$1 million. Millionaire status. The two comma club. Whatever you call it, becoming a millionaire is a status symbol in the United States, and has been for a long time. Though $1 million today buys half of what it did in the early 2000s, it’s still a lot of money and can have major implications for you and your career. Why?
Because, at this level of wealth, money doesn’t just buy things, it buys freedom. While $1 million isn’t enough for most working people to retire indefinitely, it is enough to choose a different path. Whether that means taking a lower-stress role, funding a passion project, or enjoying some time off, having this much wealth buys you options.
This is the millionaire’s dilemma. Do you take a step back? Do you keep working the same as before? Or do you take a big risk and try something new?
Entertaining these questions is undoubtedly a privilege. Most people around the world will never have this luxury. Yet, if you reach Level 4 ($1M-$10M) of The Wealth Ladder, considering these options may be one of the most important decisions of your life.
What makes this decision so difficult is that it isn’t purely financial. Work can provide purpose, identity, and community. Stepping back can feel risky, and staying the course can mean sacrificing your time and well-being. The millionaire’s dilemma lives in this tension.
But, before you can decide what to do next, how do you know when you have enough to do so?
The Price of Freedom
When it comes to having more career freedom, there are a variety of options to choose from, with differing degrees of financial safety:
- Investment Income > Annual Expenses. If your after-tax investment income exceeds your annual expenses, then you are financially free and no longer need to work. For example, if you need $100,000 a year to live and your after-tax dividends and interest from your non-retirement accounts are $110,000, then you are financially free.
- Benefits: This is the safest form of “work optional” that exists because you can live off of your income without selling down your assets.
- Risks: If your income declines or your spending increases, then you may need to sell down assets or go back to work to make up the difference.
- The 3.5% Rule. Even if your investment income doesn’t exceed your annual expenses, you can still stop working if you have enough saved up. How much do you need exactly? Roughly 28.6x your annual expenses. This equates to the 3.5% Rule, which is the safe withdrawal rate for a 40-year retirement according to Michael Kitces.
- So, if you had $1M saved, you could withdraw $35,000 in Year 1 (and adjust for inflation every year thereafter) for 40 years without running out of money (historically).
- More importantly, as Kitces noted, “it appears that the safe withdrawal rate does not decline further as the time horizon extends beyond 40-45 years (given the limited research available).” This means that you could retire with a 50 or 60-year time horizon and still be okay when using the 3.5% Rule.
- Benefits: You can stop working without needing to have enough income to cover your expenses. You can also retire for a longer period of time when using this rule versus more traditional approaches (e.g. The 4% Rule). This is particularly relevant for those in the FIRE community.
- Risks: If your assets don’t keep pace with inflation, you may need to reduce your spending or go back to work to avoid running out of money.
- Coast FIRE. Coast FIRE focuses on saving up enough for your future retirement and then coasting until you get there. This means that once you hit your Coast FIRE number, you can stop saving money for retirement. How do you calculate your Coast FIRE Number? As I stated here, it is:
-
- Coast FIRE Number = Future Retirement Savings/((1+ Rate of Return)^Years to Retirement)
- So if you need $100,000 a year for a 30-year retirement, we know your future retirement savings will be $2.5M [or 25X $100,000 using the 4% Rule]. If you are 35 years old today and want to retire at 65, then your “Years to Retirement” is 30. With a 4% return assumption, your Coast FIRE number today (at 35) would be:
- Coast FIRE Number = $2.5M/(1.04^30) = $770,797
- This means that a 35-year-old would need $770,797 today and a 4% real return for the next 30 years to have $2.5M (in real terms) by the time they turn 65.
- Benefits: You can save far less than with other “early retirement” approaches. As a result, you can have more career freedom earlier in time. Since Coast FIRE is a calculation, you can track your actual retirement savings against your Coast FIRE number over time. If there is ever a major deviation, you can adjust accordingly.
