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Can I live like a millionaire?

Beer money, champagne taste is a criticism that can be leveled at a few acquaintances of mine – not least a good friend who lives in fine style for the present but reacts like Dracula to sunlight to the word “Pension”.

Recent jousting over our contrasting lifestyles (“You can’t take it with you!” comes his counter jibe) reminded me of research from the Prudential that reckons the average Brit will have earned a million pounds by age 46.1

That’s a great headline, but a million ain’t what it used to be.

According to the research, it would take a man (I’m one of those) 28 years to notch up his millionth pound earned (assuming he earned the average wage for his age, starting at 18).

After 28 years, a million would only be worth around £492,000,2 as inflation gets to work like woodworm on Pinocchio.

Of course, you’ll have to pay the bills along the way that will consume much of your million pound in earnings. Food, water, a roof over your head – even the most extreme frugalists can’t avoid spending a few pennies over the course of nearly three decades.

And then there are taxes.

By the time the average worker has earned their first million pounds they will have paid approximately £138,500 in tax and £99,680 in national insurance – a total of more than £238,000.

Maybe I’ll put that Ferrari catalogue back on the shelf for now.

Making a slow buck

What does a million pounds buy these days?

The real question is what could I do with a million pounds if I had it now? There are plenty of answers to that, but essentially I’d like to live it up, draw an income, and never work again please.

The standard rule of thumb for living off your assets is that you can withdraw 4% a year without going bust.

My million pounds equates to a £40,000 annual income in that instance:

£1,000,000 x 0.04% = £40,000

However retirement researcher Wade Pfau has smashed lumps out of the 4% rule with his data sledgehammer, so let’s use a more cautious 3% to keep us out of harm’s way.

The million pounds now delivers an income of £30,000 a year.

So if you can’t live on less than £30,000 a year then you’re gonna need to be a millionaire by the time you retire3.

A real millionaire.

How to save a million

All you need is the saving ethic of a Swedish tramp, an eye on inflation, the magic of compound interest, and a fair wind for your stock-heavy portfolio.

Well I say that, but although the average Brit may see a million pounds slip through their fingers by age 46, in reality it’s going to be an absolute b’stard for most to become a millionaire.

The key factors are:

If you’ve got nothing in the bank now and we assume a new normal growth rate of 5.5%4 for your portfolio, then you’d need to save around £28,000 per year for 20 years to hit the magic million.

You can use Dinky Town’s investment return calculator to run your own numbers – or check out Monevator’s millionaire calculator.

The problem is that inflation of 2.5% a year will wear down that million to around £600,000 in today’s money. You’d draw an equivalent income of £18,000 per year from that, given a 3% withdrawal rate.

So just how much do we need to put away to earn a real million, given annual growth conditions of 5.5% nominal return and 2.5% inflation?

20 years to save a million

To earn the equivalent of a million pounds in today’s money, we need to invest nearly £46,000 a year for 20 years.

By that point, we’ve amassed around £1,640,000 in nominal terms. That’s just over £1 million in real terms.

Impossible you say? It is for me. So let’s take a more leisurely 30-year route to Millionaire City.

30 years to save a million

Annual investments of just over £13,000 a year would balloon into a million after 30 years, given the same growth and inflation assumptions as above.

But, tragically, a cool million in our hypothetical 2046 will only be worth a very uncool £468,000 in today’s money.

You’ll need over £2m to have the same spending power as a millionaire does now, which means you’d need to invest nearly £28,000 a year to make a real million after 30 years.

So let’s think more optimistically. Thirty years is a long time, who knows what might happen? What if growth was a more normal 7% for a 60:40 portfolio of equities and bonds over that time?

You’d still need to find almost £22,000 a year to achieve the £2m target that would make you the equivalent of a millionaire in today’s money.

My Ferrari catalogue is now burning on the fire because I can’t afford the central heating.

A country estate is something I’d hate

Millionaire status will stay beyond the reach of the average Brit for a long time to come, barring a dose of Weimar inflation. Little wonder just one in 65 of us had achieved millionaire status at the last count, and those mainly due to soaring property prices in the South East.

Even comfortable retirement status looks like a steep climb for many. You’re going to need a pot well into six figures as a minimum. Hitting seven figures, unless you’re rolling in it already, is going to be tough, but it can be done.

You’ve got to save hard, live on less, and work long. Who wants to be a millionaire, eh?

Perhaps I’ll re-read The Investor’s tips on how to live like a billionaire in the meantime.

Take it steady,

The Accumulator

  1. Notwithstanding a raft of exciting caveats, like losing an arm and a leg to taxes. []
  2. Assuming a steady rate of 2.5% p.a. []
  3. Not accounting for taxes or the state pension. []
  4. Nominal return subtracting investment costs of 0.5%. []

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{ 70 comments… add one }
  • 1 Jamie Dickinson @ YourSavingAngels February 5, 2013, 10:23 am

    Really interesting post, thanks. A million really doesn’t go that far these day, but still seems out of reach for the vast majority.

