How to live long-term on a million dollars

Your twice-removed great-aunt Flo, who you never even knew about, just died and left you exactly one million dollars. It is your goal to live on this money for the next 50 years without having a job. What would you do to be able to live off of it? Invest and interest only? Live very frugally and just spend down the principal? But real estate, hold and sell in a few years?

The big issues are: (i) how likely you want to be able to live solely off of that million dollars and (ii) just exactly how low on the hog you want to be required to live.

On one end of the spectrum (i.e., lower likelihood and higher on the hog), you buy real estate with a large chunk of the principal (and some debt as well, depending where on this part of the spectum you want to be). Well, I guess you can even further on this end by day-trading or investing in even riskier stuff. One difficult (in a manner of speaking) aspect of strategies on this side of the sprectrum is that you may end up with cash or valuable assets at the end of the 50 years–if your goal is to spend it all, then not dying broke will have meant that you could have consumed more.

On the other end of the spectrum, just enjoy your $20,000 a year of principal.

Invest half of it in AAA muni bonds, staggered to allow different maturity dates. You could risk a portion on lower rated bonds in order to garner higher interest, but it really depends on your tolerance for loss.

How well do you want to live. Do you want to merely exist?

Assuming you get this money relatively early in life I think the thing to do is invest the money in the highest but pretty darn safe and sure investment you can find, which is probably going to be in the 5 percent range give or take.

Then, live off the smallest fraction of that return you can stand to. Move to the middle of nowhere. Learn to enjoy the cheap joys of life like fishing down by the creek, hiking, and the nice night country air. Take up astronomy and hiking. Grow your own vegetables. Drive an old used car (given you don’t have a job that should be workable).

Think of living as cheaply as you reasonably can and still enjoy life as your new job.

After a few decades of that your investment should have grown enough to provide a much larger annual income that you can now spend with a decent safety buffer.

Billfish, what is this investment you speak of–the one that has a pretty darn sure 5% income stream and capital appreciation?

Pick another number then. Two fucking percent and live on 10 k a year then.

Let’s assume you’re 30 and you want to live to be 80. That’s 50 years. I suggest you pack up and move to Laos or Thailand. In fact, just pick a country from Estonia on down. I hear Malta’s nice. You’d live an average (OK, median) lifestyle for just your principal, and your interest is icing on the cake.

Ok. But an investment that delivers a pretty darn safe and sure 2 percent will not deliver any capital appreciation.

You could invest in say, Proctor & Gamble your entire $1m and that’d bring you around $33.5k/year in dividend income. That’s without any capital appreciation and without any selling of those shares.

Now you wouldn’t actually put your money all in P&G stock as that’d be insane. But P&G is just an example of a “Dividend Aristocrat.” Dividend Aristocrats are large blue chip companies that have paid a dividend and increased it annually for 25 consecutive years or more. S&P maintains a list of them, and if you invested basically an equal portion of your money into each you’d have a very safe investment (as these are all blue chip stocks) that provide income without even having to touch the principal.

Now we’re just talking about living off the dividends of these stocks, over the last 5 years (a very, very bad period for equities) the Dividend Aristocrats returned 3.6% annualized, so you would have gotten some capital appreciation as well. Over the long term these stocks have historically averaged over 10% annualized returns over long periods of time.

So that being said, you could buy such a basket of stocks and hold it for ten years living off the $33.5-35k or so a year. After twenty years you’d have at least $2.5m or so that you could just invest in a fixed income annuity for the second half of the 50 years. Buy a fixed annuity at around 3% (still available especially at the amount of money you’re talking and signing up for 25 years) and that’s $11.8k/mo for the rest of the period so quite the raise over the $35k a year you had been living on.

In January of 1990 you could buy Proctor & Gamble stock for $4.86 a share. By January of 2010, $1,000 purchased in 1990 would be worth $11,434. So $1m invested back then would have been worth $11.4m (this assumes full dividend reinvestment.)

PG’s dividend yield was a little under 2% for part of the mid-90s, but in 1990 it was almost 4% and has generally been over 2% most of the 20 years ending in Jan. 2010.

So that is fairly large capital appreciation with an income component.

What does this have to with investing money in the next 50 years? It’s totally irrelevant.

You are totally right. Just invest 1 million in a stock that will return 20 percent for the next 20 years and you’'ll be super rich bitch! Problem solved.

but seriously, unless you just wanna pull numbers out of your behind, past investment performance is certainly a realistic start for what is reasonable and what isn’t

Only to those that lack the sophistication to understand the fairly obvious point he’s making. A diversified portfolio of blue chip stocks with a solid history of performance is a pretty standard approach to retirement planning.

I thought I was making a concise point. Basically one way you could live off of $1m for the next 50 years would be to invest it in a collection of blue chip, dividend paying stocks for some number of years.

At the average annualized return rate for blue chip dividend payers in the United States you’d basically double your money every ten years. At some point you could just roll it all into an annuity with a 3-4% rate for the remainder of the 25 years and live very, very well for that time. Or you could start living off some of the capital appreciation as it happens, for that matter.

