Personal Finance— Will my capital last 40 years when I retire ?

Understand how much you need to retire comfortably

Pierre-Alexandre HEURTEBIZE
6 min readAug 24, 2021

How I think about capital requirement

When I think about how much money I need on my bank account to live off the interest and not have to work anymore if I don’t want to, I usually ask myself

1 — How much $ I would need to spend per year to live happily

2 — How much % return I think I can achieve without taking too much risk of losing my investment (i.e. my capital)

When I think about the above, I have always used the assumption that I should not use the capital. And after discussing it with people from different generations , it appears that the idea that the capital we have accumulated over a lifetime (or half a lifetime) should remain untouched.

It can make sense from different perspectives. If I start spending my capital, which is the base on which my interests / return on capital are earned, then I am slowly decreasing my annual income, and I don’t want that right?

But yesterday I changed the angle of my approach a little. What if I accepted to spend a bit of my capital each year ?

Logically, instead of aiming at constantly have an amount of Capital such as (Capital * RoI) = my living expense, if I start thinking about it the other way around where Living expense = (Capital*Interest + Fraction of my capital), then my target capital that’d allow me to retire should mathematically be lower.

Let’s model scenarios out

It’s good to have that new perspective in mind. But how long would the capital last? The last thing I want is to end up at 75 year old with no money on the bank and close to no revenue!

That’s when I decided to use my best friend Excel to put together a quick model to figure that out.

Also, I was pretty curious to understand the impact of the different input (Initial Capital, Level of my annual expense, Inflation, Return on Capital etc.) on how long my Capital would allow me to live under some set standards.

So I put together the following excel model, that you can download for free on Eloquens.

And you can see the explanatory video below where I walk you through the model :

Let’s look at a few examples together

Base Assumptions

I started with the following assumptions

  • Expected annual return on investment on my capital, before tax : 5% (remember this is for a fairly safe investment with minimal risk of losing the capital)
  • Tax rate : 30%
  • Expected annual inflation 2.0%
  • Capital as of today : $1 000 000.
  • Annual cost of living : $40 000

I picked $1M as the starting capital simply for the common hype and story-telling about being a millionaire, because I believe a lot of people ask themselves the question “could I stop working if I had $1M on my bank account” and because the average net asset of Americans in their late 60’s early 70’s is slightly above $1M (spoiler alert, median is far less).

If you were willing to take on more risk and be more creative with your investment, there are a lot of different ways you can invest your money.

In particular, if you use stock trading or private equity investment as part of your investment strategy, it is highly important for you to do your own research and know how to do your financial due diligence.

Scenario 1 — Capital of $1M, Annual costs of $40k

Here what it looks like

The line above represent the remaining capital at the end of the year so that you can see how fast it decreases.

So with these assumptions, I could live 31 years off my capital.

That’s not too bad, but if I wanted to retire at 50 (assuming I’m actually able to get to $1m capital by then off course), I may face a stressful situation if I turn 80 one day.

Let’s now look at the impact of my expected cost of living.

Scenario 2 — Capital of $1M, Annual costs of $36k

All things being equal, if I reduce my expected annual costs by 10%, down to $36k a year here is what happens

I can now live 35 years off my capital, i.e. a 13% increase vs. a scenario with $40k annual expense.

Scenario 3 — Capital of $1M, Annual costs of $30k

Let’s now say that with a bit of budgeting effort, I can decrease my annual spending down to $30k a year, which, let’s face it, is likely more than what half of Americans can reasonably afford (Credit put aside) to spend in a given year.

The number of years I can live off my capital jumped to 46 years, an increase of 49% vs. the scenario with a $40k annual cost, for a decrease of 25% of my annual spend.

I like to point this kind of fact out because I strongly believe that the number one way to reach financial independence is to refrain from increasing your spending.

I think that the day where you’ve reached a lifestyle that you can afford, which is comfortable enough and makes you happy the best thing you can do to reach financial independence quickly is to stick to that lifestyle even when your income grows.

This will have the double effect of 1) having significantly increase your savings, hence your capital, and 2) allow you to live longer off that capital.

We could do at scenarios all day, so let’s just look at two last ones, and if you want to play around with the model, you can download it right here.

Scenario 4 — Capital of $1M, Annual costs of $40k, additional passive income of $10k

Let’s redo the first scenario ($1M capital, $40k annual expense) that gave us 31 years but with a little twist. Now we’re adding a passive income of $10k a year (net of tax).

The number of year is increased by 29% from 31 years to 40 years.

Scenario 5 — Capital of $1.5M, Annual costs of $40k

And now let’s start back from scenario 1 again, but instead of having $1M in the bank, we decided to work harder, or longer, or to reduce our expense in such a way that we could save more.

Through these efforts, we managed to get $1.5M in the bank. Let’s look at the impact :

Here what happened is that in the first years, the RoI on our Capital is providing more income than our annual expense, which means that the capital is increasing each year for the first 18 years, until the impact of inflation makes our Annual Costs higher than our income from investment.

Thanks to that phenomenon, the number of years we can live-off our capital skyrocketed from 31 years to 54 years! Should be enough to retire at 50 now!

Spend time understanding your finance to retire comfortably

In conclusion, it is important for you to understand the impact of your financial situation and expense habit on you capacity to live off full passive income.

By understanding that, you’ll be able to make better decision and better planning to fix your own life goals and financial objectives, and act accordingly.

So play around with the model, and feel free to share with me in the comment section what you think and what’s your take on the above!