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Author: Maphisto Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 74759  
Subject: I'm Rich - Now What? Date: 9/25/1998 3:39 PM
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OK, I started, and sold a business, invested the proceeds, and (by chance, not skill) got rich, and retired at 45. (I ended up with about $5 million)

How do I organize my portfolio? Do I still need to take risks? Can I just sit back and get 5% from Bonds? Should I worry about inflation? Do my investments still need to outperform the market?

I have very low expenses, I like to travel, and have figured out I can live very nicely on $150,000 a year. (before taxes)

I'd like to average 10% growth a year. 5% to spend, and 5% for inflation and to steadily increase my income. I don't want to lay awake worrying at night, and I don't want to wake up to learn I just lost 50% of my nest egg.
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Author: shess Two stars, 250 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 5644 of 74759
Subject: Re: I'm Rich - Now What? Date: 9/25/1998 5:58 PM
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Maphisto wrote:

<<(I ended up with about $5 million)>...<How do I organize my portfolio? Do I still need to take risks?>...<I can live very nicely on $150,000 a year.>>


Good work - if you can get it...



The odd thing about investing, especially when you're this far ahead of the game, is that you can reasonably take _bigger_ risks than if you had half as much and were 15 years older. Not with all of it, obviously, but with some.



If I were feeling really conservative, I'd probably go with bonds, possibly municipal bonds, for $3M or so, with the goal being to live off of the interest, and put the remaining $2M into a growth/capital gains strategy. Foolish Four would be alright (and the dividend kicker might be nice), but you'll be paying taxes all the time. Better to use Cash King or somesuch, and let it ride for the 10-15 years or so that the bond income will continue to be reasonable.





BTW, what is your goal for after-tax income? Obviously, if you're going to pull a Ross Perot with municipal bonds, your taxes would fall substantially. And keep in mind that you only pay SS taxes (aka FICA) on _earned_ income. And if you can organize so that most income is from long term capital gains, that'll be another win.



$150k earned income before taxes for me (self-employed, filing jointly) works out to federal payments of about $43k, including social security taxes. If that $150k were all interest on bonds, the taxes would drop to $33k (no SS tax!). If that $150k were instead long-term capital gains, taxes would drop to $22.5k. After Y2K, if that $150k were instead five-year long-term capital gains, it would knock another $3k off.



If I need $150k earned income to maintain my current standards, I'd only need $130k in interest income, or $123k in long-term capital gains income, or $120k in five-year long-term capital gains income.
Obviously, it should be easier to kick off $125k forever from a $5M portfolio than $150k!


[This is all back-of-the-envelope to demonstrate that it makes a big difference. These aren't _specific_ amounts, just estimates.]



Later,

scott



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Author: slwjpw Three stars, 500 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 5645 of 74759
Subject: Re: I'm Rich - Now What? Date: 9/25/1998 6:13 PM
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Look at today's (9/25) Foolish Four report and search for past articles written by Robert Sheard regarding your questions.

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Author: gapfan Three stars, 500 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 5646 of 74759
Subject: Re: I'm Rich - Now What? Date: 9/25/1998 6:43 PM
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Maphisto wrote:

<<<I'd like to average 10% growth a year. 5% to spend, and 5% for inflation and to steadily increase my income. I don't want to lay awake worrying at night, and I don't want to wake up to learn I just lost 50% of my nest egg. >>>

I reply:

If you have capital gains involved in your investment, I suggest posts #11 and #14 on the "Retired" board (Birds of a Feather group) for your consideration.

Good Luck and don't get bored!!

gapfan :-)

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Author: gapfan Three stars, 500 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 5647 of 74759
Subject: Re: I'm Rich - Now What? Date: 9/25/1998 6:46 PM
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Correction: That's "Retired Fools" in Fools of a Feather group. Sorry about that.

gapfan :-)

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Author: TMFPixy Big gold star, 5000 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 5658 of 74759
Subject: Re: I'm Rich - Now What? Date: 9/26/1998 11:06 AM
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Greetings, Maphisto, and welcome. You asked:

OK, I started, and sold a business, invested the proceeds, and (by chance, not skill) got rich, and retired at 45. (I ended up with about $5 million)

How do I organize my portfolio? Do I still need to take risks? Can I just sit back and get 5% from Bonds? Should I worry about inflation? Do my investments still need to outperform the market?

