About 10m. Invest that into 'safe' assets that only produce 3% a year, but do so with low risk and low overheard.
300k a year is about the right number to do everything you want to do if you are a family. Buy whatever cars you want (within reason) - travel when you want, eat what you want, live where you want.
Thats the definition of FU money.
You can do it for less, but its not FU money if you have to worry about possibly losing your fortune.
Kids/family increases the number obviously, if they go to private school/college- Add 50k/yr per kid to that figure above.
Your 3%/yr is assuming you only invest in the safest of assets, like government bonds. You can get that up to 5-6% tax adjusted yield by having a bond portfolio (corporates, munis, junk, etc.) without much increase in default risk due to diversification. This would essentially cut your FU money in half, and going from 10M to 5M is a pretty huge jump.
If you have no plans of ever liquidating, you can use leverage (and increase your exposure to interest rates, which is irrelevant if you will not liquidate) but get up to a 8-9% tax adjusted yield right now, so then your FU money drops to about 2.5-3M.
You can't increase your safe withdrawal rate by using leverage. Even if you don't ever plan to liquidate completely, a sufficient reduction in assets combined with your regular cost of living withdrawals could bring you to a point where the withdrawals are no longer sustainable.
Look at it this way: even if you could borrow money at the risk-free rate (which you can't), anything you're earning on those leveraged funds is a risk premium (which by definition can't be diversified away). So you would certainly increase your odds of making more money, but you also increase the odds of a larger downturn, which again, could reach unsustainable levels.
I don't believe there exists a workaround to achieve a long-term (ie near indefinite) safe withdrawal rate of more than 3% or so in real dollars.
I think it depends on what you deem "safe." UST's are considered "risk free" but we all know that's not true, there is some risk involved. So if you consider the liklihood of an inverted yield curve to be low in your lifetime (or at least, only for a short period) then buying a leveraged bond fund that leverages via the spread does increase your 'safe' withdrawl rate, afaict.
Bottom line is once you buy those bond funds you should only be spending your coupons/distributions. There's a chance your distributions might decrease if for example the yield curve flattens or interest rates decline and the fund has to roll over into lower yielding paper, but for the purposes of discussing FU money you should probably be buffered to withstand a moderate decrease in monthly interest payments anyway. Ie, in practice you're not going to spend your entire monthly distribution, so any cash leftover can be rolled back into your investments and likely moderate any of the risk incurred by not going with a full 'risk-free' portfolio.
Fair enough. If we're talking about discretionary luxury spending, then you can take on a bit more risk to get to your desired income with a lower FU number, as long as you're willing to curtail spending if things go bad.
That said, it's a lot easier to increase spending than to decrease it, so I'd want that risk to be small, or to have a desirable fallback for added income.
10 million dollars after taxes so I'm guessing the actual amount is higher, possibly around 15 million dollars. on top of that 300k a year will be subjected to taxation, you will end up with 188k a year, not quite the 300k. you would need around 450k a year and after taxes, you will end up with 300k. to be able to produce that much you'd need about 15 million dollars after taxes. so in reality you'd need about 20 million dollars.
20 million dollars, would generate 300k after taxes if invested in bonds. from the 20 million, you'd end up with 15 or 14 million dollars after paying taxes.
so 20 million dollars is what one would need to target for.
however, note that you'd need to live in a large mansion that's already paid for and maintenance and expenses, property taxations being paid, I'd put away 30~50k for upkeep. You will probably have two kids on average so it will be another 100,000 to support them.
21 million, seems to be the true 'FU' money. After that leave off 400,000 after tax a year in money.
21 million is a staggering figure for someone starting out. I don't even know if I will get to one million.
Living in some area you have to live due to financial constraints and not exploring the world at your own schedule is the opposite of definition of FU money.
EMH says this will get priced in, and companies who pay dividends will just switch to stock buybacks or other more efficient methods of capital distribution.
I can see that. I've been hoping more for the FU money that would bring jump #1 (which is more how I defined it in my other comment), since jump #1/FU money #1 would be the only reasonable way for me to get to jump #2/FU money #2 with the cars, travel, and no work.
Comments
About 10m. Invest that into 'safe' assets that only produce 3% a year, but do so with low risk and low overheard.
300k a year is about the right number to do everything you want to do if you are a family. Buy whatever cars you want (within reason) - travel when you want, eat what you want, live where you want. Thats the definition of FU money.
