4 ms·

It's not guaranteed, but based on historical average returns for the stock market we frequently assume ~7% growth - ~3% inflation = 4% as the amount you can tak

• PaulDavisThe1st 5y ago
  If you're planning to live on your investments' income generation, and nothing else, putting them all (and arguably any) in the stock market could be catastrophic. One minor downturn for that last just a few months, and you have zero income. IMO, "US$1M nest egg, live on proceeds" requires guaranteed income, and more or less excludes speculative investment. I appreciate that others opinions on this may vary.
  • jandrewrogers 5y ago
    Under what set of assumptions does a "minor downturn" lead to zero income? I've lived through multiple major crashes that lasted a lot longer than a few months and it had no catastrophic impact on my (theoretical) ability to safely generate an income from public equities. I am having a hard time coming up with a realistic scenario where a responsible person would become insolvent investing in public equities with an expected return of 4% (inflation adjusted). And in practice, most people doing this have a hedge of some type against a protracted downturn -- the cost of the hedge is already baked into the 4% expected return. There is no such thing as guaranteed income no matter how much money you have. The only return that can be guaranteed is a total loss since the value of all assets can go to zero. Picking a different selection of assets, including cash, is just rearranging the set of ways you can lose everything. Most of the retirement risk is a byproduct of having inelastic expenses that run right up against the reasonably sustainable withdrawal rate. That might happen more often with only $1M in the US, but even then it depends on your lifestyle.
    • saltcured 5y ago
      I suspect the difference in outlook is in defining "income". Earlier, a goal of "living off the gains" was states, implying to me either dividends or profitable sale of securities when you rebalance a portfolio. The fiscally conservative mindset is that in a downturn, dividends shrink. At the same time, being forced to sell securities to cover living expenses means "losing" money from your nest egg, not living off of gains. Someone with this view would be balancing their portfolio to have enough cash and/or bonds to support them through some unknown future, and only expect to sell stocks when the market is doing well, to realize gains. Then, one needs to consider the rate of return of such a safe portfolio...
    • PaulDavisThe1st 5y ago
      > There is no such thing as guaranteed income no matter how much money you have. state bonds (free of federal tax) backed by an insurance policy are pretty close to guaranteeed income. At least that's where I put my first (and only) half-million (for a while). > And in practice, most people doing this have a hedge of some type against a protracted downturn -- the cost of the hedge is already baked into the 4% expected return. All true if your goal is to generate a 4% return over the long haul. Not so easy if your goal is to generate a reliable 4% income stream. The 4% return, reinvested, will be smoothed out over time, and if things are planned well, achieving that over the long haul should be fine. Pulling 4% out of the investment every year, on the other hand, is much harder to cover with hedging. Remember, the goal in this case is not to generate a 4% average return over the lifetime of the investor. It's too generate an annual income of 4% of the investment value, without ever depleting the investment value. These are not the same goals.