Can you retire early with 1 million dollars? That’s a tough question. A million dollars isn’t what it used to be. This is especially true when it comes to retiring early. Early retirement means you can have 40, 50, or more years in retirement. Those 1 million dollars will have to last a very long time. On the other hand, most people will never accumulate anywhere near a million dollars. Less than 10% of all US households are millionaires. You’re far ahead of most households if your net worth is over a million dollars. Early retirement is possible if you plan ahead.
Today, we’ll examine what it takes to retire early with 1 million dollars. But first, we’ll talk a bit about why people think they need a lot more.
Why people need more money
One of the most popular posts on Retire by 40 is this one – Can You Retire With 5 Million Dollars? Actually, it’s kind of an absurd question. Of course, you can retire with $5,000,000. That’s a lot of money. You can generate $200,000 per year using the 4% rule. Most people would be extremely happy with that kind of retirement income. That’s 5 times our annual expense! However, something strange happened with my poll. Vote to see the result.
Over 10,000 people (70%) voted they need $5 million or more to retire right now. This is very surprising to me. It’s a huge percentage.
I think the result is skewed because of Google. Most readers get to this poll through Google search. They search for something like this – “Can I retire with 5 million dollars?” People who do this search are probably worth close to 5 million dollars. Of course, they’d vote for $5 million or more.
Most people worth $5 million dollars are used to living a $5 million lifestyle. I assume they drive luxury cars, live in a beautiful house, and spend a lot of money on entertainment. Once you get accustomed to that lifestyle, it can be very difficult to cut back.
The big lesson here is this – you need to keep your annual expense under control if you want to retire early with 1 million dollars.
Retire early with 1 million dollars
I know retiring early with 1 million dollars is possible. That’s what I did in 2012. I retired from my engineering career with about $1,250,000 in net worth. Most of that was invested. At the time, our home wasn’t worth much due to the subprime mortgage crisis. After 8 years, I’m still retired and haven’t had to beg for a job yet.
My early retirement has been successful so far. However, I had a lot of help. My wife hasn’t retired yet, I make some money from this blog, and the stock market did extremely well since I retired. These factors enabled us to avoid withdrawing from our retirement fund. No, this isn’t a traditional retirement. But that’s why it is successful. 1 million dollars is a lot of money but 50 years is a really long time. We need to be flexible and define our own retirement.
It’s still early yet in my retirement. I’m only 46 and I have many years left. We won’t know if this early retirement will be successful in the long term. However, I feel like I’m almost out of the wood. The first 10 years of retirement are the most dangerous. If everything looks good after 10 years, it’ll probably work out in the long term.
Here are some of the things I learn from 8 years of early retirement. To retire early with 1 million dollars, you’ll need to follow many of these.
Spend less than $40,000 per year
This is from the 4% safe withdrawal rule. If you spend less than 4% per year (plus inflation,) then your portfolio should last 30 years. This is just a guideline, but it’s a good one.
Here is what our annual expenses look like since I retired in 2012.
We spent more than 4% some years and less in others. Overall, the trend looks good. Our spending is under control. We didn’t have a lot of lifestyle inflation over the last 8 years.
Tight control over lifestyle inflation
Lifestyle inflation is very dangerous for early retirement. We can see this from my $5 million dollars poll. People who spend $200,000 per year will have a very difficult time living on our budget. To retire with $1,000,000, you need to keep a tight rein on your spending. You need to track your expenses for a few years and make sure it doesn’t increase much more than inflation (2%.) If your annual expenses increase more than 2% every year, then you need to work on controlling lifestyle inflation first.
Enjoy cheap/free entertainment
One way to control your spending is to enjoy cheap/free entertainment. Our family loves reading, playing board games, and going to free events around town. Occasionally, we spend money on entertainment, but it’s a small part of our annual expense. If you want to retire early on $1 million, you’ll need to learn to enjoy cheap/free entertainment too.
