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

This is my first post in this forum. I hope I have chosen the right one for this topic. Also I have practically no knowledge about the art of accumulating money effectively.

Main Question: How much money would you need to never have to work again?

My assumptions:

1. "to never have to work again":
a) means NOT to never do anything again which is solely serving the purpoe of accumulating money (for example sealing a profitable deal per phone while relaxing at home is not "work")
b) means to never have to do something which is serving the purpose of accumulating money AND is raising your heart rate noticably above your normal heart rate. (for example almost any 9/5 job will raise your heart rate noticably at some point no matter if it is more physical or more mental work)
c) means that the things you do to accumulate money take up less than 5 hours/week no matter how slow and relaxed you are going about those things (the numbers are based on nothing; just made up to have a base for possible calculations; think of money accumulation as a recreational thing here)

2. You are living by yourself and need 2000$ every month to:
- have a place to live at
- have something to eat
- have a car
- pay any other expenses that there are in life (insurances etc.)

3. You want your money to gradually increase (even with taking 2000$ out every month) no matter how small the increase is.


Imagine Santa would knock on your door and tell you he'd give you as much money as is needed to satisfy all 3 assumptions. (Santa will know if you request more than you minimally need [to the best of your knowledge] and will not give you the money if you ask for too much.)

Q1: How much would you ask Santa for?
Q2: Which branches of investment (and to what extent each) would you choose to satisfy all 3 assumptions?

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

how old are you

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

too many assumptions

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

LOL @ $2k/month.

But setting that aside, back of the envelope calculation:

Inflation-indexed government bonds yield something like 2%. To have $24k/year after taxes, you probably need like $35k/yr income or something. If you want money to gradually increase (in real terms, after expenses/taxes), you need like $40k/yr. At 2%, that means you need $2 million.

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

I am not sure if this is a hint at my childish approach here [img]/images/graemlins/wink.gif[/img]

If it is thought to be a relevant assumption then you are 40 years old. Again if it is relevant it would be nice to know which differences there would be for a 20 year old and a 60 year old.

If the question is indeed a way to say that I made a poor post please elaborate. [img]/images/graemlins/smile.gif[/img]

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

I knew 2k would make people smile, lol.

2 million is a lot more than I would have guessed. But (as mentioned at the beginning of my OP) I have no clue. One also has to see that inflation-indexed government bonds sounds like a bullet proof thing.

I wonder what people with a good knowledge about the stockmarket, poker, sportsbetting (from the sportsbetting forum it looks like one can live of that) or other trades would say they would need.

In some post (was in NVG though I think) someone wrote in the past that 100k would be enough to make him never "really work" again. Even with my extremely limited knowledge about finances I think this is low though. [img]/images/graemlins/wink.gif[/img]

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

huge difference between being 40 and being 60 and not working again...if you cant figure out the differences then you need to think about it some more

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

someone wrote in the past that 100k would be enough to make him never "really work" again.

This probably assumes online poker is not work. Even then, it's a terrible assumption.

+++++

I had a friend a few years back whose company stock options ballooned to the point that he asked his father (a VP of finance at a major company) how much he would need to retire at 25 and live the same lifestyle his parents did. I'd describe the lifestyle as the upper end of middle class. Nice 4 BR house in the 'burbs (no McMansion), new Lexus every 4-5 years, travel and dining out at a reasonable rate. Assume married and children at some point. His father's answer was "5 million".

This was without all of your assumptions, though.

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

Do you mean money more that needs to be spent for things health related the older you are? Or do you mean expenses that have to do with social life? (we can pretend I join a monastry ...which let's me pay for my room and my living expenses [img]/images/graemlins/wink.gif[/img] )

A hint would be nice.

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

inflation

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

[ QUOTE ]
I had a friend a few years back whose company stock options ballooned to the point that he asked his father (a VP of finance at a major company) how much he would need to retire at 25 and live the same lifestyle his parents did. I'd describe the lifestyle as the upper end of middle class. Nice 4 BR house in the 'burbs (no McMansion), new Lexus every 4-5 years, travel and dining out at a reasonable rate. Assume married and children at some point. His father's answer was "5 million".

