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Author: FoolNBlue Big red star, 1000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 5068  
Subject: Poll: Annual Income/Wealth Date: 8/13/2003 11:30 PM
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0-20
20-24
25-30
30-35
Not as early as I'd have liked/Not yet!

Click here to see results so far.

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Author: dsemmler Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 360 of 5068
Subject: Re: Poll: Annual Income/Wealth Date: 8/13/2003 11:39 PM
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I voted for "Not as early as I'd have liked/Not yet!". The reason I voted this way is because my current income is slightly above our net worth. However, a few years ago, our net worth was slightly above our income. But in the last year, my income has increased dramatically so it surpassed my net worth again.

If all goes according to plan, we should equal out within the next year or so, which would result in a vote of 25-30.

dt

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Author: SRenaeP Big red star, 1000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 388 of 5068
Subject: Re: Poll: Annual Income/Wealth Date: 8/14/2003 4:15 PM
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Well my income is fairly high but sadly my net worth is still negative (student loans). I'm hoping to break even in the next year or so.

-Steph

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Author: texandesi Three stars, 500 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 393 of 5068
Subject: Re: Poll: Annual Income/Wealth Date: 8/14/2003 5:33 PM
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I clicked 30-35, but I started at zero net worth at age of 28.5

My wife is a homemaker, I am the only earner and I take care of my parents in India. My salary is 100K+ and we started with -ve equity when I purchased my car, furniture, computer/s etc. We also spend money on travel in the US. Despite this, we hit 100K in net worth in 2 yrs and will probably hit 200K some time next year.

Obviously, our net worth will go down if we purchase a house since I assume that the house price increase will only match inflation abd the loan interest rate will be more than inflation. We plan to buy a house when our net worth will be more than the prospective price of the house and will pay it off ASAP, financial gurus notwithstanding.

- TD



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Author: FanoPlane One star, 50 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 396 of 5068
Subject: Re: Poll: Annual Income/Wealth Date: 8/14/2003 10:13 PM
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So, what age were you when your financial net worth equalled your annual income?


My net worth surpassed my annual income at three separate times in my life so far.

Age 13-18
Then college tuition ate up my savings and student loans gave me negative net worth.

Age 35-38
Then stock market bust decimated my 401k while income increased somewhat

Recently, my net worth just surpassed income for the third (and final?)time.

I now save 45% of gross salary (including employer match) with an eye toward FI/RE.

Fan

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Author: prim69 Big red star, 1000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 405 of 5068
Subject: Re: Poll: Annual Income/Wealth Date: 8/15/2003 8:02 AM
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My net worth is just over double my annual income, & I'm 34.

But does it matter that my income is only $20K??

Primm
*guessing the answer is "yes"*

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Author: silverskr One star, 50 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 418 of 5068
Subject: Re: Poll: Annual Income/Wealth Date: 8/15/2003 12:47 PM
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So, what age were you when your financial net worth equalled your annual income?

Actually, I have no idea. And I see no significance to the number. You will need about 25 times your annual income requirement as a "retirement net worth", so who cares when you reach 1/25 of what you will need?

Regards, silverskr

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Author: phantomdiver Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 420 of 5068
Subject: Re: Poll: Annual Income/Wealth Date: 8/15/2003 1:00 PM
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You will need about 25 times your annual income requirement as a "retirement net worth",

But there can be a big difference between your annual income and your annual income requirement.

I was just running the numbers this morning. When I retire, I won't pay Social Security any more, nor will I contribute to my 401(k), my IRA, or DH's IRA. Also, we will move to an area where we can buy a house outright with the equity in our current house. Social Security + 401(k) + 2 * IRA = my cost of working, and it's about $23,000 right now. That amount plus the principal and interest part of the mortgage brings the cost of working in this area up to about $34,000. 25 * $34,000 = $850,000 I don't have to save.

