Two Identical $1,000,000 Accounts. One Runs Out. One Doesn’t.
Two Identical $1,000,000 Accounts. One Runs Out. One Doesn’t.
Same starting balance. Same rate of return. Same income goal. And yet one of these accounts is empty by age 79, while the other never runs low at all. The difference has nothing to do with investment performance — it comes down to a single structural decision about how the money is taxed.
The Setup
Picture two accounts, each starting with $1,000,000 at age 65, each earning a steady 7.5% annually. Both have the same goal: generate $75,000 a year in spendable income throughout retirement.
One account is fully taxable. The other is structured so withdrawals aren’t taxed at all. Everything else about them is identical.
The Math
In a 35% tax bracket, netting $75,000 after taxes means withdrawing far more than $75,000 — specifically, $115,385 a year. That’s the gross-up: whatever the tax bracket takes has to come from somewhere, and it comes from the account.
The tax-free account doesn’t have this problem. It withdraws exactly $75,000, because there’s nothing to gross up for. The chart below shows what that difference does over time.
Why the Gap Widens Every Year
This isn’t a one-time hit — it compounds. Every year, the taxable account withdraws roughly $40,000 more than the tax-free account just to arrive at the same spendable income. That extra $40,000 a year is money that’s no longer in the account earning the next year’s growth. By age 79, the taxable account has nothing left. The tax-free account is exactly where it started.
Neither account did anything wrong from an investment standpoint. Both earned the same 7.5%. The entire outcome was decided by a structural choice made years before either withdrawal was ever made.
Related Reading
This is the same underlying idea behind Using Life Insurance for Tax-Free Retirement Income — a look at one specific way to structure the tax-free side of this comparison. And for how tax-free growth and guaranteed income can work together, see Fixed Indexed Annuities: Pros and Cons.
If you haven’t run this comparison on your own numbers, it’s worth doing before retirement, not after — by then the structural decision has already been made.