  • 2 Neverland February 5, 2013, 11:13 am

    Its quite simple really

    Up until (I think) the seventies people retired at 60-65, had maybe 10-15 years of retirement and then died

    In 1971 life expectancy for a man in Britain was 68 and for a woman it was 72

    Sure if you got to retirement you would live a bit longer than the average

    Final salary schemes actually weren’t that generous then for most people

    In the last thirty years life expectancies in the UK shot up and suddenly people expect to be retired for 30 years

    At the same time government heaped regulations and responsibilities on company/government pension schemes making them a lot more generous…and a lot more expensive for the providers

    Obviously the confluence (sp?) of those parallel trends was not going to end well

    In 10-15 years time very few people will be retiring before they are 70 and we will go back to people having 10-15 years of retirement before they die

    Those people won’t need to save £1m (in today’s terms, ignoring inflation) to fund their retirement

  • 3 Paul S February 5, 2013, 12:15 pm

    Hi TA,
    You could give it it much better go if you didn’t have 40% of your investments tied up in bonds for 30 years. “Stocks for the Long Run” by Jeremy Siegel clearly demonstrates that equities not only produce better long-term returns but at time horizons of more than 10 years they are safer too.
    The long-term annulized real returns for a 30 year time horizon average:
    Equities 6.5% with a standard deviation of 2%
    Bonds 3.0% with a standard deviation of 2.5%

    That translates to a 90% probability of stocks returning between 10% and 3% real over 30 years. The equivalent for bonds is between 7% and -1% (yes, that is minus).

    Paul S

  • 4 The Investor February 5, 2013, 12:52 pm

    @Paul S — I tend to agree. I’d not bother with bonds at all for the first 10-20 years of a 3-4 decade investment program that has regular money coming in from new savings.

    T.A. is very well attuned to the mindset of the average person though, and well understands their morbid fear of volatility. (In contrast, he calls me a “DIY wannabe hedge fund manager”). And diversification has real, demonstrable, benefits. It’s “the only free lunch” famously.

    For that reason I think bonds do have a place for most, even for retirement portfolios, although I think 10-20% would do it personally, until you’re a couple of decades from the finishing line at least.

  • 5 Retirement Investing Today February 5, 2013, 1:42 pm

    Hi TA

    In answer to your question “what could I do with a million pounds if I had it now?” I’m with you. That would be plenty for me to declare financial independence.

    Interesting conclusion to the post though – “save hard, live on less, and work long”. I’m going in a slightly different direction which has been the tagline for my blog for some time now – “Save Hard, Invest Wisely, Retire Early”. We seem to be aligned on the Save Hard and Invest Wisely. Our difference seems to be Work Long vs Retire Early.

    I still believe (and I think am demonstrating as I publicise my journey to financial independence) that if you really maximise your Save Hard and Invest Wisely then Early Retirement is real even in the modern day.


  • 6 Jane Savers @ The Money Puzzle February 5, 2013, 1:51 pm

    I want to be a millionaire but unless I have some long lost maiden aunt who owns several beer distilleries in Germany and leaves it all to me is just not going to happen.

    Trying for $400,000 Canadian before I retire but at the rate I am going I will never get there. Late 40s single mom with a net worth of $190,000 and most of that is my house.

  • 7 gadgetmind February 5, 2013, 2:11 pm

    I wish we could get those on generous final salary pensions to look at these figures and realise that working in the public sector is an easy route to being a millionaire!

  • 8 Neverland February 5, 2013, 2:21 pm

    @ gadgetmind

    Thats just a function of annuity rates, which in turn are just a function of QE

    In reality most public sector workers don’t retire on extravagant pensions

    But I really don’t know why the governments didn’t take an axe to the small number of schemes which are just stupidly generous…doctors, judges, senior civil service, MPs – hmm maybe there is a clue there somewhere

  • 9 gadgetmind February 5, 2013, 2:35 pm

    I don’t begrudge a Doctor a decent pension as I think they work hard at a job that few could do. MPs on the other hand …

    As shown in this article, few can get to 7 figures just by saving hard and relying in compounding, but it can be done. Just.

    However, pretty much everyone I know who’s achieved this level of wealth has done it by setting up their own business, working extremely hard to grow it and make it successful, and then finding a good exit strategy.

  • 10 OldPro February 5, 2013, 2:42 pm

    What about “earn more”…. a method you don’t hear so much these days, but I don’t believe all avenues to enrichment are closed now… businesses are made after busts!

  • 11 ermine February 5, 2013, 3:08 pm

    @TA Wade Pfau’s analysis included world wars. There isn’t a retirement strategy that can hedge against that sort of social upheaval. You just can’t do it. Look at the countries at the bottom of Table 3. France, Germany, Japan. All three took a gutful in WW2. If you think your retirement is going to be proof against major wars on your home ground or being occupied or defeated then you’re an optimistic fellow indeed!

    Some things can’t be done or hedged in advance, you just have to do the best you can with what you have to hand. There’s no investment strategy I can imagine that will deal with peak oil or disruptive climate change either.

  • 12 The Investor February 5, 2013, 3:12 pm

    @OldPro — I agree. I need to get Monevator back on track on that side of things, as I am definitely not in the scrimp and save and skip every last latte school of thought. Besides earning more in work or your own business, even a small side income can add £2-5K to a retirement account every year, which will do a lot for most people’s prospects.

  • 13 gadgetmind February 5, 2013, 3:37 pm

    @ermine –
    If you choose your 30 year period with care, you can include two world wars and the great depression!

    Those who want a retirement strategy that can copy with that should probably use the gold, guns and beans portfolio.

  • 14 Neverland February 5, 2013, 5:30 pm

    In Japan, way back in 2006, 40% of the male population over 60 was still working

    Further, those 60+ workers have a much higher self-employed proportion than the average for younger workers

    The UK is about 30 years behind Japan in terms of demographic trends

    We are just beginning to see the ageing process they saw in the 1980s as our baby boom starts to hit what they thought would be their retirement

    …then they suddenly find they can’t afford to retire

  • 15 Financial Samurai February 5, 2013, 7:00 pm

    The best way to live like a millionaire is to be a millionaire.

