Can you live off interest of $1 million dollars? A practical long term investing guide

What ‘living off interest’ means and how long term investing fits in

The phrase living off interest often sounds simple, but people use it to mean slightly different things. Some mean only bank interest. More commonly, it refers to taking annual cash from a portfolio made up of interest, dividends, and occasional realized gains. To decide if the money will last, you need to think in terms of withdrawals, not just a single year’s interest.

In planning discussions, a widely cited benchmark is the 4% rule, which says a starting withdrawal of 4% of the portfolio can be sustainable in many historical scenarios. For a $1,000,000 portfolio that rule implies $40,000 a year before taxes, a useful starting number for comparison Schwab Center for Financial Research.

Plain definition: interest, dividends, and withdrawals

Interest is income from cash and bonds. Dividends come from stocks that share profits with owners. Withdrawals combine those receipts with selling assets to produce the cash you need each year. Thinking in terms of withdrawals helps you plan for years when interest and dividends are low and you must sell holdings.

Why long term investing matters for sustainable income

Long term investing affects how much income a portfolio can sustainably provide because expected real returns over decades determine whether your portfolio can support annual withdrawals without running out. Forward-looking research shows that future real returns for common balanced mixes may be lower than past averages, which makes withdrawal choices more sensitive to allocation and horizon Vanguard Research.

In plain language, the higher the expected return you design into the portfolio, the more likely a given withdrawal rate will be sustainable, but higher expected return typically means more volatility and sequence-of-returns risk. That trade-off is central to the rest of this guide.

How much does $1,000,000 actually pay: 4% and more conservative estimates

Start with the arithmetic. At 4% a year, a $1,000,000 portfolio provides $40,000 in the first year before taxes. That simple calculation is the core of the 4% rule and gives a quick sense of scale when comparing budgets and lifestyle choices Schwab Center for Financial Research.

Recent institutional work updated in 2024 and 2025 suggests the safe baseline for long retirements may be lower than 4 percent. Several large research teams now point to a conservative range closer to 3.5 percent to 3.8 percent when planners account for lower forward-looking returns and longer horizons Morningstar Research. See Morningstar’s updated analysis for 2026 here.

To compare in cash terms, a 3.5 percent starting withdrawal on $1,000,000 is $35,000 a year; 3.8 percent yields $38,000. Those differences may look small, but over decades they change spending capacity and the chance of depleting the portfolio.

Why the lower numbers? Forward-looking capital markets assumptions in recent outlooks point to weaker real returns for typical balanced mixes than past decades delivered. Lower expected returns mean a lower sustainable withdrawal if you want a similar probability of maintaining the portfolio over a long retirement Vanguard Research.

Putting this together: 4% equals $40,000 but many planners now suggest testing 3.5-3.8 percent as part of a cautious plan. Use those figures as scenario anchors rather than hard rules.

Taxes, account type, and where your money sits

Taxes change how much cash arrives in your pocket. A $40,000 pre-tax withdrawal will not equal $40,000 in spendable cash if some of it is taxable. The tax treatment depends on account type and the nature of the distributions, so estimating after-tax income is essential IRS guidance.

Common account types behave differently. Taxable accounts owe taxes on interest, dividends, and realized capital gains in the year they occur. Tax-deferred accounts, like traditional IRAs and 401(k)s, generally tax withdrawals as ordinary income when you take them. Roth accounts offer tax-free qualified withdrawals for money that has met the account rules. Which accounts you draw from first can materially change after-tax cash.

Interest, qualified dividends, and long-term capital gains may face different rates and timing rules. For example, qualified dividends and long-term capital gains often receive preferential rates relative to ordinary income in many jurisdictions, while interest is usually taxed as ordinary income. How you sequence withdrawals, and whether you realize gains in taxable accounts, affects your net spending power IRS guidance.

Practical step: when you model withdrawal scenarios, show after-tax cash under realistic assumptions for the account mix you have, and ask a tax professional to confirm which rules apply to your situation.

Main risks that reduce sustainable income: inflation and sequence-of-returns

Inflation erodes purchasing power over time, so a fixed nominal withdrawal will buy less in the future unless you adjust for rising prices. Tracking expected inflation and factoring indexation or cost-of-living adjustments into your plan reduces the chance that your spending falls behind prices U.S. Bureau of Labor Statistics CPI data.

Sequence-of-returns risk happens when poor market returns early in retirement force larger sales of assets during a low period, which can amplify long-term depletion risk even if average returns later are normal. That is a key reason planners often recommend conservative starting rates, buffers, or adaptive withdrawal rules rather than a fixed percentage every year Morningstar Research.

Buffers reduce the chance that a bad sequence ruins a plan. A common approach is keeping one to three years of spending in cash or short-term bonds so you do not sell risky assets after a market downturn.

