A million dollars isn't what it used to be. Can you retire on one million dollars today?
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Did you know the word millionaire was first coined just 14 years before the United States even became an independent country? It was the year 1762 when we called the rich, “millionaires”. But can you retire on a Million Dollars?, that’s a question that’s I think on everyone’s mind at some point in life and it's important to understand in the context of investing and passive income.
If we assume an average income here in the United States of $50,000 a year, working for 40 years starting at the age of 22, and retiring at age 62, the average person will then go on to make around $2,000,000 in his or her lifetime. Obviously we don’t get to keep that whole 2 million, after taxes, we’d keep around $1,691,800 which assumes a best case scenario of no states income taxes if you live in states like Alaska, Florida, Nevada, South Dakota, New Hampshire, Tennessee, Texas, Washington, or Wyoming.
If we then take the average savings rate in the United States, which is an embarrassingly low 7.6%, in 40 years, most people will end up saving around $128,576.80 of that 2 million, which seems really low (because it is)
Despite what mainstream media tells us, retiring on a million dollars is very possible, and you can live comfortably without ever running out of money for all eternity and it’s not some magic trick, it’s pure simple math.
First, it is true that one million dollars does not have the same purchasing power as it did in 1980. To be able to afford the same amount of stuff with one million dollars today as you did in 1980, you’d need around 3.3 million dollars. So it’s true, as time goes on, inflation makes our money less and less valuable.
For every dollar in your bank account, it’s worth around 2 pennies less every single year because we’re printing money. With what’s going on today with the economy and because we’ve had to print so much more, inflation can reach as high as 5% or 5 pennies for every dollar that you’d be losing every year. So that’s definitely an issue but not as much as you may think.
In fact, not only can you retire on a million dollars in your 60s, but theoretically, you can retire on a million dollars at any age, and never run out of money.
It was a research paper published from Trinity University by three professors. What the trinity study measured, was the success rates of investment portfolios that had different withdrawal rates in retirement for different time periods throughout history between the years 1926 to 1995, which was later expanded to 2009.
This time period spanned the 2 world wars, the Great Depression of the 1929, high inflation period of 1970s, and the booming 1980s. So this simulation covered a lot of ground. They ran this simulation with 5 different portfolio diversities, 100% stocks, which is what I have with Robinhood, 75% stocks 25% bonds, 50% stocks 50% bonds, 25% stocks 75% bonds, and 100% bonds. They also researched the lengths for 15 years, 20 years, 25 years, and 30 year rolling periods.
The Trinity Study found that 4% was the magic number. If you retired in your 60s and you withdrew 4%, out of all the simulations that they ran, there was a 100% success rate that your money would outlast you in retirement. So in the case of our hypothetical example of one million dollars, 4% of a million would be exactly $40,000 per year. If you withdraw $40,000 per year, starting at retirement age, there’s a 100% chance your money will outlast you in all the economic simulations.
But there's a catch, If you increase the amount of years you want to be retiree, then your chances of success will decrease. If you want to be retired for 50 years and withdraw 4% per year, the chance of success drops down to 90%.
To compensate for that, a safer rate is using a 3.5%, doing this, increases the odds back to 98% success rate (assuming a 100% stock portfolio). In fact, if you withdraw 3.5%, your "terminal amount" (the amount you're left with after retirement), would multiply 6 times. That's because compound interest grows your money faster than you can spend it.
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