I’m not going to live 50 more years as that would make me well north of 100, so I wouldn’t invest this way, but if you plan to live another 50 years I think you’d need to invest in something with at least a potential for serious capital appreciation. By and large most fixed income investments have very little capital appreciation.

What I’m talking about isn’t fanciful and you do not have to be Warren Buffet. I’ve been investing in Proctor & Gamble since the 1980s, and I’m not a guru or a great investing mind. The reason I mentioned PG so much is they are a “poster boy” for the “Dividend Aristocrats” index.

The reason I talk about Dividends is typically dividend paying companies are “cash cows” meaning their days of fantastic (imagine Google / Apple type growth) is long past, but they are reaping massive amounts of revenue and distributing hefty dividends. A lot of things go along statistically with these dividend paying blue chips, for example over long periods of time they actually outperform many non-dividend stocks because you literally get paid to hold the stock even during market downturns.

Companies in this vein would be the aforementioned PG, but also Colgate-Palmolive, 3M, Clorox, Abbott Labs, Johnson & Johnson, Coca-Cola, McGraw-Hill, Cintas, Exxon, McCormick & Co…hell you can look at the list here.

This isn’t really a crazy risky stock investment scheme either, many of these companies are probably more reliable than many governments. Many countries in Europe have defaulted on debts more recently than some of the Dividend Aristocrats have failed to pay a dividend. For example Proctor & Gamble, every single year since 1891, including during the Great Depression, two world wars and etc has issued a dividend. Further, the companies on this index aren’t just companies that pay long term dividends, they are companies with 25 consecutive years or more of annual dividend increases. Which means your dividend payout is likely to at least track with inflation.

In general these stocks average over a 11% annualized return historically, and even during particularly bad periods, say the last 5 years, this index has had 6.5% annualized returns (including dividend pay) and that is during the financial crisis and stock market crash we went through.

Boy, life as a millionaire sure ain’t what it used to be…

Well, Martin Hyde, you are just using a different definition of “pretty darn safe and sure” than I was thinking of. I was thinking in terms of instruments with a guaranteed return from a creditworthy source, like US government bonds–I was thinking of strategies on the extreme side of the safe and low return side of the spectrum. You are thinking in terms of historical performance.

I definitely agree that the US stock market overall has returned 10% in every rolling 20-year period since the Great Depression, but investing solely in stocks (no matter how well diversified) seems kinda nuts to me if someone wants to be absolutely certain that they’ll be able to live on the million. But as a riskier strategy somewhere in the middle of the spectrum I outlined above, sure, it’s fine.

Well, 1 million divided by 50 is $20,000 a year, and it’s quite possible for one person to live on that. Heck, I’ve been supporting TWO people on less than that for the past 4 years. Granted, it’s not a lavish existence, but we live in secure housing, eat well, have adequate clothing, reliable vehicles, travel occasionally (usually to visit relatives) and have a small amount left over for entertainment purposes. While I can certainly understand wanting more than that, strictly speaking, you don’t need more than that.

Of course, inflation is going to nibble away at that over the next half century.

So, really, the question might be better expressed as how to maximize one’s use of the money over the next 50 years. With that in mind, investing some of it while living frugally the first few years is probably the best way to extract the most utility out of the inheritance.

Work any job at all during that time period and you could live comfortably even at a less than ideal return on one’s investments for the rest of your life.

Fixed income instruments are often times just as risky, if not more so, than stocks.

Warren Buffet explains it very well:

That being said, both I and Warren Buffet would advocate holding some fixed income. But I think in terms of risk over a 50 year period there is actually a greater risk in holding a basket of investments overweight with bonds versus overweight with equities.

The problem with bonds is two fold, one is they are intrinsically vulnerable to inflation of the currency in which they are denominated. Two, you can ultimately end up in a liquidity “trap” with bonds, because if you buy a bunch of bonds at a low interest rate then interest rates go higher you will not be able to sell those bonds on the open market for a profit, but instead will have to sell them for a loss or end up potentially holding bonds that earn nothing relative to inflation. A lose-lose.

Equities are based on the intrinsic value of the underlying business, and thus a company like Microsoft or ADP’s share price is going to reflect fairly closely the fair value of those companies no matter what inflationary activity occurs with the dollar. If you have $1000 in ADP stock and the U.S. dollar becomes 50% less valuable (due to massive inflation) then generally that $1000 in ADP stock is going to be worth roughly $2000. Equities are an amazing protection against inflation, probably better than anything else (certainly better than TIPS bonds and gold which is only a hedge against Weimar Republic style economy-destroying hyperinflation.)

That said, you’re right to characterize a 100% equities allocation as crazy, and I don’t follow that example in my personal life. I personally hold a mixture of bonds, real estate, and stocks. Additionally I diversify my stock holdings into domestic and international stocks (and try to diversify international stocks into both European, Pacific, and other developing areas) and large, medium, and small market cap companies. My strategy of just investing in a basket of consistent dividend growth blue chip stocks isn’t one I personally follow. However, such a strategy is just one example of how easy it is to make money on the stock market if you invest in intrinsically valuable companies and hold them for a long period of time.

3% on $1,000,000 would net me more than my current annual income. I think it would be fairly easy to find safe investments and (very) slowly grow my principal while living solely off of the interest/growth of the initial investment.