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If I want to determine how much gross return I would need to live on $5000 / mo ($60,000 / yr) and I were to assume all return would come from an investment pool of capital in ETFs, stocks, etc, that met the average return of the stock market, how would I determine the total under management in order to meet the budget?

Taxes: I would need to deduct capital gains, but would I be responsible for any other taxable amount on that income? What other expenses should I budget for?

High side / low side: I'd like to calculate for re-investment on the high side during good months in order to offset any low sided months where I have to pull from capital to make the monthly withdrawal.

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    How long does this need to last (a year? A decade? Half a century)? What country? How confident are you that current capital gains tax treatment will continue? – Brythan Mar 5 '18 at 1:03
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    You will also be paying tax on dividends, at the same rate as capital gains. – prl Mar 6 '18 at 4:39
  • While all the below answers are correct, it really are guesstimates since you are trying to predict the future. Safely assume a couple of millions. – reaper_unique Mar 6 '18 at 10:31
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    You need to specify how long you want the $5000 per month to last. 10 years, 25 years, 50 years, infinity? Note that in 50 years $5000 will probably buy a lot less stuff than it buys today. – Five Bagger Mar 14 '18 at 12:20
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It depends on whose numbers you want to believe, and how much chance of success you want. But the answer is usually somewhere between a 3% (Trinity Study) and 8% (Dave Ramsey) withdrawal rate of your investment. A lot of well-known investors side with a 3% to 4% rate, as cited by the Trinity Study. William Bernstein, in his book "The Four Pillars of Investing" says about a 4% withdrawal rate is fairly safe, and you could maybe even go as high as 5% (this even accounts for inflation). Dave Ramsey's 8% number is pretty optimistic, and is based on keeping your money aggressively invested in all stocks, with the market performing fairly well on average (and many people take issue with his analysis). Bernstein even claims that you can calculate a 90% chance of success for a withdrawal by subtracting 2% from your expected rate of return. There's a couple big buts:

  • All of this analysis is based on historical data. Nobody can predict that the future will mirror history.
  • Even the fairly conservative Trinity Study only predicts a 95% chance of success--there are no guarantees! And of course, even though it's well researched, lots of people find flaws with the Trinity study, too. As for the 8% withdrawal rate, there's probably a much lower chance of success. As Joe points out in the comments, two unexpected major market downturns in decade could eat your lunch!

That said, the simple analysis using some of the above numbers gives us:

  • 3% withdrawal rate: $2 million nest egg
  • 4% withdrawal rate: $1.5 million nest egg
  • 8% withdrawal rate: $750,000 nest egg

I can't stress enough: this is just a starting point, with no guarantees! In the end, you'll have to decide for yourself what number you're comfortable with. I've you given some resources you can start looking into to, but hopefully this gives you at least a rough ballpark.

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    Anyone following The David, and having the misfortune to be retiring in the late 1990s, was nearly wiped out by 2010. Great advice from Ramsey. – JoeTaxpayer Mar 5 '18 at 3:08
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    @JoeTaxpayer, well, I did say many people take issue with his analysis. I believe I covered the major caveats with his numbers. – Ogre Psalm33 Mar 5 '18 at 13:49
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    @JoeTaxpayer Interestingly, I think Dave Ramsey's team has quietly backed off of that 8% number in recent years--I tried his team member's retirement calculator (chrishogan360.com), and playing around with it, I found he's using a 6% withdraw rate number. Still high, but maybe more in line with aggressive investing. – Ogre Psalm33 Mar 5 '18 at 13:59
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    @OgrePsalm33 - including him in the answer gives him undeserved credibility. He had no basis for the original number, and I got many emails in the early 00's from people who retired with too little, only to find themselves wiped out. The promise of 12% long term return and 8% withdrawal rates boarders the lines between criminal and stupid. – JoeTaxpayer Mar 5 '18 at 22:24
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    @mkennedy Unfortunately, as far as rates of return, keep in mind, 8% is only an average (and you probably want to include inflation, too). So if the market is down 5% per year for the first 5 years you retire, but then goes back up 10% per year the next 5, you're going to deplete your nest egg quite a bit during those first five years. This causes the "safe" withdrawal rate to be lower than the rate of return. I'd suggest reading up on the topic. This link might be helpful: investopedia.com/financial-edge/0113/… – Ogre Psalm33 Mar 6 '18 at 2:54
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First, a disclaimer. There are fans of the entertainer, Dave Ramsey who follow his every word, and are especially vocal about his views regarding credit. Their premise is that credit, its very existence, is dangerous, and even one who has extra cash each month and simply uses a card for convenience is on a risky path.

