I have a million Dollars, now what?
When I talk to people or give presentations I always talk
about how easy it is to become a millionaire and how important it is you strive
for that. I use that number because it is a nice big round catchy number. But
what does it mean to have a million dollars and what can and should you do with
it once you have it?
You will get there by knowing
the difference between needs and wants. You will stay there by
knowing the difference between needs and wants and sticking to you plan. When
you get your million dollars you will receive all kinds of “advice” or
suggestions about what you should do with the money or how other people would
spend it. Most of that “advice” will come from people that will never have a
millions dollars because they never understood the importance to making tough
decisions of not over spending in the first place. You don’t want to take
advice from people that don’t have their own financial situation in order
simply because they lacked the self-control you exercised to get where you are financially
comfortable.
People that earn their millionaire status by working and
saving are much more likely to retain their financial independence throughout
their life time than people that win millions in the lottery or were given a
large inheritance. If that later group never learned and practiced the concept
of living below their means and having a plan, they are unlikely to retain
their wealth. You have all seen stories of people that won millions in the
lottery or were successful entertainers or athletes that end up broke. You
don’t want to end up like that, so stick to the plan that got you the financial
independence in the first place.
When you are retired you will still have needs and wants but
you won’t have a steady income. If you saved and invested properly you can afford
more wants than those that did not, but you can’t spend the whole million
dollars or at some point you won’t be able to afford even the needs. A general
rule of thumb, and starting point recommended by many financial planners, is to
take out no more than 4% of your principle in the first year and then adjust
for inflation after that. I am more conservative than that and recommend 3%.
However even if you go with the more generous 4% it is not a lot of money as it equates
to $40,000 a year adjusted for inflation for the rest of your life.
Combine that with your social security and pension (if you
have one) and that is what you could live on for several years. For illustrative
purposes let’s say you have a combined pension and social security of $40,000
giving you a combined amount of $80,000 to spend in your first year. That is a
pretty comfortable living, but not rich my any means. You can certainly afford
some luxuries (your wants) with that kind of money but you have to be careful
not to over spend just because you see that large number in your account. Unfortunately it is likely your pension is
fixed and social security rarely keeps up with inflation, hence the phrase you have
heard about retirees living on a “fixed income”.
The problem with a fixed income is that in just ten years of
an average inflation (3.15%) you will have lost more than 36% of your
purchasing power. In other words you will need over $109,000 just to buy the
same amount of goods and services you bought for $80,000 in your first year of
retirement. Where does this extra $29,000 in income come from? It isn’t coming
from social security or your pension, it has to come from your savings. If you
live 20 years you will need $149,000 or $69,000 more, almost twice as much! If
you over spend your savings early on your will never be able to make up that
difference and you will outlive your money.
You can see where this is going, the longer you live the
more important your savings will be to provide you with the string of income
you need to stay out of the poor house. While you see that big number and are
tempted to spend it for the finer things in life, you have to remember you will
have certain needs and wants for the rest of your life. You must pace yourself
so you don’t outlive your money.
Whatever your situation it is important you have a plan. The
plan should be based on how long you may live and how much fixed income you
have. You also have to factor in the possibility of higher than average
inflation or a down market. Once you factor all this in you can come up with
the formula that makes sense for your situation. You will know what you can
afford and what you can’t afford. So, just like you gave up some of the wants
you may have liked to have indulged in earlier in life to make you financially
secure, you have to resist the temptation to spend your money to quickly in
retirement. If you fail to make tough decisions now you may not be able to
purchase any wants at the end of your life. If you plan properly you can live a
comfortable life for the remainder of your life instead living a luxurious life
now just to be a pauper depended on others at the end of your life.
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