(Guest Post by Corey)
If you know anything about Budgets are Sexy, you know that J Money is well on his way toward a million dollars. Not only does he have 83 people in his Million Dollar Club, but he also gives regular updates on his net worth. If either of these two things doesn’t inspire you to shoot for a cool million, I don’t know what would.
Yet, if I were to be honest, I don’t aspire to be a millionaire. I hate to say it, but there’s a reason why I haven’t joined the million dollar club. (I don’t mean to hate because it does a lot to get people on the right track, but…) If you really look at what a million dollars can do for you, I think you will come to realize that it is nothing special. That’s right – I said it. A Million dollars isn’t worth that much these days, especially if it makes up your entire fund for retirement.
Instead of focusing entirely on one lump sum, I want to emphasize cash flow. Cash flow is more important to focus on because that is what really matters when it comes to living out the years when you are old and wrinkly. When it comes to paying all of your bills, do you figure out how much you have in the bank or do you figure out how much you earn for the month or year? I think it’s more of the latter.
A Million Dollars Sounds like a Lot
Most people associate a million dollars with either the lottery or a huge pile of gold – a million dollars is something that exists only in dreams. So, when they think of having a million dollars all to themselves, it sounds a little crazy. Considering that the average US family earns less than 50k per year, it makes sense that only a few would think 1 million dollars is within their reach.
As a result of this perception, many ambitious individuals set their retirement goals on this large number. Because it sounds like a lot of money, they figure if they could have 1 million dollars by the time they retire, they will be set for life. I know that I have thought the same thing. If someone gave me a million dollars, I would be tempted to quit my day job because it sounds like so much money. I’m sure most of you have thought the same thing.
Why a Million Dollars Ain’t All its Cracked to Be
Yet, even though a million dollars sounds like a lot, it really isn’t that much when it has to last you the rest of your life. It is often said that the safe withdrawal rate for retirement funds is around 4%. This means that you can withdraw 4% of your total lump sum and survive for another 30 years or so. If you have exactly one million dollars to start with, this means your annual income is a whopping $40,000. While I could live on that, it really doesn’t sound like that much, does it?
I’m sure that is how we all feel. Yet, the problem with this is that it often takes 40 years to reach this landmark. With enough discipline to save and invest your money over the length of your career, I think that many people could reach the million dollar mark. But, if we’re going to be honest – who wants to go through all of that work? 40 years of ceaseless discipline takes a lot out of a person. If often equates to years of sacrificing the things you want now, just for financial security later. It definitely isn’t that sexy, that’s for sure!
Why Cash Flow is Better than a Lump Sum
If was at the same time that I was working on my early retirement plan that I started to realize how long it would take me to save up enough money to quit my day job. Saving enough money in the bank in order to continue my current lifestyle would take me decades to accomplish. That’s when it hit me.
If I started a business that would generate enough income to replace the income from my day job, I could retire early. The only catch is that it would have to be profitable enough that I could hire someone to take care of many aspects of running the business and leave me with money in my pocket. In other words, my net profit (after all expenses) would have to equal the income from my day job. That doesn’t sound easy either, right?
Most businesses require upfront costs like purchasing land or mandatory operating expenses like a mortgage, insurance, etc. This often limits the profitability of small businesses because there is so much overhead. After considering this, I decided to focus my efforts on the online world because of its small overhead. The only expense that I have for a blog is $10 per year for the domain and $100 per year to pay a company to host it for me. By creating and running online blogs, I imagine that I will be able to generate enough income to replace my pathetic income from my day job in the next year or two. I’m not confident that the online world will continue to be as profitable in 10 or 20 years, so I am going to use my income as an investment to get into real estate. People will always need to rent a home or apartment, right? As my online business develops, I should be able to hire out more aspects of running the sites, while keeping a huge profit for myself. I hope that this will allow me to increase my free time and help me see retirement at an early age.
By focusing on building up cash flow, I don’t have to wait around for my yearly contributions and compound interest to slowly add up to a large lump sum. Instead, I am able to reap the same benefits in a short period of time. It seems like the best of both worlds: an early retirement with the same size income as those who save their whole life.
Do you look at the cash flow in your retirement planning?
Corey is a personal finance blogger at Passive Income to Retire and 20’s Finances. He writes about his financial goals, including his most recent aspiration to retire by the age of 27, in order to persuade others to get a handle on their own finances.