Besides, the sooner you hit big numbers, the sooner you'll be FIRE. So it does matter when you achieved net worth equal to your annual income.

phantomdiver

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Author: silverskr One star, 50 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 421 of 5068
Subject: Re: Poll: Annual Income/Wealth Date: 8/15/2003 1:09 PM
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But there can be a big difference between your annual income and your annual income requirement.

Besides, the sooner you hit big numbers, the sooner you'll be FIRE. So it does matter when you achieved net worth equal to your annual income.


OK, so your retirement income requirement is less than your working income. It still seems irrelevant to me when you reach that milestone. Of course, the faster your net worth increases, the sooner you will be able to retire, but the net worth, annual income parity point is so far from what you will need at retirement that it has no meaning to me.

Regards, silverskr

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Author: cyberisme Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 427 of 5068
Subject: Re: Poll: Annual Income/Wealth Date: 8/15/2003 2:33 PM
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Actually, I have no idea. And I see no significance to the number. You will need about 25 times your annual income requirement as a "retirement net worth", so who cares when you reach 1/25 of what you will need?

Since this board specifically addresses FIRE wannabees.. the point is that the earlier you reach this, the earlier you are likely to reach FIRE.

C.

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Author: cyberisme Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 428 of 5068
Subject: Re: Poll: Annual Income/Wealth Date: 8/15/2003 2:35 PM
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I was just running the numbers this morning. When I retire, I won't pay Social Security any more, nor will I contribute to my 401(k), my IRA, or DH's IRA. Also, we will move to an area where we can buy a house outright with the equity in our current house. Social Security + 401(k) + 2 * IRA = my cost of working, and it's about $23,000 right now. That amount plus the principal and interest part of the mortgage brings the cost of working in this area up to about $34,000. 25 * $34,000 = $850,000 I don't have to save.

Don't forget it will run $10K+ per year for insurance :o

C.

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Author: phantomdiver Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 429 of 5068
Subject: Re: Poll: Annual Income/Wealth Date: 8/15/2003 2:37 PM
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Don't forget it will run $10K+ per year for insurance :o

You mean health insurance? Depending on when I retire, a lot to all of that will be covered by the company that has employed me for 19 years.

phantomdiver

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Author: texandesi Three stars, 500 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 440 of 5068
Subject: Re: Poll: Annual Income/Wealth Date: 8/15/2003 6:43 PM
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Actually, I have no idea. And I see no significance to the number. You will need about 25 times your annual income requirement as a "retirement net worth", so who cares when you reach 1/25 of what you will need?


That is not correct. You will need 25 times your annual expenses, assuming 40 yrs of expenses and an SWR of 4%. The annual income would/should have an effect on the retirement goals only because it affect the annual expenses.

- TD




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Author: krissylou Big red star, 1000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 443 of 5068
Subject: Re: Poll: Annual Income/Wealth Date: 8/15/2003 8:58 PM
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You will need 25 times your annual expenses, assuming 40 yrs of expenses and an SWR of 4%.

Question for the gurus. REHP scares me so I'll ask it here. :)

I thought that a safe withdrawal rate was one that would never run out. As long as the market performs for the next 1000 years like it has for the previous 100 then I could live on my SWR for the next 1000 years.*

Assuming 40 years of expenses sounds like a reasonable estimate for an early-side-of-normal retiree (60-65) but skating a bit on the edge for an early retiree. Running out of money at age 85 would really bite. So what's a "safe" withdrawal rate? What does it mean? How calculated? How would I crunch the numbers if I wanted to prepare for 50 years of expenses? Or 60?

In the interest of full disclosure: I have been working for not quite a year and finished school with $58,000 in loans (and many of my colleagues had twice that so I'm counting my blessings) so I'm still a ways away from having a positive net worth, much less a net worth equal to my income. And I'll be 28 in a couple months. But I'm getting closer every month! :)

KrissyLou

*OK, that's a big assumption since the last millenium brought plagues and revolutions and such, and something like the Black Death or the Thirty Years War can really put a crimp in your plans, but I'm reasonably confident I won't live to 1000.

