Can You Live Off Your Investments? How to Know

The ability to live off your investments is both possible and empowering. Making the leap, however, can feel intimidating if you’ve always relied on a paycheck to support your lifestyle. It requires a deep understanding of your income needs and preparing for the unexpected.

In this article, we’ll break down how to determine whether you’re ready to live off your investment income. You’ll learn what it means to do so, the strategies professionals recommend, and how to know whether it’s the right move for your situation. We’ll also share expert insight from financial advisors to add additional perspective on what goes into the decision.

What It Means to Live Off Your Investments

Living off your investments is the point where portfolio-generated income can support your essential spending needs. This includes income from interest, dividends, distributions, or systematic withdrawals from either tax-advantaged or taxable accounts. These sources all combine into a reliable stream that you can use to fund your desired lifestyle and, if possible, retire for the foreseeable future.

A major element of accomplishing this step is living within your means and not spending too quickly. Many professionals recommend following a sustainable withdrawal rate, such as 3% to 4%, to avoid dwindling your principal and burning through your money. Your lifestyle needs and income-generating ability of your portfolio should dictate the amount you’re able to draw, however.

It’s also worth noting that the ability to live off your investments does not always mean you’ll live well. If your portfolio only covers essential expenses, your financial independence may feel restrictive. To maintain a comfortable or even affluent lifestyle, you’ll need a portfolio that produces enough income for discretionary spending as well as necessities.

Because goals and spending needs differ for every person, living off investments will look different for everyone. Before making the transition, it’s important to understand what you need versus what you want and to verify that your portfolio can support both. If your goal is to retire indefinitely, your investments must be resilient enough to support you not just now but far into the future.

What You Need to Accomplish It

To be able to live off of your investments, you’ll need to have several components in place. This starts with long-term developments, such as building a substantial portfolio. Then, it shifts into immediate strategies, like risk management and a sustainable drawdown plan. These all join to allow you to prepare for unexpected costs (which will undoubtedly happen as life moves forward) and cover your day-to-day expenses.

1. Enough Assets to Support Withdrawals

To maintain a comfortable lifestyle, you’ll likely need significant assets to support annual withdrawals or regular income from dividends or interest. The less you have, the greater the risk of tapping into your principal and potentially depleting what you’ve built.

As an example, consider a portfolio worth $2,000,000. If you draw down 4% annually, this will equate to $80,000 in income before any taxes. For some, this may be enough, but for others, an even more substantial portfolio may be necessary.

2. The Right Structure for Your Portfolio

Your portfolio must be able to generate dependable income and keep pace with inflation for it to support you long-term. To achieve this, it takes the right blend of assets, including:

• Dividend-yielding stocks
• Mutual funds
• Real estate investment trusts (REITs)
• Rental properties
• Bonds

3. A Sustainable and Efficient Withdrawal Plan

Also important is a framework for how you’ll withdraw money from your taxable and tax-advantaged investment accounts. Whether you work with an advisor or on your own, it’s often wise to adhere to an annual percentage as a general rule, such as 3% or as much as 5%, depending on what’s feasible for you. This serves as your annual income to use for essential needs and discretionary expenses, while shielding you from depleting your portfolio too quickly.

Keep in mind, however, that these percentages are hardly ever one-size-fits-all. “Those rules can be useful guardrails, but they’re not commandments,” says Drew Lunt, founder and advisor at Scratch Capital. It’s important to understand that surprises should be expected and to establish your annual withdrawal rate with that in mind. “The only guarantee is that something unexpected will happen. Your plan has to survive that,” adds Lunt.

How to Know If It’s Possible

Retiring with your investment income and accumulated wealth is possible, but knowing when you’re ready can be a challenge. There isn’t a universal dollar amount that guarantees your financial independence. Rather, your number will be unique to you based on factors like your spending needs, retirement age (retiring early requires more), and the predictable income your portfolio can generate.

Before you retire, it’s absolutely crucial to have a plan in place. Ronnie Gillikin, president and CEO of Capital Choice of the Carolinas in High Point, North Carolina, details what to think about: “Clients must map their monthly or yearly income need, stress-test it against inflation, layer in Social Security and pensions, model survivor scenarios if a spouse dies first, and pre-empt the tax sting of required minimum distributions.”

As Gillikin breaks down, it’s vital to develop a deep understanding of your costs (and how they may evolve over time) before you rely on your portfolio for income. You should also consider, as he suggests, examining the impact of a spouse’s passing or the inevitable required minimum distributions (RMDs) you’ll need to make.

If you’re trying to determine whether you’re ready, use the checklist below as a starting point and discuss these factors with a financial advisor:

• Your annual spending can be supported by a sustainable withdrawal rate of around 3% to 4%, without putting your long-term security at risk.
• Your portfolio generates stable income and is structured to withstand market volatility and inflation.
• You maintain an emergency fund, so you won’t need to sell investments during downturns.
• You understand the tax impact of withdrawals and have a plan for which accounts to draw from first.
• Your spending is predictable and flexible, meaning you can adjust discretionary expenses if markets decline.

When You Might Not Be Ready

Even with a substantial portfolio, you may still not be ready to rely solely on it for income yet. Lack of a spending plan or having too many expenses can cut into your ability to retire. These can force you to withdraw more than the recommended 3% to 4% and dwindle your wealth down quicker than you expect.

Another sign you may not be ready yet is if your portfolio isn’t built to support you during retirement. Up to this point, your investments have likely focused on growth, with a heavy allocation to equities. Once you start depending on investment income and regular withdrawals, it often makes sense to shift toward an allocation that balances stability with long-term growth and protects you from unnecessary risk.

Before you make the leap, it’s wise to speak with a financial advisor and run the numbers carefully. You can model how much income you need, what your spending would look like, and how to structure your portfolio to blend risk and reward. Doing this ensures you have a plan to reference when determining your readiness and after you retire.

Bottom Line

Living off your investment income is possible, but you’ll need the right plan and a clear understanding of your essential and discretionary financial needs. The size of your portfolio and the income it can generate are important; however, without a sustainable drawdown strategy, you could find yourself spending way too much or, in some cases, too little.

No matter how good your plan is, you should always prepare for life to throw surprises at you. Home maintenance, supporting children, or you or a family member needing long-term care are all examples of highly expensive costs that can drastically impact your plan.

“Living off your investments is less about hitting a target and more about building a system that can absorb surprises. The number matters, sure. But the mindset matters a whole lot more,” Lunt explains.

If you’re unsure where you stand, running projections with a financial advisor can give you clarity before you make the jump. With the right structure and a plan built around your long-term goals, your investments can provide the financial independence you need to retire on your terms.

To find a high-quality financial advisor that suits your needs, consider using this free matching tool. After filling out a short form on your goals and current situation, it’ll connect you with a vetted fiduciary expert.

Frequently Asked Questions

Can you just live off dividends?

It’s feasible to live off of dividend income or interest if your combined assets are able to generate enough for you to cover your essential needs. For this to be possible, you’ll likely need a substantial portfolio and a defined withdrawal strategy to ensure you don’t run out of money too quickly.

What happens if the market crashes?

This depends on the structure of your portfolio and if it’s built to withstand risk. A market crash, of course, would reduce the value of your assets (namely, equities) and make it precarious to sell them off at that time. For this reason, it’s crucial to keep an emergency fund in a short-term bucket, such as a high-yield savings account, to shield yourself from this risk.

Is a 4% withdrawal rate right for me?

This percentage is often a good starting point but may not fit your exact situation. We recommend speaking with a financial advisor to model out your expected costs and determine the withdrawal rate that achieves your desired lifestyle while ensuring your portfolio lasts through retirement.