4 ms·

With bank interest rates at < 1%, having $2 million in the bank earns < $20K/yr. He must be rich or ultra frugal.

by genwin 12y ago

michaeltoth 12y ago
When people refer to interest they often are referring to investment gains, rather than actual bank interest. Specifically, it is generally assumed that a diversified investment portfolio will earn ~4% after inflation on average, and by spending 4% of your portfolio balance at any time you are reasonably safe in the assumption that your money will not run out. At 3% it's all but assured that your money will not run out. These are conservative assumptions and take into account the fact that in any given year your investment performance could be significantly less than 4%
- genwin 12y ago
  Yes, a diversified investment portfolio could perform like that in the past, when the gov't wasn't minimizing interest rates. Nowadays only with much greater risk of loss of principal.
  - aggronn 12y ago
    The S&P 500 is up about 7% annually over the last 5 years, with inflation never exceeding 3% over that period. That leaves a calm 4% real return on one of the less risky investment options.
    - genwin 12y ago
      How has it done over 10 years? And that's with mega gov't help.
      - jonknee 12y ago
        About the same... Over 10 years the S&P is up 83.6% excluding dividends. Going back to July so month to month comparisons are valid it looks like the annualized return is 6% excluding dividends and 8% including them. http://dqydj.net/sp-500-return-calculator/ http://dqydj.net/sp-500-return-calculator/
        genwin 12y ago
        Agreed. With a lot of risk for that reward. The risk shows in the volatility (ups & downs) over that time, and that the gov't had to borrow several $trillion to prevent a negative return over that time.
christiangenco 12y ago
That's why you don't put $2 million in a bank account. This guy retired on $800k raising a family of 3 with $25k/year of passive income: http://www.mrmoneymustache.com/2012/01/13/the-shockingly-simple-math-behind-early-retirement/ http://www.mrmoneymustache.com/2012/01/13/the-shockingly-sim...
neilsharma 12y ago
Another option is to put the money in foreign accounts. I don't know this space at all, but interest rates at consumer banks in India are 9-12%. Even after currency exchange rates, you'd probably make >= 4%/year
- notahacker 12y ago
  That interest rate is because on average, rupee inflation has been at over 9% in the last two years, and was over 11% at the beginning of the year. http://www.tradingeconomics.com/india/inflation-cpi http://www.tradingeconomics.com/india/inflation-cpi If I'd opened a bank account last time I visited India, converted sterling to rupees, to saved in an Indian bank account at 12%, I'd end up less pounds than I started with. Putting money in consumer banks in India really only makes sense if you live there.
- genwin 12y ago
  No such thing as a free lunch, though. Plenty of people's savings went poof that way.
  - neilsharma 12y ago
    Why? Indian banks defaulting? Corruption/theft issues? I haven't tried this method -- just regurgitating advice other's have given me. Always thought it seemed more profitable than keeping money in US banks, and India always seemed accommodating of foreign money coming in.
    - jonknee 12y ago
      Forex is risky because unless you have a use for the foreign currency you are at the mercy of exchange rates. For example, INR lost 0.74% vs the USD just today.
    - genwin 12y ago
      For example, savers around the world were enticed by Iceland's high interest rates, and then this happened: http://en.wikipedia.org/wiki/2008%E2%80%9311_Icelandic_financial_crisis http://en.wikipedia.org/wiki/2008%E2%80%9311_Icelandic_finan... Turned out those savers were the suckers needed by those banks, in an attempt to remain solvent.
jonknee 12y ago
Bank accounts are't for storing your retirement savings. Even with the current low rates you can get 3% from 20 year Treasuries. If you want more yield you'll have to take some risk, which is why diversified portfolios are always advised.
- genwin 12y ago
  In other words you must take the risk of forgoing retirement when trying to beat inflation. In 2008 pretty much the only diversified portfolios that didn't take a huge hit were the baskets of low-risk investments.