As far as investing for retirement is concerned, it's His advice that's dangerous, and far riskier than any view I may hold regarding credit card use. This quote is still active on His web site.

How Can You Make Sure Your Retirement Funds Last?

As long as you didn’t take the ready-fire-aim approach to retirement planning, you should already know how to make retirement last. But, here’s a refresher:

You’re going to keep your nest egg invested and averaging 12% growth. We’re estimating inflation at 4%. So, to maintain your nest egg and break even with inflation, you will live on 8% income from your nest egg. That means if you have a nest egg of $625,000, you will live on $50,000 per year: $625,000 x 8% (.08) = $50,000.

Some fraction of the population retire each year, and it's safe to say that of the 160M households in the US, a few million retired at the end of 1999. How would they have fared under Dave's advice?

enter image description here

Spreadsheet construction

I pulled the S&P total return data for the years from 1990 or so. Data is freely available from multiple sources. I start with $1M as it's a round number, and easy to see as it's a typical goal, especially when assuming the 4% rule. Now, for 2000, I first withdraw the full 80000, or 8% as Dave suggests, then apply the year's gain/loss to enter the year end balance. For each year following, I inflate the starting withdrawal, the $80K, by only 2%.

For further analysis, I simply put the starting $1M/$80K after a different year, to show how he's produced 12 solid years of failed investment plans.

As he suggests, we take out 8% each year, and are full into stocks, no stock/bond mix, because that would surely lower the return given the near zero rates on bonds. He also assumes 4% inflation. I kindly lowered the multiplier to 2% since inflation has been running lower than 4. How did his retirees do in that decade? They spent through every cent by the end of the 10th year. It's little comfort that the decade before (or after) performed so much better that the average got pulled back up. (i.e. 1991-2010 CAGR was 9.17%, and 2000-17, 5.37%, at least a positive number).

The 1990's decade was pretty strong, but even retiring in 1995 would have left you with a balance of $480K and inflated withdrawals this year of $124K, so just a few years to zero.

And continuing to analyze via spreadsheet, a 2007 retiree would be down to a 2017 year end balance of $433K. A 12% return thru 2023 and he'd still see zero by that date.

In the end, it's not me trying to game the system, discovering one bad year. Every retiree who followed The David's advice from 1995-2007 would have seen their money run out far too quickly. Unless he had the good fortune to die first.

As far as the 4% rule goes, a 2000 retiree, using the same assumptions as I did for the 8%, would run out of money after 31 years. Keep in mind, the recommended stock/bond mix from the Trinity study would have fared better in the lost decade than 100% stock, I am just trying to keep this apples to apples.

4% is still the general rule I'd recommend. It was the number I used to make my own retirement decision. In our case, there are 2 safety nets. Social security that will kick in for my wife and me, in 8 and 15 years, which is forecast to cover half our current expenses. And a potential downsize, which would reduce our expenses 25%, and provide cash, the difference in home prices. I share this extra detail to make a point. You shouldn't just look at one number when making these long term decisions. One's "Number" needs to be looked at far closer when it's used for early retirement vs a post 60 retirement. A 70 year old retiree doesn't have too worry too much about whether the money actually lasts beyond 30 years.

