Is R$1 Million Enough to Retire and Live off Income in Brazil?

RIO DE JANEIRO, BRAZIL – For a long time, reaching the dreamed first million reais was associated with the idea of financial independence, with the possibility of quitting work and living off the income generated by that amount.

But is it still feasible to live on the income generated by financial investments with that amount? According to experts consulted by InfoMoney, probably not.

“People talk about R$1 million (US$250,000) because it’s a round figure, it becomes a psychological thing, but today this amount doesn’t mean much when we talk about financial independence,” says financial educator André Massaro.

Although he points out that any simulation is a function of the desired lifestyle, the consultant points out that it is expected that an investor with financial assets of R$1 million will not have a low cost of living in Brazil and, therefore, will not be able to depend exclusively on this reserve for a long time.

With this amount, Massaro calculates that a person who intends to make monthly withdrawals of R$10,000 from a portfolio with real profitability (discounting inflation) of three percent per year, will take only 115 months (a little less than ten years) to exhaust initial equity of R$1 million.

Daiane Reis, investment advisor, and partner at Monte Bravo points out that the context of interest at historic lows hampers the return on more conservative investments and that the famous return of one percent per month, previously easily found with the SELIC rate at the double-digit level, no longer exists.

“Today, in order to achieve a good return on investments, investors need to expose themselves more to variable income, to investments that fluctuate and may suffer devaluations, negatively impacting the income,” she says.

Over the past 12 months, whoever had invested R$1 million in Monte Bravo’s conservative “model” portfolio, comprised mostly of fixed-income assets, says Daiane, would have had a return of 130 percent of CDI, representing a real gain of 7.74 percent.

In the best-case scenario, that is, if 15 percent income tax and inflation of approximately four percent per year were discounted, the investor would have a net monthly income of about R$2,200, the advisor points out.

It is worth remembering that Income Tax is regressive, that is, if investors redeem the investments in less than two years, the cost will be higher and, consequently, the amount to be received, lower.

The current “magic number”

A 60-year-old who intends to retire and withdraw R$10,000 net (discounting inflation) a month for 30 years would be required to have a financial asset of R$2.42 million (in current figures), considering a real rate of three percent per year, calculates Massaro.

Diana Lemos, a financial planner with CFP certification, reinforces the need to diversify the portfolio to achieve the proposed goal. “If left alone in CDI, investors will not get the real return needed to achieve financial independence. They will have to seek diversification, which includes having other types of fixed-income indexes, such as the IPCA (Broad Consumer Price Index), which gives protection of purchasing power over time, in addition to variable-income assets,” she says.

According to her, to have better earnings, even the conservative investors will have to accept more credit risk in fixed income and, thus, the recommendation would be to have a professional orientation to select the most adequate assets to their profile.

Diana recalls, however, that diversification should only be done after the emergency reserve is created, with an amount equivalent to living costs for six to 12 months.
How to calculate how much you need to “retire”?

To achieve financial independence, the first step, according to Diana, is to assess the initial available capital, the income to be obtained from that amount and the time needed to start making periodic withdrawals. A relatively conservative rate, considering the SELIC at lower levels, is two to three percent real interest per year, she says.

The financial planner stresses that it is crucial that people have a portfolio that fits their risk profile and that they always keep an eye on real interest, that is, above inflation, to avoid loss of purchasing power.

In Daiane’s evaluation of Monte Bravo, one of the most advantageous products for those who want to live on income are the real estate funds, which pay monthly dividends of around 0.6 percent, excluding IR (income tax). “It’s an alternative, but REIFs enter the variable income box, so the gain is not guaranteed, which can compromise the monthly income,” she cautions.

R$1 million today is not what it used to be

Because of inflation, the purchasing power of R$1 million was, 10 years ago, much higher than today. Since 2009, the accumulated inflation in Brazil was 76.3 percent. This means that R$1 million at that time would have been equivalent to R$1.76 million today, that is, almost double.

If we consider inflation since the beginning of the Real Plan, in 1994, it is even easier to see how R$1 million has lost value over time. Over the past 25 years, since the country instituted the stable currency, the accumulated inflation was 520.6 percent.

This means that R$1 million in that year had the same purchasing power of R$6.2 million today. Therefore, the purchasing power of the income obtained with this amount was also affected in the same proportion.