On the drive home the other day, we got to talking about an unclaimed $35 million lottery ticket in Ontario. After a discussion about people doing crazy things to get a divorce after learning they won the lottery, we moved on to the natural topics of “what would I do” and “retirement.”
We settled on a scenario of ten people splitting the ticket, so $3.5M each.
An important note here is that lottery earnings are not taxable in Canada.
So you’ve got $3.5 million. The next question is “is it enough?”
Enough for what? To resign and be “retired.”
It turns out that many people had never heard of the 4% withdrawal rule, which only slightly surprised me. By no means a hard and fast, nor guaranteed, rule, the 4% withdrawal rule is a rule of thumb that says you can “safely” withdraw 4% of the value of your portfolio each year, without running the risk of depleting the capital.
Thus, with an investment portfolio of $3.5 million, 4% per year gives you $140,000 in gross income. Even better? Investments are preferentially taxed versus employment income.
$140,000 Per Year
Is that enough for you? Would it be more complicated than a simple yes/no?
I think that I would fall into the “more complicated” category. You see, all of us in this group of coworkers earn quite high incomes. With $140,000 rolling in, all on its own, we could bank our entire salaries, growing the nest egg even further.
Plus, regular income continues to generate tax-advantaged savings vehicles, like RRSPs, though their value would be greatly diminished if a portfolio was generating that kind of revenue. It would be best to have some sort of tax professional or at the very least, a tax calculator, to help crunch numbers. However, if you weren’t withdrawing from your portfolio at that rate, it may still be useful to create that tax advantaged space.
For argument’s sake, say you were bringing in 100,000 from a day job. I’ll assume a 35% effective tax rate, so you’re able to add another $65,000 to your nest egg each year you continue working (ignoring RRSPs etc.). A 4% withdrawal rate means that for each additional year you work, you can increase your post-“retirement” income by $2600. That is all assuming that you invest your entire salary and live off of the portfolio in the meantime.
Another way to approach it would be to live off of your day job and assume an 8% growth rate of your portfolio, followed by a 4% withdrawal rate from the point at which you retire. Going one year increases the value of your $3.5M by $280,000. At a 4% withdrawal, that means an additional $11,200 for each year your portfolio sits and grows.
Do You Keep Working?
Fast forward five years, and your portfolio is now worth $5M. If you switch to a 4% withdrawal rate at that point in time, you are looking at a gross income of $205,706, or $65,705 more.
Naturally, this argument can be made at length, at any level of income, but it will all come down to preferences.
Paying off Debt
Just to make sure that we cover all of the basis, if you take your windfall and pay off a bunch of debt, or worse, spend the principle, it will reduce your 4% withdrawal income. Let’s assume you have $250,000 on a mortgage and buy a modest new car at $30,000 (I’m in Canada, don’t forget.) That decision has reduced your income by $11,200 per year. (In magical news, this scenario is exactly equal to delaying your decision to quit your job by one year.)
That amount may in fact be less than you were paying for your mortgage and a potential car payment, so perhaps it is worth it to you? However, you can see that reducing your portfolio has a negative effect on future earnings. If you paid down that debt, then worked for five years like in the last thought, the end result would only be $175,231, which is $30,475 less than the straight “work for five years” scenario. Ten years later, you will have had $304,476 fewer dollars to spend.
It may make sense to pay down debt, but if you spend your lotto winnings up front, it can be extremely costly over time.
Is It Enough for Me?
Would winning $3.5M be sufficient for me to quit my day job?
The answer to that is, “probably.” I am looking to become financially independent as soon as possible. It would probably take us at least a year to figure out a portfolio allocation with which we were happy, and to figure out a lifestyle plan that allowed us to enjoy life without depleting the nest egg. Our magic number to retire is higher than a $3.5M portfolio, so we would want to ensure we were setting ourselves up to achieve all of our goals.
Our early retirement vision includes the ability to take shorter term work contracts to keep ourselves challenged and to supplement our incomes periodically. If I won the lottery, I might seriously consider a PhD again, for example, or perhaps another master’s degree in a related but slightly different field.