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Author: Hyperborea Big red star, 1000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 446 of 5068
Subject: Re: Poll: Annual Income/Wealth Date: 8/15/2003 10:53 PM
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REHP scares me so I'll ask it here. :)

This issue has been discussed a lot of time on the REHP board so you could, if you are daring, use the Fool's search engine to find some discussion of this.

I thought that a safe withdrawal rate was one that would never run out. As long as the market performs for the next 1000 years like it has for the previous 100 then I could live on my SWR for the next 1000 years.*

The Safe Withdrawal Rate (SWR) is a historical construct. It uses the historical data of the US market for the last 130 years to generate maximal withdrawal rates that would have survived over an certain number of years. The 4% number that you will often hear is pretty much a 100% historically safe 30 year withdrawal with certain requirements on the asset allocation and the caveat that the future will be no worse than the past.

Of course in reality there is no 100% safety. There are way too many things that can happen. You can't pick a number and be sure that it will survive until you are dead. Use the 4% as a rough guide to your withdrawal strategies but the most important thing is to stay flexible in your planning and have some fallbacks.

As you increase the number of years that you wish the portfolio to survive you will find that from the historical data that the number asymptotically approaches the withdrawal rate for an infinite withdrawal period.

o what's a "safe" withdrawal rate? What does it mean? How calculated? How would I crunch the numbers if I wanted to prepare for 50 years of expenses? Or 60?

I really reccomend that you read the Retire Early Home Page - www.retireearlyhomepage.com and the Trinity Study - http://www.aaii.com/promo/mstar/feature.shtml

Hyperborea

P.S. I'm about four beers in right now (Friday beer bash at my company) so please excuse any errors.

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Author: krissylou Big red star, 1000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 455 of 5068
Subject: Re: Poll: Annual Income/Wealth Date: 8/16/2003 1:55 PM
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Thanks. I've skimmed a little at REHP and thought that 4% was generally a "you could live to be a thousand and your money won't run out" number. I shall steel myself and look around a bit more carefully.

KrissyLou

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Author: SoftSimp Two stars, 250 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 458 of 5068
Subject: Re: Poll: Annual Income/Wealth Date: 8/17/2003 1:14 PM
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Obviously, our net worth will go down if we purchase a house since I assume that the house price increase will only match inflation abd the loan interest rate will be more than inflation.

Somewhere in the above statement you've made a mistaken assumption. And the misunderstanding is a fairly big one, so I thought I'd try to set you straight - it may mean you can "afford" to buy a house sooner than you think.

It looks to me as if you're assuming that a mortgage payment is an "interest only" payment, and that's simply not the case. If it were, then no one who only paid the minimum would ever pay off their mortgage. That's where the terms "30 year mortgage," "15 year mortgage," etc. come into play - even if you only pay the minimum required, your mortgage will be paid off in full within the stated time period.

When you purchase a house, your net worth will go down temporarily, due to the closing costs involved in obtaining a mortgage (generally $2,000 - $4,000). But your downpayment will remain as part of your net worth, and a portion of each payment (the part that goes toward principal) will be retained in your net worth.

Mortgage loans are structured in such a way that, no matter what interest rate you're paying, your equity in the home increases with each payment and the outstanding amount you owe decreases with each payment. Over time, this means that owning a home helps your net worth to grow, not vice versa (as you seem to believe). As long as the value of your home is not decreasing, your net worth will increase each month. The bank or mortgage company will set your payments high enough to ensure that you are paying more than just interest each month, and with each payment, the portion that goes toward principal will increase and the portion that goes toward interest will decrease.

What makes the difference? Where does your error lie? The fact is, house payments are sort of like a "forced savings plan." Yes, you're paying interest on your loan, but because you are also paying principal, you are essentially paying yourself, too. And with today's interest rates, you aren't paying very much interest, historically speaking.

We plan to buy a house when our net worth will be more than the prospective price of the house and will pay it off ASAP, financial gurus notwithstanding.

