The Treasury Income Floor: How $1.5 Million Can Actually Last in Retirement

The math behind a comfortable retirement no longer requires selling stock during a downturn. For the first time in more than a generation, U.S. Treasuries pay enough to cover most of a retiree's essential expenses without touching equity principal — turning bonds from the passive half of a portfolio into its income floor.

Consider a 58-year-old veteran living in California with $1.5 million in investments and a VA disability pension. This is not an unusual profile to evaluate, and the numbers are a useful cross-section of how retirement income works in today's market.

Here is the starting point. At age 58, a retirement portfolio needs to last perhaps 30 years or more. The Bureau of Labor Statistics reports the average American household headed by someone 65 or older spent about $59,600 a year in recent data. California runs above the national average. But this retiree has a VA disability pension — tax-exempt at the federal level — that covers a portion of that need. So the portfolio does not have to produce $60,000. It only needs to fill the gap.

That gap is the question.

What the $1.5 million can sustainably produce

The traditional rule of thumb says withdraw 4% in the first year, adjust for inflation, and the portfolio should survive 30 years. That rule, established when stocks yielded more and bonds yielded less, has been revised downward as the research base has improved. Morningstar's 2025 analysis puts the safe starting withdrawal rate at 3.9% for a new retiree seeking consistent, inflation-adjusted spending over 30 years with a 90% probability of not running out. Other researchers suggest rates as low as 3.3% to 3.7% when current valuations and return expectations are factored in.

At 3.9%, $1.5 million produces $58,500 a year in the first year. Combined with even a modest VA disability pension — about $1,133 a month at a 50% rating, or roughly $13,600 a year — the total first-year income reaches about $72,000 before taxes. That covers the average retiree's spending. For a California retiree, the cushion is thinner but still defensible.

The tax drag matters in California. VA disability compensation is not taxable federally. Investment income and capital gains are. At current tax rates, a $58,500 withdrawal would face a blended tax bill — federal and state — that reduces the net amount. But the calculation is manageable, and the VA pension being tax-free is a structural advantage that most retirees do not have.

The real test is not whether the math works in the base case. It is whether it survives the first five years of poor returns.

The old way: chasing yield through dividend stocks

The instinct for many retirees is to build a portfolio of dividend stocks — companies that "pay you" regardless of market direction. The logic feels sound: income is income, and you don't need to sell shares to live.

The problem is structural. The S&P 500 dividend yield is about 1%, near its lowest level in over a century. A $1.5 million portfolio invested in the broad stock market produces roughly $15,000 a year in dividends. That covers 26% of the $58,500 sustainable withdrawal. The rest requires selling shares. And if those sales come during a downturn — which is precisely when they're most painful — the portfolio suffers from sequence-of-returns risk, the single largest threat to retirement longevity.

Dividend-chasing strategies try to fix this by tilting into high-yield sectors: utilities, real estate investment trusts, energy midstream. But they do so at the cost of diversification and growth exposure. As Charles Schwab has noted, investors who chase yield often buy riskier assets that carry equity-like volatility while pretending to be income. The payout can be cut precisely when you need it.

The current way: Treasuries as the income floor

Something has changed since the 4% rule was written. Today, U.S. Treasuries pay more than the S&P 500 dividend yield — a spread that is wider than it has been in a generation.

The 10-year Treasury yields about 4.85% right now. Three-month T-bills yield roughly 3.9%. A $1.5 million Treasury portfolio at the 10-year rate produces $72,750 a year in interest. No shares to sell. No sequence risk on the income you need.

The practical implication is a different kind of portfolio architecture:

1. Cover essential expenses with Treasuries. Build a ladder of maturing bonds that produces enough interest to fund housing, healthcare, and groceries. If the VA pension plus Treasury interest covers the baseline, the equity portfolio never has to be touched for essential spending.

   

2. Let equities grow without forced sales. The equity allocation — perhaps 40% to 50% of the portfolio for a retiree in their late 50s — provides inflation protection and long-term growth. Dividends from equities are a bonus, but they don't carry the budget. This frees the retiree to ride out market downturns because the bills are already covered.

3. Withdraw from equities only for discretionary spending. If the retiree wants to travel, upgrade a car, or spend beyond the essentials, those withdrawals come from the equity side — and they can be scaled back in a down year without cutting into survival needs.

This is what researchers and practitioners call the total-return approach: the portfolio produces income through a combination of yield (from Treasuries and dividends) and strategic withdrawals from appreciated assets during rebalancing. It is more flexible than the dividend-only model because it doesn't tie spending to what individual companies decide to pay out.

The numbers that would break the case

No plan survives contact with reality without stress-testing. Here is what would change the answer from "yes, this works" to "proceed with caution":

• Early-sequence failure. If equity returns in the first five years of retirement are severely negative while inflation spikes, the 3.9% withdrawal rate may not be enough. Morningstar's analysis shows retirees who experience poor returns in the first five years are significantly more likely to exhaust savings unless they reduce spending. Flexibility is the only insurance.

• Healthcare costs above average. A single serious medical event can consume $100,000 or more. The portfolio needs to absorb a shock without permanently altering the withdrawal rate.

• The Treasury yield advantage reverses. If the Fed cuts rates aggressively in response to a recession, short-term yields fall and the income floor thins. Locking in longer-duration Treasuries now — at nearly 5% — hedges against that scenario. A bond bought at 4.85% pays 4.85% for the life of the security, regardless of where rates go next.

• Inflation persistence. If inflation runs above the Fed's 2% target for years, the real value of fixed-rate Treasuries erodes. TIPS (Treasury Inflation-Protected Securities) can be mixed into the ladder for partial protection, but they currently yield less than nominal Treasuries. The trade-off is explicit: you accept a lower starting yield for inflation insurance.

The retirement calculation is not the same as an investment recommendation

This is where the analysis ends and the reader's own math begins. The $1.5 million with a VA pension can sustain retirement in the current environment — but only if the portfolio is built around what the market is actually paying right now, not what retirees think they want to hear.

The key move is counterintuitive: buy the safest asset in the market and let it carry the income. U.S. Treasuries at nearly 5% are not the half of a portfolio you own while you wait for stocks to do the work. They are the floor. Equities sit on top of that floor, growing the portfolio and covering discretionary spending. The dividend is a bonus, not a strategy.

For investors without the VA pension or the same tax profile, the arithmetic is harder but the architecture is the same. The income floor gets thinner, the equity allocation carries more weight, and the withdrawal rate may need to be lower. The question is not whether you can retire — it is whether your portfolio's income structure can survive the first bad market without forcing you to sell at the wrong time.

Today's Treasuries make that survival more possible than at any point in the last decade. Whether that advantage lasts is a different question — and the answer is to lock it in while it exists.