- Risks: If you can’t find work, you may need to dip into your retirement savings to make up the shortfall. Additionally, you may need to save more or work longer if your retirement spending needs increase after hitting Coast FIRE.
-
- Financial Runway. Financial runway means you’ve saved enough money to take extended time off work and re-assess your direction, even if you don’t have enough saved for retirement. It doesn’t mean that you never save or work again, but it gives you enough to explore other options. This could be anywhere from 12-24 months of expenses saved outside of retirement accounts.
- I’ve had friends use their financial runway to learn software development, pursue passion projects, and one even became a full-time poker player. Some of these individuals are looking for full-time work again now, but they were able to take a mental break because they had a financial runway in the first place.
- Benefits: Buys time and optionality to re-assess what you really want out of your career and your life. More importantly, you don’t have to be a millionaire (or anywhere near it) to have such runway.
- Risks: Leaving the workforce can make it harder to re-enter later, especially if any skill gaps develop. If you can’t find work, you may draw down on your savings more than initially anticipated.
As you can see, these options are ordered from most conservative to least. Some people will be happy to take a leap of faith with a small financial runway, while others wouldn’t feel comfortable until they are fully financially free (investment income exceeding expenses). To each their own.
I don’t know where you stand on this spectrum, but it provides a high-level overview of the decisions you might make as a millionaire.
Some of you in your 20s, 30s, and 40s might be reading this and thinking, “Nick, I’m not a millionaire. How does this apply to me?” Well, you’re not a millionaire…yet. But, some of you will be millionaires within the coming decades. Let’s look at the data to see how many.
Not a Millionaire…Yet
While becoming a millionaire isn’t easy, a good portion of U.S. households reach this threshold before traditional retirement age (their 60s). As this table from The Wealth Ladder shows, about 5% of U.S. households in their 30s, 15% of U.S. households in their 40s, and 24% of households in their 50s were in Level 4 ($1M-$10M) or higher in 2022/2023:
While most U.S. households don’t reach millionaire status this early, there’s still a decent chance. And that chance can materialize in unexpected ways.
Consider my story. In my mid-20s I originally projected that I would hit $1M in net worth (Level 4) by my mid-40s. At the time I had about $50,000 to my name and was saving about $30,000 a year after-tax. With a 4% real rate of return, I’d reach seven figures by age 45. I tried to speed this up by setting a goal to get to $500,000 by age 30. Unfortunately, I came up short.
Despite failing to reach my goal, the progress I made in my 20s put me ahead of my original projection. By age 30 I was now projected to reach $1M by age 40.
But then Covid changed everything. It changed the business I work for, my writing career, and how I earn income. After writing for free for three years, I monetized my blog in 2020. And because of the lockdowns, I ended up writing Just Keep Buying in early 2021. It was released in 2022 and became an international bestseller in the years that followed (80% of all JKB sales are outside the U.S.).
Thanks to those upside surprises and strong U.S. stock returns, I reached Level 4 ($1M-$10M) six years ahead of schedule. None of my projections included such a scenario.
But, you don’t have to publish a bestseller to build wealth. I have many friends who have done better than me financially without such efforts. They didn’t write books or start side hustles either. What did they do instead?
They worked at companies that provided generous equity compensation, those companies did well, and they saved aggressively. Yes, there is some luck here, but you’d be surprised by how many people I know in their 30s that worked at Facebook, Reddit, Uber, or other startups and are well into Level 4 today. While this isn’t typical, it’s not impossible either.
Whether you get to Level 4 in your 30s, 40s, or 50s isn’t relevant though. Regardless of when you join the two comma club, the challenge that follows is the same—what will you do now? Money can buy comfort and security, but its greatest power is giving you the freedom to do what you care about most.
This is the heart of the millionaire’s dilemma. How you choose to solve it is up to you.
Thank you for reading.
If you liked this post, consider signing up for my newsletter.
This is post 470. Any code I have related to this post can be found here with the same numbering: https://github.com/nmaggiulli/of-dollars-and-data
