Maybe the five percent figure is too generous… but if you have (per our hypothetical example) $10,000,000, I would argue (in a friendly way!) that you probably can spend $500,000 a year.

You’ll be getting some dividends. You’ll have some interest income. And you can realize and then spend some capital gains.

BTW, I use David Swensen’s formula as described in more detail here and I think that formula averages a little over five percent if you’re talking not any specific year but decades.

Basic question: Assuming the investor is being prudent taxwise, living off the yield and not realizing capital gains on a yearly basis, how would he/she generate 5% income? I see 3.1% yield on VTIAX, 1.8% on VTSAX and 2.6% on VBLTX. Thanks.

Fair questions. So let me share my perhaps shoot-from-the-hip but still sort of quantitative logic.

With regard to the $10,000,000 investment portfolio threshold, what I roughly figure is that at this portfolio size, with a 5% return, a taxpayer is looking at a minimum of $500,000 a year in investment income. And that’s enough investment income to put the taxpayer into today’s top marginal bracket and also (I’m guessing here) future top marginal tax brackets. At $500,000 of investment income, for example, the person is probably into and maybe even well into the top 39.6% federal bracket ($450,000 of taxable income for married filing joint taxpayers). Furthermore, the taxpayer will be paying the Medicare surtax or net investment income tax (that kicks in at $250,000 for married filing joint taxpayers). Note too that the personal exemptions phaseout for a married filing joint taxpayer is complete at $422,500 of adjusted gross income. And then the itemized deductions phaseout (which starts at $300,000 adjusted gross income) is pretty far along too. These are 2013 values BTW…

Note: People using head of household, single or married filing separate filing statuses would move into the top marginal bracket at lower income levels. That lower income level would mean, following my logic, that they should use a lower threshold for going with a Roth.

The $2,000,000 threshold for justifying thinking about tax diversification was even rougher. But here’s my thinking: With a $1,000,000 or less of traditional retirement savings (and the resulting perhaps $50,000 distrbution) you’re probably not paying that much income tax and so don’t need to worry that much about diversifying tax-style risks. At double that amount, or $2,000,000, you are paying or starting to pay pretty heavy income taxes. And so thinking about tax diversification makes sense.