Having a million very well may not cut it.
The stack above represents 100 packets, each containing 100 $100 bills.
This begs the question – Is retiring with 2 million dollars a reasonable goal? A 2020 survey from Schwab Retirement Plan Services found that the average worker expects to need roughly $1.9 million to retire comfortably.
So is $2 million the magic number?
There certainly are a myriad of moving parts involved in answering the question of whether retiring with 2 million dollars is enough, and a number of subjective and objective variables that need unpacking. The recent text thread between our President, Joseph Eschleman, and his wife, Megan, sums this concept up in a simple but perfect way:
How pragmatic is it to consider retiring with 2 million dollars tucked away in your nest egg? Is retiring with two million dollars even enough money to truly be comfortable, especially considering today’s rampant inflation? Does retiring with 2 million dollars require that you work until you are 75 or 80 years old? And what do the nebulous and subjective concepts of “comfortable” and “retirement” even mean?
While they are tremendously important ideas (or perhaps abstractions) to define when answering the question of whether retiring with 2 million dollars is “doable” (and is enough money), we will reserve opining on what “comfortable” and “retirement” means to the intimate conversations we have with each of our current and prospective clients. Needless to say, different people define these two terms very differently. Instead, let us explore five specific steps that will put accumulating 2 million dollars within reach for you, while leaving yourself enough time in retirement to actually enjoy and spend some of it! And no, playing and winning the lottery is not one of the steps…
Step 1 – Don’t Wait, Start Investing NOW!
The fastest path to retiring with 2 million dollars, in our opinion? Drop everything, stop reading this newsletter (!), establish a plan to begin investing, and immediately begin to pay yourself first. Right now! As you can see below, the sooner you start, the more time your assets have to compound and grow:
And if you already are proactively saving and investing, stop reading this newsletter (!), drop everything, and make an incremental increase to the dollar amount, or percentage, or both, that you consistently add to your nest egg. When it comes to retiring with 2 million dollars, time is money, and the sooner you start to invest, and the more consistently you do so, the easier it will be to hit this very achievable goal.
Step 2 – Properly Diversify Your Investment Portfolio, and Be Wary of Individual Stocks!
The idea of diversification is basic yet essential to most investors. Unless you are truly willing to lose everything, do not put all of your eggs into only one or two baskets. Protecting against the risk of “significant shrinkage” of your retirement nest egg is critical; it is important (we argue essential) to allocate your resources and investments over a broad spectrum of asset classes and sectors:
Being diversified does not assure a profit nor guarantee against a loss, but it does help to insulate your retirement nest egg against major market declines. Retiring with 2 million dollars is a lofty goal, and the importance of managing your downside should be as much of a priority as consistently growing your portfolio. Adding additional types of assets to a portfolio will help it last longer, and help you avoid major pitfalls in your journey towards a financially-independent retirement.
Additionally, we believe it is important to exercise extreme caution when considering investing in individual stocks. While it can be fun and “sexy” to own specific companies, investing is not meant to be fun nor sexy. Do not confuse speculation with investing.
Chase individual stocks at your own risk. Individual equity ownership oftentimes becomes a short-term bet – even an outright gamble – which is the antitheses to a longer-term strategy geared to helping you retire with $2 million. While all investing involves risk, this risk materially increases when focusing on or owning just a few stocks. The statistics bear this out:
Source: Morningstar, 12/31/2020
History is replete with examples of blue-chip companies that have crumbled miserably, and correctly picking a long-lasting, top-performing stock is usually a product of blind luck rather than skill. Don’t be overconfident in either your acumen to evaluate the investment merits of a single company or stock, your ability to consistently predict the future, nor your ability to consistently guess correctly which individual equities might outperform.
A little boring? Perhaps. But being boring and disciplined in how you grow, protect, and diversify your nest egg, is an excellent way to improve your odds of successfully retiring with 2 million dollars.
Step 3 – Take Advantage of FREE MONEY
We believe that there is no EASIER way to compound your wealth and improve your odds of retiring with 2 million dollars than by fully understanding, and then maximizing all employer matching program opportunities within your company sponsored retirement plan:
If your employer offers a match, be sure to find out the following:
- Is there a waiting period until you are eligible for it? Common waiting periods are six months, twelve months, or sometimes no waiting period
- What is the actual formula your employer uses to compute their match? Put differently, what percentage of your own contributions will your employer match? $0.50 on the dollar? Dollar for dollar? Up to what maximum of your contributions?
- How much do you have to contribute to qualify for the match? Oftentimes, you have to contribute a minimum amount of your pay into your company-sponsored retirement plan in order to receive the maximum match, which hopefully is not a problem in your pursuit of retiring with 2 million dollars…!
- When do the company matching contributions vest? Put differently, how long do you have to wait, or work for your employer, before the company’s matching contributions are 100% yours to keep?