EDITOR’S NOTE: I actually agree with a lot of this (though a million dollars STILL is a lot of money). My mind is slowly morphing into the “cash flow” mentality as well, and I think being able to live your life *as if* you were retired earlier on is a lot better then when we’re old and not as healthy. And unfortunately it’ll take many of us 40+ years to get to that point w/ our current savings habits. That being said though, “starting your own business” is def. not for everyone, and that’s OK too – we need all types of people to run this world :) So if you fall more into that category, keep rockin’ what you’re doing over there but just increase your savings/debt ratio a notch so you don’t have to wait that long. There are plenty of ways to get to retirement! (Thanks again Corey, great post)
(Photo by stevendepolo)
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Great post! I actually look at cash flow and multiple streams of income now. That’s one of my keys to being financially free.
I still have a goal of reaching a million dollars. I agree that it’s not a whole lot of money. But my goal is not to get there when I am 65. I will have way more than one million at that time!
I totally agree with this mentality. The cash flow should pay for your expenses with some excess which can be recycled into more cash flow. It is the ideas espoused in the Richest Man in Babylon.
Funny, but this is exactly what I calculated seven months ago. So now, we are working on building income streams for a specific amount and clearing some loose ends. I got there is a slightly different way from you though. I was thinking that ‘traditional’ retirement mentality builds on having reliable ways ‘to store labour’ – savings (inclusing pension funds) and investmets. There are two problems with that: 1) a lot of labout should be stored (Jacob from ERE calculated that to store enough for very frugal existence over a short period it has to be 3:1; normally it will take about 30 years working life); and 2) the ways to ‘store labour’ have become unreliable. Thus, one needs to build different kinds of income (streams that may not be entirely passive but require relatively little and pleasurable input) rather than rely on savings etc. Having said this I still have a good pension provision but it could change over the next 25 years.
I agree that cash flow is the key. A million dollars will not sustain you for very long.
I agree. A million dollars isn’t really that much… I recently blogged that I was basically going to get there no matter what by saving $25,000 per year (actually, less than $25,000 because every year my investments generate more assets).
I’m not shooting for a “goal” number, but if I ever do it will have to be more than $1,000,000 =\ maybe five million lol Might as well challenge myself
A million dollars sure isn’t what it used to be! I agree that it’s wise to save money for retirement and set up income streams that will last you through your “golden years.” The fact that the average life span is steadily increasing means that we will all need more money to live on. I think a great idea is to find a source or sources of income that someone can continue even if they aren’t in the best of health, or have a reduced physical capacity. Great article!
I wholeheartedly agree! Plus, setting a cashflow goal sounds a lot more achievable than saving a huge sum like $1M.
If only starting a successful business were just that easy. Building up any type of sizable cash flow that would replace even $40,000/year would take several years and cost more than $110 a year in expenses. It’s certainly possible but most people don’t have the business sense, patients or ability to accomplish it before they quite or fail.
FYI = $1 million earning 4% interest will earn $40,000/year indefinitely and a 4% interest isn’t that difficult or risky to attain.
Good thoughts; I’d suggest that both saving and laying the groundwork for a cash flow generating enterprise is the wisest course. Plan A1 and Plan A2, so to speak. I wonder how the millions of real estate investors presently underwater or in foreclosure would react to the rationale that real estate investing is sound because “People will always need to rent a home or apartment…” Could be a bit more complex than that.
Thanks for the thought-provoking post.
Ha! I like it, although I’d say a million dollars should be “laughed with” instead of “laughed at” :)
Gotta love cash flow, for sure. But a million dollars can serve multiple purposes including being cashed into Benjamins and sewn together to keep warm…
I forget where I read this, but it was a while back. An author claimed that “a million dollars isn’t what it used to be.” Basically, he made exactly this argument using small farms as an example. Many have over a million dollars in annual revenues, but in reality only make a subsistence wage.
@Kurt what about those investors that own their properties out right with zero debt? They are the ones laughing their way to the bank because 1. They can’t be foreclosed on and can ride out a lull 2. they are buying up properties from investors struggling each month at a cut rate
I say build slowly, reduce your risk by paying cash and enjoy the higher returns on fewer properties and few landlord headaches.
@Shondellclarke – Yeah baby! That’s the spirit! I still think $1 million is a damn lot of money, but ofcourse it’s always good to push for more too ;)
@cashflowmantra – One of my top 4 favorite books!
@maria@moneyprinciple – I miss Jacob already! It’s fun to go back through some of his old posts to get energized though – great stuff :)
@Michelle – I still think $1Mil could get you far if you really paid attention, but yeah – more is still needed for a truly “free” life.
