Is earning $1 million a year, at least a top 1% income, enough to retire early? Most would say yes. However, some people who earn $1 million a year having a hard time letting that money go.
After all, all you've got to do is work one more year and you will make another $1 million! For most people, I'm sure they'd happily sacrifice working at a crap job for another one million dollars.
Meanwhile, there are plenty of undisciplined high-income earners who spend everything they make and then get into debt. It doesn't matter if you're earning $1 million a year if you're spending $1.1 million a year! You will never retire early at this rate.
This article explores when earning $1 million a year isn't enough to retire early. Many high-income households in big cities are having a difficult time escaping the rate race to do something new.
Note: I originally wrote the article in 2018 and it has since been updated for 2024 given inflation.
When Earning $1 Million A Year Isn't Enough To Retire Early
We know that a $300,000/year household income is pretty middle class if you live in an expensive coastal city like San Francisco or Washington DC.
However, we can all agree that earning $1,000,000 a year or more makes you rich, especially since a top 1% income level starts at roughly $650,000 as of 2024. No household earning $1,000,000 or more should ever struggle unless they leveraged up and their investments imploded.
If you make $1,000,000 a year or more, you're free to celebrate. Just don't tell anyone lest you want an ax-wielding robber waiting for you in your living room after an evening of fine dining.
Below we'll explore the lifestyle of a typical household earning $1 million a year living in New York City. A family anonymously shared with me their expenses, and I've done my best to tell their story without sharing their exact details.
This post will give you a taste of what it's like to make $1 million a year. You'll also get to decide whether making a top 0.1% income is truly worth the price.
Very Profitable Earning $1 Million A Year
After tax cuts were introduced in 2018, making more money has never been more profitable.Not only didthe top federal marginal tax rategetcut from 39.6% down to 37%, the income threshold for the top federal marginal tax ratealsorose from $418,400 to $500,000 for singles and from $470,700 to $600,000 for married couples.
In other words, there's never been a better time for earning $1 million a year! However, beware as President Biden is looking to raise the federal marginal income tax rate on households making over $400,000 to 39.7% again.
So, if you've been wanting to make over $500,00 a year as an individual or over $600,000 a year as a married couple, now is the time to do it. You're essentially getting about a $15,000 federal income tax break if you make $1,000,000 now versus in 2017.
But as we are all well aware, the desire for money and prestige tends to corrode lives after a certain point. Once you make over $200,000 as an individual or $350,000 as a family, there is no additional happiness that accrues from making more money.
Instead, lifestyle tends to deteriorate due to longer hours at the office, more stress, poorer physical health, and less family time.
$1 Million A Year Profile
Rachel Chen is one such person who doesn't know whether the $1 million lifestyle is worth it.At 45, Rachel is one of several portfolio managers at a small hedge fund with $1.5 billion in assets under management.
She toiled as a research analyst on the sell-side for six years before making the leap to buy-side analyst at 28. At 37, she was finally promoted to portfolio manager.
Rachel's husband, Colin Chen, 43, has been a stay at home dad since their second son was born in 2011. Colin used to make about $350,000 as a strategy consultant, but got tired of all the travel and decided to give up the grind, especially after Rachel started making more.
Colin has been working on a non-fiction book to keep intellectually stimulated. But it's hard to stay focused with the kids and his wife's robust earnings. It took Colin several years to get comfortable being a stay-at-home dad.
Related: My Secret To Retiring Early With A $4 Million Net Worth And Two Kids
Income Statement Of A $1 Million A Year Household
Let's take a look at the family's income statement and household budget. As you will see, earning $1 million a year goes fast due to taxes and other living expenses.
Income And Tax Analysis
After contributing $22,500 to her 401(k), Rachel has a taxable income of $977,500. Her income is in the 37% federal marginal income tax bracket, and she pays an effective federal tax rate of 40%, or $379,920.
Given this household lives in New York City, they pay a State tax rate of 6.85% ($323,200+), and city tax rate of 3.87% ($500,000+). Paying Federal + State + City taxes is a lot of money. Can you imagine paying $379,920 a year in income taxes?
