How To Retire With $4 Million

Co-produced with Treading Softly

Congrats! You’ve made it to the big 6-5! Now you’re staring down the barrel of retirement and have a lot of unknowns that need answers from you.

Are you prepared?

So many of us, when we reach 65, are experts in specific skills or fields but few have mastered retirement planning. This is why there is an entire field of employment focused on financial planning and advice. I’ve learned over the decades that when people ask for free advice, they often do not follow it – why? Because it cost them nothing, so they place the same value on it.

I’ve been running High Dividend Opportunities for going on 7 years now, and when people discover what I do for a living, some will ask for a free tip. I’ve stopped giving out many to people because most never act on it. It’s a waste of my time and theirs. Yet those who end up joining High Dividend Opportunities or HDO Lite apply the insight provided by my team and me, often find themselves adopting the Income Method. Why? Because they paid for it and thus value it more.

I digress.

For decades the target savings level for retirement was the big million. Having $1 million in your retirement account was considered having crossed the threshold of a comfortable retirement, financially speaking. As we lived through years of a zero interest rate environment, that target continued to creep higher. Some started advocating for $2 million because “a million just ain’t what it used to be.”

Now that target has moved higher: some experts estimate you’ll need between $3 to $4 million to retire comfortably.

That’s a full four-fold higher than the $1 million which so many retirees were already struggling to achieve!

That’s a big ask from a generation of workers who often already feel stressed out, live paycheck to paycheck, and are dealing with record inflation, stagnant real-world wage growth, and soaring debt.

I think we get the question of how much we need backward. So often, we try to give a fun, witty answer without asking the right question.

“Sir, how much do I need to save to retire?”, “Eh, about a million.”

Let’s Focus on the Right Question

There is a story told of a civilization seeking the answer to life, the universe, and everything. So they build a massive computer to compute the answer. After years and years of computing, the machine, aptly named Deep Thought, provided the answer, “42.” The inventors were dumbfounded as to how 42 was the ultimate answer. To their shock, it turned out they weren’t understanding the answer due to not knowing the ultimate question.

Often an answer seems reliable due to it being repeated frequently. This applied a famous driving force of state propaganda efforts “Repeat a lie often enough, and it becomes the truth.” While having $1 million, or $3 million, or even $4 million for retirement would doubtlessly be nice, it’s likely not the correct answer for you.

You must take some time to determine what lifestyle you want for retirement and then determine how much you’ll need each year to sustain that lifestyle. The answer you’ll end up with is an annual income figure. This gives you insight into how much you’ll need to earn each year.

How long do you need that income? Well, forever. No, you aren’t really going to live “forever”, but when you retire at 60, 65, 70, or whatever age you decide to ride off into the sunset, you have no idea whether you will live for one year, five years, ten years, or thirty years.

You don’t know how many years you will live, and therefore cannot possibly know how much money you will spend in your lifetime. However, you can have a very good idea of how much income you will need every year before inflation.

The next step is determining how much you’ll need to invest to achieve that annual income. This becomes your “Million dollars” answer for you, and likely it isn’t 1 million dollars. It likely will be more or less depending on where you want to live and the type of lifestyle you desire to have.

How Much You Earn Changes How Much You Need

It shouldn’t be a hard truth to accept that the more you earn, the less you need to save. If your portfolio generates 5%, you’ll need to save significantly less than a portfolio generating 1% to get the same annual income.

Yield	Amount Needed To Earn $40,000 Annually
1%	$4,000,000
2%	$2,000,000
4%	$1,000,000
6%	$666,667
8%	$500,000
10%	$400,000

Click to enlarge

The simple truth is that earning more from each dollar means that fewer dollars are needed to earn the equivalent amount.

Take It To The Market

When you approach retirement savings or income viewpoints, the overwhelming method recommended is the 4% SafeMax withdrawal method. Essentially, you liquidate 4% of your starting portfolio value annually, adjusting for inflation as you go. This allows you to have a steady supply of cash and assumes if your portfolio’s value rises more than 4% annually, your portfolio will live longer than you do.

It’s great in theory, but depending on the timing of your retirement, this method works excellently or horribly. Why? It relies on the market to climb each year by more than 4%. If the market dips at all, now you’re compounding the losses by selling off pieces of your portfolio at lower prices. Your ever-reliable enemy becomes the Sequence of Return risk. Locking in those losses makes recovery harder in the long run. This is why the 4% rule is 4% – a percentage much lower than the stock market’s average returns.

The Tale of Two Farmers

I liken it to a farmer who decides in retirement he is going to sell off 4% of the value of his land every year based on its initial value when he retires. Some years, his land appreciates in value, and he can sell off smaller pieces. Other years, the value is down, and he has to sell off a large piece.

He’s systematically dismantling everything he worked for, and his total holdings erode as each year passes. This is what so many of you are doing, and the fear of running out of land to sell terrifies you – as it rightly should.

Now this farmer’s neighbor, also a farmer, decided to retire but takes a different path. He decided to keep his land but lease his fields. This way, he is getting revenue from them, but others are working the fields and keeping the profit. He lives off of the money from the leasing while keeping his assets.

Which farmer do you think had less stress as the decades went on? The farmer selling his farm to pay his bills, or the farmer who leased his fields?

I can tell you from knowing farmers who have done both methods the second farmer has fewer worries.

Invest for Income, Not For Selling

I personally created the Income Method for investors and retirees to live like the second farmer.

We approach the market and invest for income. No investment is held that does not pay a dividend. Everything must pay. I don’t buy in the hopes to flip the shares later and pocket a small profit. I want to own the “land” and get revenue from it.

I am not systematically dismantling my portfolio. Instead, I am using the constant production of income from my investments to pay for my retirement. Additionally, I set aside some excess to buy more dividend-paying stocks. After all, even in retirement, I want my income to grow.

My personal portfolio currently yields nearly 9%, which means $1,000,000 would generate $90,000 annually – more than most working Americans make annually. Furthermore, a portfolio worth $4 million would generate $360,000.

You can retire on $4 million at 9% yields pretty easily for more lifestyles. You can do so on $1 million as well, but for most of us, you won’t need anywhere near that using dividend investing.

The truth is, taking out only 4% is too conservative in most cases. Most of the time, the SafeMax rule results in investors living a much lower standard of living than their portfolio could support. The problem is they don’t know the future. The market could collapse by 50% next year. It might not recover quickly.

Using an income method, you know what your income is. You know every year how much you have to spend and how much you have available for reinvestment. You can live your chosen lifestyle with confidence that your portfolio can support it, even when the market is bleeding red.

Stop accepting the wrong answers, and start asking the right questions.