    In the US, being a millionaire is becoming a dime a dozen now given there is such much opportunity.

    The secret is to live under the radar, so nobody knows you are a millionaire so the gov’t doesn’t come after you and neither does the public!


  • 16 SemiPassive February 6, 2013, 12:07 am

    It is especially tough when you factor in how typically most people won’t hit career peak earnings until your late 30s to early 40s.
    The people I know who have hit or surpassed the magic million pound net worth either run successful businesses or leveraged up through BTL. Or are quite old and just bought a house or two in London decades ago.
    I’m probably already too old already to hit a million in just investment assets now, but total net worth including a paid off home it might be possible.
    It all points to working, in some form, longer than originally
    intended. But The Monevated should at least be winding down a little in their 50s and 60s with less financial stress than the population as a whole.

  • 17 Paul S February 6, 2013, 9:18 am

    Hi TI,
    Thanks for the response. I do understand that some people have a morbid fear of volatility but shouldn’t Monevator be trying to demonstrate that it is an irrational fear and can seriously damage your wealth. Many people believe that active management is essential for stock market success but you don’t let that pass without exposing the myth. The bond safety myth (for long-term investing) is just as damaging to wealth as active, high cost, management.

  • 18 Neverland February 6, 2013, 12:37 pm

    @ Financial Samurai

    I think you’ll find the reason that millionaires are “a dime a dozen” now is compound inflation

    According to your Bureau of Labor Statistics $360,000 in 1980 is the same as $1m today

    Today, in the UK and the US, being a millionaire just means you are a relatively comfortable member of the middle class, not rich per se

  • 19 The Investor February 6, 2013, 2:48 pm

    @Paul — I don’t believe it is irrational to fear volatility or to hold some bonds. Post coming soon. Cheers! 🙂

  • 20 gadgetmind February 6, 2013, 3:03 pm

    I read somewhere recently that affording the “millionaire lifestyle” currently requires about £3M. I was actually surprised it was that little.

  • 21 IverPotter February 6, 2013, 3:04 pm

    There are two main groups in my mind (terrible simplification) – lower-paid but on a promise (public sector) and higher-paid but not on a promise (private sector). I am in the latter camp. I have some excess in my monthly budget but I realise that I need to resist all temptation to spend it (as most people assuredly do/would) in order to save for tomorrow. Those in the former camp arguably have it easier in terms of financial/mental discipline as the saving for tomorow is automatic, predominantly done by someone else and comes with more of a guarantee still.

  • 22 The Investor February 6, 2013, 4:27 pm

    @IverPotter — While I don’t discount the attractiveness of public sector pensions, I’d actually feel safer in a private scheme that I could run in a SIPP myself. Crucially, you can be in hands on control of the latter, which I far prefer. In the public sector you’re to some extent at the mercy of the state (admittedly a very generous benefactor to date).

    Part of the reason I was motivated to set up Monevator was seeing a relative wrangling with the strictures of a final salary pension scheme.

  • 23 Cru February 6, 2013, 5:12 pm

    I thought these types of blogs were supposed to be empowering. This is the same super-depressing conclusion I find on my own. What gives?

  • 24 Juan February 6, 2013, 5:49 pm

    Just for the sake of argument:
    Have you thought that if too many people are trying to become millionaire, that will make being a millionaire less worth?
    Millionaires can’t be too many by definition. Because the value of money is always a RELATIVE value.

    If everyone could afford to have a chauffeur ¿who will be willing to work as a chauffeur?

  • 25 teamdave February 6, 2013, 6:00 pm

    This is the saddest post ever.

    We’ll never be millionaires.

    All the enthusiasm garnered from previous Monevator articles, other great PF bloggers and Guy Thomas’ Free Capital book just decimated in a few hundred words.

    I’m off to eat burgers, fries and drink beer to make myself feel better.

  • 26 Davy Jones February 6, 2013, 6:04 pm

    I prefer to think of investments now in terms of hundreds of years .. that they should continue to grow & provide benefit long after i’m gone , i’d be more than happy to live from a 3 % dividend income whilst they continue to appreciate .. life is not an eternal well though is it .. a balance between living & enjoying life now should also be made just in case.

  • 27 Neverland February 6, 2013, 6:21 pm


    Governments have a poor track record of living up to their promises. The idea that the government is done fiddling with public sector, private sector or state pensions is just laughable. The first thing to get sliced when Greece, Spain and Portugal got into trouble was pensions for ex-government employees. What are they gonna do – strike?

    @ teamdave

    I’m sure you will be a millionaire. You just have to hope that your £1m will buy you more than a few Happy Meals at McDonald’s when you have it 🙂

  • 28 Juan February 6, 2013, 6:25 pm


    More important than money itself is what you can buy with money. If everything is more affordable in future (house, clothes, food, governments, education, cars, healthcare, travelling…) then ¿why worrying if you are just a half-millionaire?

  • 29 Joe's Sustainable Portfolio February 6, 2013, 7:23 pm

    Very intresting post. I will come back in twenty years and tell you if I am millionarie by real value of 2013! Alas, I do not think I will get a million pounds. 🙁


  • 30 gadgetmind February 6, 2013, 7:33 pm

    I guess I ought to come clean and admit that by most metrics I became a millionaire when I sold my first company back in the early 90s. It’s taken since then for me to become one again because some of it might just have been spent rather than invested.