Last - I continue to be amazed at how vocal the David's anti-credit follows are, while the choice to use credit is quite personal, and based on behavior, yet they remain silent on his entire retirement thesis, which, at best, failed for over a decade's worth of his followers.

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4% is considered by some to be a safe withdrawal rate, so you sock away $1,500,000 (often 80:20 stock/bond split) and withdraw 4% annually ($60k) and should be able to do that in perpetuity. This notion is based on historical performance, and nobody can guarantee future performance will cooperate. If you're wanting that $60k to come post tax then you have to also project out the long-term capital gain rate and increase your pool to accomodate.

A more comprehensive retirement plan will require you to think about how many years you will live post-retirement and if you care to leave behind any money. Unfortunately nobody knows exactly what their cost of living will be like come retirement, but as @Dheer mentions, you'll likely want to plan for inflation and increased medical spending. There are a great many variables.

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    This is good as a thumb rule. One also needs to factor in that cost of living will increase by inflation. So $5K needed today may not be sufficient after 10 years. Some inflation like Medical grow at faster rate than general Consumer Inflation that is published. – Dheer Mar 5 '18 at 3:54
  • OTOH, some spending might well be less. For instance, if own a home and have paid off the mortgage, there's a significant drop in your monthly expense. – jamesqf Mar 5 '18 at 19:24
  • @jamesqf Yep, and myriad lifestyle choices to be factored in. – Hart CO Mar 5 '18 at 19:25
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    @Dheer, I think the 4% rule of thumb takes that into account. – prl Mar 6 '18 at 4:34
  • To net $60,000 per year after taxes, you need over $70,000 gross, assuming 15% effective tax rate, so over 1,750,000 to start. – prl Mar 6 '18 at 4:38
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An annuity is a fixed stream of payments paid to someone, typically for the rest of their life. So one way you could answer the question of how much capital you would need to receive $5000/month would be to find the price of an annuity which pays that amount for life.

You can use an online "annuity calculator" to get a rough estimate. For example, according to money.cnn.com, a 63-year old male living in Nevada, could annuitize $1,000,000 and receive $5020/month for life in return:

enter image description here enter image description here

Notice that the age of the person plays a critical role in the answer. If you play with the calculator you'll see that a 40-year old would only receive $3727/month in exchange for the same $1M lump sum. This makes sense since the counterparty who is selling the annuity will have to make more payments to a 40-year old than to a 63-year old on average.

Blindly following a 4% Rule (or any of the N% Rules) without taking into account your age is folly.

Please note carefully that I am not recommending that you buy an annuity. There are a lot of pitfalls associated with buying annuities (including, but not limited to high fees and hidden commissions). You may be able to do better (or worse!) investing in, say, a mix of stocks and bonds on your own.

However, the number that the annuity calculator gives you is a sanity check on the 4% Rule and a ceiling on the amount you would need to achieve $5000/month.

  • It's fine to add the (immediate) annuity to the mix. What you did not mention was that this product typically means giving up your principal. If you die at 80,85,90, etc, there's no money left for heirs. That's ok, but it's why they can offer a number higher than 4%. That, and the payment typically has no inflation adder. – JoeTaxpayer Mar 14 '18 at 17:05
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For the last 30 years, the average growth of the stock market has been 8.6% per year. Longer term a little less, so most analysts say to expect 6 to 7% per year.

That doesn't include dividends, just growth in value. Average dividends for the S&P 500 are just over 2% per year.

So typical profit for a stock market investment is about 8 to 9% per year. So assuming 8%, if you put $750,000 in the stock market, you could expect a return of roughly $60,000 per year.

But if you're planning to live on this money long term, you don't want to withdraw all the profits. You want the nest egg to grow with inflation, so that the amount you withdraw can grow with inflation. That's running about 2% a year, so you really want to withdraw only 6% a year. That requires a nest egg of $1 million.

