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#31
04-13-2007, 01:34 AM
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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. 
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#32
04-13-2007, 02:02 AM
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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.
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#33
04-13-2007, 02:44 AM
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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.
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#35
04-13-2007, 03:58 AM
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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.
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#36
04-13-2007, 04:08 AM
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Re: How much $ is needed to never have to work again?
pig4bill, please explain.
--------- 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. --------- edtost, Evan: What kind of books or websites would I need to read to gain knowledge about the calculations you perform? -------- 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?
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#37
04-13-2007, 04:12 AM
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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...
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#38
04-13-2007, 04:25 AM
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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.
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#39
04-13-2007, 04:27 AM
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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.
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#40
04-13-2007, 04:43 AM
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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.
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