Another big problem with early retirement is health care. A good health insurance plan isn’t cheap. If you’re healthy, you can go with a cheaper high deductible plan to save some money. Even with a good health plan, a chronic disease can cost a lot of money. It’s best to eat well, exercise regularly, and stay healthy. Luckily, I haven’t had to spend a lot of money on healthcare. You need to take care of your health and minimize health care expenses. Of course, health depends on genetic too. If your family history is full of expensive diseases, it might be best to keep working.
Earning money is good
Most people think you shouldn’t work after retirement. This is fine with traditional retirement. However, early retirement is a different story, especially with $1,000,000. It’s good to work a bit and earn some money while you’re young. This will enable you to minimize withdrawal in those crucial early years. I made money from blogging and other side gigs. It’s not a full retirement, but it’s a huge step down from working 60 hours per week as an engineer. Keep your eyes open. There are many opportunities to make money.
A big reason why I’m doing so well in retirement is thanks to my wife. She is still working and she isn’t ready to retire yet. Her income enabled us to save and invest more. If you’re married, it’s a really good idea to stagger your retirement. This might not work for every couple, though. Many couple wants to retire at the same time. That’s okay too. You have to figure out what works for you.
We have one son and he hasn’t cost a lot of money yet. Daycare was expensive, but that expense went away when I became a stay-at-home dad. Other expenses haven’t been too bad. He wears out his clothes and shoes quickly, but kid stuff are pretty affordable. As for extracurricular activities, we only sign him up for one thing at a time. All in all, we haven’t spent a lot of money on our son yet. The big expense will come when he goes to college. We’re saving for that in his 529 college savings plan. If all goes well, we’ll have enough to fund 4 years of in-state College.
Early retirement will be harder with more kids. My brother has 3 kids and he won’t be able to retire for a long time.
Here is one that most people don’t think about much. Last year, we sent over $10,000 to my parents to help with health care and cost of living expenses. They didn’t save much for retirement and we’ll help out as much as we can. Luckily, they live in Thailand and the cost of living there is much cheaper than in the US. If your parents need help with their retirement, you’ll have to figure that into your budget.
Open to relocation
My brother lives in the Bay Area (expensive!) and he isn’t willing to move. That’s a big obstacle to early retirement. He needs to accumulate a much bigger retirement portfolio than we do, especially with 3 kids…
On the other hand, we live in Portland and we’re open to relocation. Portland is cheaper than the Bay Area, but it is still pretty expensive. Right now, we’ll stay here due to Mrs. RB40’s job and Junior’s school. Once Mrs. RB40 retires and Junior goes off to college, we’ll probably move to a more affordable location.
You will need a lot of luck to make early retirement work with a million dollars. I was very lucky that the stock market performed so well since 2012. Someone who retires in 2020 might not have the same luck. However, don’t be discouraged yet. The stock market might continue to do well for many years. Who knows? Also, you can overcome the sequence of return risk by going back to work during an economic downturn.
Early retirement is possible
In closing, it’s entirely possible to retire early with 1 million dollars. However, you have to control your spending and be flexible. If things start to go wrong, you need to react quickly. Fortunately, there are many options for early retirees. We can earn some money through gigs and hobbies. Also, we could cut expenses by moving to a cheaper location or cutting back on entertainment. I was lucky to retire in 2012, but others are braving it now. Here are some examples.
- A Purple Life plans to retire at 30 with about $500,000.
- Jim retired to Panama with a little over $1,000,000.
- Nomad Numbers spent about $30,000 last year traveling the world.
These folks are very good at controlling their expenses. I’m sure they are very adaptable too. Will all of us succeed? You’ll have to follow us and see.
What do you think? Can you retire early with 1 million dollars?
Planning for retirement? You need a good retirement calculator. Personal Capital has a great one. It will take all your accounts into the calculation and help you figure out if you’ll have a successful retirement. Sign up for a free account at Personal Capital if you don’t have one yet.
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Passive income is the key to early retirement. This year, Joe is investing in commercial real estate with CrowdStreet. They have many projects across the USA so check them out!
Joe also highly recommends Personal Capital for DIY investors. They have many useful tools that will help you reach financial independence.