A practical framework for deciding if $1M will work for you

Step 1: Estimate after-tax essential expenses. List the core expenses you cannot reduce without a major lifestyle change and convert them to a pre-tax and after-tax number for clarity. This gives the baseline annual cash you need to cover essentials.

Step 2: Pick a withdrawal-rate target and test alternatives. Use a conservative baseline such as 3.5 percent to 3.8 percent and compare that to the 4 percent rule to see how they affect your budget. Modeling multiple rates shows how much flexibility you have and the implied spending under each scenario Morningstar Research.

Step 4: Model scenarios and stress tests. Run simulations for different sequences of returns, including prolonged low-return decades, and track portfolio survival or depletion probabilities. Include taxes and fees in these models so the results reflect after-tax cash, not only nominal withdrawals.

Step 5: Set buffers and contingency actions. Decide on a short-term cash buffer, a partial guaranteed income portion such as a deferred annuity if appropriate, and rules for reducing withdrawals in bad sequences. These contingency options trade some upside for stability and lower the chance of running out of money.

Decision criteria and a simple checklist to compare options

Personal factors to consider include your remaining time horizon, how flexible your spending is, other income sources such as Social Security or pensions, and risk tolerance for volatility and portfolio depletion. See also our guide on financial freedom and financial independence.

Portfolio factors include expected real return, allocation and diversification, fees, and tax treatment across accounts. If forward-looking return assumptions for a 60/40 mix are lower than historical norms, a $1M portfolio will produce less sustainable income at the same withdrawal percentage than it might have in prior decades J.P. Morgan Asset Management, and related analysis from the CFA Institute RPC.

Quick checklist to help categorize your situation: if essential after-tax spending is well below a conservative withdrawal (for example 3.5 percent of your portfolio) and you have moderate sequence risk exposure and buffers, you are more likely sufficient. If essential spending is close to or above conservative estimates, or tax drag and fees are high, treat the situation as borderline or likely insufficient and explore additional income or guaranteed options.

Common mistakes, false assumptions, and how to avoid them

Assuming historical returns will repeat is a common error. Forward-looking capital market research shows lower real return expectations for many common mixes, so using historical averages without adjustment can overstate sustainable withdrawal capacity J.P. Morgan Asset Management.

Another mistake is treating the 4 percent number as universal. It is a useful starting point, but planners now recommend stress-testing lower rates such as 3.5 percent and modeling taxes and sequence risk. Also, ignoring taxes and fees can materially reduce the after-tax cash available from a $1M portfolio.

Practical fixes include updating return assumptions, running several scenarios including bad-sequence cases, keeping a one-to-three year cash buffer, and considering partial annuitization or guaranteed-income products if stability is a priority.

Scenarios, short examples, and final takeaways

Conservative scenario: 3.5 percent starting withdrawal. On $1,000,000 that delivers $35,000 before taxes in year one. Using a conservative starting rate reduces the chance of depletion in long retirements, though actual after-tax cash will vary by account mix and tax rates Morningstar Research.

Middle scenario: 3.8 percent starting withdrawal equals $38,000 a year before taxes. This rate sits between cautious and traditional guidance and may suit people with moderate sequence risk tolerance or additional guaranteed income sources Vanguard Research.

Optimistic scenario: 4 percent starting withdrawal equals $40,000 before taxes. It is still widely used as a rule of thumb, but recent research suggests treating it as one scenario rather than a universal standard Schwab Center for Financial Research.

Final takeaways: a $1,000,000 portfolio can provide meaningful annual cash, but whether it will support your lifestyle depends on expected returns, taxes, inflation, sequence-of-returns risk, and your tolerance for portfolio drawdown. Use the checklist and models in this article to test scenarios, and verify tax assumptions with a professional.

References

• https://www.schwab.com/learn/story/what-is-a-safe-withdrawal-rate
• https://advisors.vanguard.com/investments/retirement/withdrawal-rates-2025
• https://www.morningstar.com/articles/2024/05/20/retirement-withdrawal-rates-2024
• https://financepolice.com/category/investing/
• https://financepolice.com/how-to-budget/
• https://www.morningstar.com/retirement/whats-safe-retirement-withdrawal-rate-2026
• https://www.irs.gov/retirement-plans/plan-participant-employee/retirement-topics-taxation-of-retirement-distributions
• https://www.bls.gov/cpi/
• https://am.jpmorgan.com/us/en/asset-management/adv/insights/market-insights/2024-capital-markets-outlook
• https://www.pgim.com/us/en/borrower/insights/annual-best-ideas/2025/rethinking-safe-withdrawal-rates
• https://financepolice.com/how-to-budget/
• https://financepolice.com/financial-freedom-and-financial-independence/
• https://rpc.cfainstitute.org/research/reports/2025/future-of-the-60-40-allocation
• https://financepolice.com/advertise/