I bet you have the same question as I do on occasion. How long does €1.000.000 last? Oh, you don’t. Never mind… Anyhow, there are obviously multiple ways of looking at this. Including the use of many variables, as to how quickly (or not at all) you are running out of money. So I played a bit with Excel and this is what I came up with.
Simply asking the question “how long does €1.000.000 last?” is not enough. You have to specify some parameters. But the various combination of these parameters will lead you to some scenarios. Here is what I stuffed into my little simple Excel sheet:
- Inflation = 2%
- Tax credits (“Algemene heffingskorting”) and tax bracket also change with 2% per year (in line with inflation)
- Taxes and brackets are from 2020 and are assumed to stay the same, but with brackets corrected for inflation as noted in the aforementioned bullet. Tax rate is maintained at 30%. (Yes, I’m ignoring the 2022 elephant in the room here)
- Yearly expenses = €25.000
- Situation is valid for a single person household
- You do not invest! Nope, you leave everything in a mattress, sock or bank account that does not give, or charge, you interest.
How do you get €1.000.000? There are multiple ways to get this amount of cash. You can think of robbing a bank, playing the lottery, sell drugs, just to name a few. Or you can work hard, save harder and invest every cent you can. It might take a few years, but you will likely get there at some point if you keep going long enough.
The basic scenario
Well, you spend €25.000, you have €1.000.000. That makes 40 years of expenses covered! Heck, that’s well above the 25x that is often assumed to be FIRE (in you invested it). So done, right?
The inflation scenario
Okey, so you spend €25.000 in the first year, the second year it’s already increased to €25.500 due to 2% inflation. The year after that it’s €26.010. And it just keeps going. If you stuff this into the aforementioned Excel sheet, you find that you will run out of money in year 30 (around about month 8). That is what 2% inflation does to your money. Wow, you just lost 25% of your time. Damn. But wait, it get’s worse! Taxes, wealth taxes to be exact in this little country of ours.
The taxed and inflated scenario
The whole taxation thingy is explained in this post (as well as what it means in terms of how much you need to FIRE in this country to have €25.000 net per year). What does this do in terms of the amount of years you have before you would run out of money? Well, my “magic” Excel sheet says that you run out of money in month 9 of year 28. Wait, huh?
Inflation takes off 25% of the time, but taxes only take another ~5% (compared to the basic option). I really thought that would be worse! Below are two graphs that show the effects of inflation and taxation. Turns out taxation actually already stops in year 18. At that time your wealth drops below the assumed (inflation corrected) combination of taxation thresholds and credits.
But what if you do invest?
So what happens if you do decide to invest. I’ve looked at two options of 4% and 6% return per year after fees (and fixed every year!). The inflation and taxation assumption stay the same. The effect is massive! In more ways than one. Two graphs are shown below, one for your total wealth and one for the expenses per year. Please note that I’ve added the owed taxes as an expense in the various graphs.
With the made assumptions, you will run out of money with the “4% return on investment” scenario. But not until about year 58. With the 6% return on investment scenario, you will be bloody rich in year 58. Albeit, it “only” translates to about €1.700.000 in today’s money. Still, I’d love to have it 🙂
Couple (obvious) statements and notes:
- Inflation is a killer!
- If you want to build wealth and maintain it, you really need to invest it.
- You need a higher return on investment, or more wealth, to remain FIRE for a longer period of time. This all thanks to wealth taxes.
- Retirement/pensions funds have not been taken into consideration, nor any old age security (AOW). This will obviously make sure you can live longer on that same €1.000.000, without running out of money.
- As the government is all but helping you in terms of it’s taxation policy, the above will never happen. Simply because the taxation system changes too often.
So, based on your final note, you just wasted your time….. Yup! But it was fun playing around with these scenarios.