I’ve heard about people selling businesses or getting inheritances and then just living off the interest without touching the main amount. Sounds simple, but how does this actually work?
Say someone has $10 million after taxes. I know they’d invest it and only live off a smaller percentage of the returns, like if the market averages 8%, they’d take maybe 3%. But how does this actually look in practice?
Is it as easy as giving the money to a firm like Schwab, letting them manage it, taking their cut, and sending you monthly deposits? Or how would you do this on your own without hiring anyone?
I’m not wealthy, but this idea has always been interesting to me. Thanks for any answers!
You don’t need to hire anyone. Just get a diversified mix of stocks (index funds are good) and bonds. You collect the dividends and interest, and if it’s not enough, you sell a small portion each year to cover the rest. For example, if your portfolio grows 7% a year and you sell 2%, your overall wealth still increases.
The FIRE (Financial Independence, Retire Early) community is all about this. They often follow the 4% rule, which is a good starting point. Basically, you need to save 25 times your annual spending. If you spend $100k a year, you’d need $2.5M invested. The idea is you can withdraw 4% each year, adjusted for inflation, and not run out of money. But the 4% rule isn’t perfect—it’s just a guideline.
@Dru
This is solid advice, but keep in mind that the 4% rule isn’t guaranteed. It’s based on not running out of money during retirement, but things like market crashes in the first few years can mess it up. You also need to adjust your spending or find temporary income if needed.
@Sage
That’s true. The 4% rule isn’t a hard rule—it’s more of a starting point. Some people want to build wealth that lasts forever, while others are fine using up most of their money by the time they pass. Your withdrawal rate depends on your risk tolerance, time horizon, and whether you plan to leave money to your heirs.
@Dru
The 4% rule works well if your retirement is around 30 years or less. But if you retire early, like before 60, it might not last. If the markets have a bad decade, you could run out of money too soon. It’s a helpful guide, but not foolproof.
@Davin
The original study behind the 4% rule looked at 30-year retirements, so it’s not as reliable for longer periods. But it’s still a good baseline. If you want to be safer, you could aim for something closer to a 3.8% withdrawal rate or plan to adjust spending if needed.
@Dru
Exactly. The biggest risk is in the early years. If you avoid a bad market right after retiring, your portfolio is likely to grow enough to make withdrawals safer over time.
I retired early a few years ago. Here’s what I do:
I invest in ETFs like VTI and VOO. I need about $60k a year. Dividends cover about $20k, and I sell $40k worth of shares around January. This keeps taxes low since most of it is long-term capital gains. I move the money into a cash account and withdraw as needed.
Monroe said: @Lyle
Do you sell everything at once in January? Why not spread it out over the year?
I sell early to avoid market fluctuations later. If the market does well, I might sell more to take advantage of the gains, but I keep cash on hand for flexibility.