Advocates and passionate followers of the Financial Independence, Retire Early (FIRE) movement have been ripped by some financial professionals for years now because financial planning is now harder than ever, and there is no magic bullet to any finance independence journey.
So, we figured we’d answer this question with some math for today’s post to fuel that discussion:
Is it possible to retire at 32 with a $1M portfolio?
Read on to find out our answer and what that would take when it comes to saving, investing, and delaying gratification.
Financial independence facts to remember
You may recall from previous posts on our site, that we believe Financial Independence (FI) is a simple concept to grasp but very difficult for most people to achieve early. That’s because it takes some serious savings rates and discipline to be achievable.
We believe FI is the status of having enough income to cover your living expenses for life – without ever having to work for money unless you want to.
Realizing financial independence takes a plan, some multi-year discipline, and ideally one or both of the following:
- For every additional dollar you save, you can invest that money so it can grow your wealth faster, and/or,
- You can realize financial independence by consuming less.
Use of either lever will do, however, here at Cashflows & Portfolios, we suggest you optimize both.
When it comes to optimizing both, you really have no choice if you want to “retire early” or at least semi-retire and work on your own terms. For the vast majority of us, it’s actually going to be your savings rate that will be your largest determinate of wealth-building potential.
We’ve published some case studies on our site before, about early retirement at certain ages, and linked to those articles below:
- How much do you need to save and retire by age 40?
- This couple plans to retire by age 50 by using their appreciated home equity.
This post however takes it a notch higher – is it possible to retire at 32 with a $1M portfolio?
Case study – Age 32 with Aggressive Savings
The math is simple but the discipline is not. Meaning, the more you save, the faster you’ll achieve your FIRE goal. Sure, your portfolio rate of return is important but it only matters once you have a modest amount of money invested anyhow.
Case in point is our example for today’s post.
Our couple, Craig and Christine, just turned 32 but found “FIRE” over a decade ago. They graduated at the top of their class as Software Engineers and were offered relatively high paying software positions right out of school – about $70k each, receiving 5% bumps in salary annually. Assume no bonus or RRSP matching.
While they are now making good money as Software Engineers (now about $108k each) – they realize that they have a passion for adventure and want to travel as much as possible, perhaps even start a blog and eventually write a book. Essentially they want to work and travel on their own terms.
Even before the pandemic, they were working from their modest apartment. They’ve saved big money in the process with non-existent commuting costs, they cook from home more often, and they continue to avoid any lifestyle inflation (even with increasing income). They believe thanks to their aggressive savings rates over the years, leveraging the last decade of a major bull market, and given their frugal spending existence they can FIRE or retire to entrepreneurship sooner than most!
Craig and Christine know they can continue to save ~ 50% (and more as their income increased) of their net income in the coming months because they’ve already downloaded the FREE cashflow spreadsheet from Cashflows & Portfolios with her free email subscription!
(Thanks Craig and Christine.)
Craig and Christine’s Path to $1 million
- Since the TFSA was established in 2009, our millennial couple has been able to contribute to this account throughout most of their professional careers. They’ve known for years that tax-free compounding power is one key to financial freedom!
You can read everything you need to know about the TFSA as a wealth-building account here.
- Our couple has $200,000 in their TFSAs as of right now, and they’ve maxed out contributions.
- Our couple has also taken advantage of their RRSP contribution room for wealth-building.
Check out everything you need to know about RRSPs here, including any RRSP contribution limits.
- With good-paying jobs and progressive salary increases over the last decade, their RRSPs are maxed out as well, now worth $400,000
- Thanks to their high savings rate, our couple ran out of TFSA and RRSP contribution room – so they started a joint non-registered account to invest even further. That account is now worth $400,000.
We’ve also assumed the following:
- Their portfolio has generated returns in line with the TSX over the last decade. This is because they invested in low-cost indexed funds. See iShares low-cost ETF XIU (an ETF we’re a fan of) as a proxy for those Canadian market returns over the last decade: XIU 5-Year = 10.28%; XIU 10-Year = 9.16%
Is it possible to retire at 32 with a $1M portfolio? The results!
Using the account balances above, we leveraged the professional retirement projections software to calculate if Craig and Christine can possibly retire at age 32 with now $1M saved. Before we get to the results, let’s look at our assumptions:
- CPP starts at age 70. Since they had a short career, their CPP amount is just 20% of the maximum
- Full OAS starts at age 65 – we assume they will continue to live in Canada for the most part / between travels as residents
- Both CPP and OAS increase with inflation at 2%/year
- Assume investments are 100% invested in broad-based indexed equities with a rate of return of 6.5%
- Assume they use various strategies to reduce sequence of returns risk
- To maximize tax benefits, at age 65, a portion of RRSPs are converted to RRIFs for pension splitting and pension tax credit benefits; eventually
- Lifespan to age 100;
- Retirement spending goal: $40,000/year after-tax (increasing with inflation).
So can Craig and Christine call it quits and transition to their dream life is travelling and blogging? They should be able to, but it could be tight depending on the market conditions!
Using the assumptions above, the projections software shows that they can spend up to $48k after-tax until age 100 – they can even increase their spending with inflation (2%).
Warning – Poor Market Conditions May Impact Early Retirement
The sequence of returns risk is a big deal in retirement – luckily there are strategies to mitigate the risk. While the market has been great over the last 10 years, what if the coming decades are not? As a harsh hypothetical scenario, what would be their max spend in retirement if the worst historical 20 year returns were to happen again, and repeat again every 20 years?
In this case, the projections software shows that by spending $40k/year they will run into a deficit by their mid-50’s. Not a great scenario, but even in this extreme case, a little income from their entrepreneurial ventures will make a big difference. Just $10k each in part-time/business income until age 60 would help them overcome even this harsh market scenario and make their money last well into their 90’s. If their ventures are modestly successful, they may not even need to draw on their portfolios at all which would lead to a very large final estate.
Final Thoughts – Is it possible to retire at 32 with a $1M portfolio?
Early retirement is simple but for most individuals or couples, it will undoubtedly require a very high and sustained savings rate.
Saving enough is your first priority and investing wisely is your second priority.
With a high savings rate, you can build great wealth by using these low-cost ETFs and portfolio solutions here.
We encourage you to check out these other case studies to see how you can model your financial freedom as well.
- Can you retire with $500,000 in your RRSP?
- Here is how much you need to save to retire at age 60 rather comfortably.
- You can carry a mortgage into retirement – if you have a great plan. Read on in this early retirement case study.
- When to take Canada Pension Plan (CPP) in retirement – find out what works in this case study here.
- Lastly, if you want to retire early have you considered the different ways to earn passive income? Read on in this post how to earn passive income in Canada.
Need any support with your retirement income projections?
Knowing how to demystify the retirement income puzzle is not trivial work but it’s absolutely something we can help with – we’ve helped many clients in the last few months alone!
If you need some help solving your retirement decumulation puzzle (i.e., how to efficiently withdraw from your retirement accounts), or figuring out if you have enough saved to spend for your retirement income plans, we’re here to help answer those questions and more!
If you are interested in obtaining private projections for your financial scenario, please contact us here to get started.
Thanks for your ongoing readership and for sharing this site with others – our site is growing thanks to you!!