4 ms·

I'd feel more financially independent with a cast iron $5,000 of passive income per month than I would with $1,000,000 in the bank. Obviously the lump sum woul

I'd feel more financially independent with a cast iron $5,000 of passive income per month than I would with $1,000,000 in the bank. Obviously the lump sum would probably be able to yield that sort of money in interest, but the interesting thing is that it should be much easier to secure the monthly passive income than it would the lump sum.

beagle3 13y ago
In today's market, $1M gets you ~$2000/month.
- cpursley 13y ago
  Well managed mutual funds / etfs yield 8 - 12% per year long term.
  - cdjk 13y ago
    A 5% withdrawal rate is a lot more comfortable, as it allows for some capital appreciation to handle inflation, and gives you more runway to weather market downturns. A quote about the efficient market hypothesis is relevant here - markets may be rational in the long term, but they can remane irrational longer than you can remain solvent.
  - beagle3 13y ago
    They don't. They yield that in good years, and negative that in bad years. I worked at a fund that managed $2bn with no leverage, and our limited partners were extatic that we were able to get 15% net of fees in 2008. The long term 7% average often quoted isn't if you average the last 15 years rather than the last 150.
    - gpjt 13y ago
      To be fair, 2008 was the year the current financial meltdown started, and stocks were doing pretty poorly even in the run-up to that. From a quick check of Yahoo Finance, it looks like the Dow dropped from 14k in July 2007 to 8k in January 2009. Sure, a fund is meant to outperform the market as a whole, and sure, most of them don't manage that for obvious reasons, but when the market plunges like that no-one's going to be safe.
      - beagle3 13y ago
        > To be fair, 2008 was the year the current financial meltdown started No, that's not being fair at all. That's being irresponsibly optimistic. Let's say it is now 2005, you have a $1,000,000. You follow cpursley's advice, and put it in a well managed ETF/mutual fund, expecting to get 8%-12%. You get that for the first year and second year - and then you get -50% (which, if you look at your starting sum is "just" -40%). Now, you need 8 good years just to go back to where you started. 2005 is unfair? Go back to 1999, and check yourself at the end of 2001. 1999 is unfair? Go back to 1986. My point being, the "common knowledge" 150 years long term average of 7%/year is irrelevant, for two reasons: a) market dynamics have changed significantly in the last 10 years or so; the 140 years before that aren't as informative as the last 10 - and the last 10 are abysmal. b) even if the 150 year statistics were relevant - what you care about is your 10-30 year horizon. There are just too many unlucky events during those 150 years that you are very likely to have a 30-50% loss in one of the years of your 10-30 year horizon -- which might take you 50 years (that you don't have) to average out and come out on top. Anyone who really believes the 8%-12% numbers can borrow at <6%, invest at >8%, leverage ad absurdum and basically print money. Which, incidentally, is the empirical proof that 8% is not attainable. (P.S - CALPERS assumed a modest 8% return. That's why they're now only 50% or so funded http://www.calwatchdog.com/2012/03/22/calpers-funding-might-be-only-40-percent/ http://www.calwatchdog.com/2012/03/22/calpers-funding-might-... . If you can get them 8%, they'll give you $20M/year in salary. Really.)
  - gw666 13y ago
    Yes, but with risk. Index stock and bond funds yield in that range, with much less volatility. I've been using them since 2008 and have gotten an average of over 10% annually. I suggest the book I used, _The Only Guide to a Winning Investment Strategy You'll Ever Need_, by Larry Swedroe (endorsed by John C. Bogle, founder of the Vanguard Group). Cheesy title, but it's ideas are supported by lots of data.
conanbatt 13y ago
It would take you well over a million in assets to generate 5000 dollars of passive income. And the higher the payout the less passive/safe it becomes (i.e., CD > Real state > businesses > web apps > ???)
- LockeWatts 13y ago
  Not really. A hot mobile app can sell for that much, and doesn't require anything more than a laptop and some time.
  - conanbatt 13y ago
    But it wont last a lifetime. Buying a specific game for its returns would have a serious discount compared to almost any conventional asset. And "time" is work. Building a house also requires just some materials and some time :). Even real state needs management (things break, rents have to be collected, risk of lawsuits, tenants that dont pay).
cpursley 13y ago
Good point. If you valued a residual income stream of $5,000 at 10% per year, that would be the equivalent of having $600,000 in the bank at the same rate of return. That buys nice lifestyle in most places in the world.
buddylw 13y ago
I don't know that this is as cast iron as you think. It really depends on what the market does, but I would rather have a large lump sum in a diversified investment than a fixed monthly income. Generally investments return at higher rates in times of inflation where a fixed monthly income will only lose value more quickly. That said, $5,000 a month is $60K a year, or 6% of $1,000,000. I'd probably take the $5k also since it's a reasonable (and 100% guaranteed) rate of return on the lump sum. I wouldn't feel much safer because it's "cast iron" -- it could still be worthless in 30 years. It's just a slightly better deal in your example.