What about you?
Have you considered your target portfolio size to retire before? I bet you have considered winning the lottery before! What kind of scenarios do you envision if you win?
Later the discussion on the commute home moved on to teeth knocked out, but I’ll spare you the details on that one. Hockey has some downsides, what can I say.
Gen Y Finance Guy says
It would be enough for me to quit my day job. It is not my number per say, but if I got it today it would put me about 12 years ahead of schedule on my march to $10M.
Now don’t be mistaken, I don’t need $10M, but that is the number I am chasing.
$3.5M would be enough for me to leave my day job and spend the rest of my life making it my JOB to live life by design. However, I would probably stick around for a year or longer until I was sure I could hit my $10M goal.
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Amanda @ My Life, I Guess says
I would OBVIOUSLY quit my job! But I don’t think I’d quit “working” – I’d just work for myself – maybe start a blog like this and hire my online friends as writers 🙂
I’d then pay off my student loan (which wouldn’t seem so bad next to $3.5 million!) and then – I don’t know! I’d say get a house but I’m not sure we’d stay in this city. I suppose I’d have to hire a professional to help me set up a portfolio, because up until reading this post my answer would be “put it in the bank!” and I thought that was it.
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🙂 That sounds like an awesome plan. We can all dream, right?
Is the money taxed before you put it into a retirement fund? I really don’t know. If so, then no, it’s not enough. If not, then it would be enough, but like so many others I’d probably work at things I wanted to to build things like college savings for the kiddos.
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Aaaand you already answered that. I want to win the Canadian lotto lol.
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It would be enough for my hubs to retire. Knowing him he would pursue one of his multiple hobbies and turn it into an income. So I guess “retire” is quoted to mean stop working for the man and work for ourselves! I currently stay home and it would reduce the possibility of having to go back to work someday.
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Having hobbies that can be converted to income is pretty darn sweet! Other than blogging, I don’t think I can say any of mine have income potential, more like major non-income potential!
Everyone should have their number in their hip pocket. How do you make decisions with your money if you don’t know what the trade offs are?
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$3.5m would be a sweet amount of money. I think it would be enough to help the family out financially by ensuring they were mortgage and debt free and topping up their retirement accounts. I’d probably have $2.5m left which would be enough to buy a house, set up an investment portfolio and possibly retire although I can’t see myself not working. Having that sort of money would allow me to follow my passion rather than go to work for the income.
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Chela @SmashOdyssey says
I’ll definitely split it with you! If I won the lottery, I’d probably be a perpetual student. And I think I’d buy some little properties in places I like to travel to, set them up as rentals, and do my best with the passive income 🙂 Heck, the day I finish paying off my debt, I’ll probably be as happy as if I’d won the lottery. Who knows what I’ll do then! Hahaha
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diane @smartmoneysimplelife says
$3.5m? Definitely enough for me to retire. More than enough!
Without debts and with a decent income, I’d have the freedom to choose how I spent my day. I might still have income generating hobbies but I wouldn’t work, per se. I have simple needs and the heavy lifting side of parenting is basically over so as long as I can buy what I want from the bookstore, I’d be happy!
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Tonya@Budget and the Beach says
I’m with Shannon on this one. It would be enough for me, but then I could freaking relax as a freelancer a bit and work on projects that were more meaningful, not the ones I had to take to pay the rent.
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Shannon @ Financially Blonde says
I think that $3.5 would be enough for me; however, I wouldn’t stop working. I love work and the money would just make my work more of a benefit for me rather than a need to support my family.
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Taylor Lee @ Engineer Cents says
If I won that much money I would pay the taxes (say $1.5M), set up a charitable trust ($1M), and keep the last $1M for my house/bank account/retirement fund. It wouldn’t be enough for me to fully retire, I don’t think, but it’ll put me ahead by ten years or so.
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The Money Spot says
It probably might not be enough to fund my retirement all through out..But it would make me live a life that’s more relaxed and not working on some side hustles one after the other. And I can probably take my dream Euro trip!
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