In the book Freakonomics, there’s an anecdote about a poor woman who hit the jackpot in the lottery. The book recounts how she wanted to remain living in her same neighborhood, so she did lots of upgrades to her house – jacuzzi, gold-plated bathroom fixtures, and so on.
Apparently her extravagant ways started taking a toll, and she started racking up debt. The point of the story was that she had invested so much “improving” her house in a lousy neighborhood, that when it came time to sell it, nobody would buy such an opulent (read: garish) house in a bad neighborhood.
Now, the plural of anecdote isn’t data; but the singular of anecdote does mean entertaining story.
To live comfortably on 1 million, the underlying assumption is that there are no debts and you live in a (paid-for) house without extravagant taxes. Further you have few or no dependents and the public is picking up your healthcare expenses–Medicare, say. Your money is returning a safe 5-7% or so and you are not using all of it so that the principal is helping to keep up with inflation. You are in your retirement years so that you can draw down the principal if necessary over 20 or 25 years. Your tastes run to the modest.
Thus, the idea of living ‘comfortably’ on a million is realistic for a 65 y/o meeting the above criteria, but probably not a 25 y/o.
Of course a 25 y/o could invest the money more aggressively, get an actual job, live more modestly than her income and retire very wealthy much much earlier than 65.
Don’t forget retirement investments and pensions for the older guy winning a million bucks. He may already be set for retirement by 40ish so this new money only needs to bridge him till the rest (retirement monies) can be collected. If he’s smart he’ll work for about 5 years and then the interest off the million will make his nest-eggs even larger.
Except the interest rate for a risk-free investment tends to increase with inflation. Back in the late 70s you could get very high interest risk-free investments, because every knew that money today was worth more than money tomorrow, even more so than usual, and were willing to pay a premium to get it. So today’s absolutely safe investment that gives you 5% would give you more if inflation were higher. Of course, we could see a financial meltdown that would destroy your savings–if the government defaults on treasury bills that million you’ve got saved is going to be worthless. You’re going to be in trouble–you and everyone else.
As for the contention that 5% of 1 million might be enough for a retired person living frugally but wouldn’t be enough for a family, then how exactly can I support my family of 4 at a job that pays only a little more than that? And this is in the Puget Sound area, with a very high cost of living and a mortgage and paying for insurance. You aren’t going to get Medicare if you’ve got a million dollars in the bank.
Of course the point is that a million dollars will only buy you a modest middle-class lifestyle. But if a young family of four can’t survive on $50,000 a year then how the hell do the vast majority of americans survive on less?
All you have to do is figure out your current budget, multiply that by 20, and that’s the amount of money you’d need to continue your current lifestyle without working assuming a safe 5% annual return. If you want better than your current lifestyle, of course you’ll need to fantasize about more money.
Survive is not the same as live comfortably. I grew up in a single income household that was probably around the 25k a year mark and we survived. We damn sure didn’t live comfortably though.
Hmmm, but $50,000 is twice $25,000. And the gorilla in the equation is the cost of housing. Most people need to live near where they work. You need to be able to commute to your office in some reasonable amount of time from your home. So if I want to work for Microsoft, say, I have to live somewhere that’s within commuting distance of Redmond. And all such places are expensive. Go live in Kansas and prices for exactly the same home will be halved.
The only difference is that you won’t be living in the hip, happening Puget Sound area. If it’s important for you to live in Manhattan or LA or the Bay Area, you’ve either got to pay through the nose for housing, or accept really crappy housing. But a million dollar endowment isn’t enough to support you for the rest of your life without working if you want to live comfortably on Manhattan. You’ll have to fantasize about more money.
Yes, it is twice. But I’m talking about the late 70’s on, with a family starting at 3 and growing to 6 plus 1-3 ‘extras’ living with us. (cousins, grandmother etc).
My point though was, the previous responses talked about living comfortably and your example took it to being able to survive. Those are very different concepts.