Financial planners universally use a rule of thumb that you can deduct about 4% of your retirement account annually without compromising your principal(*). With a retirement account of $1,000,000 you can therefore spend $40,000 a year.

As for how well you can live on $40,000 a year that is another question entirely.

If you live in New York City or San Francisco, $40,000 a year will likely not even cover the rent of a small apartment. On the other hand, many states offer 3 bedroom houses that won’t kill a $40,000 budget. Alternatively, you can live in a small apartment or an RV and reduce your housing costs a lot. Then you will have plenty of money for other things.

If you like to go out and eat and otherwise buy most of your food preprocessed, food can easily run $600 or more monthly. If you learn how to cook and take the time to do it, you can eat equally well for 1/3 of the price. If you eat to live rather than the other way around, a healthy and varied diet costs less than $100 per person. But if you can’t bake a bread or boil an egg to save your life, expect to pay more.

If you have kept yourself in good health and exercised several days a week, health insurance and health costs will be cheaper and you will be able to do things like skiing, hiking, biking, etc. that would otherwise be excluded. If you are overweight and out of shape and have put off your future health for tomorrow for most of your life, expect to pay more and have less opportunities. The good news is that your expected life span will be shorter, so quite possibly you will have more than $40,000 a year if that’s the case.

If you like to go to the movies, you can go to a lot more movies, if you go to the dollar theatre or independent films at universities than if you go to premieres. The difference can easily be a factor 5 or more.

If you like to dress fashionably, expect to pay more than if you like to dress conservatively in quality clothes. The latter will cost less than a couple of hundreds per year. I am not sure what dressing fashionably costs, but I hear it can be quite expensive. Following fashion from cheaper outfits is generally also more expensive than a more conservative dress code.

If you know how to fix things around the house, you often save a lot of money compared to people who have to pay for reparations. This money can be used elsewhere.

If you like to give people gifts, you can get more valuable gifts, if you budget and plan ahead compared to a person who shops at the last minute.

If you like to travel in luxury, you will obviously have to budget the same way as working families do. This means one trip to Disneyland or a trip on a cruise ship every few years. On the other hand, if you have an RV or a van, you could travel pretty much all the time and see a lot more.

If you like to drive you can have a used luxury car or a new large car for the same price. If you know cars, you can have get more car for your money compared to a person that does not know about cars. If you don’t drive a lot and you are fit enough to bike, you can have a luxury bike for the fraction of the cost of a new car. If that’s your thing, you can rent a car in the rare case that you need one.

Since people differ widely in their ability to handle money, a single number is not really the best way to determine how well you can live on some amount. Those who are good with money and have lots of skills can live much better than people who are financially wasteful and do not know how to do many things themselves.

However, chances are good that if you have managed to accumulate a million dollars, you are one of the former. Therefore you should be able to live very well if you retire with a million dollars.

Personally, I live quite well for less than $13,500 a year (California) or $6600 a year (Midwest).

(*)This rule of thumb is based on historical returns over the past century. The future may be different.

Update: California numbers have subsequently been reduced to midwestern numbers by moving into an RV. You could do the same by moving into a mobile home. There are also the occasional fixed foundation house available in this price range if shared with another person.

Originally posted 2008-01-22 08:01:58.