Can I retire with a million dollars?
Simple answer? Yes. But not necessarily. This is obvious when you think about it because some people are better at handling money than others. But in general a million dollars should afford you a comfortable standard of living from a PERPETUAL flow of income from your investments for the rest of your life – however long you live – and that capital base will still be their for either your partner or children to inherit – if you wish that!
What perpetual flow of income will a capital sum of one million dollars provide?
If you have one million dollars and just stuck it in the bank you would get perpetual income, it is true (in the form of interest) – BUT INFLATION WOULD WIPE OUT YOUR CAPITAL BASE OVER TIME.
So you have to use your head. And invest the money in assets that retain their value (i.e increase in value at least in line with inflation) and provide a perpetual flow of income in the form of dividends or rental income etc. So what investments should these be? Well quite simply:
1) dividend paying stocks. These are well-established companies that have limited growth opportunities but pay out decent dividends (from the products they make) to shareholders. A good dividend yield can be around 4-5 percent. This is your income!
2) rental income from renting out a property. You should be able to rent out a property for around 5 to 10 percent of the property’s value. The disadvantage with holding property (compared to stocks) is that your income may be reduced by maintenance costs, taxes, and especially of course the risk you can’t find someone to rent the property to.
Note that I have avoided mutual funds from the possible investments. Why? Because investment mangers charge fees to manage your money. Over time the fees can reach very sizable amounts. Why pay someone to choose your stocks when you can do it yourself?
Sample portfolio: 50 percent in property and 50 percent in dividend paying stocks.
1) Since you have chosen to invest 50 percent of your money in dividend paying stocks, you obviously have US$500,000 to invest. But do NOT choose only one company. Invest in at least ten. This spreads your risk – reducing and for all intents and purposes eliminating the specific risk of stocks (as investment professionals like to call it). Choose large well-known companies where there are barriers to entry so they are sheltered from competition. Cement companies and utilities are good. Also choose strong brand names, companies with a dominant presence like Unilever, McDonalds etc. With an average dividend yield of 5 percent you will get a PERPETUAL flow of income from your US$500,000 investments in stocks of US$25,000. Forever! Not bad huh?
2) The other 50 percent of your US$1 million has gone into two US$250,000 properties which you can rent out for US$750 a month each. This gives you US$750 x 12 x 2 = US$18,000 a year. Knock off US$3,000 a year for taxes and maintenance, and you get US$15,000 a year net.
This sample portfolio will give you a PERPETUAL flow of income from your investments of US$25,000 + US$15,000 = US$40,000. Personally I prefer to have 100 percent in dividend paying stocks – it’s easier.
But can you live well on this income? Well possibly. And possibly not.
But you will have a MUCH higher standard of living if you try to live on US$40,000 in a place like Mexico or Indonesia than in New York or London.
In fact, in Bali, a lush and tropical paradise in the Indonesian archipelago, you could live on half that amount.
So that means you could retire on just half a million dollars. I’m nearly there and I’m only 43. Before 50 I could choose to never work again.
Now ain’t that food for thought?
Retire in Bali? WHY NOT!!!!!!!!!!!!!