As a W2 wage earner, there's really no way around this enormous annual tax bill. Due to the SALT (State And Local Tax) limit of $10,000, high-income earners in high income tax states such as California, New York, New Jersey, Connecticut, Oregon, Minnesota, and Iowa lose out. Before 2018, the deduction was unlimited, but subject to Alternative Minimum Tax.
Even though the marriage penalty tax has been abolished for two singles whoindividually earn up to $243,725 in AGI, the SALT cap limit of $10,000 is a marriage penalty tax. If you have two unmarried taxpayers both paying $10,000 in SALT, they will get an aggregate $20,000 when they file, whereas if they get married they suddenly lose $10,000 in deductions.
Below are the 2024 federal marginal income tax brackets. By earning $1 million a year, the Chen household has to pay the top marginal income tax bracket of 37% plus state tax plus city tax. The total tax rate for income above $731,200 is over 51%!
EXPENSE OVERVIEW
Private School Tuition – $122,400/Year
The couple forks out a hefty $122,400 a year for their two sons to attend The Dalton School.Tuition includes books, computers/tablets, and lunch.
Given mom and dad went to Yale University, they'd like their children to also go to Yale University. They know that Yale and all the prestigious private schools have a legacy system which gives children of alumni a huge leg up in admittance, no matter their racial or economic background. Some call this affirmative action for rich kids.
Although legacy children have a roughly 3X higher chance of getting admitted than nonlegacy students, there is an understanding that alumni should provide regular donations to stay in good standings. Therefore, Rachel and Colin together donate $5,000 a year.
Finally, the Chens also contribute $64,000 combined to their children's 529 College Savings Plan. The maximum gift tax limit is $17,000 per adult per child. They are fortunate to have paid off their student loans years ago.
Below was the private school tuition rates for the 2024 school year. If they just sent their kids to public school and invested the cost of tuition each year for 17 years, they'd have at least $1.14 million more per kid.
Food And Entertainment – $4,480/month
New York City is the best city in America for food and entertainment. Although many in San Francisco might contest this claim, the entertainment part of the equation is truly second to none.
The classic mutton chop at Keens Steakhouse costs $60 before tip and tax. Add on a glass of Cabernet Sauvignon, some creamed spinach, wedge salad, and a 1/2 dozen fresh oysters, and we're easily talking $150 per person. A meal at one of my favorite restaurants, Le Bernardin, will easily cost $600 for a couple with wine pairing. Have a look yourself.
After a nice meal, the family like to hit up a Broadway show. Tickets range from $60 up to $1,500 on average for the latest hot show. But given they aren't earning multi-millions, they often settle for $250 tickets at most. In other words, a date night out easily costs $1,000+. Good thing they only go to shows about once a quarter because they're often too busy or too tired to do anything more than have a meal at their favorite local sushi restaurant for $150 total.
When the Chens are not eating out, they're eating home delivery from GrubHub, or having a simple home cooked meal prepared by Colin. Living in the culinary capital of America is both a blessing and a curse. Both Rachel and Colin are constantly watching their diets and working out so they don't die prematurely.
Housing – $14,958/month
They own a 5 bedroom, 3 bathroom, 2,700 sqft brownstone in Park Slope, Brooklyn they bought in 2016 for $2,600,000. It was a fortuitous time as their brownstone has appreciated by roughly 50% to $3,800,000.
When their first child was born in 2008, they had owned a $1.3 million, two bedroom, one bathroom condo on the Lower East Side bought in 2004. They realized very quickly that they needed more space for two kids.They plan to live in the house until their youngest goes off to university in 11 years.
Their mortgage is $9,800 a month, $3,300 of which goes to paying interest and $4,500 to paying down principal. Then the couple has property taxes $3,926 a month, maintenance, and insurance.
Things tend to break or leak with old brownstones. They didn't truly realize how much more it would cost to maintain a larger home with outdoor space compared to their condo in Manhattan. At least the Chens are building at least $4,500 a month in equity.
With the SALT deduction capped at $10,000, they will be losing out on thousands of dollars of tax deductions. As a result, they've diversified into real estate crowdfunding to take advantage of heartland real estate where valuations are cheaper and net rental yields are much higher.
Vehicles And Transportation – $2,842/month
Colin is a car enthusiast, and Rachel appreciates the utility and safety of an SUV for her kids. As a result, they own the newest Range Rover Velar and Porsche 911S. The P380 Dynamic Velar is leased for $800/month. The Porsche 911S costs $1,100/month.