It sounds like you were comfortable with having negative equity on your car, furniture, computers, etc. Since a house is an *appreciating* asset, it doesn't work the way those things do (because they *decrease* in value from the moment you purchase them) and is truly a much better investment. In fact, I wouldn't call those other items investments, I would call them purchases. I would consider a home to be an investment, because you'll most likely get out of it *more* than you put into it, in the long run.

My hope is that you'll rethink your plan so that you'll get into a house sooner rather than later. Each month that you pay a mortgage instead of a landlord is a month where your net worth will increase faster than it would otherwise.

If you prefer to pay extra principal each month so that the house is paid off faster, it makes sense to do so if that's what you're comfortable with. The "gurus" may say that you lose the tax advantage by doing that, but you gain peace of mind. It's not what I would do (because I did it before and didn't like the result), but you have to manage your finances in the way that makes *you* most comfortable, regardless of what anyone else advises.

Good luck!

SS

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Author: SoftSimp Two stars, 250 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 459 of 5068
Subject: Re: Poll: Annual Income/Wealth Date: 8/17/2003 3:03 PM
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My net worth is just over double my annual income, & I'm 34.

But does it matter that my income is only $20K??

Primm
*guessing the answer is "yes"*


Heh heh, I was just thinking the same thing. We're at about 2.5x income, even while owing on two houses plus a hefty HELOC. But our earnings are pretty pitiful.

I credit where we've gotten so far to my natural LBYM streak (and some very good luck early on). However, I know that in order to get to where we want to be, we need to increase income substantially (i.e. *I* need to increase *my* income because DH's room for growth is very limited).

If/when we increase income, our net worth ratio will go down, but it'll be easier to increase it than it is now, since I don't expect our expenses to rise much. Right now the biggest thing on our plate is putting our oldest through college. Fortunately, we're poor enough (income-wise) to qualify for a lot of financial aid. Unfortunately, most of that is in the form of loans.

Meanwhile, it's important for us to remember to live a little on the way. I recently posted on the CC board about the quandary I was in over buying a swing set for the little ones. We bought it and I'm very glad we did, but that's probably it for a while as far as "extravagances" are concerned!

SS

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Author: Hyperborea Big red star, 1000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 479 of 5068
Subject: Re: Poll: Annual Income/Wealth Date: 8/18/2003 7:51 PM
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Thanks. I've skimmed a little at REHP and thought that 4% was generally a "you could live to be a thousand and your money won't run out" number. I shall steel myself and look around a bit more carefully.

Not quite. The 4% would work for about 30 years with an historical guarantee. That means that for any 30 year historical time period since 1870 you wouldn't have run out of money. You might have ended the 30 years with no money but not during it. However, the odds are very high that you would have ended the 30 years with a large pot of money but not with a 100% success rate.

As you increase the time period that you wish to maintain the withdrawals the withdrawal percent drops but at smaller and smaller increments as you asymptotically approach the infinite time period. Of course, you will likely lose your money over the long time periods for other issues like political instability, economic upset, huge natural disasters, etc. Think about the last 1000 years. What would you have invested in 1000 years ago that would still be good today? How about just 200 years ago? Or even 100? How many of those would have provided for withdrawals? How many of those would have been safe from turmoil? How would you have picked them out with foresight and not hindsight?

Pushing for 100% safety is an impossible task. It can't be done. You will waste more years chained to the oars of your corporate galley ship in trying than it's worth. In my opinon, I think you are better off getting to good levels of historical safety (95-98%) and then putting in some fallbacks (variable withdrawals, don't count social security, have a house that you can sell off/reverse mortgage, etc.).

Hyperborea

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Author: cyberisme Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 483 of 5068
Subject: Re: Poll: Annual Income/Wealth Date: 8/19/2003 8:23 AM
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I'm confused - If I have 1mil in the bank and I make 6% annually on my money and I with draw 4% (of principal before interest added), I'm withdrawing less than my returns, how would I ever run out of money?

C.

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Author: mazske Big red star, 1000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 485 of 5068
Subject: Re: Poll: Annual Income/Wealth Date: 8/19/2003 8:36 AM
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I'm confused - If I have 1mil in the bank and I make 6% annually on my money and I with draw 4% (of principal before interest added), I'm withdrawing less than my returns, how would I ever run out of money?

