Is $5m enough to retire at a young age?
I'm a 3rd yearanalyst turning 27 soon so I'm pretty old for my level mainly due to me doing poorly in school, I was never book smart and so I had to retake a year I also went to a terrible school. My bank also has a 3 year program rather than the typical 2 year program so we spend longer as an analyst.
Anyway, I've been a pretty good investor over the years and 2020 was a crazy year for returns. I was able to take advantage of this insane growth and have now sold out of all my positions for safety and am sitting on around $5m in cash.
I honestly hate IBD and can't wait to quit. Is $5m enough to retire at the young age of 26/27 and live a nice lifestyle or would I have to live frugal/conservatively so I don't blow through it all by the time I'm 40? I guess it's always a risk to retire early unless you have like $20m saved up.
My plan is as follows:
sadly I live in a pretty expensive area, but I want to own a house so I don't have to worry about being homeless so I'll buy a 1 bed flat outright in cash for $1m. I come from a very poor background, parents are unemployed and don't own a home (they rent) so I would also look to buy them a house in a cheaper area ($500k). This leaves me with about $3.5m.
Future earnings (rough example but ofc I will spend time planning diversification and investment strategy):
- invest $2m into low-risk funds aiming for capital preservation and possibly generating c.1%+ annual returns ($20k+)
- invest $1m into high-risk index funds, I appreciate these are volatile and may lose money which is why I would estimate a conservative average annual return of c.3%+ ($30k+)
- invest $100k into stocks (too uncertain to predict a return or loss)
- keep the remaining $400k as a cash buffer
I don't care about living a luxury life but at the same time, I don't want to live a cheap life. I want somewhere in between, I think a good way of putting it is I want to be able to enjoy regularly going out to fancy restaurants, events, night outs with friends, helping the family out and traveling whenever I want etc.. but I don't care about buying a mansion or an expensive sports car or spending $20k on a night out. So I think a good budget to live like this would be $75k per year. I feel this is enough to live a nice lifestyle but open to other people's thoughts if this isn't enough.
Using this as a template then I would be eating into my savings by $25k a year (net of the assumed above % savings returns) and so over time I will also be earning slightly less future interest/earnings due to less AUM but at the same time you don't take your money with you when you die so eating away at my savings slightly over the years is fine in my perspective as long as it isn't too much that I end up broke later in life.
Other unknown factors that will require increasing spending:
- I'm single so I don't have to worry about spending on a GF and kids, however, I do want a gf and kids but I've just had no luck at the dating scene. If this one day happens I'll most likely have to double my income. $150k yearly spending should be enough to support a wife and two kids alongside a 'nice' lifestyle right? $150k means I would eat into my savings by c.$100k a year (net of % returns) which should still be fine I think? Also would need to upgrade the flat to a larger family home which in my area would be super expensive so I might have to look to relocate away from the city. I could rent out my 1 bed flat and then purchase a $2m+ family home (this isn't me thinking of buying a mansion I just live in a major city so a $2m family home would still be very small), could I afford this I guess it depends? If I buy it outright it would completely ruin my % returns as the AUM will be significantly lower and increase my risk of becoming broke, so I would most likely have to fund this via debt
- Other family members, I come from an overall broke and unemployed family so I have a lot of siblings still living at my parents house so chances are a lot of them will expect me to buy them a house or help them out etc. this could end up being quite expensive so I'll have to be careful
What are everyone thought's is this a good plan and enough to retire at my age to live a good life? Am I ready to hand in my resignation letter in the new year or is this too risky and I should be thankful for still having a job after covid-19 and not get too ahead of myself and stick to my job? I know MDs in their 40s who have $10m+ saved up and are still working, so this makes me feel stupid if I would look to retire in my 20s with half of that but I guess most MDs genuinely love the job so don't want to retire or want a more lavish lifestyle.
Thanks for reading and feel free to share your thoughts below.