Huge huge disclaimers:

(a) These are AVERAGES. There is no guarantee. The market could collapse tomorrow like 1929. There will be ups and downs. You don't want your plan to be ruined by a down period.

(b) This doesn't account for fees you have to pay to brokers, finance companies, etc. You need to subtract something for that.

On the other hand:

(a) If you're at or near retirement age, you can collect social security. As an investment it totally sucks, but take what you can. I'm planning on social security providing about 40% of my retirement income, which reduces the amount I need in my retirement fund a lot.

(b) If you can live purely off the profits, then your nest egg will last forever, and you'll have something to leave your heirs when you die. If you don't have any heirs (or you don't care to leave them much), you can plan to gradually deplete your nest egg. Of course you don't know how long you'll live and if you should be so unfortunate as to live a long life, you don't want to run out of money before you run out of lifespan, so you want to be careful about this. But if somehow you know that you will only be living on this nest egg for, say, 10 years, than even at 0% return, $600,000 would be sufficient. Personally, I'd rather not take chances, but, etc.

  • Your logic is good, but the disclaimer is most important. Forget about 1929. The 6% withdrawal fails the Lost Decade test. A 2000 retiree hitting zero by 2013. – JoeTaxpayer Mar 14 '18 at 12:20
  • @JoeTaxpayer Yes, good point. I should have made clear that while 1929 was an extreme case, you could be torpedoed by a much less extreme case. – Jay Mar 14 '18 at 15:51
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There are a lot of retirement calculators out there that might assist with some of this.

This is above my pay grade but I'll take a shot at it... To get a more precise number, you're going to have to set it up yourself in a spreadsheet. It's a multiple variable problem - you'll have to determine the growth rate, the monthly depletion rate, dividend reinvestment, cap gain rate (Short term or Long Term?), tax bracket, etc.

Or you could make it simple and assume that it's all short term capital gains and you earn the long term market growth rate of 7%. To net $60k after taxes, it would require a gross income of $68k+ if married and in the 12% bracket. You'd need just short of a million dollars. If single then it's the 22% bracket and the numbers bump up (gross income and size of portfolio).

All of this assumes a constant market growth. Where it falls apart is if your early years in the market are down years and you're depleting at $5k per month. So while you'll get the growth rate, you won't have enough skin in the game to avoid depleting your nest egg and you won't catch up.

Or if you want it all to be even simpler, investment grade preferred stocks currently pay about 6% per year. You'll have some secondary issues with issues called and interest rates but if you don't care about the principal's daily value, only issues called will affect you. Buy those with qualified dividends and screw all of the variables :->)

  • As I noted in an answer above, the single needs a gross $68,333. A couple only needs $64,948. The couple is in the marginal 12%, but effective 7.6% rate. Your 4th para is key. The David's method fails badly when the early years contain a bad downturn. – JoeTaxpayer Mar 14 '18 at 12:25
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For the scenario below, a pension pot is calculated to deliver inflation-linked withdrawals relative to today.

                               Time (mth.)
Today          1st May 2019        0         first contribution to pension pot 
Retire         1st Apr 2029       119        last  contribution to pension pot
Living it up   1st May 2029       120        first pension withdrawal (no. 1)
All done       1st May 2049       360        last pension withdrawal (no. 241)

With

i = monthly inflation based on 2% p.a.
m = monthly stock market gain based on 10% p.a.
o = month number of first withdrawal
n = number of withdrawals
w = withdrawal amount
p = pension pot upon retirement

i = (1 + 0.02)^(1/12) - 1
m = (1 + 0.10)^(1/12) - 1
o = 120
n = 241
w = $5000

p = ((1 + i)^o (1 + m)^-n ((1 + i)^n - (1 + m)^n) w)/(i - m) = $752,414

Based on calculations here

The first inflation-linked withdrawal is w (1 + i)^120 = $6094.97

and the pension pot is drawn down to zero on 1st May 2049.

enter image description here

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