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What Would You Do With A Million Dollars?

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scroogemcduckI remember the question growing up was always “What would you do with a Million dollars?”  That seems almost outdated now though.  Don’t get me wrong, a Million dollars is a lot of money – it is still life changing money for sure.

I am a diehard fan of the show Survivor.  I have watched every episode since it started over 16 years ago.  When the show first started, the grand prize was a cheque for a million dollars (taxable of course).  The show is now in its 33rd season and the grand prize this year….is a million dollars. The value has dropped off substantially.

Some Thoughts on Buying Power

If I go back in time to the year 2000, I think about how far a million dollars could go.  It is almost laughable.  Here are some examples:

  • According to the Toronto Real Estate Board – the average house cost in the Greater Toronto Area (Toronto and the surrounding cities) in the year 2000 was approximately $250,000.  That is less than half of where it is now.
  • A litre of gas went for $0.72 – even with the current drop of oil costs that price is still around a $1.00 now.  For our American friends, there are 4 litres in a gallon so that translates to $2.88/gallon going up to $4.00.  Yes – we pay a lot more for gas on average than you do.
  • An ounce of gold sold for $272.00 – that number has gone up 400% in the past 16 years.

Generally – costs have increased by 200-300%.  Which means the buying power of a million dollars is half (or less) than it was in the year 2000.

Inflation Isn’t New

I know what you are thinking, those numbers are crazy but inflation isn’t a new concept.  Prices go up over time, so looking at these numbers alone is somewhat meaningless.  Well it would be if the income was increasing by the same factor.  It most certainly is not.  While Survivor has kept the prize money the same over 16 years – wages as a whole are not even close to keeping up with inflation.

Again going back to the year 2000, the median family income for a Canadian was just over $45,000 a year.  After taxes that amounts to about $2,800 a month.  Compare that to 2013 where the median income was just over $53,000 (or $3,300 a month).  That is an  increase of only $8,000 a year.

Buying a House

Back to the idea of what to do with a million dollars.  Say you first priority (after paying off debts) is to purchase a house.  What does a million dollars get you in Toronto?  In many cases, a million dollars would still be considered a down payment.  You could have a million dollars in cash and still need a mortgage.  That is an insane thought – even though I understand that the housing market is massively inflated right now.  In our area, townhouses are going for around $750,000 – for a townhouse!  So…while still viable in some areas – let’s say that even with a million dollars you aren’t guaranteed to be able to buy a house without a mortgage.

Early Retirement

The concept of retiring early is wonderful – we did a podcast on the subject in Season One of the Couple of Sense podcast.  Early retirement isn’t a priority for us.  It used to be a common answer to the question (regarding a million dollars) that you would quit your job immediately.  I remember even saying that to myself, insisting that with a million dollars you could easily live off the interest and never touch the principle.

That may be true if you are the most successful investor going – but at the time I was talking about the interest you’d get out of a standard bank savings account.  Let me look at that now – I think it is important to feel stupid about previous thoughts, keeps me grounded – so let me take a second look at what I was thinking.

I’m going to give myself the benefit of the doubt and will assume that when I thought about a savings account, it would be the savings account with the highest possible interest rate.  A standard account (no bonus rates, no tax-free accounts or anything like that).  The best rate I can find for Canadian banks is a lofty 2%.  So on a balance of $1,000,000 – the annual interest would be a modest $20,000.  A typical measure of poverty is the low income cut-off.  In 2015 the low incoming cut-off was set at around $23,000.  The math doesn’t really work out – I’m quite happy to report that I’ve grown in my financial acumen since.

What Is The New Number?

So if a million dollars doesn’t make the difference – what number does?  What is the number I’d need to hit to feel comfortable buying a house and immediately quitting my job?

Well for one, there is no way I’d have a large sum of money sitting in a savings account.  Even if I was planning on living off the interest, there would be no guarantee that the interest rate would increase with cost of living. That simply wouldn’t happen.  So I’d be aiming for a 5% annual return, with 2.5% to keep ahead of inflation and 2.5% in fluid income.  With that structure, I would want a minimum of $3,500,000.

Since I would be relying on the interest as my sole income, I would likely split that amount and put around $1,000,000 into a GIC (Guaranteed Investment Certificate).  This would not be a huge source of income – no way I’d hit 5% – but it would offer protection from the fluidity of the market.  Next I’d sink large sums of money into stocks that offer a solid dividend.  If I managed to diversify my investments the same as I am now – I’d be able to bring in $120,000 annually in dividends on $2,000,000.  The last $500,000 would go into riskier investments with potentially larger returns.

If I hit my target minimum of 5% split between growth and investment cash flow, the interest payment would be equal to a salary of $87,500 a year before taxes assuming I maintained a mortgage payment.  The only reason I might do this is because mortgage interest rates are currently lower than I am confident I could net in investments.  Should the market turn I would have the capital available to dust my mortgage immediately.  $87,500 a year is more than I make now – but I also have to consider that if I wasn’t working I’d probably want some walkin’ around money.

I Dream I Might, I Dream I May…

Since I don’t play the lottery (maybe 1 ticket a year because dreaming is fun), this type of life changing money is unlikely.  A mix of hard work and tenacity sticking to your goals is a much more realistic recipe for success.  Keep building equity, play smart with your money and avoid debt – you’ll be financially free before you know it!

What number would you need to hit to buy (or pay off) a house and retire tomorrow?

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