How much $ is needed to never have to work again?

[ilikeaces86_]

5 mill

[edtost]

assume (year(i) withdrawal) = (year(0) expenses) * (1 + inflation%)^i

the easy way to do this is to assume that you want to maintain the same level of inflation-adjusted wealth at the end of each year, with the balance going to your kids or whatever at death.

assuming constant values for return and inflation, we get an infinite-horizon problem in terms of our assets:

a_{t+1} = (a_t-w_t)*(1+r)

a_t*(1+i) = (a_t-w_t)*(1+r)

a_0*(1+i) = (a_0*(1+r)) - (e_0*(1+r))

a_0*((1+r) - (1+i)) = e_0*(1+r)

a_0*(r-i) = e_0*(1+r)

a_0 = (e_0*(1+r)) / (r-i)

so if we assume r is something like 5%, i is close to 3%, and initial year expenses of $24k, your starting endowment should be

a_0 = (24000*1.05)/(.05-.03) = 25200/.02 = $1.26M

edit: note: this assumes a tax-free world, so r should be after-tax return and e_0 should be the amount of pre-tax income one would need to net living expenses in year 0. adjusting the numbers above for an effective tax rate of 30% gives

a_0 = (25200/.7)/(.05*.7-.03) = 36000/.005 = $7.2M

which is a big difference.

[DrewDevil]

$10 million

[gull]

You cannot just subtract your rate of withdrawal from your rate of return.

Do you see why?


If not compare two scenarios:
1)the stock market drops 40% one year and increases 100% the next
2)the stock market gains 10% one year and increases 10% the next

[TheMetetron]

gull,

You are wrong. DUCY?

[Evan]

Metetron, the fact that you think investing in equities is a reasonable way to go about this sort of investment doesn't bode well for the sort of credibility you'd need to make arrogant posts like the one above.

[Evan]

[ QUOTE ]

This also doesn't take into account your gains getting taxed every year, but if you do a good job, that will only knock 1% or so off.

[/ QUOTE ]
1% is kind of a lot compared to your 5$ return.

[edtost]

[ QUOTE ]
You cannot just subtract your rate of withdrawal from your rate of return.

Do you see why?


If not compare two scenarios:
1)the stock market drops 40% one year and increases 100% the next
2)the stock market gains 10% one year and increases 10% the next

[/ QUOTE ]

any sort of uncertainty about returns or withdrawals makes calculating this get really complicated .. in a model with risk, simulating your uncertainty to come up with a reasonable number will probably be easier than any sort of derivation.

[TheMetetron]

[ QUOTE ]
Metetron, the fact that you think investing in equities is a reasonable way to go about this sort of investment doesn't bode well for the sort of credibility you'd need to make arrogant posts like the one above.

[/ QUOTE ]

I think an equity/bond mix is the best way to go about it, not solely equities which would be a dumb idea. I mean if the question is 99.99% confidence of never having to work again then I guess it changes, but my answer is pretty good barring major catastrophic crashes immediately in the stock market.

[maxtower]

You could buy dividend paying stocks, such as the mergeant Dividend Achievers index. The growth rate of the dividends is faster than the rate of inflation. Principal will fluctuate, but you'll only be spending the dividends, so you won't have to actually sell any shares. This should insulate you from the big early drop scenario that destroys a lot of retirement plans.
Buy enough shares to pay your monthly expenses.