  • 31 The Accumulator February 6, 2013, 8:25 pm

    @ Teamdave / cru – I’m knackered after too many late nights at work but I’ve got to respond to your comment. Caused me a wry chuckle. I thought exactly the same thing when I wrote the piece. And I scoffed myself stupid immediately after too. But… the bit I’m gonna concentrate on is not needing to be a millionaire. Reckon I can get by on half that. Won’t live purely from the portfolio either – will annuitise some assets (hopefully QE will be a thing of the past by then), will get some state pension, will perhaps work a couple of days a week well into my 60s or even 70s (I’m picturing something moderately taxing and semi-enjoyable – should do me more good than harm) – prospects seem much brighter when you start thinking about all the things you can do.

    @ Paul S – I also agree with you but many, probably the majority, aren’t cut out for that kind of risk. And don’t make any mistake, you are taking a risk. Are your equity returns US? UK historical average is around 5%.

    @ RIT – I definitely want to retire early. Philosophically I’m in your camp. But I have a feeling I’ll be better off keeping my hand in on a strictly part-time basis for longer. Mentally as well as financially. And if the numbers don’t stack up then working longer is the best remedy.

    @ Ermine – you don’t have to be on the losing side of WW2 to break the 4% rule. But then I think the point of Pfau’s research is to break the spell of an idea which ain’t necessarily so, but beguiles with its charming simplicity. Some lucky cohorts can spend much more than 4%, depends on the hand you’re dealt and time deals that hand face down. I suppose the lesson is: worry about what you can control i.e. saving rate, spending rate, work rate…

  • 32 Snowman February 6, 2013, 8:55 pm


    That made me laugh.

    I’ll console myself with the thought that a snowman is made up of a million snowflakes.

    Having said that, based on the scene in Local Hero with the handful of grains of sand, that’s probably isn’t true either.

  • 33 Snowman February 6, 2013, 9:16 pm

    @the accumulator

    Just wondering if that’s you in 1989 singing the song 3 minutes 40 seconds in


    What an under-rated band Man from Delmonte were

  • 34 Paul S February 6, 2013, 10:15 pm


    Yes , those are US returns, the data is just so much more accessible.

    My point is that the risk is misunderstood. Long-term the risk in bonds is higher than the risk in equities for a much lower return. Long-term, bonds are a very poor prospect. The long-term risk in equities is very low for a high return. The long-term risk in bonds is higher for a lower return. To convince me otherwise you will have to produce some data. As far as I am concerned all the evidence is against bonds.

  • 35 IverPotter February 6, 2013, 11:12 pm

    @The Investor @Neverland

    True, I guess I’m learning that having control of your own pot of money is critical in this new world of legislative quicksand.

  • 36 Moneyman February 8, 2013, 10:23 am

    Another great topic…

    I’m a fan of ‘Millionaire Next Door’

    There are two issues:
    – you need to earn it
    -…and not spend it

    I’m just an ordinary guy that has retired early (without yet taking my pension) but if I add up the value of savings, investments, house and pension funds/entitlements, this seems to put me in the millionaire bracket. Amazing. And I’m still on the lookout for bargains every day.

  • 37 The Accumulator February 9, 2013, 3:21 pm

    @ Paul S – the point of bonds, for most, is to use them in a diversified portfolio to achieve lower risk adjusted returns.

    See this demonstration by Larry Swedroe: http://www.cbsnews.com/8301-500395_162-57567438/how-to-diversify-your-investments/

    The idea being to protect yourself from locking in losses by panic-selling when volatile market conditions exceed your risk tolerance, or to insulate yourself from a terrible sequence of returns just when you need to draw down the portfolio.

    You plainly aren’t concerned about this (perhaps you have a very high risk tolerance) but others are not so fortunate or certain that the historical norms will always prevail.
    This debate continues:

    @ Moneyman – I don’t know how early you retired but Ermine’s earlier post made me wonder why I’ve never seen a UK equivalent of Mr Money Mustache, the Millionaire Teacher or Jacob @ ERE.

    Have I missed them? Or is it more of a struggle to retire in your 30s in the UK?

    Perhaps because of higher cost of living, higher taxes, less opportunity to radically redesign lifestyle while benefiting from living cheek by jowl with the mainstream…

  • 38 Lee September 7, 2016, 12:59 pm

    If you stay invested in the market then the 2.5-4% dividend yield should surely be enough to live on without going into withdrawal per se. As such, 40k is more than plenty for the post retirement lifestyle – I lived on about 15% of that only about 12 years ago when in grad school. Sure, more obligations now, but a shit load of “lifestyle inflation” artificial costs.

    I guess a million is superfluous. That at least is my most deeply desired conclusion – otherwise I’m screwed with at least another 10 years at the coal face.

  • 39 Fremantle September 7, 2016, 2:10 pm

    The state pension should also be factored in – after 35 years working (actually 32 years due to the NI starting credits), and assuming max New State pension, adds about £8k to your income. Even discounting the State Pension for legislative uncertainity by 50% adds £133.3k to your effective capital at a withdrawl rate of 3%, meaning you need £870k to live like a millionaire in today’s money.

  • 40 The Investor September 7, 2016, 2:43 pm

    @Fremantle — I agree based on where we are today, but I think this article is not so much a road map as a sort of thought experiment — especially for those who’ve never considered these issues. (And that encompasses most people, though it’s easy to forget that when you’re a financial blogger or regular a financial blog reader. 🙂 )

    Who knows what will happen over 30 years at the rate the world is changing! We can only all do our best.