The Chens drive their Velar to the Hamptons many weekends during the summer where they rent a vacation house with friends. Colin drives his Porsche to the country club to play golf a couple times a week while the kids are in school. It's his way of staying in shape and socializing given most of his peers still work full-time jobs.
Vacations – $36,000/Year
The Chens take two vacations outside of New York City a year plus a staycation. Before the pandemic, the Chens would spend closer to $40,000 a year. Post pandemic, the Chens decided to stay in NYC for one week to save money.
Given Rachel works ~65 hours a week, vacations are extremely valuable to her so she can recharge and spend quality time with family. The thing is, even when she's on vacation, she's checking in with her analysts and following global stock markets at all hours.
Rachel has long felt a tremendous amount of guilt for being away from her kids for so long, but she also realizes she's in an enviable position to maximize her career earnings while the stock market is still hot. Eventually, the market will turn and it will become much harder for her to outperform.
International Travel Is Not Cheap
The Chens' favorite vacation spots are mostly in Europe: Dubrovnik, Almalfi Coast, St. Tropez, Provence, and Mallorca are some of their top destinations. It's easy to fly to Europe from the East Coast, but every other year, they'll take a trip back to see extended family in Taiwan. They also love visiting Japan, Thailand, and Vietnam when they can arrange two consecutive weeks off.
Each international trip for a family of four costs roughly $13,500 for the week. The cost can be broken down as follows: $4,000 – $6,000 for economy class flights, $4,000 – $5,000 for 7 nights at a five-star hotel, and $2,000 – $4,000 for food, excursions, and souvenirs.
Clothes For Four – $24,000/year
Rachel loves clothes and shoes, and Colin doesn't mind dressing up nicely to match his lovely wife, although he prefers to wear athletic gear all day. As a fund manager who expects to be taken seriously in a male-dominated industry, Rachel dresses her position.
Her pantsuits from Gucci, Dolce, and Chanel easily cost between $2,000 – $3,500 each. On average, she buys one work suit once a year to keep her threads fresh, although sometimes she buys a couple during holiday sales.
With every power suit must come matching Manolo Blahniks or Jimmy Choos at the cost of between $800 – $1,000 a pair on average. Below is a regular blue satin pump by Manolo for $995 before tax at Nieman Marcus.
After the pumps, Rachel must of course own a work-appropriate tote bag that can cost anywhere from $1,000 – $3,000. She prefers the understated Prada bags with their hard waterproof exterior. Below are some of her clothing examples.
Simpler Clothes For The Dad
Given Colin is a stay at home dad, he doesn't need to spend anything on work clothes. However, he does own and appreciate an array of finely cut blazers to go along with his designer jeans and button down shirts for when they go out.
Each custom blazer costs between $1,000 – $1,500 on average. Designer jeans run between $180 – $300, and shirts from the likes of Thomas Pink can range from $80 – $250. He only has one watch, a stainless steel Royal Oak Audemars Piguet he bought for $16,000 years ago.
Charity – $24,000 / Year
The Chens feel extremely fortunate to be in their position as second generation Americans whose parents worked lower income jobs to put them through school. When you are given the opportunity to make it beyond your wildest dreams in the greatest country on Earth, the Chens feel it's their duty to regularly give roughly 2.5% of their gross income to charity.
Rachel and Colin are particularly passionate about helping foster kids get through a difficult system in order to be given a fair chance at life. They know their sons are extremely fortunate to attend private school, and deep down they feel it is unfair that their kids can have so much, while other kids, through no fault of their own can have so little.
Finally, they donate to organizations that do research on nystagmus, a visual condition their youngest son inherited. Nystagmus is a neurological condition that causes involuntary movement in the eyes, which leads to worse than 20/20 visual acuity, even with the use of glasses, contacts, and surgery.
Net Worth Summary After Earning $1 Million A Year
Rachel has a target of working for 15 more years until her youngest son graduates college. Once both kids are through college, this will free up roughly $200,000 a year in after-tax children related expenses, which is equivalent to roughly $333,300 in gross income based on their 40% effective total tax rate.
