The Million Dollar Retirement Myth

To live and retire rich, control your cost of living

I write a lot of articles about retirement investing on Medium and financial media platform Seeking Alpha. My work revolves around four main tenets:

• You don’t need a million dollars to retire.
• Focus on generating income from your investments.
• Allocate your income wisely.
• Keep your cost of living low.

The retirement industry has conditioned investors to think they need a million dollars (or more) to retire. That’s no longer relevant. It probably never was.

You need enough income to meet your monthly obligations while you’re working, when you take time off, and when you retire (whatever retirement ends up looking like for you). I advocate a straightforward formula anyone can use to meet this most basic of goals.

Allocate your income into various funds, or pools of money.

I keep a subsistence fund (cash to pay my living expenses two months out), an emergency fund (enough cash to cover reduced income for three months), and additional pools of money to satisfy whatever I have going on at the moment (a travel fund, a moving expense fund, an “I want to take the next three months off” fund). Whatever.

Monitor your income daily or weekly. Ensure you keep these funds stocked each and every month. Invest every penny that’s left over in the stocks of companies that not only pay dividends, but increase their dividends annually. Reinvest those dividends. Do this indefinitely.

The goal is to enter retirement or semi-retirement with your investments generating enough income to fully cover your monthly expenses (keep the aforementioned funds stocked). On the way there, you want to allocate your income wisely as to never have to touch your investment portfolio. Dividend reinvestment only produces real wealth if you let the magic of compounding work year after year after year.

But You’re Going To Have To Move To A Cheap Rural Area

That’s the number one objection I receive from readers.

The argument goes like this. If you amass a $500,000 portfolio over 20 years that ends up yielding, say, 7 percent in dividend income (very possible), you’ll only generate $35,000 in annual income. That’s a mere $2,916 per month.

You can’t live on $2,916 a month in most cities in America!

With few exceptions (e.g., Manhattan, San Francisco), that’s simply not true.

It’s not about the cost of living in a given place, it’s about the choices you make. Not necessarily sacrifices, but compromises.

I live in Los Angeles. It’s widely considered an expensive place to live.

I plan to move to Portland next year. It’s considered an increasingly expensive place to live.

In fact, you can pay Los Angeles prices in Portland if you make that choice. At the same time, you can pay Manhattan or San Francisco prices in Los Angeles.

Again, it’s all about how you choose to live.

Do you need a big apartment in one of Los Angeles’s most desirable neighborhoods? If you do, there’s no way you can live on $2,900 a month.

However, if you do what I do — rent a studio in a nice 1920’s building for $1,350 a month in gritty, but cool East Hollywood — you can.

Live debt free and car free and the difference between $2,900 and $1,350 — $1,550 — gives you loads of flexibility. Or, better yet, it gives you tons of money to invest after you check up on your subsistence, emergency, and other funds.

But, wait, you want to live in a “nicer” neighborhood. Yet again, it comes down to making a choice.

East Hollywood isn’t as walkable as I’d like. And the weather’s too hot in Los Angeles. I love cool, clouds, mist, and rain. So I’m plotting a move to Portland.

When I get there my rent budget of $1,350 puts me in one of Portland’s most desirable neighborhoods (the NW 23rd/NW 21st Avenue area) in a recently-constructed, larger studio or one-bedroom apartment. I could drop more than $2,000 a month on a bigger apartment in Portland, but I choose not to.

Don’t Stress

Aiming for a million dollars produces stress, primarily because what we’re told we need to do to get there sounds daunting, if not impossible. And that’s because it is.

A million is a big number. So retirement experts tell us to have a realistic chance of hitting it we need to invest a significant amount of money every month for decades. We keep asking Generation X and millennials to do this even as so many prove it’s beyond what they’re capable of doing.

For many, especially those of us under 50, the “pay yourself first” method of investing doesn’t resonate. And it doesn’t work. This is the idea that you save at least 10 percent of your income before you do anything else with it. From there, you pay your bills and, with whatever is left, you live.

I do it backwards. Live first. Live frugally and live well first. Then save and invest the rest.

Chances are if you’re able to consistently bring in several thousand dollars (or more) a month via work, you allocate that income wisely, and you invest the rest (in that order), you will reach the psychological market of $1,000,000 anyway. But that should not be the goal because it doesn’t have to be the goal.

This article is for informational purposes only. It should not be considered Financial or Legal Advice. Not all information will be accurate. Consult a financial professional before making any significant financial decisions.