I have very low expenses, I like to travel, and have figured out I can live very nicely on $150,000 a year. (before taxes)

I'd like to average 10% growth a year. 5% to spend, and 5% for inflation and to steadily increase my income. I don't want to lay awake worrying at night, and I don't want to wake up to learn I just lost 50% of my nest egg.


Others have already commented, but I'll add my two cents anyway. IMHO, yes you will have to worry about inflation and you will have to take a little risk to stay ahead of the game and preserve the purchasing power of both your principal and your income for the next 40 to 50 years. OTOH, if you didn't care about principal but wanted your income to increase with inflation of 4% per year, then that $5M invested in munis earning 5% would last 40 years assuming a starting income of $150K per year.

All in all, you're in an excellent position. IMHO it wouldn't cost much for you to see a fee-only CFP on this issue. At best it would cost you $1K depending on how detailed you want to be in your planning. In exchange, you would get a portfolio mix that takes care of your income and estate needs. Not a bad trade from my perspective.

Regards….Pixy



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Author: ataloss Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 5664 of 74759
Subject: Re: I'm Rich - Now What? Date: 9/26/1998 2:51 PM
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<<$5M invested in munis earning 5% would last 40 years assuming a starting income of $150K per year.
>>

Is there a possible AMT issue here? Maybe not, I really don't understand AMT since I am not affected. I would be be happy to have this type of financial problems.

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Author: rjm1 Big red star, 1000 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 5670 of 74759
Subject: Re: I'm Rich - Now What? Date: 9/26/1998 9:55 PM
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How do I organize my portfolio? Do I still need to take risks? Can I just sit back and get 5% from
Bonds? Should I worry about inflation? Do my investments still need to outperform the market?


80% in blue chip stocks, index funds etc. 20% in bonds (probably not funds as there could be actual losses)(Use government and insurred bonds to reduce risk) with $150,000 coming due each year for seven years.

Each year sell stock and invest in bonds that come due in 7 years. If the market drops don't replace your bonds that year. You can stand 7 bad stock years so you should be able to sleep. Inflation, interest and dividends will affect the final result but I think this approach is reasonable.

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Author: Beaver56 Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 5671 of 74759
Subject: Re: I'm Rich - Now What? Date: 9/26/1998 10:28 PM
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<Correction: That's "Retired Fools" in Fools of a Feather group. Sorry about that>. Where can I find such a group? Is it in the Motley Fools web site? I can't find it after doing a search! Thanks for your help!

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Author: TMFPixy Big gold star, 5000 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 5681 of 74759
Subject: Re: I'm Rich - Now What? Date: 9/27/1998 10:25 AM
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Greetings, Beaver56, and welcome. You asked:

<Correction: That's "Retired Fools" in Fools of a Feather group. Sorry about that>. Where can I find such a group? Is it in the Motley Fools web site? I can't find it after doing a search! Thanks for your help!

In any message board window of Fooldom, just click on the word "Folders" at the top or bottom of the screen. That takes you to the Folder index where you will click on "Fools of a Feather." In the next window you'll find the Retired Fools folder. Click on that, and you're there.

Regards....Pixy

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Author: zgriner Big red star, 1000 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 5710 of 74759
Subject: Re: I'm Rich - Now What? Date: 9/28/1998 10:39 PM
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First, you must always worry about inflation. At your age, 45, you have another 40 years to have fun. Using the Rule of 72, 3% inflation will cut your purchasing power in half after 24 years. Consequently, you must always include a growth factor in your portfolio.

Regarding your risk, if you believe that a well-invested stock portfolio, over time, will increase in value, then a temporary drop should not influence your decisions at the moment. At your current age, you have time to allow the market to correct itself upward.

For example, a current portfolio of high-yielding DJ stocks should easily provide you with the 150000 pre-tax income you say you can get by on. Additionally, if you were to follow the High-Yield 10 Beat the Dow strategy, you would roll your stocks yearly. The appreciation of the stocks, over time, will actually increase your dividend income, as well as your nest egg.

Have a great life,
Zev

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