After 15 years, the couple should be able to accumulate at minimum:
- $277,500 in 401(k) plus $150,000 in profit sharing
- $816,495 in after-tax cash
- $500,000 in principal pay down (leaving $1,000,000 left in mortgage)
For a base case net worth increase of roughly $1,600,000 without any appreciation in their investments or house.
Future Net Worth Growth
Assuming $106,666 in base case net worth growth over 15 years, no compensation increase during this time period, and a current $3,000,000 net worth, including the equity in their primary residence, the Chens will realistically have a $10,000,000 net worth by the time their youngest graduates from college using a 6.2% annual growth rate.
She'll be 60 years old and he'll be 58 in 15 years.
Once their brownstone is paid off, they'll save an additional $86,000 a year in after-tax cash flow, equivalent to $145,000 gross based on a 41% effective tax rate.
Therefore, the Chens can afford to maintain their lifestyles earning just $500,000 a year once they no longer have mortgage debt or child expenses.
With a $10 million net worth, all they would need to do is figure out some way to generate a 5% return to live a great retirement and diligently track their finances to make sure there's no leakage.
They've been surprised at how some of their rich friends ended up with so much less because they weren't aware of their risk exposure during a downturn or how much they were spending.
Not Sure If It's All Worth It
On paper, everything looks great for the Chens. Yet, Rachel tells me she doesn't know if it's worth working 65 hours a week for the next 15 years. Even the finest lobster at Le Bernardin or the most picturesque luxury villa off the Almalfi Coast gets old after a while.
Rachel sees a therapist every other week to help her manage the constant pressure she feels to provide for her family, outperform her peers, and outperform the markets. The market takes no prisoners and every month she starts with incredible anxiety. This type of pressure has begun to pulverize what little peace and quiet she has left inside. She's also recently begun to develop heart palpitations, which has her worried.
Colin Feels Down Because He Doesn't Have More Purpose
Colin also sees a therapist once a month to help him get through his feelings of unworthiness for being a stay at home father. Although he's truly a great dad, he often feels gutted to have given up his career.
None of his friends, who all work, understand what he's going through. He feels isolated and occasionally depressed. Sometimes he gets jealous of Rachel's success, which leads to fights.
If there was ever a case of money doesn't buy happiness, this is it. My suggestion to Colin is to do some part-time consulting to help fill the void. 15-20 hours a week is the perfect balance because it will give him purpose, something to do, and inject him back into society while his kids are in school. Part-time consulting is what I plan to do once both my kids are in school starting September 2024.
Rachel Wants To Spend More Time With Family
What Rachel misses most is spending time with her boys, who are growing up too fast for her liking. She knows that she might only have 5-6 years left to spend time with her sonsbeforethey wouldprefer spendingall their free time with their friends. Before she knows it, they'll be off to college where she mightbe luckyto see them twice a year.
Rachel envies Colin's time at home. Most of her girlfriends are stay-at-home moms who take turns hosting playdates when their kids are off. These moms go to every school event, every social function, play pickleball five days a week, and don't seem to have a care in the world. When their kids are in school, they often go to brunch at Blue Water Grill with bottomless mimosas over mounds of freshwater oysters.
Rachel and Colin recognize they are fortunate. The Chens just wonder whether the grind is worth it, especially when they see friends from high school leading happy lives earning much less.
But the family does worry their kids will be downwardly mobile. After all, a $1 million income is a top 0.1% income level. The chances are low their children will earn the same amount.
As a result, they seek generational wealth equal to at least $10 million. They know they don't need this level of net worth, however, when you're living in New York City, it seems as if everybody has a ton of money.
The Need To Generate A Greater Net Worth
The only way to live a freer life is to drastically reduce expenses, change their lifestyle completely, or accumulate at least 20X their annual expenses in net worth. At their current $500,000 annual burn rate, Rachel will truly need to work another 15 years to finally experience the joys of financial freedom.
If I was Rachel, I'd either askfora sabbatical or dialbackwork to 40 hours a week for less compensation if she cannot outperform. Making less money with less stress,fewerhours, and a lower effective tax rate sounds so much more reasonable. They'll have to cut down on entertainment, clothes, and travel, but they'll gain back so much more quality timeasafamily.