@Bridget – Go for it! In fact, push for $10 Mil ;) I’ll ask you in 40 years where it’s at, okay? Haha…
@Monica C. – Maybe we should make CashFlowisSexy.com? ;)
@Dollar D @ The Dollar Disciple – Oh yeah totally – MUCH eaier to think about, and start accomplishing, on week one vs saving for millions of dollars. In theory, you’ll start making a few dollars and then the next year it’ll be a few hundred, then thousand, etc etc. So in a cple years you’ll be much better set to earn more while doing less too ;) But again, all in theory.
@JP @ Novel Investor – YUP!! It takes a lot of brains and ESP time and hardwork. You lose one of those 3 variables and your chances for success is slim to none. That’s why so many poeple just avoid it altogether – they’re not willing to put in the hard work or at least try and learn a new niche/etc.
@Kurt – Glad you liked it :) Def. a diff. way of thinking than my million-dollar posts.
@Nick – HAH! Excellent poing my friend, excellent point.
@Edward Antrobus – Well, there’s a big difference between $1 Million in profit than $1 Million in revenue for sure ;)
@Matt – I like it!!
Over the last few years, I too have come to realize that 1mil. just might not cut it. It definitely sounds like a lot of money, but I guess it all depends on what kind of lifestyle you want in your retirement.
Of course, having enough cash flow AND a million dollars is even better. :)
“40 years of ceaseless discipline takes a lot out of a person. It often equates to years of sacrificing the things you want now, just for financial security later”
I like this bit here. Planning for your future is really important, and so is saving, but you have to live your life too!
Great title that is unfortunately very true, particulary when one factors in even modest inflation. Backtracking 40 years to 1970, the average salary was $7,500. Today its in the $30’s. So a one million goal realistically needs to be around 4 mil for someone in their twenties/thirties.
That said, I agree with J’s comment that striking out and starting an online business isn’t for everyone. But for those who have the hustle and desire, taking a shot at generating cash flow other than a paycheck is a must. If it works, it works. If it doesn’t, at least you tried. But its definitely best to wait until the new business has generated a nice safety net as well as good cash flow before dropping out of the 9 to 5 world.
Have you ever noticed that pretty much *EVERY* lottery winner takes the lump sum instead of the annuity payments, even tho they take a 50% hit in the process?
There is a serious mentality that the greatest thing in the world would be a huge pile of money that we could slowly chug our way through.. Bit by bit.
But I don’t think so.. Your take on this is right no.. Having a cash flow, and building something that is sustainable, is a much better sense of wealth, and will lead to much greater happiness.
I am part of J Money Millionaire club and I understand where you are coming from. My total goal is to have 4 million before I retire plus some rental properties. Here is the thing, BOTH cash flow and a large nest egg are important if you are not going to work. My increasing my cash flow I am able to increase my retirement savings without decreasing my spending therefore I don’t need as much discipline as most others who cut spending to invest. Having many paths to success helps the odds that you will succeed.
I’m with RetireBy40, a few million + cash flow is much better to me than one or the other. I still am way more interested in cash flow than just having a large amount in an account, but I just don’t see a conflict. I definitely believe both are laudable goals!
@Shondellclarke, I totally understand. As long as it isn’t your entire retirement fund, why not, right? If a goal motivates you, go for it.
@cashflowmantra, I couldn’t agree more.
@maria@moneyprinciple, great minds think alike.
@Michelle, thanks for your support.
@Bridget, now 5 mil sounds sexy. :) It’s good to keep in mind how much that calculates into…
@Monica C., thanks. Live expectancy puts a downer on things for those living off of one lump sum.
@JP @ Novel Investor, good point. I still think it’s possible. Many bloggers have gone from nowhere to somewhere in less than a couple years.
@Kurt & @retireby40, there’s nothing wrong with having two safety nets.
@Nick, haha. you can give me some benjamins and I will keep you warm. ;)
@Jen @ Master the Art of Saving, I’m glad we’re on the same page.
@SmartAssetTeam, thx. Yes, why wait to live until your retired?
@Jeff, thanks. Yes, I don’t want to live with regret because I failed to give it a shot.
@Jefferson, If I won the lottery, it would be different… at least, that’s what I tell myself. hehe
@Ginger, I couldn’t agree more – I’m not against having a lump sum – only a low amount being the sole fund of retirement.
@Roshawn @ Watson Inc, thanks. Yes, both is clearly better. But, I still can’t have the lump sum for some time. Why not build up a cash flow in a matter of years and use some of the income to build up the lump sum. win, win!
