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One of the most visited article on this early retirement blog is the one that talks about do you really need 1 million dollars to retire in Singapore. Most readers found it when they are searching for how to retire with 1 million dollars in Singapore. If you are one of those searcher, let me tell you right now that you are having the wrong mindset. Trying to earn a million dollars before you retire is exactly why you WILL NOT be able to retire early.
A million dollars is not what you need to retire early
Early retirement is achieved when your monthly passive income exceed your monthly expenses. It is as simple as that. In this equation, where does the million dollar comes from? You might argue that you need a million dollars to generate that kind of monthly income. If that is the case, you need to expand on your knowledge on how to really make passive income in 2012 and beyond.
Let’s do a simple math with your favourite financial instrucment: saving deposits.
Let’s say you find a really generous fixed deposit that gives you a 4% annual return. With a million dollars, you generate about $40k annually or $3.3 monthly. This is enough to retire early and is the reason why most people believe they need a million dollars.
However, what if you have multiple income streams? Do you still need a million dollars?
- What if you create a income generating blog that gives you $1000 per month? Then you only need $690,000 to achieve the monthly $3,300 if you deposit that amount into a fixed deposit.
- What if you invest $50,000 to buy a income generating online business that gives you $3500 per month? Then you don’t even need a million dollars to retire. You can do it now for just $50,000!
- What if you invest in other new financial instrucments that can give you 10% returns? Then you only need $400,000 to give you the exact $3,300 monthly income. These instrucments don’t exist? Then you haven’t heard of peer to peer loans that generates an average of 10% returns for their investors per year.
Once you opened up your mind to explore new opportunities, you realise you don’t have to save up to a million dollars to retire. That is an outdated concept that was created when the internet was not around.
3K per month is not enough to retire!
Some might argue and inisist that 3k per month is not enough to retire. Well, I took the 3k number from what you will get if you invest your million dollars in fixed deposits. If you don’t agree and argues that the whole reason for the million dollars was to draw it gradually so that you can spend more than 3k per month, I say you are in trouble.
No early retirement plan should depend on drawing down the capital. You can never predict how long you will live or how much inflation there is going to be. It is better to have a plan that lives off your monthly income streams. These income streams should scale with a longer life expectancy or higher inflation. By depending on a fixed sum to draw down from, you are putting yourself in needless risk.
What about emergency fund
Others might argue that they need an emergency fund for crisis. I do agree with this but a million dollars is way too much money. That only tells me that you haven’t done proper financial planning which reduces the amount needed for such emergency funds. Let’s look at what some of these potential crisis can be:
- Medical expenses: you heard of health insurance?
- Car accidents: Ditto as above
- Traveling: this is not technically an emergency. You should factor this into your spending and actively save for it each month
- Opportunities: Ok, you do need about 100k to take advantage of any sudden opportunities that can be exploited such as property prices crashing. You can also mitigate this risk by creating a cash advance credit line
Personally, I think having an emergency fund of 1 year’s living expenses is more than enough. You don’t need a million dollars as an emergency fund.
A million dollars to retire is a false assumption that is keeping many of us from the freedom in life that we craved. Worst of all, they become excuses of not doing anything proactive to change the way we want to live. So, free yourself from this assumption and create a plan on how to really achieve early retirement without the million dollars.
(if you really want to insist on earning a million dollars before you retire, check out part 2 as I give you my plan on how I intend to do it. Not for early retirement purposes of course but to live a life of abundance)
Updated:See the follow up posts on this topic