[/ QUOTE ]
This is very interesting. I wonder what HE meant when he said he wants to retire. I would be very interested in what his assumptions where that need to be fullfilled before he can say he 'is retired'.

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

[ QUOTE ]
inflation

[/ QUOTE ]

Of course the money accumulation rate would need to be higher than the inflation rate. If this is the case than age plays no role here. ...am I wrong here? This is contained in my 3rd assumption. That's why I wasn't sure what mattnxtc meant.

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

[ QUOTE ]
huge difference between being 40 and being 60 and not working again...if you cant figure out the differences then you need to think about it some more

[/ QUOTE ]
To be fair, if you make it a prerequisite that the invested portion of your money increases every month, it actually doesn't matter how old you are. This assumes that already factored into that is your monthly withdrawal growing with inflation. Now, it is stupid, from a "how much money do you need" perspective, to have your invested capital grow perpetually. There's no need to end up with 60 million in the bank when you die. That was his question though, so it actually won't really matter how old you are since other provisions more than account for that.

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

The increasing money makes things easier for the reason Evan pointed out. Also think of it as a wish to give money to your family (or whoever) when you die. The more the better.

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

I wonder what HE meant when he said he wants to retire.

I'm pretty sure he meant nothing that resembles work. No managing real estate, no sales calls or whatever. Let someone else manage your money, live to a ripe old age and not worry about financing the lifestyle of you or your wife. Money does not necessarily increase every year, like your assumption, but stays at such a rate that you won't run out before you die.

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

He still would probably need 3x more than what I used in my example. So I would be fine (according to his dad) with about 1.5M - 2M. That's sounds like Perplexity's guess. [img]/images/graemlins/smile.gif[/img]

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

Your number will always go up if you ever actualy hit it.

$2000X12
----------
.08X.05

You will need $6,000,000 if you want to start drawing out immediatly.

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

[ QUOTE ]
huge difference between being 40 and being 60 and not working again...if you cant figure out the differences then you need to think about it some more

[/ QUOTE ]

Ummm... I don't get it. (40 / infinity) = 0 and (60 / infinity) = 0. Or do you mean to tell me you've never heard of The Singularity?!?!

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

As a first order approximation, start with your current salary. I make about 82K. But I also get medical benefits, retirement, etc. So my actual salary is say closer to 100K.

Esavings accounts are paying about 5% to 6% now. So let's use 5% as a conservative figure. Interest rates are not constant over time. They rise and fall and it's hard to predict what they will be. But we can adjust later.

So for me, living in Fresno that's 2 million.

That would assume no withdrawals and a constant interest rate of 5%.

If you move to a more expensive city, then 100K a year may not be enough to live on.

Inflation may cut into your cost of living. And withdrawals will obviously erode your return. So $2 million would be the bare minimum right now, using risk free investments.

If you are willing to risk some money on the stock market, or work a part time job, then you can reduce that figure.

If you are willing to work half time and can earn say 50K a year doing something more enjoyable. Then perhaps you only need 1 million in a risk-free account earning 5% interest.

So I like to start with that simple calculation, to get a rough approximation. Then adjust for other factors.

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

Gah, you guys are all bad at this.

Assume the stock market makes 7% after adjusting for inflation per year in a well diversified portfolio. So assume you can only take 5% of that, since we want our money to grow and to account for the stock market not meeting historical averages.

So if 5% of your total is what you need per year, just figure out what the hell you need every year and multiply by 20. That would be a pretty good estimate, though more would obviously make you more comfortable.

Need $35,000 pre-tax per year? Find yourself $700,000 and retire.

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. So multiply by 25x and you should be set.

I'd feel > 95% confident in $875k being enough for you to retire on if you really only need $35k pretax.

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

5 mill

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

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.

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

$10 million

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

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

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

gull,

You are wrong. DUCY?

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

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.

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

[ 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.

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

[ 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.

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

[ 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.

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

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.

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

Metetron, here's a little quick and dirty analysis of why I wouldn't use equities for the "how much do I need to never work again" scenario. It's not exact because I'm in the living room on my roommate's laptop and it doesn't have excel, so this is the best I could do in Google Docs without wasting a ton of time.

