5 ms·

A great post on the whole, but out of curiosity does anyone know how he arrived at $40k off of $1m with present-day examples?

dsacco 10y ago
The S&P 500 averages something like 7-8% over a 20 year timeline. Index funds tracking it will return similar performance. I would imagine Patrick is providing a conservative estimate, because regardless of the market average you can't count on seeing $80k on $1M each year.
FabHK 10y ago
Safe withdrawal rates are a whole chapter in itself. If you want to be 100% sure that your money lasts to the end, i.e. your death (in real terms), you cannot erode your principal, in real terms. Thus, if you have, say, a 5% total return nominally, but 2% inflation, you can withdraw 3% p.a. (Taxes complicate things, particularly insofar as you pay taxes on the nominal returns.) However, with this strategy you bequeath your original principal at the time of death (in real terms, i.e. grown by inflation), which might be too much. Thus, people generally argue for taking out a bit more, which might give you, say, 4% withdrawal with 5% nominal returns and 2% inflation (taking out about 1% or your principal p.a., halving it over the course of 70 years). When you erode principal like that, you run a small chance that you run out of money if your a) returns are lower than expected or b) you live longer than expected. A solution to a) is, as the name suggests, fixed income (i.e. bonds), which have no equity risk and (when you hold a bond with fixed rates to maturity) no interest risk. You are stuck, however, with credit risk (bond issuer goes bust) and inflation risk (except with inflation adjusted bonds). A solution to b) are annuities, that is an insurance product that pays you a fixed amount until you are dead, pooling the early/late mortality risk. The market for these is very different for different jurisdictions, one reason being, as usual, tax issues.
- IanCal 10y ago
  4% also sounds like a reference to the Trinity Study: https://en.wikipedia.org/wiki/Trinity_study https://en.wikipedia.org/wiki/Trinity_study
  - seangrogg 10y ago
    Very useful resource. Thank you.

dsacco 10y ago

The S&P 500 averages something like 7-8% over a 20 year timeline. Index funds tracking it will return similar performance. I would imagine Patrick is providing a conservative estimate, because regardless of the market average you can't count on seeing $80k on $1M each year.

FabHK 10y ago

Safe withdrawal rates are a whole chapter in itself. If you want to be 100% sure that your money lasts to the end, i.e. your death (in real terms), you cannot erode your principal, in real terms. Thus, if you have, say, a 5% total return nominally, but 2% inflation, you can withdraw 3% p.a. (Taxes complicate things, particularly insofar as you pay taxes on the nominal returns.) However, with this strategy you bequeath your original principal at the time of death (in real terms, i.e. grown by inflation), which might be too much. Thus, people generally argue for taking out a bit more, which might give you, say, 4% withdrawal with 5% nominal returns and 2% inflation (taking out about 1% or your principal p.a., halving it over the course of 70 years). When you erode principal like that, you run a small chance that you run out of money if your a) returns are lower than expected or b) you live longer than expected. A solution to a) is, as the name suggests, fixed income (i.e. bonds), which have no equity risk and (when you hold a bond with fixed rates to maturity) no interest risk. You are stuck, however, with credit risk (bond issuer goes bust) and inflation risk (except with inflation adjusted bonds). A solution to b) are annuities, that is an insurance product that pays you a fixed amount until you are dead, pooling the early/late mortality risk. The market for these is very different for different jurisdictions, one reason being, as usual, tax issues.

IanCal 10y ago
4% also sounds like a reference to the Trinity Study: https://en.wikipedia.org/wiki/Trinity_study https://en.wikipedia.org/wiki/Trinity_study
- seangrogg 10y ago
  Very useful resource. Thank you.