Can you retire early with 1 million dollars? Recently, a reader sent me this familiar question and I thought we should revisit the topic. Why should we revisit it? It’s a fun topic and I want to look at the problem from another direction. When I wrote about this a few years ago, I looked at it logically, analyzed the situation, and gave some examples. In summary, I said you can retire early with 1 million dollars if you can control your spending and be flexible. You might need to reduce expense or earn income occasionally, but it is doable. Today, we’ll look at it a bit differently. Instead of trying to predict the future, we’ll look back to the past.
A million dollars is a lot of money, but early retirement means you’ll spend many years in retirement. My retirement probably will be over 50 years. A million dollars won’t last that long if you don’t know how to invest. In addition, if you have a million dollars, you probably have high income. Which usually means your cost of living is relatively high. Perhaps this is why only 6% of the people think 1 million dollars is enough to retire on. They already live a comfortable lifestyle and don’t want to change. Most people prefer to work and spend more rather than retire early and live modestly.
Vote on my poll below to see the result.
Your Track Record
To retire early with 1 million dollars, you need to be able to grow your net worth. That is the only safe way to retire early. If you retire at 40 and your net worth decreases every year, it’s a huge red flag. While the net worth drops, inflation will continue to erode your purchasing power. That’s two big issues working against you. It’s like trying to swim upstream while wearing a backpack that gets heavier. You’ll be in trouble eventually.
So how do you prevent this nightmare scenario from happening? Most of you are probably still working and it’s hard to predict the future. Fortunately, we can estimate the trajectory by looking at your track record. How did you do with your investments in the past? Would they be good enough to keep increasing your net worth after retirement?
Estimate Your FIRE Net Worth
Here is a quick way to estimate how you’ll do once you’re retired. We need to predict the trajectory of your net worth once you no longer have earned income. You’ll need the records of your net worth and earnings for this. You can check your Social Security statement for the earning records (pre-taxed.) Hopefully, you keep good records of your net worth.
- FIRE net worth gains = Net worth gains – earnings
Basically, we’ll remove the active income from the net worth gains. This is a simplification because your earning is used to pay taxes, housing, and all kind of stuff. But it’s good enough to give us a trajectory.
Let’s use our reader’s record as an example.
Lisa started with about a million dollars at the beginning of 2016. By the end of 2020, she grew her net worth to $1,781,500. That’s about 12% annualized growth. However, a big part of that growth is from her earned income. Once she retires, she won’t have that resource anymore. We’ll remove the earnings from the equation.
The last two columns show the estimated gains without additional saving.
We can see that Lisa is a pretty good investor. Her FIRE net worth increased 4 out of 5 years. The average FIRE net worth gains over 5 years is about 6.6%. That’s pretty good. Inflation is about 2% so anything higher is good.
From her track record, I predict that Lisa will be able to keep growing her net worth after early retirement. It’ll be more difficult with no additional savings, but she should be able to do it. Of course, the stock market and real estate investment won’t go up every year. Lisa will lose ground occasionally. But over many years, the trajectory should be going up.
In conclusion, the main goal for early retirees is to increase your net worth every year. If you can do it 4 out of 5 years, you won’t have any major financial problems after early retirement. On the other hand, if your net worth decreases every year after FIRE, you might have to figure out an alternative.
Hint – Passive income is good.
What do you think? Is this a good way to estimate a successful early retirement?
Alright, did you do the math? You can calculate FIRE NW gains over the past 5 years like the example or shorten the timeline a bit if you need to. See your result below.
Average FIRE net worth gains
- negative % : It doesn’t look good. You might not be ready for early retirement.
- 0-2% : This range is pretty tight. You’ll probably be okay, but you should have a backup plan.
- 2-5% : Good. Your purchasing power shouldn’t be diminished by inflation. You should be able to maintain your lifestyle.
- 5% – 10% : Great! You’re a great investor and should have a very nice early retirement.
- 10%+ : Wow! Why are you even reading this? Tell us your secret.
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.