J.C.’s Money Blog

In a previous post, I mentioned that a liquid net worth of $1 million represents financial freedom to me, because you can earn as much as the average American purely from interest. Unfortunately, due to the effects of inflation, your $1 million won’t be enough to keep you afloat forever, if you want to keep your money in a boring, risk free place.

Let’s say you decide you do want to sit idly for the rest of your life, and that you want to pass on a fortune that will allow your next of kin to sit idly the rest of their life living work-free, risk-free, and stress-free.

First, we need to make some assumptions. We need to determine what rate of return we can get risk free. For the sake of simplicity, I choose 5%, which corresponds roughly to what you can get from an online high yield savings account.

Now we need to determine a rate of inflation. Let’s say 3%, which is roughly the historical inflation rate of the United States.

The key is to live off the difference between these numbers. That margin gives you the amount you can spend without ever having to worry about running out of money. If your money were in the stock market generating 11%, you could spend 8%, but in our example we can only spend 2%.

Now we need to determine how much money we want to spend in our idle lives, spent sipping margaritas and watching Jerry Springer all day. Let’s say we want to live in a $200,000 house with a mortgage. Our monthly budget will look something like this:

For the sake of simplicity once again, lets say you pay 25% in taxes, so you really need to bring in $61,333 a year to have your $46,000 left after taxes.

Ok, now we simply divide $61,333 by 2% (the difference between our interest rate and inflation) and we get $3,066,666. There is your minimum investment for financial freedom, so you can kick back and live the good life. As long as your spending only increases at the inflation rate of 3%, you will never run out of money.

Lets say you are a bit more risk tolerant and assume you can get a return of 11%. Well, then you only need $766,666 invested, and again, you will never run out of money.

So yeah, $1,000,000 is enough to retire on, no matter what your age is, as long as you can stick to a normal standard of life and don’t mind watching your balance fluctuate now and then.