Retiring on $1.8 million, as a thought exercise.

Without rambling on with a lengthy backstory, my wife and I were talking yesterday about what we would do if we somehow came into $1.8 million. We talked about two options:

1) spend $500K to buy a house and car, pay off all bills, and have no debt. Invest the remaining $1.3 million and use the dividends as income along with my military retirement. No debt is the big plus here, but the nest egg is smaller.

2) Invest the full $1.8 million and use the dividends to pay monthly payments on a house/car/pay off bills. There is debt, but the nest egg is larger.

What would you do? I thought about buying rental properties but I don't think I would enjoy being a landlord. 

Edit: I want to emphasize that I do not have $1.8 million, this is just a thought exercise. We arrive at that specific number for a certain (unimportant) reason.

I'm a debt free type of guy.  Pay cash for everything (not really cash) and you might spend less.  

Invest the rest to live off.  If not retirement age keep working. Your net worth is still $1.8+.

Also you must have something already in the retirement department so this money is just an adder to what you have?

As you know, it comes down to expenses and income needed to cover those expenses. If you can keep your expenses low, then you need less income coming in. The 4% rule is pretty standard advice for a 30 year retirement (likely to be fine for longer retirements too). So withdrawing 4% of 1.3mil/yr would give you $52k annually to cover expenses. With no debt of any kind, that's probably pretty doable without cutting too much. It may not be lavish, but pretty comfortable in most locations.

Keeping the extra invested, and following the same 4% rule with the full 1.8 million would provide $72k in income annually. That's $20k per year more coming in, but you're probably spending $1k/mo on a mortgage, plus any other debt servicing. So it comes down to whether you're willing to deal with any risk for what might amount to an extra $500-600/mo. That's not nothing. But it's not a ton either. You have to determine what's "enough" for you, and how much risk you're willing to tolerate to get there.

Personally, I'd probably go with lower expenses. It may not always be the most optimal scenario, but keeping your overhead low will never come back to bite you the way that high expenses and high earning potential might. That stability would mentally allow me to stay more aggressive with my asset allocation regardless of the environment. YMMV of course. Some may accept higher expenses, but choose a more conservative asset allocation. You've got to do what's right for you and your family.

No debt.  

Different question...

Would you have sufficient income to qualify for the $500K mortgage? (without counting drawing from the investment amount)

That might make your decision for you. 

Paying off debt quickly is generally the best way to end up with more money overall, but with high inflation right now that complicates the calculations...also buying a house at what is hopefully the peak of a historic real estate bubble may not be the best idea either. If not for those factors, plan 1 should be a clear-cut winner.

In reply to SV reX :

That's a good point. With dividends from $1.8 million added into my salary as well as showing proof of $1.8 million in the bank, I'm guessing the bank/credit union would be okay with it. That's just a guess, though. The mortgage would likely be closer to $300-400K, with the extra money going towards cars and incidentals.

I think we were leaning towards the no debt option as well. Having no mortgage and no car payments would be a big help with financial security, and in this day and age, mental health. Also, I could simply invest the remaining $1.3 million in growth stocks and let it grow for a few years while continuing to work. After 5-10 years, switch it over to some solid dividend stocks and enjoy the extra income.

Personally, I find this sort of thing a lot of fun to think about. We also realized a few things—smaller amounts, like a million and below, are much easier. Buy a house, invest the rest. Larger amounts, let's say $4 million, are much more difficult. If I had $4 million, I certainly wouldn't want to live in Ohio any longer. Where would we go? Canada, almost certainly. But then, where in Canada? Having to figure all that stuff out would be a good problem to have though, I guess.

Debt.

I have none, and not as much saved as that, but my money guy says I can retire now (60), maintain my current comfortable income level til 90 and still leave a good chunk to my kids.

My buddy and his wife retired with generous teachers pensions, still have a mortgage and line of credit, and they are struggling.

Retiring with debt seems absurd to me but apparently it's becoming much more common

I think the answer is "there isn't enough information to answer this question."

