How Much Retirement Income $500K, $1 Million, and $2 Million Really Pay Each Month

If you have half a million, a million, or $2 million saved, you've probably wondered what that money really pays you every month once the paycheck stops. How much retirement income from $1 million is realistic? It depends on how you set it up, and the standard way leaves less room than you'd expect.

A man in his early 50s wrote to me this summer. He has $2.3 million saved, and he told me the only thing that feels safe is going to work. He works in tech and doesn't hate the job, but it's relentless, and he's afraid that if he walks away at his age he'll never get back in.

On the 4% rule, his $2.3 million pays about $7,110 a month after federal taxes. His fixed bills run right around $7,000. He's fine, but barely. He has $110 a month of headroom, and all of it depends on the stock market cooperating.

What the 4% rule pays at three balances

The usual approach, and the way financial advisors talk about it, is to keep everything in stocks and sell some shares every month to pay the bills. The whole question is how much you can sell each year without running out. The famous answer is 4%. You take 4% of your balance in year one, then give yourself an inflation raise every year after that. Some studies say it should be lower if you retire early, but I'll use the full 4%.

At $500,000, that pays $1,667 a month. At $1 million, $3,333 a month. At $2 million, $6,667 a month. Those are gross, but for a married couple with no other income, taxes move them only a couple hundred dollars a month.

The problem is that this paycheck comes from selling shares, so nothing about it is locked in. Morningstar tests this every year, and when they looked at the plans that ran out of money, nearly 70% had one thing in common. The portfolio was down at the end of year five of retirement. You don't get to pick the market you retire into. That's why a man with $2.3 million still doesn't feel safe leaving. His grocery money depends on what his shares are worth the day he sells them.

Why everyone talks about withdrawal rates

Stocks are a growth asset, and a great one. While you're working, a bad market year doesn't cost you much because your paycheck still covers the bills. Retirement calls for the opposite. You need steady money coming in. The 4% rule only exists because a growth asset has to be sold off one piece at a time before you can spend it.

Part of the reason it dominates is how advice gets paid for. The typical financial advisor charges about 1% a year on the money they manage, according to the industry's own research. Money you move into income assets is money they don't manage, so nobody in that chain has a reason to bring it up.

You probably already know a better income asset. It's real estate, and the catch is that owning it usually means becoming a landlord. Private mortgage notes are the income side of real estate without the landlord part. The house backs the loan, the borrower makes a payment, and you evaluate the deal once at the beginning.

How I set it up instead

So you know where I sit, I'm a real estate investor who does this for himself, and I'm not a financial advisor. I want my bills paid by income that shows up every month whether the market is up or down. Once the bills are covered, everything else stays in growth assets, so I never sell shares to buy groceries.

That's how I left my own job. I got out of the Air Force at 33 after 14 years. I had some savings, but savings at 33 would have to last another 50 years, and they run out long before you do. Rental income that covered my bills is what made leaving possible.

A mortgage note works like being the bank. Someone borrows to buy a house and makes a payment every month. I know these loans from both sides. I own rental properties and fund my projects with private money. I've spent years as the borrower, and I lend on notes now too, so I have a stake in this. The Entrust Group, one of the biggest self-directed IRA companies, says mortgage notes often return somewhere between 8% and 12%. I'll use 10% to keep the math simple.

The same three balances, set up for income

Start with $500,000. I'd put $350,000 into notes, which at 10% is about $2,900 a month in interest. Then $35,000 goes to cash, 12 months of bills held in case a borrower pays late or a note pays off early and I need time to find the next one. The last $115,000 goes into stock index funds and stays there. That's 70% in notes, a tight case, but covering $35,000 a year of bills is a lot to ask of $500,000 any way you set it up. The $350,000 also gets split across several notes on different houses with different borrowers, to spread the risk the same way you'd diversify stocks.

At $1 million, $480,000 in notes brings in $4,000 a month. Another $48,000 stays in cash, again 12 months of bills, and $472,000 stays in stocks. The 4% way paid $3,333.

At $2 million, $800,000 in notes pays $6,670 a month, $80,000 sits in cash, and about $1.1 million stays in stocks. Look at that last one. The income comes from 40% of the money. The other $1.1 million never gets sold to pay a bill, so a bad year in the market is just a bad year. It doesn't change what I can spend.

Your balance won't match any of these exactly, so here's the shortcut. Every $100,000 is worth about $333 a month the 4% way, and about $833 a month in interest in notes at 10%. Every one of these numbers depends on the notes actually paying, and that comes down to the borrower, the house, and the paperwork. You can check all three before you lend a dollar.

Most people's savings sit in a 401(k) or IRA. A regular employer 401(k) can't hold a mortgage note, but a self-directed IRA can, and so can a solo 401(k) if you're self-employed. A self-directed IRA is a normal IRA held at a custodian that allows things like real estate and notes, and it's how a lot of private lending gets done.

The risks, and the $2.3 million rerun

Like every investment, private mortgage notes carry risk. Borrowers stop paying, and when that happens the lender forecloses, which takes time. Your money is committed for the long term, with no sell button like stocks have. And the payment is fixed, so it doesn't rise with inflation. That's why I keep money in growth assets and never put everything into notes.

Back to the man with $2.3 million and $7,000 a month in fixed bills. The 4% way paid him $7,110 after federal taxes with everything in stocks. Run it the income way and $900,000 in notes at 10% pays about $7,500 a month gross, which comes to his $7,000 after federal taxes. About $90,000 goes to a year of bills and taxes in cash. The remaining $1.3 million or so stays invested for growth, fun money, and the good years. Whether that mix fits his life is his call. It's the same $2.3 million, set up so his bills no longer ride on the stock market alone.