Is $2 Million Enough To Retire In An Expensive Coastal City?

$2 million is a lot of money. But a lot depends on whether the money is liquid or illiquid if you want to retire with millions and be comfortable. If you live an expensive coastal city, retiring with $2 million may be difficult if you have children. Thanks to inflation, it requires having at least $3 million to be a real millionaire.

With $2 million, you should be able to retire in an expensive city like San Francisco or New York. If you are able to start withdrawing from your 401k penalty free at 59.5, have a pension, and/or can also start receiving Social Security as early as 62, you should be good.

However, retiring with only $2 million when you are under 50 years old may prove too little. If you plan to live beyond 80, retiring with only $2 million may not be enough.

Interest Rates & Bond Yields

$2,000,000 can generate $50,000 a year in RISK-FREE capital when the 10-year bond yield is at around 2.5%. Add on a little more risk and you can probably generate 4%, or $80,000 a year relatively easily.

But, a lot depends on interest rates. Ten-year treasuries have dropped below 2% in 2021 and will likely stay low for a while. Take a look at how the Fed Funds rate fall off a cliff in March 2020 below.

invest in property
Fed Funds Rate

Another solution is to look municipal bonds. AA to AAA rated California municipal bonds with 20 year durations have a tax-free yield of about 3.5% – 4%.

Their default rates are less than 0.1%. A 3.5% tax-free rate is equivalent to around a 4.6% gross rate at a 25% effective tax rate. Hence, we’re now talking about generating roughly $100,000 a year in gross retirement income.

Once you’ve won the game, there’s no need to keep trying to amass a lot more wealth. Hit singles and stop worrying about money ever again!

Save For Retirement Before Retirement, Not After

Also, one of the great things about retirement is that you DON’T need to save for retirement. A lot of people forget this important point once they retire because they’ve been so used to saving money.

I saved 50% – 80% of my after tax-income from 1999 – 2012 before I left the workplace for good. Yet, I STILL continued to save about 20% of my passive income for retirement my first couple of years out.

Now I’m back to saving and investing 80% of my income because my passion project in retirement took off. Further, I have a hard time getting myself to spend more! Saving for retirement is addicting. But I've devised a new system called The Boot to help me spend more on a better life.

Here’s a real budget from a household with one child making $200,000 a year with a detailed discussion. This budget is a dime a dozen budget in the Bay Area with two people making about $100,000 a year or one spouse making $200,000 a year.

The big difference is they have a mortgage and childcare, and you should not once you retire.

$200,000 Income And Still Not Feeling Rich

I haven’t been employed since 2012 (age 34), live in San Francisco, and have no financial fear anymore.

You can also make another dollar, but you can never make another minute of time. Therefore, if you have one or two million in liquid cash or securities and want to retire, GO FOR IT! Not a day goes by where I'm happy I didn't leave my day job. Early retirement life is wonderful.

Please find something you enjoy doing with your one and only life. If you’ve got a paid off house and $2 million, I say that’s good enough to do what you really want to do. You don’t have to retire completely. You can do freelance work or work on your own business ideas.

There’s nothing more rewarding than creating something from nothing and doing what you enjoy!

For expensive cities like San Francisco and New York, if you have a family, I recommend saving up at least $5 million in order to retire early. Life is expensive in the big city, which is probably why there will be a demographic shift towards lower cost areas of the country, thanks to the rise of work from home.

Look to diversify your real estate investments across the country where valuations are lower, net rental yields are higher, and growth rates may be higher. The demographic shift will be a multi-decade trend.

Check out Fundrise and their eREITs. eREITs give investors a way to diversify their real estate exposure with lower volatility compared to stocks. Income is completely passive and there is much less concentration risk.

If you are bullish on the demographic shift towards lower-cost and less densely populated areas of the country, check out CrowdStreet. CrowdStreet focuses on individual commercial real estate opportunities in 18-hour cities. Both platforms are free to sign up and explore.  

Recommendation To Build Wealth

Sign up for Personal Capital, the web’s #1 free wealth management tool to get a better handle on your finances. In addition to better money oversight, run your investments through their award-winning Investment Checkup tool to see exactly how much you are paying in fees. I was paying $1,700 a year in fees I had no idea I was paying.

After you link all your accounts, use their Retirement Planning calculator. It pulls your real data to give you as pure an estimation of your financial future as possible. Definitely run your numbers to see how you’re doing. I’ve been using Personal Capital since 2012 and have seen my net worth skyrocket thanks to better money management.

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About the Author: Sam worked in finance for 13 years. He received his undergraduate degree in Economics from The College of William & Mary and got his MBA from UC Berkeley. In 2012, Sam was able to retire at the age of 34 largely due to his investments. They now generate roughly $250,000 a year in passive income. He spends time playing tennis, taking care of his family, and writing online to help others achieve financial freedom too.

Sam started Financial Samurai in 2009. It has grown it to be one of the largest independently owned personal finance sites in the world. Related post: Is Making $200,000 A Year Considered Successful In A Big City?