Once upon a time, a million dollars was a large sum of
money. If you had it, you were a millionaire, and everyone was jealous. Today
the question is often asked: “if you won a million dollars, would you quit
work?” Well the answer depends on several factors like your age, your need for
money, and even your health.
To answer the question how long would one million dollars
last, let’s look at it this way: How long will $1,000,000 produce an income for
you before it runs out? Let’s say you needed to take $60,000 as an annual
income to spend. Let’s also say that you wanted to increase that $60,000 by 2%
per year just to keep up to inflation. To run the numbers, we would assume you
wanted to invest your $1,000,000 in a relatively secure place. The rate of
interest would be around 1.5% if you wanted a guaranteed return, or maybe a 5%
return if you wanted to assume some risk. For argument sake, let’s give you 3.5%
over time, and income tax at about 25%.
With the above parameters, your $1,000,000 would give you
$60,000 income. You would gain interest on the balance in the amount of $32,900
which would be added back to your investment. Tax on the interest would be
about $8,225 which would be paid from your investment. At the end of year one,
your investment would be $964, 675.
In the beginning of year two, you would take $61,800 as
income due to your inflation and the interest and tax calculation would leave a
balance at the end of year two of $926,575. This circle would repeat itself
until year sixteen; where the annual income with inflation would have been
$93,478 and at the end of year sixteen, your investment account would have a
balance of $20,037 remaining.
So there is your answer! Sixteen years given these parameters.
Change the interest rate, or the tax rate or the annual income, and all the
numbers change. For example, change your income to $100,000 and the balance
runs out after 9 years.
If this were an estate planning question, and you owned
$1,000,000 of life insurance, the question is whether you owned enough
insurance to reach your personal goals. In other words; do you have enough insurance
and assets to replace your income for your family? If you do, for how long?
E&OE
If you are in Nova Scotia and would like some insurance
advice, please contact Corry Collins:
902-444-7000
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