Can You Retire on $500K Without Selling a Single Share?

Say you've got around $500,000 saved, almost all of it in index funds. You want it to pay your bills, and you don't want to sell shares every month to make that happen. So can you retire on $500K like that?

I ran the numbers. The short answer is yes for some households and no for others, and the line between the two is pretty specific.

What index funds and treasuries actually pay

Start with what you already own. The S&P 500 pays a dividend yield of about 1.05% right now. On $500,000, that's roughly $437 a month that shows up without you selling anything. That covers your phone bill and maybe a couple weeks of groceries.

Everything past that has to come from selling shares, at whatever they happen to be worth on the day you sell.

The best-known rule for living off a portfolio is the 4% rule. You sell 4% in year one, then raise that amount with inflation every year after. On $500,000, that's $20,000 a year, or about $1,667 a month. A little of it comes from dividends. About $1,230 a month comes from selling shares, in good markets and in bad ones.

If you don't want to sell anything, treasuries are one option. This week a one-year treasury pays about 4.5% and a 10-year pays a little over 5.1%. Put the whole $500,000 in and you'd average somewhere between $1,875 and $2,150 a month. The interest arrives twice a year or when the bond comes due, though, not monthly.

The catch is that it takes every dollar you have. Nothing is left to grow, so nothing in that plan is working to keep up with prices.

That leaves about $437 from index funds without selling, or about $2,000 from treasuries that swallow the whole balance. I think there's a better tool for this job.

The private mortgage note

Someone borrows money to buy a house. Instead of a bank, a private person makes the loan, and the borrower pays that person every month. The loan is recorded at the county against the house. The lender sits in the bank's seat, collecting a mortgage payment instead of making one.

Why would a borrower pay a higher rate than a bank charges? They're buying speed and flexibility. A private lender can close in days on a small loan that plenty of banks won't touch.

As for what these pay in the market: the Entrust Group, a company that administers self-directed IRAs, says mortgage notes often return between 8% and 12%. I'll use 10%, the midpoint, for everything below.

How I'd set up $500,000

Here's the split I'd use, as an illustration at that market midpoint.

$300,000 goes into notes. At 10%, that's $2,500 a month in interest. And it isn't one loan. It's around six notes on six different houses, with more than one borrower in the group.

$30,000 sits in cash. That's 12 months of those bills, and it covers the stretch between one loan paying off and the next one starting.

$170,000 goes into stock index funds. None of it gets sold to pay a bill. When the market has a rough year, it just sits there and recovers.

Set up this way, $500,000 carries about $2,500 a month of bills without selling a share, and none of it depends on you going to work that month. That's about $833 a month more than the 4% rule produced, and it comes from only 60% of the money. The other 40% is still in index funds doing its own job.

Why a note fits this job

The payment is written into the loan. The amount and the due date are both set before you lend a dollar. The market can fall 30% in a year and the borrower still owes the same payment on the same date. Your grocery money stops being tied to share prices.

Notes pay monthly, which is how your bills show up too. You're not selling a chunk once a year and trying to make it stretch.

There's a house behind the payment as collateral. The loan is for less than the house is worth, so the borrower has their own money in it too, and they'd lose that first.

Notes have end dates, often just a few years out. Your money comes back on a schedule, and each time it does you decide again whether to lend it out or move it somewhere else.

And you make the decisions up front: which borrowers you back, what house secures the loan, how long it runs, how much gets lent. You can say no to any deal.

I own a couple dozen rentals and manage them myself, so I know what that side takes. Vacancies, repairs, something always wanting my attention. A note asks for your attention when you lend, while you check the borrower, the house, and the paperwork. After that it mostly just pays. I could add six notes and it wouldn't add work to my day.

Doing it inside an IRA

You can hold notes in a retirement account, but you need a self-directed IRA. If your $500,000 is mostly in an IRA or an old 401k, you can roll it into one held by an SDIRA custodian. The money never leaves the retirement account. The IRA makes the loan, and the payments come back into the IRA.

A 401k at a job you still hold usually can't be rolled over yet. Once you're past 59 and a half, you can take the interest out as income. Take it out before that and it costs a 10% penalty on top of the tax.

One limit worth knowing: your IRA can't lend to you, your spouse, anyone in your direct family line like parents or grandkids, or a company you control. The borrower has to be someone else, at arm's length.

Who $2,500 a month is enough for

$2,500 a month is real money. It's also a modest month. Whether it works comes down to what your life costs.

House paid off, no car payment? $2,500 covers quite a bit. If your household runs on $6,000 a month, it covers well under half. And if you stop working before 65, that $2,500 also has to buy your health coverage until Medicare starts.

A note payment also stays flat for the life of the note. Year 10 pays the same as year 1. Keeping up with prices is the job of the $170,000 in index funds. Every few years, as notes pay off and that $170,000 grows, you can sell some shares in a year you pick and put the money into more notes, so the income gets a raise when your bills do. This is where $500,000 is tightest. The growth money is small, so it carries those raises with less room to spare than a bigger balance would.

Like anything that pays you, a note carries risk. If one of the six borrowers stops paying, about $417 a month goes missing until that house is sold. The $30,000 cash bucket could cover that missing payment for about six years. That's what the cash is for, and it's one reason my own money is never all in notes.

So can you live off $500,000 without selling a share? If your bills plus the tax on that interest come to about $2,500 a month or less, yes. Shares only ever get sold to buy more income, in a year you choose.

If your life costs more

If you're still working, look at it a different way. $500,000 covering $2,500 means your job only has to bring in the rest. If your expenses are $6,000 a month, your job needs to cover $3,500, not $6,000. That gives you options. You could work part-time, or take a lower-stress job you pick because you like it.

Covering the whole $6,000 this way takes more money: about $720,000 in notes plus a year of cash, which puts you near $800,000 before anything goes into growth.

But the notes don't have to carry your whole life to change what your job has to be. They only have to carry part of it, every month, whether you clock in or not.