The Benefits of Compound Interest After Retirement

When you are ready to retire, how much of your stock should you sell?

Let’s pretend it’s time to retire and we have $1 million of stock invested in a wonderful company...

Not too bad, huh?

We can sell all of our stock in the company and use that to finish paying off our mortgages, travel the world, and visit our children - or we can keep our money in the company and skim what we need from the top to live during retirement.

Which path to retirement is better?

Scenario #1: Sell All of Your Stock

When we sell the stock, we’ll pay long-term gains tax on the million and end up with roughly $850,000. TThen I suppose we might invest in a government bond yielding around 4.5% today, and we’ll have roughly $38,000 per year before tax to live on.

This is how someone not tuned into Rule #1 would retire.

And since we play by Rule #1, we know we can invest our retirement money without fearing loss, so why would we sell 100% of our company as long as it continues to be a wonderful business?

Why not keep the million dollars growing at 15% and live on the annual gains?

Where else can you get 15% or more returns on your money? Certainly not in a government bond.

Obviously, this assumes Mr. Market is rational, which, as we know, he isn’t all the time. In the real market in any given year, the price of your stock could be far above or below the 15% increase we expect.

For a retiree, those ups and downs could create an emotional rollercoaster, especially during a stock market drop.

⚠️ Before you decide how to tap into your investments, it's important to remember one major hidden danger: inflation. Even modest annual inflation of 2-3% can erode your purchasing power dramatically over a 20- to 30-year retirement. Rule #1 investors account for inflation by aiming for investments that not only protect principal but also grow significantly faster than inflation. This is why selling everything for a fixed-income product like a bond can be so risky long-term.

Another important concept to consider is something called "sequence of returns risk." If you are forced to sell investments during a down year early in retirement, it can permanently damage your portfolio’s growth potential. Rule #1 helps mitigate this risk by investing in wonderful companies bought with a Margin of Safety, allowing you to be more resilient even during market downturns — and only sell when valuation and timing are right.

For now, however, let’s assume Mr. Market does get it right enough for this example to be true on average.

Scenario #2: Sell Only the Stock You Need for Living (Keep the Rest Invested and Compounding)

At the beginning of that year, we had $1 million of stock and it continued to grow at 15%. This means that by the end of the year, we have $1.15 million of stock.

If we sell just those gains from that year, or $150,000 worth of stock, and pay long-term gains tax of 15%, we have $128,000 after tax to live on.

Two scenarios set up with the same amount of money, yet two entirely different outcomes. With the exact same amount of retirement money at the start ($1 million in stock), a Rule #1 investor is living on $10,000 a month while another millionaire (who cashed out of the market and bought a bond) is trying to get by on $2,500 a month.

This little compounding interest example highlights one of the great and wonderful benefits of Rule #1 investing:

After a few years, our wonderful Rule #1 business is compounding all of our money— including our gains—over the years at such a rate that, even starting with a small amount of capital, we’ll be able to live very well off our investments in a very short time.

Can you imagine just sitting there retired and watching a $10,000 investment you made 20 years ago handing you $150,000 per year with zero work on your part?

Nirvana in retirement.

Are you unsure of how much you need in retirement, or how much you need to save? Use this free early retirement calculator to calculate exactly how much you need to retire comfortably.

**Editor’s Note (Updated April 2025): This article was originally published in 2016 and has been updated in 2025 to reflect current examples and Rule #1 investing insights.