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Having a million dollars doesn't go as far as it used to, but you still may wonder if you can live off a cool million. What it comes down to is how much monthly income you require, how much you need to live off of to have a comfortable retirement, and what your current and projected financial situation is.
In this article, we'll go over techniques to saving a million dollars, how long it may take you to save a million dollars, and how to live off a million dollars. In the end, a number of factors will determine how much money you need to live comfortably for life.
Let's jump right in.
Table of Contents
How To Save One Million Dollars
Saving a million dollars takes time. Your strategy, income, and living expenses will determine how long it takes to reach your goal. Some may save a million dollars in a decade; some may take two to three times as long or longer. Others may get there faster if they have a solid investment portfolio helping them.
In short, those that have higher returns and invest more dollars per year will get to a million dollars saved faster than others. With higher yields comes higher risk, so determining your risk tolerance will have weight in how fast you save one million dollars.
Next, we'll talk about specific ways to reach your one million dollar goal faster.
Create Multiple Income Streams
Side hustles are things you do in your spare time to earn money. They can be odd jobs that you do a few hours a week to businesses you run whenever you're not working at a full-time job.
Passive income takes more time to build as you'll have to build each stream individually, however, as you're already in the process of saving up a million dollars, you'll likely be earning passive income on that money already. Passive income includes investment income, rental property income, and income from sales on digital products like eBooks and courses, to name a few.
By increasing your income as much as you can, you'll be able to reach your goal to save a million dollars much faster.
Pay Off Debt
Paying off debt serves multiple purposes. Aside from not owing anyone money, which is a liberating feeling in itself, paying off debt means less money spent on debt payments each month, which means less money that you need to live to get by. When you're trying to just live on a million dollars, part of the strategy is to reduce your total expenses by as much as you can.
There are two major methods to paying off debt: the debt snowball method and the debt avalanche method. With the debt snowball method, you focus on paying off debts with the lowest balances to free up money quicker. With the debt avalanche method, you focus on the debts with the highest interest rate to save the most amount of money. Both methods have merits, so pick the method that works best for you to get out of debt.
Maximize Your Savings Rate
Your savings rate is the percentage of your monthly income that you put aside each month.
To calculate your savings rate, take how much money you have leftover at the end of each month and divide it by your total gross income. Finally, multiply by 100, and you'll have your savings rate.
If you earn $5,000 in a month and have $1,000 leftover in a given month, your savings rate would be $1,000 divided into $5,000, times 100, which gets you 20%.
Combining a high savings rate and a high total income will allow you to save one million dollars more quickly.
Check out this article to see how you can save up to $10,000 in a year.
Invest for the Future
To build up a one million dollar retirement nest egg, you'll want to invest early on. The longer you invest, the more time that compound interest can build up your net worth and total retirement funds.
Some options to invest in include, but aren't limited to:
- Index funds
- Dividend stocks and ETFs
- Real estate
- Peer-to-Peer lending
- Your own business
- Municipal bonds
A good starting point for creating an investment strategy is to talk to a financial planner about your financial goals. A financial planner can best come up with a plan of action depending on your financial situation and what you'd like to accomplish with your money.
How Long Does It Take To Save One Million Dollars
The length of time it takes to save a million dollars is based on how much you save each month and how much your average return on investment is. Let's look at a few examples:
Perhaps the best way to save up a million dollars is to create a long-term plan where you determine how much to save or invest each month and how your lump sum will grow over time. Using a financial calculator like this one on Bankrate can help you determine how long it will take you to save a million dollars based on how you plan to save.
How Much Interest Do You Earn On One Million Dollars
The amount of interest that you earn on one million dollars depends on where you have your money stored. For example, if you have your one million dollars stored in a high-yield savings account, you might earn 0.5%, or about $5,000 per year. If you were to invest your million dollars in an index fund following the S&P 500, you might instead earn between 8-10%, or $80,000 to $100,000 per year. Generally speaking, higher returns come with more risk.
When thinking about living off a million dollars for the rest of your life, you'll have to determine how much risk you're willing to take. Perhaps you'll decide to invest your million in dividend-yielding stocks or funds, which may net you 4-6% passive income each year, paid quarterly or monthly, depending on the funds.
If you plan on only living off one million and nothing more, determining how much income you need is crucial. You'll have to estimate your withdrawal rate for future years to keep up with inflation. To ensure your capital remains at a lower risk, you may have to go with a lower-yielding option, but this will limit your income. You'll need to find a balance between risk and income earned from your investments.
Is One Million Dollars Enough to Retire
Two factors will determine if one million dollars is enough to retire. The first is how much your annual expenses are. The second is how much money you're earning on your million dollar investment. If your investment return is greater than your total expenses, and your expenses don't rise higher than your income, then a million dollars is enough to retire on.
To be more specific, based on the rule of 4%, you'll be able to withdraw $25,000 per year without risking capital, provided your investment is earning at least 4%. You'll have to live frugally enough so that you can get by with just $25,000 of income. Of course, if you're collecting social security or have other sources of passive income, you can add all of your sources together.
Is it possible to live on $25,000 per year? It may be, depending on where you live. Some retirees move to other countries where US Dollars go a longer way. These countries include The Philipines, Thailand, Vietnam, Argentina, and Malaysia, to name a few.
Of course, you may be able to live in the US on $25,000 per year if you have no debt, live in an inexpensive area, and adopt a very frugal lifestyle.
Determine How Much Income You Need to Retire
Financial institutions estimate that you'll need approximately 80% of your income to retire on. To determine how much income you'll need to retire, factor in your current expenses and anything extra you may spend money on when you retire, such as travel.
Use a free app like Personal Capital to put all of your finances in one place. With Personal Capital, you can see how much money you're making and how much you're spending.
It makes sense to assume that you may need more money in later years due to inflation. Using a calculator makes the most sense to determine what your living expenses may be 10, 20, or 30 years down the line. Use this link to see Bankrate's calculator to help you determine what income you'll need to retire.
You'll also want to factor how many years it is until you'll gain social security benefits, as that will increase your retirement income.
Once you determine how much income you need to retire, determine how much money you'll be earning off your million dollars each year, on average, and add that to all other sources of income. A spreadsheet can help with this.
How To Live Off One Million Dollars
Having a million dollars in retirement savings may last you the rest of your life, but there are many factors that will determine this. Here, let's talk about ways that you can live off a million dollars for life.
Healthcare costs amount for over $300,000 of a senior's expenses found a study done in 2021; Fidelity Retiree Health Care Cost Estimate. Staying healthy will cut down on doctor's visits and treatment for avoidable illnesses.
Living frugally means cutting back on spending and minimizing living expenses. If your annual expenses rise above your annual income, your million dollars will begin to deplete. You may end up depleting your lump sum, depending on how many years you live in retirement.
Add a Side Hustle
Adding an income stream is a good idea to help you million dollars last longer. By staying cash flow positive as long as you can, your money will last longer. Married couples may have more expenses than a single person, though this leads to more income opportunities if both spouses work.
Wrapping It Up
The bottom line is that you can retire on a million dollars if you make a sound retirement plan, keep your expenses low, and supplement your income as needed. Saving a million dollars may not be important, but saving money in general is important. This means you may not be able to live in a big city or have a rich lifestyle. That said, a financial advisor can look at your entire situation, listen to your goals, and help you make good decision that will lead you to where you want to be.