Another form of FREE MONEY that employers may offer is a profit sharing plan, in which employers give workers a portion of the company’s profits in the form of pre-tax cash contributions to an employee retirement account.
Regardless of what the rules are, or in what form the FREE MONEY is packaged, if your employer makes available matching contributions and/or profit sharing, taking full advantage of it makes retiring with 2 million dollars that much easier.
Step 4 – Don’t Panic When the Market Declines
A market decline of 10% or more is also known as a correction. And they happen regularly. How regularly? On average, once a year!
If you are able to develop and cultivate a mindset that allows you to anticipate, perhaps even expect, a market correction (decline) to happen, you will be much less inclined to hurt yourself by getting scared, hitting the panic button and selling low to “stop the bleeding.” Don’t kid yourself, this happens, regularly, even to investors who posture as “disciplined,” “objective,” and “unemotional.”
Want to improve your probability of retiring with 2 million dollars? Be smarter than your neighbor, know that declines happen, and that there will be years when you have less money on December 31 than you did on January 1. It is never fun, and can even be be outright painful, to experience a year-over-year decline in the value of your overall net worth, but enduring these periods is absolutely necessary. Fortunately, history has continually proven and strongly suggests that the odds are in your favor, especially if you have a little bit of time to patiently wait for the recovery to occur:
Who summarized this concept best? We are torn. Please click HERE and vote for your favorite!
I. The legendary investor Peter Lynch:
II. The legendary investor Shelby Davis:
III. The legendary investor Warren Buffett:
Step 5 – Trust in America, and Own Real Estate
Stocks, bonds, and mutual funds are wonderful investment vehicles, and are excellent tools to build wealth. However, like any investment vehicle, they have their drawbacks – namely, they can be volatile, tax inefficient, intangible, and expensive to leverage. Contemporaneously, real estate is a wonderful investment vehicle to build and accumulate wealth, for reasons similar to stock/bond/mutual fund ownership, and also for a number of reasons that are quite different.
Real estate values, like the stock market, predictably increase over time. This long-term growth is representative of the value continually created by the advancements in our standard of living and in our economic productivity, both here in America and globally.
The growth in the value of stocks, bonds, and real estate is directly correlated to the continued growth of our gross domestic product, or GDP.
Put differently, and we would argue much more eloquently, by Warren Buffett:
“The American miracle, the American magic has always prevailed, and
it will do so again. Nothing can basically stop America.”
Don’t let the negativity of today’s 24/7 news cycle (in which bad news sells!), sway your opinion – we live in an amazing place, in an amazing point in time. Please click below for an excellent 1-minute video of Warren supporting his opinion, shot on May 2, 2020, just months after the coronavirus shock began:
Let’s look closer at two main reasons to own real estate:
1. Income tax benefits
When insidious income taxes are avoided or deferred, retiring with 2 million dollars becomes much easier, as compounding the growth of your overall investment portfolio occurs much more quickly when Uncle Sam is not taking a big bite out of your nest egg. Consider:
Income tax breaks and deductions. There are a myriad of tax breaks and deductions potentially available to real estate investors that are not available to those who invest in stocks, bonds, and mutual funds. Deductions of the expenses associated with owning real estate (property taxes, property insurance, mortgage interest, property management fees, maintenance and repair costs, advertising, legal and accounting fees) are oftentimes tax deductible, as is depreciation.
Section 1031 tax-free exchanges. A 1031 exchange allows an investor to do a tax-free swap, or exchange, of one investment property for another one, while deferring the payment of capital gains taxes on the transactions. Unfortunately, “1031s” are not allowable nor applicable to the sale of traditional stocks, bonds, nor mutual funds.
Capital gains tax exemption on the sale of a primary residence. If you are single, you will pay no capital gains tax on the first $250,000 of profit on the sale of your primary residence; married couples are entitled to a full $500,000 exemption. And while this $250K/$500K exemption is allowable only once every two years, it is a very powerful way to have more of your money compound, without paying Uncle Sam, as you pursue the goal of retiring with 2 million dollars. Additionally, many people consider moving and downsizing their primary residence as they enter into retirement, which can potentially unlock significant equity that can then be added to your retirement nest egg.
While all-cash transactions have recently become more popular in today’s red-hot and competitive real estate market, the most common way to buy real estate continues to be by borrowing money to do so. This is also known as leverage. While it can be a double-edged sword (problems can quickly arise if property values decline, too much money is borrowed, or the interest paid on borrowed funds is too high), leverage provides a wonderful opportunity to own MORE of an asset for less money, expanding your potential to see your nest egg grow.
The simplest example of leverage is the down payment “obligation” when purchasing a primary residence. You typically only have to put down, 20% of the cash to buy and own100% of the asset! And while the borrowing and down payment terms may not be quite as favorable, the same leverage opportunity holds true when buying and owning investment real estate. In today’s ultra-low interest rate environment, larger amounts of money can be borrowed more cheaply (read: at lower interest rates), affording investors additional leverage when building and growing their overall net worth. This can be quite helpful in accomplishing the goal of retiring with 2 million dollars!
