is a new feature where you can see how you’d do with different savings and income. It’s pretty neat. I created a new scenario with these parameters.
- Savings: $3,000,000
- Social Security: $25,000/year at 67
- Social Security (Spouse): $25,000/year at 67
- Blogging: $30,000 per year for 10 years. I made $65,388 from blogging last year, but the blog income is unstable. I’m pretty sure this income will crater as soon as we see a recession.
- Retirement Spending: $90,000 per year starting this year.
- College: $40,000 per year from 2029 to 2032.
Here is the result – You’re in very good shape for retirement. We forecast a 95% chance your portfolio will support your goals, including $90,000 per year in basic retirement spending.
I also ran this scenario through FireCalc and other retirement calculators. They all agree that $3 million is plenty for us. Withdrawing 3% is very conservative and the portfolio should last indefinitely.
Sign up with Personal Capital if you don’t have an account yet. The Retirement Planner is a very good tool that use your real data to help you plan for retirement. I highly recommend them for DIY investors.
Can you retire with 5 million dollars?
Lastly, the problem with money is that you always think you need more. I figured we’d feel wealthy if we ever reached $5 million in net worth, but maybe that’s just because we’re not there yet. It’s easy to say $5 million is plenty to retire on. Maybe I’ll change my mind once we get there. I’ll update this post when we reach $3 million and let you know what we think then.
It seems people who have $5 million also think more is better. I read some discussions in various forums and people hesitate to retire even when their expenses are under control. It’s tough to know what enough really is. I believe that’s call the one more year syndrome. Or is it one more million syndrome? You can’t buy time, though. You have to take that into account when it comes to retirement.
Do you think you can retire with 5 million dollars?
For 2018, Joe plans to diversify his passive income by investing in US heartland real estate through RealtyShares. He has 3 rental units in Portland and he believes the local market is getting overpriced.
Joe highly recommends Personal Capital for DIY investors. He logs on to Personal Capital almost daily to check his cash flow and net worth. They have many useful tools that will help every investor analyze their portfolio and plan for retirement.
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