$1M: The New Starting Line

$1M is this magical 2-comma figure, but it isn’t what it used to be. It isn’t enough to retire. There are plenty of houses selling for more. With the recent pace of inflation, it’s tough to say what the new $1M equivalent might be.

The average family of four lives off of $80,000 annually. Using the 4% rule, their financial independence number would be $2,000,000 invested into assets returning 6 to 8% annually. Remember these are investable assets, not equity in a personal residence.

Considering 3% annual inflation over the next 20 years, this $2M FI goal will inflate to $3.5M. If you find yourself or your family living on more than $80,000 per year, your FI number will be greater then the national average. The take away here is that you will need close to $1M to achieve any form of financial security. An intimidating starting line.

I like to think anyone can benefit from my entries, but this blog is catered to high-earning medical professionals. Most readers live on more than $80,000 annually. And that’s not a bad thing. Living to your net worth and gradual lifestyle inflation are two personal finance decisions I fully support.

I don’t expect anyone without high interest debt earning $400,000+ to limit their annual spending to $80,000. Just know your FI number and make the necessary contributions to arrive at your destination at the desired time.

For the new grad, 30-something-year-old CRNAs out there, your FI number is realistically in the $5-10M range set to be achieved in 20-30ish years. Intimidating. Remember we all start somewhere. Usually $0 at birth and $250,000 in the hole after graduation. Sad.

I have some news blunting the emotional trauma from knowing you are $10M away from achieving FI and retiring. ONE, your earning potential as a CRNA is amazing. Generally worth the insane cost of education. I have an upcoming blog post dedicated to increasing earnings as a CRNA, so I won’t dwell on it here.

And TWO, the almighty 8th wonder of the world – Compound interest. Your money continuously earning money. Money doing work. Earnings above and beyond your day job.

Unfortunately when starting out, there is no money, no investments, and no compounding interest. The first $1M is the hardest to achieve.

Your first $1M is built from your cashflow. From dollars earned at work that didn’t go towards student loans or any of the numerous items and experiences money can buy. Your first $1M comes from working hard and saving diligently.

After having $1M invested in low-cost, passively managed index funds, then and only then will you notice the magic of compounding interest. I say this because returns on a small investment portfolio take years to ramp up. This is the “invest $50 per  month starting at age 18 to be rich in 50 years.” Well, those in high opportunity cost professions don’t have as much time on their side.

I recently wrote about the time-value of money. This is summarized by the following formula.

FV = PV * (1 + r)t

Let’s assume investments in the S&P 500 achieve a 10% annual return. Investments over time look like this:

Value of Early Investing

This means someone who starts investing at age 20 grows every dollar invested by 88x. That $50 investment compounds into $4,400 at age 65. A flat $50 per month from age 18 to 65 grows to a $550,000 portfolio. $28,200 in principal and $523,000 in compounded gains.

Delay investing just 10 years and your dollars multiply by 28x. You would need to invest $157 to have the same value at age 65. Doable if you spent your 20s increasing your earning potential.

This is where the moneymoon comes in. Timing is essential as the multiplier is rapidly decreasing. Make your bed, clean up the castle, and enjoy the rewards of compounded growth. The TFC goal at age 30 was $20,000 per month. Each month’s investment at age 30 explodes into $550,000 over the next 35 years. That’s $550,000 at retirement EACH AND EVERY MONTH I invest $20,000.

Do this for 1 year —> $6M at age 65.

$240,000 at age 30 —> $6M at age 65. And that’s never investing again.

Professionals who finish training in their 30s and don’t clean up their finances may not start investing until 40. This drastically stunts the compounding effect. This would require a $440 monthly investment to match a $50 investment of a 20-year-old.

If I delayed 10 years, I’d need to invest $55,000 per MONTH to have the same result of my efforts at age 30.

Those who delay investing until their 50s and 60s miss out on the magic effects of compounding interest. With nothing saved into your 50s, this is where working during the arbitrary retirement of age 65 becomes a reality.