Bonus Step – AFTER You Have Retired with 2 Million Dollars – Pick the Right Place to Retire
Clearly, maximizing your lifestyle post-retirement requires attention to the cost of living. Stretching a dollar is always important, and retiring with 2 million dollars “buys” you options, specifically, on where you choose to live.
Click the thumbnail below for the ThinkAdvisor.com slideshow that focuses on the 8 Best U.S. Cities for Retirement Over the Past 5 Years:
It is important to note that accumulating enough money is only Act One when determining whether retiring on $2 million is feasible. Figuring out how to properly, and sustainably, withdraw money (AKA decumulate) from your nest egg is Act Two, and is just as, if not more important to get right. A way-too-simplified back-of-the-envelope computation might look like this:
- $2,000,000 nest egg x 3.5% annual withdrawal rate = $70,000/year
- $70,000/year – 25% in assumed federal and state income taxes = $52,500/year net retirement income, or $4,375/month
Information is intended to be general in nature, for simplistic illustrative purposes only, and is not intended to serve as Investment
advice, since the availability and effectiveness of any strategy is dependent upon your individual facts and circumstances.
However, there are a myriad of additional variables and considerations that factor into this “retirement calculus.” What about pensions? Inflation? Social Security? Income from part-time work? Variability in market growth and investment returns? Appropriateness and sustainability of a 3.5% annual withdrawal rate? Increases in health care and insurance expenses as you age? Legacy and philanthropic planning and objectives? The list of important and yet very subjective considerations goes on and on. When developing a customized retirement income plan, the nuance in working through and deciphering each consideration cannot be understated.
Is retiring with 2 million dollars doable? Is $2 million enough to be happy and comfortable? As our President communicated to his wife, “it depends ,” and without a much deeper analysis of the variables mentioned above, it can be very difficult to accurately answer. However, what we can say with confidence is that if you have, or have nearly, accumulated $2 million for retirement, you have an excellent head start, and have probably secured yourself many attractive options. In our opinion, wealth is not defined by a set amount of dollars, but by the freedom it affords you. And having options and choices on how to live your life is the essence of what freedom, and retirement, truly is.
What’s Happening at TPW?
When the cat’s away, the mice will play!
Our President spent his Thanksgiving week in Surf City, USA (AKA Huntington Beach, CA), where he enjoyed a successful day of deep sea fishing. That’s a California scorpionfish on Joseph’s line – don’t touch those dorsal spines, they are very poisonous!
While our entire TPW family was out of the office on the Friday after Thanksgiving, we were all still working (with some help from the little ones!) in our respective WFH offices!
Chart / Infograph of the Week
Inflation is no longer being called “transitory” and is now here more permanently, according to Federal Reserve chairman, Jerome Powell.
Thanks to Visual Capitalist for the infographic below. Understanding that it has been virtually impossible to avoid, please reply to this email and let us know what recent purchase you’ve made where you have specifically noticed today’s inflationary pressures.
Quote of the Week
In the spirit of the Thanksgiving holiday, we enjoyed American Trappist monk, writer, theologian, mystic, poet, social activist, and scholar Thomas Merton’s quote below…
Cartoon of the Week
A snarky and insightful cartoon from Real Life Adventures, roasts not only how buying high and selling low is an all-too-common problem, but also how novice investors lose money and disciplined investors make money during a market panic.
Ah, the folly of the investing world…
As the 24/7 news cycle churns, twists, and turns, a number of trending and notable events have occurred over the past few weeks:
- The CDC reported that the first US case of the COVID-19 Omicron variant was identified in California
- Justices heard arguments about whether a 15-week ban of abortion in Mississippi is constitutional. A Supreme Court decision is likely months away
- Get ready: The Biden administration announces controversial new COVID rules to combat COVID-19
- A 15-year-old sophomore, who has been arrested, shot four fellow students to death and injured seven more with his new 9mm pistol at a Michigan high school
- Twitter’s CEO, Jack Dorsey, stepped down, with former CTO Parag Agrawal being appointed CEO, effective immediately
- Virgil Abloh, American fashion designer and one of Time magazine’s “most influential,” has died at age 41 from a rare aggressive cancer
- CNN and Chris Cuomo face difficult questions after the anchor’s suspension
- The US plans a diplomatic boycott of the 2022 Beijing Winter Olympics
- The recent spate of smash and grab crime continues
As always, we sincerely value our relationships and partnerships with each of you, as well as your trust and confidence in us here at Towerpoint Wealth. We encourage you to reach out to us at any time (916-405-9140, firstname.lastname@example.org) with any questions, concerns, or needs you may have. The world continues to be an extremely unsettled and complicated place, and we are here to help you properly plan for and make sense of it.
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