We’d love to have both, obviously. Right now, generating income and savings is at the top of our priority list, but as that grows we want to invest in more dividend stocks. We have a rental property that is losing money right now, but hopefully will be making money in the future when the market upticks again.
We are aiming to have 1.4 mil in cash at retirement. As we lump along, we’ll be looking into passive income opportunities as well.
My plan is to be in the million dollar club but invest in dividend stocks in addition to the retirement savings. This will allow me an income stream in addition to the retirment income.
One million dollars mean completely different things in different parts of the united states. Living in California has definitely taught me that. Still..it’s nice to have a concrete goal to focus on, but it wouldn’t be the best idea to sit back contently if/when you reach it!
You’re right. A million dollars really isn’t that much anymore. $40k per year based on your withdrawal rate isn’t bad though, if you have you are mortgage free and have another source of retirement income (like social security).
Cash flow is very important and it really is up to the individual to determine how they want to spend their retirement and plan accordingly. Great topic. Thanks for bringing it up!
I like the post, I would add that Young Professionals should make a concerted attempt to retire earlier rather than later. In fact that should be the number one goal out of college or high school. There is a lot of written material about this in Tim Ferriss’ books and blogs.
I’d encourage people to Bing/Google “Mortgage your Retirement” by two Yale professors who theorize that young investors would be better suited borrowing money to invest earlier in life when they are more risk tolerant. This essentially involves using financial leverage.
On that note young investors should also consider using leveraged exchange traded funds (ETFs) to boost returns during their 20s and 30s. While these are not classic buy and hold investments – for the experienced investor – they are a good way increase one’s chances of reaching the million dollar mark sooner rather than later.
Wait, are we insane?! A million dollars is a ton of money. We aren’t giving it to a recent college graduate and saying, “Hey kid, live on this for the rest of your life.” This is supposedly when you retire and you start cracking into this money.
Here’s to cash flow! I have to agree that a million dollars isn’t much at all, especially if you are still 20, 30 or 40 years from retirement. With inflation you will likely find that by the time you save 1 million you will actually need 2. Of course getting to 2 million will be quicker with the 1 million already saved, but maybe by the time you get to 2 you will still need 3 or even 4 million. Who knows what inflation could do in the future, look at the inflation in the 70’s.
Personally I would shoot for 10 million to be safe if I wasn’t focused on cash flow. That amount should provide a sufficient cash flow to both live on and to keep reinvesting and growing.
@Azra – Oh yeah, great point! $1 Million can go a loooooooot farther in different places of this country than others – that makes a huge difference.
@Evan H. – Haha, I agree with you ;) Many of us could certainly live off of $1 Mill at retirement… or even now, if we really worked at it. I guess the point is really to pay more attention to cash flow than this large number that seems impossible to reach.
Great post. Cash (and cashflow) are still king for sure! I kind of have my eye on $3M dollars. Would have to see $1M first.
I have a million-dollar goal, not because I think a million means that I’ll be “set for life” or anything like that, but because it motivates me. And since growing money is 90 percent motivation … bring on the motivation!!
@BE @ BusyExecutiveMoneyBlog – Yup – you gotta get to $1 Mil first before $3 ;) All in due time though!
@Paula @ Afford Anything – Damn straight, sistah! Highly motivating for yours truly too :)
as the old guy here “47” . I have been saving for almost thirty years. Goal is five million. I’ll take the interest and be fine. Should be there in three years
Good for you!! That is incredible man, wow. Way to go :)
This has to be one of the most idiotic articles I’ve every read. 1st you have to have a decent cash flow to obtain a million dollars. Then that million dollars will provide a cash flow without doing a single thing. 2nd if you only focus on cash flow then you have to work FOREVER to keep the cash flow going. Now if you look at average stock market returns then you are making more then the claimed 4% withdrawal rate. The average from the crash of 2008 – 2014 so far is 10.5% return or 100k on your million dollars in increase value, without including dividends and cap gains. So now I have a cash flow, I have a million+ that is up 46k in the past 4 month, then add in I make on average 25k on dividends and cap gains a year which is reinvested. When I retire I will convert the other 60% of my portfolio to investments that pay dividends and cap gains. This will put more receiving passive income that well exceeds the standard 4% withdrawal rate. Should I give up the million and go for some blogging cash flow that merely covers the bills? I donated to your cash flow by actually looking at this ridiculous blog and advice. My advice pick your poison i.e.: stock market investing, real estate, savings and then hit that as hard and as long as you can and you’ll have a decent life.