  • 41 JW September 7, 2016, 2:53 pm

    The figures do show why so many people on average earnings don’t really bother with savings- it seems an impossible task.
    But they also show how unreasonable the lifetime allowance system is for pensions, penalising anyone who does end up with more than £1m in pension savings, and yet is not thereby assured of a high income in retirement. While it is open to us to save outside of pensions as well to stay below that limit, it is also tricky- if you set your savings levels taking a pessimistic view of investment returns and we do go back to a time of higher returns (not impossible over a couple of decades) that £1m limit could be exceeded. I am always deeply uncomfortable about fixed limits in tax rules, as they are often left frozen to catch more and more taxpayers.
    I am lucky enough to have net worth of a bit over £1m, mainly through being a fairly high earner with a consistent savings habit, and even then 60% of it is tied up in one house in the south east… but I certainly don’t feel confident that I could retire now, in my early fifties, and not run out of money

  • 42 magneto September 7, 2016, 4:08 pm

    “If you stay invested in the market then the 2.5-4% dividend yield should surely be enough to live on without going into withdrawal per se. As such, 40k is more than plenty for the post retirement lifestyle” Lee

    Yes; was also wondering about that.
    In the linked article Wade Pfau puts to one side 100% Stocks and states :-
    “it is worthwhile to focus on a more plausible 50/50 retirement asset allocation”
    Wade Pfau

    While £million would have been appreciated, we retired in 1992 (aged 49), for specific reasons, with substantially less than £1m, (even after adjusting for inflation).
    Our investments were (and are), as Lee may be proposing, therefore always tilted to yield; to thus be able to live within the natural yield of the portfolio, while growing the capital.
    Not advocating 100% Stocks however!
    It is unnerving to be without a wage, but by cutting back on non-essentials we did manage.
    And manage quite well.
    Trust this is a message of hope!

    When Greybeard focuses on income producing ITs, has there been any mention of Fixed Income or other non-Stock Assets in his thoughts to date?
    His thoughts might well throw some light.

  • 43 old_eyes September 7, 2016, 5:43 pm

    I enjoyed the post and did not find it depressing, but bracing, like a cold shower. There is nothing like looking realistic scenarios square in the eye and then planning how you will try to live your life.

    I find many people obsess about a single number as if it had some real meaning, and tie themselves in knots to prove they have the ‘wealth’ they have decided on (counting illiquid assets like homes being a common sneaky trick). As many others have commented, unless you are planning to pass the wealth down the generations as untouched as possible, what matters in most situations is the income flow you can create. There I am with those who look at state pension/personal or company pension/interest/dividends/other congenial work, and say – it can be done. To hideously misquote Everett Dirksen – a pension here, dividends there, part time work – pretty soon you’re talking real money.

    Diversity, resilience, an intentional life – that’s my plan.

  • 44 Dave C September 7, 2016, 5:44 pm

    The title of the piece is ‘Can I live like a millionaire?’.

    Whilst it may be an interesting read, the idea of chasing the ‘million’ is a waste of energy.

    Much more useful is to understand clearly how much money you need to per year for your habitual lifestyle: not the lifestyle of a millionaire.

    As Keynes said “a man’s habitual standard of life usually has the first claim on his income”.

    Or, if you must, then choose your millionaire/billionaire wisely. Two things I always remember and copied (in part) from visiting San Simeon (Hearst Castle) in California: 1. He always had ketchup and mustard on the dining table and 2. He just bought a lot of pairs of black socks so there was never any wasted time trying to match them up – there is never an odd one.

    (The latter may be Warren B – but either which way it is a life changing millionaire experience!).

  • 45 Henrik September 7, 2016, 7:22 pm


    I only tread the post quickly so forgive me if I’m wrong but I think you counted inflation twice. The 5.5% compound annual return is inflation adjusted already? Therefore if you do the numbers the resulting put in n-years time is already in today’s money, if you know what I mean.

  • 46 SurreyBoy September 7, 2016, 8:27 pm

    Its good to kick this point around. The £1 million is a totemic figure, but not especially relevant to me. I have looked a lot at “how much is enough” and sequence of return risk and SWR etc etc.

    I have a basic spreadsheet showing my current age, and a Retirement Pot (RP) which is pension pot/isa/family house proceeds minus current mortgage/retirement property and uni funding for kids. Then its RP x SWR of 3% = FI annual income. This feels uber conservative.

    For example this (isnt but) could be £400k x 3% = £12,000. This can be inflation adjusted up in theory as long as i live. Then i plug in the state pension for me and the better half at 67 – assuming they are paid. Then i reflect on the fact we will probably spend naff all at 80 as i will be sat in the corner or dead.

    That way i get to a decent ish FI/pension outcome with far less than £1m. If you can live happy on £15k upgraded for inflation a year you need only amass £430,000 at a SWR of 3.5% and thats before the state pension. I know £430k isnt small change but its less scary than £1 million.

  • 47 The Investor September 7, 2016, 8:39 pm

    @Henrik — No, the 5.5% is a nominal return, as per The Accumulator’s acceptance of the cautious Brave New Normal world of lower returns. Depressing I know!

  • 48 FI Warrior September 7, 2016, 8:46 pm

    Everybody has got to have some luck during the period that is their entire life, so if it looks discouraging now, don’t forget that if you are disciplined and have a system, catching a break could change everything, it ain’t over ’til it’s over. Never give up trying, FI-ers.

    In my corporate years, all the big swinging dicks earning 6-figure salaries got lulled into a false sense of security thinking their earning power was all down to their own personal genius. I was stunned to learn that almost none of them had paid off their mortgages, the more they made the more they upgraded their lifesytles; more bedrooms, better area, private schools for Orlando, Jemima and Tarquin, add a mistress to the trophy wife, get new vehicles and better holidays every year.