If you're assuming a 6% rate of return from your investments, then when mortgage rates are 3% the answer is different than when mortgage rates are 6%. 

$1.8 million is an oddly specific number, but anyway - I assume you own a house now?  Assuming it's at least partially paid off, the selling price of that home will cover part of the price of a new house. Having said that, do you really need to buy another house, and does it have to be one that's worth a half million?  

I retired a year ago and am considering moving in the opposite direction - I'd rather downsize into a smaller and less expensive house, that has less maintenance/tax/insurance costs.

In reply to Tom Suddard :

Yes, but speaking as a person who is now on the threshold of making those big life change decisions, there is NEVER enough information to answer the question. 

It's amazing how many variables can berkeley up the results.

That's why it's a thought exercise.  Not an investment plan. 

No, not in the US because healthcare is too much of a question mark. If you have that figured out via other avenues - retiree benefits from another company or are a veteran or something else - then it is easily possible... But for me, not without owning my home free and clear. 

The big question is, how much do you spend. Start tracking every penny that goes out of your account and see how much you spend and where. That is the big driver to how much you need to retire.

It is a very specific number and there's a reason behind it but that's not really important. We started thinking about this and as I was comparing the two options I realized I didn't know enough to truly know which one would be better, although I felt more comfortable with option 1. No debt just feels nice, and if something bad happens, not having to worry about a mortgage payment is comforting. I figured this would be a fun question for the grm hivemind, as there's a wealth of knowledge and experience here.

mtn - I'm a disable/retired army vet so I have tricare, which covers most of my medical expenses. I agree though, if I didn't have that then things would be different.

There's more options as well, as I said before one could purchase rental properties or flip houses. I'm not sure if I would ever enjoy that sort of thing (the rentals, at least) so I didn't really consider it. Buying real estate in certain areas might be a good medium- to long-term investment as well. 

If starting with no debt like us, I'd invest that 1.8M, wait 2 years and then retire. At that 6% 2 years puts that over $2M. that brings your yearly income at closer to $100k post taxes. With no debt and paying only utilities that would make a nice retirement.

One question I have is - why do you need a $500k house?  If it's a $300k house + $200k garage, that would be one thing, but most $500k homes are too much for two people.  

Unless you are going to sell it before you die, it's not an investment.   There are probably better ways to invest that money.

BTW, having gone through the process- there are some good "4%" estimators out there to calculate a long term income.  It was one way to make us more comfortable a few months ago.

So far everyone is forgetting income taxes.  State and federal.  Even in retirement taxes continue.  
    The tax avoidance schemes that are most secure and totally legal uses  interest and property taxes to reduce  income taxes.  
 Through most of my working career I paid only 2% in Federal and 3% in State income taxes annually.  
 Rather than deducting interest and property taxes every April 15th.  I took additional dependents every paycheck  to allow me to own more house than I could otherwise afford.  Yes that kept me house poor but by building wealth through untaxed asset appreciation  I'm massively ahead  of all of my contemporary's 

  Yes I had to be careful about spending. Yet I still managed to achieve personal and family goals. I sacrificed $5.00 cups of coffee and wore $2,000 suits instead of $10,000. With care and cleaning they would last long enough so I was always well attired.  OK I didn't spend time in bars or expensive entertainment. Preferring modest family time over the alternative.  
     I celebrate work. I am realizing that things I quickly did just 10 years ago now take me a lot longer and require a lot more effort.  But I recognize how long I'll be resting in my grave and want to do all I can while I still can.  
    Doing so I have a comfortable semi retirement. And once paid work is no longer an option. I'll still remain in my home building equity  to pass on to my heirs.  

Retire to Spain. A 500,000 Euro home in Spain gets you a golden visa which means you don't need to be a student or have a work visa to stay there long term. It also fast tracks you to "permanent resident" status within 5 years.

