How Can You Run Out of USD 6 Million?

Financial Independence asked on my recent post about the 4% rule:

"I need to have more insights on how somebody can run out of almost 6 million dollars. Why and how would you even spend 180,000 a year"

Thank you for the inspiration for another post! First of all, this is a simulation where you spend 4% in the first year and it then increases at the rate of inflation. The expected rate of return is 8.3% a year with a monthly standard deviation of 1.86% (that is low volatility)* and the inflation rate is 4% per year, which is the current rate in Australia. Failure is defined as having negative money left apart from our house (currently about USD 950k of the total) in 2060, when Moominmama would be 85. The model does include getting the Australia age pension when the money falls below the asset test level and the UK state pension. You could still sell the house, but that would reduce the Australian age pension–owner occupied property is not in the asset test. With 4% inflation there is a 10% probability of failure. There is about a 20% probability of having less than AUD 1 million left. With only 3% inflation but the same rate of return the failure rate falls to 3%.

So, this doesn't say that we would actually spend USD 180k per year. It is a thought exercise. 

On the other hand, to see what we actually spent, you can check this post with almost 40 years of data and my latest post on 2024-25 spending, which also gives recent years. We spent about AUD 175k (c. USD 125k) according to this last year. It includes mortgage interest but not principal in spending. It doesn't include taxes. These will be a lot lower than they were in recent years, but you also have to pay those out of your portfolio. I think we can easily get to USD 150k including taxes going forward. Education is the biggest expense apart from taxes. If we stay in private education it is going to rise steeply. It is around USD 30k per year at the moment. Apart from this we don't live a luxurious lifestyle–for example, our car was built 22 years ago, though we will probably buy a new one soon.

* The investment returns are the averages over 30 years of the target portfolio. They are better than our own track record, because we did so poorly before 2012.