This is insane, you don’t need $5 million to retire
If we all do, we’re all doomed.
Then again, this is Suze Orman. A woman who vacations on a private island and has a private plane to get there.
Yep. That’s true, at least she said so in a recent interview.
Author, TV host, and seemingly disconnected from reality, money guru Suze Orman made headlines in the personal finance blogosphere recently claiming on the Afford Anything podcast Americans need at least $5 million if you wanted to achieve “FIRE” – be Financially Independent Retire Early.
That’s an insane number. This post will tell you just some of the reasons why.
- It depends…on what you spend
The favourite (and most relevant) answer for most things in life is – it depends. Personal finance and investing is no different – it’s personal.
How much do you need to retire? It depends.
How much insurance do you need in retirement? It depends.
How much investment risk are you willing to take on? It depends.
You get the idea.
I have no doubt that Suze has gotten accustomed to living large thanks to her private island and plane. That paradigm will never occur for 99.99999999% other retirees.
According to Statistics Canada, the average Canadian household now spends close to $90,000 per year; increasing by $2,000-$3,000 per year accommodating for inflationary prices of goods and services paid for.
|Household expenditures, summary-level categories||2012||2013||2014||2015||2016|
Most retirees don’t need $90k per year to live from though. After the mortgage debt is gone, kids have left the house and actually saving for retirement is no longer required, most Canadians could expect to get by on 50-60% of that amount, or, in other words, about $54,000 per year after tax in today’s dollars.
You don’t have to take my word for it – you can check out my reviews and takeaways from actuary Fred Vettese’s collection of fine books for further references to these figures.
Given most Canadians over age 65 are likely to earn $12,000 or more per year thanks to Canada Pension Plan (CPP) and Old Age Security (OAS) benefits combined, many Canadian families only need to make up a $30,000 per year retirement shortfall – even if their average pre-retirement income is now almost 3 times that much.
Suffice to say in Canada Suze, unless you’re a very big spender to afford that jet fuel to and from your private island, you certainly don’t need a $5 M retirement nest egg to retire in your 40s.
- Can you predict your health care future?
I can’t either. Even Suze can’t. Nobody can.
This is where Suze’s argument during the podcast makes some sense. During the interview, she mentioned: “as you get older, things happen”. True, they do. But she went off the rails…
“If you don’t have a significant amount of money…listen…like I do….$20, $30, $50 or even a $100 million dollars…be like me…if you have that kind of money. Fine.”
Yes, we understand that bad things can happen to great people but you certainly don’t need that kind of money to hedge risks.
“The worker that retires at the age of 30..if something goes wrong from 30 until 70..now they’re in trouble.”
Fair point. But how many 30-somethings actually never work again? No blogs to run, no books to pump, no side gigs to occupy their time and improve their wallet? No other business ventures – ever – at all? I don’t know of any and I’ve never heard of any.
If you truly “retire” early, you have no income other than your nest egg to rely on; no workplace insurance plan to rely on; no dental plan; no health care plan or any government financial assistance plan to support you then yes, sure, the costs incurred to you and your loved ones should something catastrophic happen could cause financial ruin. (This is a good time to note our health care situation is FAR different in Canada when compared to the U.S.). If you retire early and stay retired, meaning you never work again, you need to factor in some health care risks that it presents.
Given none of us can predict the future with any accuracy, it would be wise to “insure up” before you make the leap into FIRE – when you’re young and healthy. No doubt in doing so however you will never need $5 M invested though.
- Lost time to the compound machine
Anyone who argues $5 M is not enough to retire is seemingly disconnected from the reality the rest of us live in. I mean, it’s hard to fathom given my point #1 above that any senior in Canada or in the U.S. or really anywhere on our planet for that matter can’t “get by” on even half that amount using some form of geographic retirement arbitrage. This is a huge sum of money in a global context. A $2 M or $2.5 M portfolio should easily churn out $80,000 or so per year in income for decades if not generations depending upon where you live and what you spend.
Yes, income taxes can change over time. High levels of inflation might come back too. Again, bad things can happen to very good people when it comes to their health. Robots could rule the world; AI might take over in a decade or less thanks to Elon Musk’s latest invention. I suppose anything is possible But I would think the biggest argument against retiring early is missing out on the power of compound interest. You see, if you’re drawing down your portfolio in your 30s or 40s, you’re as Suze puts it “insulting compounding”. That could be the biggest mistake young retirees are making today.
This FIRE movement absolutely has some traction. It also has huge haters like Suze Orman who quipped: “I think it’s just ridiculous”.
While I remain curious about some form of semi-retirement myself this FIRE stuff is certainly not something I’m ready to work towards radically or aggressively right now. Instead of being an uber-frugal 40-something living in a small 1-bedroom rented unit with my wife and our beloved cats, I’m gravitating to a job/work that I thoroughly enjoy that I can do for many decades on end. This means I don’t need FIRE. I just need my/our plan.
If your life’s purpose is to retire early or even have some sort of semi-retirement that buys more time to do something else, great, go for it. Reach for that star. Otherwise, love your personal life and work towards that passion related to your professional life. In doing so you may be able to work as long as you want; be a productive member of society in the process, be far happier and become utterly fulfilled, and you’ll certainly never have to worry about scrimping and saving towards some (insane) $5 million nest egg.
Doesn’t that sound so much better? What’s your take on this latest FIRE craze/movement? Do you even care?