At high income levels, retiring early is a choice. Yet so many people cannot or will not because oftentimes, the money is too hard to quit. 10, 15, 20+ years later, they find themselves still grinding with golden handcuffs, wondering where all the time went.
Cut Expenses And Get A Consulting Job
The key for the Chens is to reduce their $500,000 annual expenses.
Going down to “just” $400,000 and investing the $100,000 every year would enable them grow their net worth by an extra $2.7 million over 15 years, using a 7% compound rate of return. Alternatively, Rachel could retire two-and-a-half years earlier and still achieve a $10+ million net worth if the housheold spent $100,000 less a year.
The other solution is for Colin to get back to work. He doesn't need to go back to strategy consulting full time making multiple six figures. Colin can simply take on part-time freelancing work to boost their household. Part-time work would also give Colin more purpose and make him feel less lonely.
Making $125,000 – $180,000 a year working 20 hours a week as a consultant is relatively common in New York City, especially with Colin's skillset and experience. 20 hours is just enough to feel productive, while not enough to make yourself miserable about work. Colin will still have enough free time to play with the kids, pick them up and drop them off from school, and take care of the house.
Make Hard Choices To Create A Better Life
At the end of the day, the Chens have choices that will enable them to lead a better, more balanced lifestyle. They need to appreciate how fortunate they are to earn so much. In addition, they need to try and let go of social comparisons.
The last thing they want is to look back on their life at age 60 and regret having worked so much. Yes, they'll probably have a $10+ million net worth, but they probably wished they would have enjoyed their lives more.
Sure, their kids might have graduated from top universities. But for what? To work in the same professions as they did for the next 30+ years and be miserable half the time? Surely there must be more to life than status and money.
Track Your Finances Wisely
Even if you are earning $1 million a year, you must build a big net worth and track your finances. To do so, sign up for Empower, the web’s #1 free wealth management tool to get a better handle on your finances.
Run your investments through Empower's Investment Checkup tool to see exactly how much you are paying in fees. After you link all your accounts, use theirRetirement Planning calculator. It pulls your real data to give you as pure an estimation of your financial future as possible. What you measure can be optimized.
Earning $1 million a year is great, but you've got to save most of it and invest it. The other problem with earning $1 million a year and then retiring early is that you actually have to give up $1 million a year! The higher your income, the harder it is to walk away.
Invest In Real Estate
Earning $1 million a year is great, but you need to invest the money wisely as well. Real estate is a core asset class that has proven to build long-term wealth for Americans. Real estate is a tangible asset that provides utility and a steady stream of income if you own rental properties.
Given interest rates have come way down, the value of rental income has gone way up. The reason why is because it now takes a lot more capital to generate the same amount of risk-adjusted income. Yet, real estate prices have not reflected this reality yet, hence the opportunity.
Take a look at my two favorite real estate syndication platforms:
Fundrise: A way for accredited and non-accredited investors to diversify into real estate through private eFunds. Fundrise has been around since 2012 and now manages over $3.3 billion for over 500,000 investors. It invests in the Sunbelt, where valuations are lower and rental yields tend to be higher.
CrowdStreet: A way for accredited investors earning $1 million a year to invest in individual real estate opportunities mostly in 18-hour cities. 18-hour cities are secondary cities with lower valuations, higher rental yields, and potentially higher growth due to job growth and demographic trends.
Both platforms are free to sign up and explore.
I've personally invested $954,000 in real estate syndication across 18 projects to take advantage of lower valuations in the heartland of America. My real estate investments account for roughly 50% of my current passive income of ~$350,000.
Invest In Private Growth Companies
Finally, consider diversifying into private growth companies through an open venture capital fund. Companies are staying private for longer, as a result, more gains are accruing to private company investors. Finding the next Google or Apple before going public can be a life-changing investment.
Check out theInnovation Fund, which invests in the following five sectors:
- Artificial Intelligence & MachineLearning
- Modern DataInfrastructure
- Development Operations(DevOps)
- Financial Technology(FinTech)
- Real Estate & Property Technology(PropTech)
Roughly 35% of the Innovation Fund is invested inartificial intelligence, which I'm extremely bullish about. In 20 years, I don't want my kids wondering why I didn't invest in AI or work in AI!
The investment minimum is also only $10. Most venture capital funds have a $250,000+ minimum.
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