Savings Rate vs Return on Investment

For the first $1M as a high-income earner, it’s all savings rate. The average employed CRNA earns $250,000 annually. After taxes, live on $100k and invest $100k. Repeat this treasure chest investment every year to become a millionaire in 10 years.

If this annual $100k was invested in an index fund with a 10% annual return, you are looking at 7.27 years to $1M. Almost 3 years earlier than wrapping stacks of bills in plastic and stacking them in a chest.

Say you listen to the common advice of a net 15% savings rate and invest $30,000 per year instead of $100k. Earning an impressive 15% annualized return, $1M is achieved in 12.4 years. Meh…Way higher cost of living. Longer path to FI. Not a great strategy despite the improved annual return.

An unrealistic 25% annualized return on $30,000 would shorten the $1M arrival time to 9.5 years. A lower savings rate plus an amazing return puts you at millionaire status at the same time as treasure chest guy. See where this is going.

Investing $30,000 annually, would need a 40% annualized return to achieve the $1M mark in the same 7 years. Fortunately for you, achieving this kind of return would allow you to start your own investment firm earning a cool 8-figures annually from a 2 and 20 fee structure. Seriously.

When it comes to savings rate and rate of return, I have far more control of savings rate year after year. For the first $1M, the savings rate wins every time.

Which are you?

Path to $10M

After building a seven-figure base, your time to subsequent millions is drastically shortened. For the younger CRNAs looking for that $6-10M, here ya’ go. Get that first $1M!

This is a table compounding a flat $100,000 annual investment ($8,333 per month) at a 10% return. It takes 7 years to reach $1M. Begin investing at age 30 and have a seven-figure portfolio at age 37. A portfolio not typically achieved until one’s 50s. But you aren’t average AND you read The Financial Cocktail 😊

Compound Interest’s Effect onTime to Financial Milestones

Continue investing $8,333 per month and your time to $2M shortens to 4 years – Age 41. Then $3M around age 45. $4M at age 47. All the way to $10M at age 55.

Yes, compound interest applies at any dollar amount, but let’s be honest 5 and 6 figure investments don't have a life-changing impact. A 10% return on $50,000 is $5,000. Great, but not a substantial impact for those looking at a $5M+ FI number.

Year 1: $100,000 invested from your cashflow and $10,000 of compounded interest. Skip ahead to age 47 and you will note $100,000 invested from your cashflow and $400,000 of compounded interest. That’s a net worth impact.

But that first $1M is a bear.

When to Start?

Knowing that a sizable investment portfolio produces significant returns year after year, I’ll propose a simple question. Would you rather have a sizable portfolio at age 40 or age 60? Win the lottery at age 40 or 60? Obvious answer being as early as possible to maximize the compounding effects of your investments. Prioritize that multiple.

Application to Practice

Next question…are you willing to do what is required to achieve such a feat?

I’ll summarize the TFC family thought process as we started our journey. Our FI number was $2.2M representing the average COL for a family of four. It would be a bonus to have a paid-off house plus a $2.2M portfolio. That was good enough for me.

The plan was to live off Mrs. TFC's income while investing a CRNA income. Goal to achieve was age 35.

Invest $20,000 per month for 7 years at an 8% annual return. This back of the napkin plan gives us $2.2M in investments. FI at 35. The ability to retire and forego earned income at age 35. Oversimplified, but conceptual.

This blog is not a practice paradox. When I make seemingly drastic recommendations to better your financial health, I’m right there with ya.

Mrs. TFC and I agreed to take jobs that would probably clear $20,000 monthly cashflow. The work and compensation is out there. We agreed on a COL allowing for a reasonable quality of life. A cost that allowed for $20,000 in monthly cashflow.

Now I work as a locum. Again, doing what needs to be done to meet the objective. It’s a matter of willingness to do what needs to be done. I’ll leave you with this regardless of where you find yourself on your financial journey…

“Significant moves create significant change leading to significant outcomes.”

--Leland while sleep deprived at 0500 in the call room

As always, thank you for reading. If you need help achieving your first $1M, ask someone who has done it. Shameless plug…Find my online course here. Thank you to all of you have completed the course.