With bank interest rates at < 1%, having $2 million in the bank earns < $20K/yr. He must be rich or ultra frugal.

by genwin 12y ago

With bank interest rates at < 1%, having $2 million in the bank earns < $20K/yr. He must be rich or ultra frugal.

When people refer to interest they often are referring to investment gains, rather than actual bank interest. Specifically, it is generally assumed that a diversified investment portfolio will earn ~4% after inflation on average, and by spending 4% of your portfolio balance at any time you are reasonably safe in the assumption that your money will not run out. At 3% it's all but assured that your money will not run out. These are conservative assumptions and take into account the fact that in any given year your investment performance could be significantly less than 4%

genwin 12y ago
Yes, a diversified investment portfolio could perform like that in the past, when the gov't wasn't minimizing interest rates. Nowadays only with much greater risk of loss of principal.
- aggronn 12y ago
  The S&P 500 is up about 7% annually over the last 5 years, with inflation never exceeding 3% over that period. That leaves a calm 4% real return on one of the less risky investment options.
  - genwin 12y ago
    How has it done over 10 years? And that's with mega gov't help.
    - jonknee 12y ago
      About the same... Over 10 years the S&P is up 83.6% excluding dividends. Going back to July so month to month comparisons are valid it looks like the annualized return is 6% excluding dividends and 8% including them. http://dqydj.net/sp-500-return-calculator/ http://dqydj.net/sp-500-return-calculator/
      - genwin 12y ago
        Agreed. With a lot of risk for that reward. The risk shows in the volatility (ups & downs) over that time, and that the gov't had to borrow several $trillion to prevent a negative return over that time.

christiangenco 12y ago

That's why you don't put $2 million in a bank account. This guy retired on $800k raising a family of 3 with $25k/year of passive income: http://www.mrmoneymustache.com/2012/01/13/the-shockingly-simple-math-behind-early-retirement/ http://www.mrmoneymustache.com/2012/01/13/the-shockingly-sim...

neilsharma 12y ago

Another option is to put the money in foreign accounts. I don't know this space at all, but interest rates at consumer banks in India are 9-12%. Even after currency exchange rates, you'd probably make >= 4%/year

notahacker 12y ago
That interest rate is because on average, rupee inflation has been at over 9% in the last two years, and was over 11% at the beginning of the year. http://www.tradingeconomics.com/india/inflation-cpi http://www.tradingeconomics.com/india/inflation-cpi If I'd opened a bank account last time I visited India, converted sterling to rupees, to saved in an Indian bank account at 12%, I'd end up less pounds than I started with. Putting money in consumer banks in India really only makes sense if you live there.
genwin 12y ago
No such thing as a free lunch, though. Plenty of people's savings went poof that way.
- neilsharma 12y ago
  Why? Indian banks defaulting? Corruption/theft issues? I haven't tried this method -- just regurgitating advice other's have given me. Always thought it seemed more profitable than keeping money in US banks, and India always seemed accommodating of foreign money coming in.
  - jonknee 12y ago
    Forex is risky because unless you have a use for the foreign currency you are at the mercy of exchange rates. For example, INR lost 0.74% vs the USD just today.
  - genwin 12y ago
    For example, savers around the world were enticed by Iceland's high interest rates, and then this happened: http://en.wikipedia.org/wiki/2008%E2%80%9311_Icelandic_financial_crisis http://en.wikipedia.org/wiki/2008%E2%80%9311_Icelandic_finan... Turned out those savers were the suckers needed by those banks, in an attempt to remain solvent.

jonknee 12y ago

Bank accounts are't for storing your retirement savings. Even with the current low rates you can get 3% from 20 year Treasuries. If you want more yield you'll have to take some risk, which is why diversified portfolios are always advised.

genwin 12y ago
In other words you must take the risk of forgoing retirement when trying to beat inflation. In 2008 pretty much the only diversified portfolios that didn't take a huge hit were the baskets of low-risk investments.