A 40-year-old friend, Bill, told me that he believes he needs $5 million to retire.
"Part of that will be equity in my home," Bill explained. "But I'd like to have $4 million invested. With today's low interest rates, even with $4 million, I'll barely have enough to live."
Bill figures that, even if he can earn 5% on his $4 million stash -- tough to do these days -- that's still only $200,000 a year. If he pays half of that in taxes, he'll have to live on $100,000 a year, in an expensive house, in the fast lane he's used to. Also tough to do.
Bill ran some more numbers by me and asked me how soon I thought he'd be able to retire.
"That's easy," I said. "Never."
Bill makes a lot of money. But he faces both low investment returns and the progressive tax system in the United States. Interest rates on CDs, bonds, treasury bills, money markets and so on today approach zero, lower than the rate of inflation. Returns for riskier investments, such as stocks, are volatile and uncertain.
On top of this is the progressive tax. The more money Bill makes, the more he pays in taxes. With his salary and bonus on top of investment income, he could end up paying as much as 70% in total tax on each additional dollar he earns (thanks to federal income tax, the Alternative Minimum Tax, state income tax, property tax, sales tax, gas tax, car and license fees and so on).
In the United States, the more money you make, whether through work or investments, the higher your marginal tax rate.
Conclusion: Bill will never reach his $5 million goal, almost no matter how much he makes. His stash compounds at a miserably low rate. And the closer he gets to his goal, the higher his tax rate becomes. Like Zeno's paradox, Bill can get closer and closer to his goal, but never actually reach it.
Zeno's Paradox goes like this: Suppose I wish to cross the room. First, of course, I must cover half the distance. Then I must cover half the remaining distance. Then I must cover half the remaining distance. Then I must cover half the remaining distance... and so on, forever. The consequence is that I can never get to the other side of the room.
What to do? You (and Bill and Zeno) have to think more creatively.
First, forget $5 million or whatever other goal you have in your head. You'll never make it if you approach things that way. Instead, ask yourself how you could retire right now, or in a year or two, with the money you already have.
How much money is "enough" to retire on? There's no answer to that question, but I suspect that whatever you have for retirement could be enough -- if you're up for changing your lifestyle. Bill could not retire on what he's got stashed away right now if he intends to continue his current standard of living into retirement. Big house... big car... maybe two cars... regular big nights out... Bill's right to think that he couldn't retire now, on what he's got now, if he's got to continue supporting that brand of living.
My advice to Bill (and now to you, too)? Move. To retire sooner (maybe even, for example, right now) rather than later, you have to remove yourself from a high-cost, high-tax lifestyle. You could sell the big house and move to a cheaper community in the United States. You could move to your cottage on the lake and travel during the winter.
However, because you're reading this, you probably recognize already that you have another, often more interesting option: You could retire overseas. I guarantee that, when you begin considering options beyond U.S. borders, you'll find that your retirement nest egg, whatever it amounts to, is enough to fund a comfortable, appealing, rich, and rewarding retirement. Right now. You simply have to open yourself up to the possibilities.