Understanding how to live off your investments
Updated
What living off your investments means
It means paying your bills only with what your money earns, without working and without touching the principal. It sounds simple: build a pile, let it earn and spend the returns every month.
But there’s a detail that trips up a lot of people. Think of an orchard. You can eat all the fruit it gives every year, but if you never plant a new tree, one day the orchard gets old and the fruit isn’t enough for the family anymore. Inflation does that to money: the same $4,000 buys a little less every year.
The calculator’s two scenarios
Not protected from inflation shows the amount that pays today’s bills. It works in the first year, but your buying power slowly shrinks.
Protected from inflation shows the amount that leaves part of the returns reinvested, just to keep up with rising prices. It’s bigger, and it’s your real target, because it keeps your lifestyle the same forever. The calculator starts with 3% inflation a year, and you can change it.
The math behind it
Nest egg = Monthly cost ÷ (Monthly return − Monthly inflation)
In the unprotected scenario, the inflation part disappears from the formula. That’s why the gap between the two results is so big: taking a small slice off the bottom of the fraction makes the top number grow a lot.
An example with real numbers
If you want $4,000 a month and can earn 0.6% a month (about 7.4% a year), you’d need $667,000 without inflation protection. Protecting against 3% yearly inflation, the goal rises to about $1.13 million. Both numbers are right; they just answer different questions. The first answers “how much do I need for next year”. The second, “how much do I need to never worry again”.
What about the 4% rule?
You may have heard of it. It comes from US studies in the 1990s: people who withdraw 4% of their savings a year, adjusted for inflation, have a good chance of the money lasting 30 years. For $4,000 a month, that’s $1.2 million, very close to the protected scenario. Treat it as a reference, not a law.
What the math doesn’t show
The final number is often a shock, and the shock can freeze you. A million-plus looks like a mountain so high it doesn’t seem worth starting the climb. But nobody climbs a mountain staring at the peak the whole time. It helps a lot to think in stages: first cover the electric bill, then the rent, then groceries. Each stage is a small freedom that’s already worth it.
It’s also worth looking at your living costs with some care. Every $500 less in monthly spending lowers the protected goal by about $140,000. We talk more about the way each of us sees money in this piece on your relationship with money.
Frequently asked questions
How much do I need to live on $3,000 a month? At 0.6% a month, about $500,000 without inflation protection and about $850,000 protected. Try your own number in the calculator above.
What return should I use? Pick a conservative rate, a little below what you expect. Erring low gives you a safer target.
Do I have to save it all before I stop working? Not necessarily. Many people slow down gradually as passive income covers more of their bills.
Next step: already have savings and want to know how long they’ll last if you withdraw every month? Try the withdrawal calculator.