beagle3 13y ago

In today's market, $1M gets you ~$2000/month.

cpursley 13y ago
Well managed mutual funds / etfs yield 8 - 12% per year long term.
- cdjk 13y ago
  A 5% withdrawal rate is a lot more comfortable, as it allows for some capital appreciation to handle inflation, and gives you more runway to weather market downturns. A quote about the efficient market hypothesis is relevant here - markets may be rational in the long term, but they can remane irrational longer than you can remain solvent.
- beagle3 13y ago
  They don't. They yield that in good years, and negative that in bad years. I worked at a fund that managed $2bn with no leverage, and our limited partners were extatic that we were able to get 15% net of fees in 2008. The long term 7% average often quoted isn't if you average the last 15 years rather than the last 150.
  - gpjt 13y ago
    To be fair, 2008 was the year the current financial meltdown started, and stocks were doing pretty poorly even in the run-up to that. From a quick check of Yahoo Finance, it looks like the Dow dropped from 14k in July 2007 to 8k in January 2009. Sure, a fund is meant to outperform the market as a whole, and sure, most of them don't manage that for obvious reasons, but when the market plunges like that no-one's going to be safe.
    - beagle3 13y ago
      > To be fair, 2008 was the year the current financial meltdown started No, that's not being fair at all. That's being irresponsibly optimistic. Let's say it is now 2005, you have a $1,000,000. You follow cpursley's advice, and put it in a well managed ETF/mutual fund, expecting to get 8%-12%. You get that for the first year and second year - and then you get -50% (which, if you look at your starting sum is "just" -40%). Now, you need 8 good years just to go back to where you started. 2005 is unfair? Go back to 1999, and check yourself at the end of 2001. 1999 is unfair? Go back to 1986. My point being, the "common knowledge" 150 years long term average of 7%/year is irrelevant, for two reasons: a) market dynamics have changed significantly in the last 10 years or so; the 140 years before that aren't as informative as the last 10 - and the last 10 are abysmal. b) even if the 150 year statistics were relevant - what you care about is your 10-30 year horizon. There are just too many unlucky events during those 150 years that you are very likely to have a 30-50% loss in one of the years of your 10-30 year horizon -- which might take you 50 years (that you don't have) to average out and come out on top. Anyone who really believes the 8%-12% numbers can borrow at <6%, invest at >8%, leverage ad absurdum and basically print money. Which, incidentally, is the empirical proof that 8% is not attainable. (P.S - CALPERS assumed a modest 8% return. That's why they're now only 50% or so funded http://www.calwatchdog.com/2012/03/22/calpers-funding-might-be-only-40-percent/ http://www.calwatchdog.com/2012/03/22/calpers-funding-might-... . If you can get them 8%, they'll give you $20M/year in salary. Really.)
- gw666 13y ago
  Yes, but with risk. Index stock and bond funds yield in that range, with much less volatility. I've been using them since 2008 and have gotten an average of over 10% annually. I suggest the book I used, _The Only Guide to a Winning Investment Strategy You'll Ever Need_, by Larry Swedroe (endorsed by John C. Bogle, founder of the Vanguard Group). Cheesy title, but it's ideas are supported by lots of data.

conanbatt 13y ago

It would take you well over a million in assets to generate 5000 dollars of passive income. And the higher the payout the less passive/safe it becomes (i.e., CD > Real state > businesses > web apps > ???)

LockeWatts 13y ago
Not really. A hot mobile app can sell for that much, and doesn't require anything more than a laptop and some time.
- conanbatt 13y ago
  But it wont last a lifetime. Buying a specific game for its returns would have a serious discount compared to almost any conventional asset. And "time" is work. Building a house also requires just some materials and some time :). Even real state needs management (things break, rents have to be collected, risk of lawsuits, tenants that dont pay).

cpursley 13y ago

Good point. If you valued a residual income stream of $5,000 at 10% per year, that would be the equivalent of having $600,000 in the bank at the same rate of return. That buys nice lifestyle in most places in the world.

buddylw 13y ago

I don't know that this is as cast iron as you think. It really depends on what the market does, but I would rather have a large lump sum in a diversified investment than a fixed monthly income. Generally investments return at higher rates in times of inflation where a fixed monthly income will only lose value more quickly. That said, $5,000 a month is $60K a year, or 6% of $1,000,000. I'd probably take the $5k also since it's a reasonable (and 100% guaranteed) rate of return on the lump sum. I wouldn't feel much safer because it's "cast iron" -- it could still be worthless in 30 years. It's just a slightly better deal in your example.