In this scenerio, I don't think you would run out of money. I think the problem is that there is no guarantee that you can continually make 6% year after year.

The other problem is inflation. Every year, inflation will go up some yet to be determined amount. Let's say an average of 3%. If you do not increase your withdrawals, over time you will lose your purchasing power. If you increase your withdrawals to match inflation, then that means you are only effectively getting a 3% return <6% - 3%> and if you withdraw 4% you are losing money.

The 4% Safe Withdrawal Rate is what was determined to be a safe rate after studying historical records and returns. As you know, the market will flucuate year after year. After looking at all 30 year periods during a more than 100 year time period, 4% was found to be the rate that would have survived any 30 year time period. This included the depression of the 30's and all other time periods.

I hope this helps a little, but if not, I'm sure someone else who can explain better will join in.




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Author: cyberisme Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 489 of 5068
Subject: Re: Poll: Annual Income/Wealth Date: 8/19/2003 12:31 PM
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That helped thanks!

I did forget "inflation" - but, I figured 6% would end up being the average return, sometimes lower, sometimes higher.

C.

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Author: sykesix Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 490 of 5068
Subject: Re: Poll: Annual Income/Wealth Date: 8/19/2003 2:07 PM
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I did forget "inflation" - but, I figured 6% would end up being the average return, sometimes lower, sometimes higher.

I think average return is something to closer to 8%. But the problem is that your returns might be zero or even negative for periods of years at a time, during which you're drawing down the the principal.

This is a similar problem to the "grocery checker dilema." If you run a grocery store, you don't want customers standing in long lines (say more than three or four customers), but you don't want too many checkers standing around with nothing to do either. So you try to estimate the minimum number of checkers required to keep the customers happy. But what happens in practice is that you can never the right amount of checkers. Either the lines get too long or the checkers stand around and pick their noses.

That's the way your nest egg works too. If you play around with financial calculators, you find that over time your nut either goes to zero, or it goes to infinity. Because of market variations, there's no "steady state" where you can withdraw a certain amount and your nut stays the same.

The 4% SWR is an estimate such that your nut likely won't go to zero before you die. But it at that rate it might go to infinity too (given enough time of course).

But as someone mentioned, if for some reason your nut is headed towards zero it's possible to make corrections by downsizing your lifestyle.


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Author: sydsydsyd Big red star, 1000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 491 of 5068
Subject: Re: Poll: Annual Income/Wealth Date: 8/19/2003 2:41 PM
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I'm confused - If I have 1mil in the bank and I make 6% annually on my money and I with draw 4% (of principal before interest added), I'm withdrawing less than my returns, how would I ever run out of money?

What bank is going to pay you 6% real return? (i.e., after taxes and inflation).

A few years ago, long-term CDs were paying around 6% or 6.5%. Depending on your tax bracket, that is probably 3.5%-ish after taxes, which is roughly zero net return considering inflation. And that was during a period of high real returns -- these days, a 5-year CD pays what, 3%?

sydsydsyd

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Author: Eldrehad Big gold star, 5000 posts CAPS All Star Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 492 of 5068
Subject: Re: Poll: Annual Income/Wealth Date: 8/19/2003 3:21 PM
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I'm confused - If I have 1mil in the bank and I make 6% annually on my money and I with draw 4% (of principal before interest added), I'm withdrawing less than my returns, how would I ever run out of money?

In the above example you would, of course, never run out of money.

Two things to consider...

Is that withdrawl rate of 4% before or after inflation? In other words, might there be a time when, due to inflation or other factors, you need to withdraw more than 4%?

Is that return rate fixed and guaranteed? If not, it could change on you in the meantime, and might not necessarily always be greater than that 4% withdrawl rate.

So again, you are right, with 6% returns and a 4% withdrawl rate you'll never run out of money. The real question, in my view at least, is will either of those rates (6% or 4%) ever change?

Regards,

Eldrehad



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