What can you do with a million dollars?

If you're thinking of retiring, buying a lower-end condo, a car, holidays around the world, then unfortunately there's no way you will be able to retire with a mere million dollars, but I am pretty sure most people have an idea that even a million dollars is not enough for retirement nowadays, unless you are living on the meager-est of standards (what kind of retirement is that then??).

However, it is actually still very possible to retire and lead a pretty good life with a million dollars present value. That's my personal plan as well, lets see how. Firstly,

How unsustainable a million dollars is in retirement?

For simplicity, lets just assume that you stuff the million dollars under your bed - in cash, or in a way that it doesn't earn any sort of interest. Its spending power will definitely be eroded by inflation, which means you will increasingly spend more just to maintain the same living standards, drawing more and more over the years on your initial million dollars. With an average inflation rate of 2%, and a monthly spending of just $3000, we can see that the amount will last less than 23 years.

Assuming you retire around 60 years old, you will be broke and pretty screwed by 83 years old, not a good time for that to happen, especially if you do not want to be a huge burden to your descendants.

Don't forget, this is assuming you only spend $3000 per month, how many of you can maintain that level of discipline? I am sure not many people have the willpower to not lavishly spend on something if they have a million dollars. Yea this sucks.

Other factors that could additionally drain upon it are:

- Insurance for old age

- Parents / children lump-sum expenses such as hospitalization or university fees

- Holidays or luxury spending

- Buying a car

- If you are retiring too early - at 50, it will only last till 73

BUT WAIT, you think to yourself,

"I am not that dumb to keep my money under the bed, even a typical bank multiplier account gives 2% interest, or government bonds (SGS), which are extremely safe and can help to counter inflation."

Fair enough, let's assume because of that your 1 million dollars manages to preserve it's spending power by growing proportionally with inflation. That makes our calculations much simpler. You will simply have

1,000,000 / yearly spend = amount of years it can last

Using the same $3000 spending, a million dollars can last approximately 27.78 years. Slightly better, but the discipline condition stills hold. Furthermore, $3000 a month is actually pretty crappy. Most of you are already spending $3000 a month on average with all your holidays and bubble teas.

Getting to the main point

A million dollars can actually be sustainable provided it is earning a high enough rate of return. Of course in this case we are assuming a conservative enough rate whereby it can be realistically achieved and maintained.

So how high is enough? The basic idea is that your initial capital will give u returns of

(Total return% - Inflation% = Real spending power%)

Your spending power is thus clearly determined by the total return. If total return equals inflation, then you actually have no additional spending power generated by that million dollars.

Realistically, a total return of 7% can easily be achieved (feel free to ask me how), giving you 5% in real spending power. This means that for a million dollars, you will have 5% of it - $50,000 per year - as free cash flow without reducing the value of the capital. This $50k cash flow can be provided to you indefinitely. This leaves you will approximately $4,200 spending power per month, pretty significant (and it's forever!).

In reality, my own portfolio is allocated such that it churns out approximately 5% in dividends and 2%(a very conservative estimate) in capital gains. While the amount of capital gains thus far is pretty significant and beating inflation by a huge margin, as a worse-case scenario, I simply require it to keep up with inflation. Any more is a bonus, I don't really care for it.

This results in an ideal case (for me, at least) whereby my investment assets naturally grow with inflation while providing me with free cash flow without having to sell stocks or be involved in continuous buy/sell trades in order to realize profits. I thus have a natural liquidity to either reinvest, keep it as cash, or to spend it.

While one of my main principles of investing is 'anyone can do what I do', it is understandable that the effort required is not worth it for everyone. Thus, as a rule of thumb, supposedly you are 'not doing anything', one can still reasonably expect a safe return of 5-6%, yielding you real cash flow of around $30-40k a year, while preserving capital, which is pretty decent and enough to live off on. Don't forget about the liquidity to cash out partially or the entire sum at any time. I would go out on a limb to say that is actually better than any financial institution offered products.

What about properties though?

Compared to many other investments, especially property when such huge sums are mentioned, I believe equities to be vastly superior. There are several reasons,

- Properties require rental to generate income, which comes with a ton of hassle with regards to permits, sourcing for tenants, maintenance, constant administration and a risk of default. Equities have no such issues, except for dividends risk, which can be easily eliminated by proper selection of stocks.

- Properties are extremely illiquid, it takes months to buy or sell a property and involves a lot of effort. Furthermore you are subjected to government risk of stamp duties or levies when transacting properties. You also cannot partially cash them out when you say, need only $100k out of $1M. Equities on the other hand, are totally liquid and can be cashed out a minimal amounts.

- Property yields are abysmal compared to equities, an average condo costing $1mil can fetch a monthly rental of $2.5k after taxes, or 30k a year, a measly yield of only 3%. Might as well buy SGS.

- Probably a few more others which I don't want to exhaustively list, you get the idea.

Conclusion

To actually generate real returns on your money, or what people call '钱滚钱' (lit. money roll money), the rate of return on your investments must definitely be high enough to counter inflation AND give you enough cash flow. If not, you are simply drawing down on an initial sum, albeit at different speeds - which isn't sustainable.

With the same initial situation, a difference in decisions can vastly affect the resulting outcome. You might have heard of '同人不同命' (lit. Same person, different life). A million dollars endowed to 2 different people can result in one of them leading a very stable life while the other becomes a pauper again in a flash.

Obviously, you don't need a million dollars to make this work. However, it should be a reasonable goal to pursue as a million dollars can actually get you more or less settled for life.

It pays to know what is out there. Fortune favors the learned.

Thanks for reading!