To live on dividends and capital gains of $65,000 a year, after taxes, a 65-year-old would need a lump sum investment of $1.62 million in a taxable investment account, allocated as 60% stocks and 40% bonds.
The same considerations regarding tax-advantaged retirement accounts and Social Security income apply.
Assumptions used in this simulation
Fry used a Monte Carlo simulation to estimate the starting balance someone would need in an investment account the day they leave work to live on either $100,000 a year or $65,000 a year in dividends (fixed income from bond investments) and capital gains (income from equity investments), after paying taxes.
The following assumptions were used in the simulation:
Investments
- All investments are in a taxable account
- Used $8,333/month for $100,000 target annual income and $5,417/month for $65,000 target annual income
- JPMorgan long-term return estimates used for investments, 3% inflation used for conservative amount
- Assumed younger investors can take on more risk than older investors
- 5% annual portfolio turnover
- $0 capital loss carry over
- No asset-under-management fees included
- Lump-sum is invested at start of simulation as cash with no built-in gains
Taxes
- No state or local/city tax factored in
- Standard deduction taken for a single filer
- No Social Security payments factored in for older investors
- Dividends — 85% are qualified dividends, 15% are non-qualified dividends
- Capital gains — 90% long-term capital gains, 10% short-term capital gains
- Tax law — TCJA sunset 2025: reflects all updated provisions related to TCJA, including the sun-setting of most individual income tax provisions in 2025
Fry notes that the Monte Carlo simulation has two clear limitations: The outputs are only as good as the inputs and it does not factor in the behavioral aspects of finance, or how investors react to swings in the markets.