    For J. Bloggses however, what you can still do is learn how to recognise opportunities so they don’t pass you by, stay hungry and sharp and grab with both hands when they go by. Redundancy lumpsums, divorce settlements, inheritances bonuses, anything you don’t need to pay off existing debt, mentally think of as pension money, not yours now for fun. If you struggle with discipline, look at old or sick Americans living in cardboard cities on wasteland eating catfood in news programs, because the UK slavishly follows US trends and if that is what the richest country on the planet has, don’t think it’s impossible here.

  • 49 dawn September 7, 2016, 9:04 pm

    it is a depressing post i must admit
    worst case, pretend youve got a bad back get a walking stick and live of the benefit system that lot seem to do very well indeed.
    im banking on getting state pension of £8000 pa thats worth £200,000 of investments alone
    that will cover all my living expenses and my portfolio will be my fun money.
    i may finish at 57 ten years before state pension kicks in where ill draw from my aviva pension and cash.
    we just dont know how its all gonna pan out
    but articles like this are demoralising but maybe its the hard truth we need to face
    my lifestyle dosn’t require £30,000 pa anyway so im lucky i dont need to get the million.

  • 50 W Neil September 7, 2016, 10:07 pm

    While some caution with safe withdrawal rates is prudent, emphasis on too low ‘safe withdrawal rates’ (e.g. 3%) may make savers and investors unnecessarily disillusioned.

    We are in a low yield world now, but over an investment life time things change. Further, even the current low yield and resulting SWR scenarios demand further attention.

    Finke, Pfau, and Blanchett previously studied SWR and the low yield environment “The 4 Percent Rule is Not Safe in a Low-Yield World” and that too suggested the old 4% SWR would struggle. For an equity and bonds portfolio, the concern is that if bond yields remain low the forecast equity returns are also downgraded to reflect the equity risk premium. However as Kitces pointed out, the low yield data assumed negative real bond returns when even the markets expect some returns (as represented by 30 year TIPS values at the time). At the time Pfau in response suggested it can “still be appropriate to start at 4% while maintaining flexibility to reduce spending later if needed.”

    Pfau (2010) also looked at global returns and concluded a SWR of 4.0%-4.5% as a baseline with a balanced asset allocation (40%-70% equities), with a lower 3.6% baseline where expectations are for sustained lower economic growth. He concluded that SWR expectations are lowered further (below 3.6%) only in cases of war or severe external shocks.

    In all cases these SWR were based on simple asset allocations and no additional strategies. But, as Pfau acknowledges, for a diversified global portfolio, not over-weighted with home bias or to any single market, there remains the potential to increase the SWR through active strategies, including Guyton Klinger ‘Decision Rules’, tilts (especially an allocation to small caps), and dynamic asset allocation. Any one of these can add 0.5-1.0% to a benchmark SWR, and combining strategies can increase the SWR further.

    So the message is, keep saving and investing. Over the long-term yields and returns may be better, and even if they remain mired where they are, it may still be possible to generate more income from your cash pile, without risk of portfolio failure, than the headline SWR figures currently suggest.

    SWR is probably an area worth a dedicated section on Monevator; it is highly relevant and of increasing interest as the investment journey progresses.

  • 51 weenie September 8, 2016, 12:01 am

    My lifestyle is nowhere near £30k pa – like SurreyBoy, I’ve worked out that it’s possible for me to get a decent FI/pension outcome on far far less than £1m, probably need around £300k and I plan on spending it.

  • 52 Massive September 8, 2016, 2:30 am

    Always intrigued by the focus on a 4% safe withdrawal rate.

    I have a strong expectation that I will still earn some income once I stop my current aggressive accumulation phase – I will consider myself fully independent once I reach a withdrawal rate of 10% – and anticipate that I will not run my assets down regardless as a result of some non-investment income.

    This is all definition dependent but I sometimes wonder if people get things all out of perspective by focussing on the 4/3/2.5% rule.



  • 53 dearieme September 8, 2016, 4:46 pm

    I know someone who worried that his Final Salary pension would be valued at £1.5M for the purposes of an LTA calculation. All it needed was a lifetime of sound earnings and then two stellar promotions late in his career.

  • 54 John B September 9, 2016, 7:59 am

    I’m on holiday visiting stately homes where real millionaires have splashed their cash for 400 years, but I can visit dozens a year for a £60 HHA pass. To live like a millionaire means spending £100k a year, which needs a high earning job or huge investments, many million.

    But with a single million you never never never need to work again, and live a very comfortable life, and often much less is needed because of the favourable tax position on investments. You lose 30% of a salary in tax, while a well-managed ISA/pension combination should keep you under the £17k combined allowances, so you pay no tax. Combined with commuting costs, and trading time for money costs, and eventual state pension, a retirement income of 50% of the stressed-out working Jones’ next door should be enough.

    £1m should allow you to SPEND £100 a day for life, which is an awful lot, look at your life and work back from spending, not job income, and the magic pot could be much lower than that.

  • 55 Sara September 9, 2016, 11:47 am

    I have to refer you to this news report and I’m sure your local university / public/ health library will be grateful to be put in your will (cos the government ain’t coughing up anymore) –


  • 56 Finance Solver September 10, 2016, 1:48 am

    This is what people don’t get. Millionaires aren’t made overnight (unless it’s the tech bubble era, but this is an anomaly) but over time. I’m hoping to make my first million in the next 15 years. It will be a hard goal but I believe that once I reach it, my growth will just accelerate even further. I have no doubt in my mind!

