Can You Live Off the Interest of a Million Dollars?

Many aspire to a financial milestone where their wealth supports their lifestyle, often represented by living off the “interest” of a million dollars. Sustaining oneself on a million-dollar portfolio isn’t a simple yes or no answer. It depends on individual finances, desired lifestyle, and the economic environment, as “interest” includes various investment returns.

Defining Your Income Needs

Living off investments begins with understanding your financial requirements. A detailed budget provides a comprehensive overview of spending, differentiating between essential expenses like housing, food, utilities, transportation, and healthcare premiums, and discretionary spending such as travel, dining out, and hobbies.

Lifestyle choices directly influence the amount of income needed from investments. A modest lifestyle will naturally require less income compared to one that involves frequent luxury expenditures.

While current expenses provide a starting point, it is important to consider how these may change in retirement; for instance, commuting costs might decrease, but healthcare expenses could increase. Accurately determining your annual income requirement provides the target amount your million-dollar portfolio needs to generate.

Investment Income Generation

Generating income from a million dollars involves strategically allocating capital across various investment vehicles. Different investment types offer varying income streams and levels of risk.

• Fixed-income investments, such as corporate, municipal, and government bonds, Certificates of Deposit (CDs), and money market accounts, provide stable income. Current top CD rates can be around 4.60% APY for shorter terms, while corporate bond yields for investment-grade bonds have recently been around 4.76% to 5.08%.
• Equities, particularly dividend stocks, offer income through regular dividend payments, though these can fluctuate. The S&P 500 dividend yield has recently been around 1.19% to 1.25%.
• Real estate investments can provide rental income.
• Annuities offer guaranteed income streams, often for life, in exchange for a lump sum payment.

A key concept for sustainable income generation is the “withdrawal rate,” the percentage of your portfolio withdrawn each year. The “4% rule” is a widely discussed guideline suggesting that an initial withdrawal of 4% of the portfolio’s value, adjusted for inflation annually, can sustain a retirement income for approximately 30 years. For a million-dollar portfolio, a 4% withdrawal rate would initially provide $40,000 in annual income. While this rule is a useful starting point, its effectiveness depends on market performance and individual circumstances.

Navigating Financial Variables

External financial variables impact the purchasing power and longevity of investment income. Inflation erodes the value of money, meaning a fixed income buys less over time. The annual inflation rate in the US was around 2.70% in July 2025. Investment returns must ideally outpace inflation to maintain your standard of living.

Investment income is also subject to taxation, which can reduce the net amount available for living expenses. Different types of investment income are taxed differently; for instance, ordinary interest income and non-qualified dividends are taxed at ordinary federal income tax rates, which range from 10% to 37% for 2025. Qualified dividends and long-term capital gains, from assets held over a year, receive preferential tax treatment, with rates of 0%, 15%, or 20% depending on taxable income. Additionally, a 3.8% Net Investment Income Tax (NIIT) may apply to higher earners.

Healthcare costs are another escalating expense, particularly in retirement. While Medicare provides coverage, retirees face premiums, deductibles, co-pays, and other out-of-pocket costs not fully covered. The standard monthly premium for Medicare Part B is $185.00 in 2025, with an annual deductible of $257. Some estimates suggest a 65-year-old retiring in 2025 might spend an average of $172,500 on healthcare throughout retirement, with a significant portion allocated to Medicare premiums. These costs must be carefully factored into income needs.

Long-Term Sustainability

Ensuring a million-dollar portfolio lasts throughout one’s lifetime requires proactive management and adaptability. Longevity risk, the possibility of outliving savings, is a consideration, especially with increasing life expectancies.

A fixed withdrawal strategy might not always be optimal, necessitating periodic reviews and adjustments to both spending and investment allocations. Dynamic withdrawal strategies, which involve modifying annual withdrawals based on market performance, can enhance portfolio longevity. This approach allows for reduced spending during market downturns and potentially increased spending during periods of strong market growth.

Flexibility in retirement spending is important; adjusting discretionary expenses can help preserve capital during unforeseen financial challenges. A million dollars serves as a foundation, but sustained financial well-being hinges on ongoing financial planning and diligent monitoring. Regular assessments of income, expenses, investment performance, and economic conditions are necessary. While living off a million dollars presents challenges due to variables like inflation, taxes, and healthcare costs, it remains a feasible goal with careful planning and responsive management tailored to individual circumstances.