You can do it for less, but its not FU money if you have to worry about possibly losing your fortune.
Kids/family increases the number obviously, if they go to private school/college- Add 50k/yr per kid to that figure above.
Your 3%/yr is assuming you only invest in the safest of assets, like government bonds. You can get that up to 5-6% tax adjusted yield by having a bond portfolio (corporates, munis, junk, etc.) without much increase in default risk due to diversification. This would essentially cut your FU money in half, and going from 10M to 5M is a pretty huge jump.
If you have no plans of ever liquidating, you can use leverage (and increase your exposure to interest rates, which is irrelevant if you will not liquidate) but get up to a 8-9% tax adjusted yield right now, so then your FU money drops to about 2.5-3M.
You can't increase your safe withdrawal rate by using leverage. Even if you don't ever plan to liquidate completely, a sufficient reduction in assets combined with your regular cost of living withdrawals could bring you to a point where the withdrawals are no longer sustainable.
Look at it this way: even if you could borrow money at the risk-free rate (which you can't), anything you're earning on those leveraged funds is a risk premium (which by definition can't be diversified away). So you would certainly increase your odds of making more money, but you also increase the odds of a larger downturn, which again, could reach unsustainable levels.
I don't believe there exists a workaround to achieve a long-term (ie near indefinite) safe withdrawal rate of more than 3% or so in real dollars.
I think it depends on what you deem "safe." UST's are considered "risk free" but we all know that's not true, there is some risk involved. So if you consider the liklihood of an inverted yield curve to be low in your lifetime (or at least, only for a short period) then buying a leveraged bond fund that leverages via the spread does increase your 'safe' withdrawl rate, afaict.
Bottom line is once you buy those bond funds you should only be spending your coupons/distributions. There's a chance your distributions might decrease if for example the yield curve flattens or interest rates decline and the fund has to roll over into lower yielding paper, but for the purposes of discussing FU money you should probably be buffered to withstand a moderate decrease in monthly interest payments anyway. Ie, in practice you're not going to spend your entire monthly distribution, so any cash leftover can be rolled back into your investments and likely moderate any of the risk incurred by not going with a full 'risk-free' portfolio.
Fair enough. If we're talking about discretionary luxury spending, then you can take on a bit more risk to get to your desired income with a lower FU number, as long as you're willing to curtail spending if things go bad.
That said, it's a lot easier to increase spending than to decrease it, so I'd want that risk to be small, or to have a desirable fallback for added income.
10 million dollars after taxes so I'm guessing the actual amount is higher, possibly around 15 million dollars. on top of that 300k a year will be subjected to taxation, you will end up with 188k a year, not quite the 300k. you would need around 450k a year and after taxes, you will end up with 300k. to be able to produce that much you'd need about 15 million dollars after taxes. so in reality you'd need about 20 million dollars.
20 million dollars, would generate 300k after taxes if invested in bonds. from the 20 million, you'd end up with 15 or 14 million dollars after paying taxes.
so 20 million dollars is what one would need to target for.
however, note that you'd need to live in a large mansion that's already paid for and maintenance and expenses, property taxations being paid, I'd put away 30~50k for upkeep. You will probably have two kids on average so it will be another 100,000 to support them.
21 million, seems to be the true 'FU' money. After that leave off 400,000 after tax a year in money.
21 million is a staggering figure for someone starting out. I don't even know if I will get to one million.
It's also pretty outrageous. A person can live very comfortably on say 50k a year in many areas of the country (without kids).
Living in some area you have to live due to financial constraints and not exploring the world at your own schedule is the opposite of definition of FU money.
At that level the recommended allocation would bias towards munis and dividend stocks, so taxation burden will be lighter.
Today. If you're planning long-term, it's reasonable to assume a non-zero chance of dividends being taxed more inline with normal income.
EMH says this will get priced in, and companies who pay dividends will just switch to stock buybacks or other more efficient methods of capital distribution.
I can see that. I've been hoping more for the FU money that would bring jump #1 (which is more how I defined it in my other comment), since jump #1/FU money #1 would be the only reasonable way for me to get to jump #2/FU money #2 with the cars, travel, and no work.
Except you will eat up all your principal in about 30 years. You're going to need yo earn more than 3% or spend less than 300k yr.
Its fairly easy to live on $<300k anywhere in the world.
That's about how I would define FU money, but with taxes and a margin of safety I'd put the actual number at 20M.
Have you heard of inflation?