  • 57 VKK September 10, 2016, 4:36 am

    I was very fortunate as I had an opportunity to work in several countries in past 15 years as an expat. This sorted out my kids education and housing and i was able to save upwards of 80% of my salary on average including share options. All our savings are in equities outside of ISA .
    We were able to savings well over a million due to this unique opportunity. This accompanied by a final salary scheme will see us through . I had never imagined that I would be in this position .

  • 58 Richard September 10, 2016, 7:28 am

    Is the 4% (or 3%) rule to prevent any loss of capital or does it assume running capital down to 0 within a certain time period? So if I wanted to create Downton style generational wealth, would 4/3% allow me to pass all my capital down? Or would I have to spend less? And if I want to leave exactly £0 (or maybe negative) wealth at death, could I spend a higher percentage?

  • 59 theFIREstarter September 10, 2016, 8:45 am

    The key point for me here is the line “a country estate is something I’d hate”. I think too much wealth would just become a burden as you’d worry about where to spend it or who to give it away to. Or be tempted to buy too big a house or widgets that become the bane of your life with upkeep and so forth. I’d also like to keep earning a bit of money throughout my life and actually do it not literally just for fun (I.e. I feel like it is useful money) so having a million quid in the bank doesn’t really seem worth working all that time / hard for.

    On the other hand if there are any wealthy social scientists out there who want to run an experiment to see if my views would change once I’d tasted millionaire status I’m willing to be the lab rat 😉

  • 60 W Neil September 12, 2016, 9:05 am


    The original 4% rule was the result of work by Bengen (1994). It was based on 50% equities 50% bonds over a 30 year period.

    Higher SWRs can be achieved with more optimum allocations. The most sustainable withdrawal rates are achieved with equity allocations from 50% (but no lower) to around 75%. Higher equity allocations can achieve better returns with little long-term increased downside risk.

    Bengen later (1997) suggested that a 30% allocation to small caps on a 60% equity portfolio increases SWR 0.2%.

    To answer your question (partially) Bengen again (busy man!) (2006) found that decreasing the SWR 0.2% leaves initial principle intact (worst case).

    However it is important to understand the real significance of the 4% rule. The point which is often overlooked is that the 4% SWR meant that in every possible scenario – significantly this means all the worst market data and worst sequence of returns and worst combinations of low returns and high inflation during every 30 year period run through the number crunching – even if you had started withdrawing at the worst moment in investing history, your portfolio would have survived the 30 year period with, worst case, nothing left on the final day. However, in every other scenario, at the end of the period the portfolio would have cash left over, and in most cases double the original capital (inflation adjusted). In short, using the 4% rule meant that everyone who does not experience a terrible sequence of returns will leave a lot unspent.

    A quick analogy courtesy of Michael Kitces. In engineering the results of a Monte Carlo analysis must be incredibly accurate as failure cannot be fixed after the fact. For example, an engineering MC analysis giving a 98% probability of success and a 2% chance that a bridge could collapse would be unacceptable. So the bridge is constructed under MC simulations where the risk of failure as close to 0.00% as possible. But in the case of forecasting a SWR, a 98% MC success does not mean you run out of money 1 time in 50 lifetimes; it means there is a roughly 1 in 50 chance of running out of money if at some point you see the rocks ahead and do nothing to alter your direction.

    You do not relinquish control of your portfolio or your spending on day one and leave the rest to chance thereafter. A portfolio does not fail on the day an unprecedented 10 Standard Deviation annual global market decline occurs. The 2% is not the odds of absolute failure; it’s the odds of needing to make an adjustment.

    So if you want to leave money unspent, the odds are almost certain that you will, and if at any point it looks like it may not be the vast sums you imagined leaving unspent, then an adjustment can get you back on course.

    I hope this helps.

  • 61 Massive September 13, 2016, 2:23 am

    @ W Neil

    Brilliant post. Super clear.

    Thanks for posting.


  • 62 SemiPassive September 13, 2016, 9:29 am

    Really surprised nobody has mentioned Thomas Stanley’s The Millionaire Next Door which explores the myth vs the reality of how the average millionaire lives.
    Often the average millionaire next door will drive a 5 or 10 year old car, vs the ‘millionaire wannabe’ next door who leases a new Range Rover Sport on something akin to a second mortgage.

    The ability to have enough FU money to sack your sucky employer or clients has to be worth at least 10 Range Rover Sports.

  • 63 Richard September 14, 2016, 7:48 am

    Yes,thanks W Neil, very interesting post!

  • 64 The Accumulator September 18, 2016, 11:54 am

    @ W Neil, could you link to the Pfau paper where he concludes that 4 – 4.5% is reasonable for a globally diversified portfolio?

    I’ve read a few studies where he concludes that 4% carries a high-possibility of failure across international markets because very few have enjoyed investment returns as consistently good as the US:



    @ Richard – the 4% rule is the maximum safe withdrawal rate (inflation adjusted) that a US retiree could sustain over a 30-year retirement under the conditions modelled by Bengen. A smidge over 4% and the set of US retirees entering retirement on the eve of the worst run of results would have entirely run out of money before the 30-years were up i.e. they used all their capital. From memory, that was approx 1969, then their portfolios were ravaged by 1970s inflation and losses for bonds and stocks. By the time, the 1980s turned up to save the day, they’d already spent down too much of their portfolio to recover.

    But most US retirees – the ones who enjoyed a better historical sequence of returns – would have had plenty of money once their 30 years are up.