I took the returns of every 12 month sample of the S&P 500 going back to 1950. To be clear, April 06-April 07 is one sample, March 06-March 07 is another. So each month gets counted 12 times. This probably isn't statistically perfect, but it's a close enough approximation for not having excel.

Average return: 8.3%
Standard deviation: 14.8%

Positive "years": 491
Negative "years: 185

Winning:Losing: 2.67:1
% losing: 27.4%

Let's call 5% our benchmark long term risk free rate..
Z score: (x-m)/s=(.05-.083)/.148=-.22
Cumulative normal distribution: 41.2% the return of equities will be less than the risk free rate


Falling below the benchmark rate is a big deal in a scenario, like this one, where you're withdrawing money every month or year. It's not just an issue of catastrophic disaster.

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

Is that not made up by the market overperforming some other time in the 20 years necessary for no growth of the principal before we are busto?

I mean I see that losing 30% sucks big ass because now our gains are only on 70% of our initial investment, but I don't see how only gaining 2% the first year is going to break this plan.

I'm not saying it will never not work, and I'd definitely recommend a bond/equity mix, but it isn't as dire as some of you are making it to be.

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

What about buying an open market annuity?

Obviously maybe not suitable for a younger person. Not sure if these are available in The US, or what the rates are, but I'll convert some example UK annuity rates to $US

60 year old male
$730p.a. per $10000 or
$460p.a. per $10000 for an escalator annuity

so if you need $35000 per year to live, you can buy an annuity for around $750,000

Of course if you're younger you'll need a lot more.

The good news - if you're a smoker, you need a lot less.

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

I'd be pretty comfortable with a half-mill. Somebody give it to me and I'll prove it to you. [img]/images/graemlins/smile.gif[/img]

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

[ QUOTE ]
What about buying an open market annuity?

Obviously maybe not suitable for a younger person. Not sure if these are available in The US, or what the rates are, but I'll convert some example UK annuity rates to $US

60 year old male
$730p.a. per $10000 or
$460p.a. per $10000 for an escalator annuity

so if you need $35000 per year to live, you can buy an annuity for around $750,000

Of course if you're younger you'll need a lot more.

The good news - if you're a smoker, you need a lot less.

[/ QUOTE ]

keep in mind that the annuity you need increases disbursement each year by the rate of inflation.

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

pig4bill, please explain.

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Thanks all for the responses. This is really interesting in my opinion and people answering in numbers between 750k and 7,2M shows that the answer to the problem is not obvious.

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edtost, Evan: What kind of books or websites would I need to read to gain knowledge about the calculations you perform?

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Question for all:
Is a person who is studying economics or finance of some sort automatically a lot more probably to never have to work again compared to a person who hasn't studied in this field?

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

Ludanto,

But what kind of "retirement" could you have at 2K/month?... sounds like it would get kinda boring, if you started doing that early in life...

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

Sniper, actually the 2k seems to be a number which doesn't matter a lot (I think). I looks as if I wanted 4k/month I'd just need to have double that of what I need for 2k. The 2k was just a number for a "Ok, I'm done with the world. I'll just sit on my ass and do nothing from now on"-scenario. As I said it seems easy to translate the money needed to a different monthly redrawal.

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

Investment Science by Luenberger has a good section on annuity valuation/pricing, which is basically the calculation I was doing. As an intro to this stuff, it may be overkill, but its a great book on basic financial concepts and the math supporting them, that doesn't resort to really dry theorem-proof style writing.

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

[ QUOTE ]
Is that not made up by the market overperforming some other time in the 20 years necessary for no growth of the principal before we are busto?

I mean I see that losing 30% sucks big ass because now our gains are only on 70% of our initial investment, but I don't see how only gaining 2% the first year is going to break this plan.

I'm not saying it will never not work, and I'd definitely recommend a bond/equity mix, but it isn't as dire as some of you are making it to be.

[/ QUOTE ]
"Made up for" is a risky term. If we get hit hard up front it's going to be very hard for the market's outperformance to catch up since we start withdrawing on day one.

This is the sort of problem where you need to put risk of ruin above expected return.