Assuming you spend $50k in moving expenses, immigration lawyers and ancillary expenses, that leaves you with $1,250,000. A couple can live very well on $1200/mo in Spain. I'm not sure how old you are, but assuming you just live off the remaining money and it earns 0% interest, that buys you a little over 86 years of retirement. If you want to be ballin, spend $2400/mo and you still have 43 years.

alfadriver said:

One question I have is - why do you need a $500k house?  If it's a $300k house + $200k garage, that would be one thing, but most $500k homes are too much for two people.  

$500K was the number we arrived at for buying a house and a car(s), plus incidentals and whatnot. This day and age, if you want a nice house in a good, safe neighborhood with great schools, it's expensive. If we were ever to fall into a large sum of money, the top priority would be buying a house in the best school zone we could. To get in the best school zones around where I live, you'll be lucky to find a 3 bed 2 bath house for $350, and northern Ohio is notoriously cheap. If we lived anywhere near Denver, you could easily double that price. You can easily spend $500K on a nice sub-2000 square foot house in a good, safe city. Remember, the housing market is still pretty nuts right now. Even in your own city, there's a lot of very reasonable houses for upper $400K range.

Realistically speaking, that number would be smaller. I'd probably wait for the right deal on a house and spend closer to $350K, plus some money for a 997 (dream car) and something new and reliable for the wife. Tack on a bit extra for some solar panels on the roof. $500K is just easy math.

In a perfect world it would be something more like $350K house with garage, $50K for a barn/garage built on the back of the property to hold my race car(s), motorhome, and enclosed trailer. Then who knows how much for a motorhome, race car(s), and enclosed trailer.

In reply to calteg :

That's a pretty interesting idea! We both love the thought of expatriating, but it's expensive/difficult. Even Canada is difficult. If we were to fall into a large pile of cash, moving would be one of our top priorities (depending on the size of said pile).

I agree healthcare is the 800 lb. gorilla lurking quietly in the corner when it comes to early retirement plans.  I've done just about everything else in my power to prepare: no debt, maxed-out pre-tax plans, fairly hefty savings, and live within my means without being a hermit.  I'm still only marginally confident I'll reach my goal of retirement at 60 in 8 years.  But healthcare costs are the big unknown and hard to budget for.  I'm hoping to be able to budget the cost for a few years of insurance to cover the gap between my employer insurance and when I'll be old enough for MediCare.  At the moment, I'm fairly healthy for my age and have no medical conditions requiring medications.  Still... a lot can happen in 8 years.

In reply to infinitenexus :

Why do feel the need to retire in an area with good schools?  Do you plan on having school-aged kids in retirement?  To be frank, one of the reasons I like where I live is because the schools aren't great.  One of the side effects is fairly low taxes.  I pay less than half in taxes than almost anyone I know as they all live in ares with better schools. But I don't have kids and at this point, never will, so great schools are not really a concern. 

In reply to Ian F (Forum Supporter) :

Yup.  That's exactly why I am not already retired.

I would want to keep as much invested - earning me $ as possible.  I'd have a mortgage, I'd finance cars, etc.

1.8million = $72k a year at 4%.  Easy to live off that.  If you want to spend more, go get a job.  But something you enjoy, you can pick your hours, has good healthcare - you don't need to focus on the $ nearly as much because of your base income.

Ian F (Forum Supporter) said:

In reply to infinitenexus :

Why do feel the need to retire in an area with good schools?  Do you plan on having school-aged kids in retirement?   

Because I have a 10-month-old son. Schools and safety are the top priority.

infinitenexus said:

Ian F (Forum Supporter) said:

In reply to infinitenexus :

Why do feel the need to retire in an area with good schools?  Do you plan on having school-aged kids in retirement?   

Because I have a 10-month-old son. Schools and safety are the top priority.

Ok. Definitely changes the equations.  Of course, if by some miracle I had kids at 52, any thoughts of early retirement would be right out the window... 

I have heard many places homes appreciate more in areas with good schools.  Anecdotally, I have seen it.

Quick random google:

https://thinkrealty.com/home-values-higher-in-zip-codes-with-good-schools/