    Caveats include:

    The studies mostly use US investment returns since 1926. Many other developed world countries couldn’t match these returns – generally as a result of World Wars. Morningstar concluded that 3% was a safer bet for UK retirees in current economic circumstances:

    30-year retirement period – if you fancy living for 40 or 50 years beyond your retirement date then safe withdrawal rate (SWR) goes down.

    Taxes and investment costs were ignored – these are very real costs but Bengen didn’t include them in his simulation. They bring down the SWR.

    Diversified portfolio – there’s some evidence that a more diversified portfolio than Bengen’s would do better as W Neil has indicated. Extensive historical data is hard to come by though. portfoliocharts.com has done a brilliant job on looking into this problem using data from 1970 on. Results are encouraging!

    You can up your withdrawal rates considerably if you’re flexible with your spending (i.e. reduce withdrawals and therefore your income in bad years) and can tolerate a higher probability of failure your money will run out.

    It’s worth knowing that the SWR is highly sensitive to the inputs both in simulations and in real-life! Small changes in circumstances lead to a wide dispersal of results.

    On the whole, I agree with W Neil that there’s more SWR flexibility than meets the eye from the headlines.

    Conservative me is aiming for a SWR of 3%.
    Party me thinks that I could be fine on 4% or even higher but that depends on being able to cut my income back when the chips are down. Flexibility is key.

  • 65 W Neil September 19, 2016, 8:42 pm

    Absolutely. Flexibility is key.

    I was wrong to cite Pfau as stating 4.0%-4.5% in that paper. His study showed that SWRs outside of the US were often awful. But there was a correlation with the impact of the World Wars on country SWRs. I think it may have been Kitces that suggested 4.0%-4.5% if you exclude the war scenarios from the international SWRs. This was Pfau’s research http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1699526

    For what it’s worth, Pfau responded in the comments section of an article by Kitces and both seem to acknowledge the scope to boost a SWR back to around 4% with optimized allocations and flexible drawdown strategies.

    Flexibility and optimum asset allocations is the key and in this respect the Guyton Klinger decision rules strategy is interesting http://www.cornerstonewealthadvisors.com/wp-content/uploads/2014/09/08-06_WebsiteArticle.pdf

    One could reduce Guyton Klinger’s 5.2%-5.6% SWR quite a bit to make allowances for US-bias or lower future returns and still end up with around 4%. One of the attractions of this strategy is that even if a reduction in income is required at some future point, the reduction will probably still only take you down to where you would have been anyway on a vanilla annual inflation increases SWR approach.

    http://www.cfiresim.com/ can be useful too. Unlike portfoliocharts it doesn’t have the option to explore the higher potential SWRs from wider diversification or allocations to small caps, but it does include options to test flexible strategies and factor in other income such as state pensions kicking in after so many years. Both make tangible differences to the initial SWR.

  • 66 W Neil February 20, 2017, 9:00 am

    An update to the previous comments about Guyton Klinger Decision Rules for SWR. Subsequent research suggests that the GK rules need a caveat.

    Their published research selectively reports the higher amounts that can be withdrawn as a percentage of total portfolio value. In adverse conditions their ‘guardrails’ require relatively small downward adjustments in the percentage withdrawal rate. But their results did not report what the reduced annual withdrawals would be equal to in inflation adjusted cash terms.

    In very adverse conditions the GK rules alone may not preserve the portfolio value sufficiently to enable the SWR claimed while also maintaining the withdrawal amounts in inflation adjusted terms. Taking too much (i.e. their claimed achievable SWR) at the beginning may mean accepting large reductions in inflation adjusted income later on.

    This is not to say GK rules do not have any value, or that a flexible approach to withdrawals doesn’t have a place. A flexible approach may be preferable to sticking to a fixed withdrawal rate regardless of circumstances. But if using GK rules it may still be better to start with a lower withdrawal rate than they claim it can deliver.

    A link to this alternative perspective on GK decision rules is here – https://earlyretirementnow.com/2017/02/08/the-ultimate-guide-to-safe-withdrawal-rates-part-9-guyton-klinger/

  • 67 The Accumulator February 20, 2017, 6:45 pm

    Thank you for following up W Neil. Will take a look at the new research as soon as I can. I’m planning on using some version of a dynamic withdrawal rate so interesting that they are being challenged.

    Btw, are you already drawing down or will you do so in the near future? Have you formulated your own approach yet? I ask because you clearly have a strong grip on the topic and I’m interested in any conclusions you’ve reached. Firm or otherwise!

  • 68 W Neil February 21, 2017, 5:51 pm

    @The Accumulator
    I’m a few years from drawing down but trying to gain as much information now. I haven’t settled on a strategy yet, but it is likely to be something dynamic. Will be glad to share any ideas and anything I find of interest.

  • 69 W Neil February 27, 2017, 6:01 pm

    @The Accumulator,
    If considering a dynamic approach I can recommend Living Off Your Money by Michael McClung. He is of the view that standard annual rebalancing as followed during the accumulation phase is not best followed when withdrawing income. He thoroughly tests existing dynamic withdrawal strategies and also puts forward his own which he calls ‘Prime Harvesting’. It’s not a light read but whether or not you chose to follow his strategy it’s worth it for a thorough examination of the subject.

  • 70 The Accumulator March 2, 2017, 10:13 pm

    Thanks for the recommendation W Neil. It’s on my reading list. I agree, btw, at some point I’ll settle on a dynamic method. Flexibility looks like an important bulwark against sequence of return risk.

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