Money!

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Agree completely. One million dollars doesn't go as far as it used to. Even if you are a wise investor, there's no way you could support a family for an indefinite period of time on 1 million dollars. Think of it this way. Even if you are very frugal, and manage to spend only $50,000 per year on everything you need for yourself, your spouse, and your children, that million dollars will be used up in 20 years. Now, if you want to live pretty well and spend, say $100,000 per year, you'll use up the money in 10 years. I've actually thought about this, and I have estimated that I would need between 5 and 6 million dollars at this point in my life to be able to retire and live comfortably along with my wife and any children we may eventually have. For one million dollars - I'd still have to go to work every day.

 

Yay!

Same here. I have calculated that $7 million would be my lottery winning cutoff point for stopping work completely and living (very) comfortably off the conservatively invested proceeds.

 

You are assuming the money is being kept in a matress. You can get a CD at more than 5% interest that will give you $50,000 per year. The million would never be depleted.

Even at a spending level of $100,000 per year you should be able to stretch that out for 15-20 years depending on how well you invest the money.

 

My aim would be to live purely off the investment returns, plus save some to keep building the capital in order to offset the effects of inflation. Consider that you might live for another 60 years. $100,000 a year will be pretty useless in 60 years time, so your investments had better be earning you $500,000 or more by then. And that can only happen if you add to your capital each year.

If I won $7m and invested it at your theoretical 5% per year, I would probably reinvest $150k pa and spend $200k. I could live pretty sweetly on that, and never have to worry about running out.

 

CDs are up to 5%? What duration? 12-month? 18-month? 5% seems awfully high for a 12-month rate, but if so, it's definitely a pretty good investment option at this point. 5% beats inflation over all but the most heavy-inflation years. It doesn't match the average stock return of 9% annually, but it's guaranteed. Randomly picking stocks will give you an average return of almost double that, but you may make less than 5%, or you may lose all that you invest.

end rant.

Anyway, even factoring in interest payments, I agree with what HB says about then factoring in inflation. The $50,000 per year you are spending today will likely only have the buying power of $25,000 per year in 20 years time.

Believe me, I have done the math on this. I assume I spend $100,000 per year every year, adjusted for inflation with an annual rate of 3.5%, and that means I need to start with an initial nest egg of at least 5 million dollars. Other assumptions made in this calculation were that I live to be 90 years old (I probably won't, but it's better to over-estimate than under-estimate this figure) that I have two kids and that they are both going to want to go to college (and 20 years from now, a 4-year college education can easily cost $200,000 per child). Also pursuant to the kids, I'd have to buy a signifcantly larger home than I currently live in, and that would easily cost me $500,000. If I wanted to live in one of the nicer areas around Baltimore, it would be more like $750,000.

The thing is, every year I'm assuming I'm spending more. Year 1 I spend $100,000, Year 2 $103,500, etc. By the time you start looking 50 years from now (I'm currently 32) that gets into some pretty hefty bucks. Besides HB's estimation is even higher than mine - he went with $7 million dollars. However, I am unsure what the coversion rate is between U.S. and New Zealand dollars, so it may not be much of a difference after all.

 

Aldeth, NZ$7m is about US$5m, depending on the day, so we're about spot on in our calculations. We rule!

 

Whoa, I'm with Aldeth - CD's are earning that much? My 'dream windfall' calculations assumed a 3% ROI (fees, charges, and all the other sundry ways the financial community seek to suck me dry)

That means I could win/steal/earn a smaller amount than I originally estimated to make the initial purchase of assets and then pay off living expenses for a 'modest but comfortable lifestyle' from the remainer's investment interest...


But ANYWAY, back to the original question:

I see money as literally, a representation of effort - I do a task for someone; they gauge the value of my work, and reimburse me this commodity.

Hypothetical Illustration: a chicken farmer operates his business and determines that a dozen of his eggs is worth a fair trade to his neighbor the dairy farmer for a quart of milk. To make these exchanges easier, they invent a method of currency - each is valued at 'one dollar', for argument's sake.

Very elementary demonstration, but it hits back to what money IS - representation of the value or worth of someone's time and effort.

This can lead to some interesting comparisons of various consumer products' 'prices':

"Huh - sony REALLY thinks this thing is worth 74 hours of my work to own? I think I'll wait until they start lowering their bids to me."

or

"Yeah, it took me three day's work, just to pay off the unexpected layover - what with food, hotel and taxi fees."

Now some people may make the comment that people can get 'greedy' and seek to hoard large amounts of money. I look upon this as an exaggerated response to an underlying survival instinct - in a contemporary urban environment, one needs money to acquire the goods and services to survive (food, shelter, health care, etc.).

Maybe it's a over-compensation from a time when the person was in a formative state and had very little money, and perhaps had to undergo serious privation or embarassment due to it?

ROFL - just as I was typing this part, Weird Al Yankovic's song "This is the life" came on...my jukebox is reading my mind and playing contextually-relevant music! sorry for the tangent)

Or perhaps they feel a need to 'compete' with other hoarders and 'have the most'?

Or it could just be that they despise the financial infrastructure that today's world is 'infected with' and seeks merely to take as much currency 'out of circulation'?



Now I'm willing to say that possessing money imbues the bearer with a certain amount of power, much like pushing a rock to the top of a hill imbues it with potential energy. The bearer could spend their money to aid others, or to acquire personal possessions, or even to hire a person to deny a third party of their possessions, freedoms, or even life.

Now, if a person has what most decide is a 'vast' amount of money, this possession 'buys' a fair amount of courtesy, respect and even assistance (in the hopes of that philanthropic actions will be repaid). As such, that 'stockpile' of money in and of itself brings power to the possessor - the ability to control one's environment, and even the actions of others.

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Then on the other side of the profound/absurd coin, we have money as the catalyst that helps a ridiculous (and hopefully amusing) theorm:

assume the following statements to be true - 'a marriage requires time and money', 'time IS money', and 'money is the root of all evil.'


'a marriage requires time and money'
or
Marriage = time x Money

and 'time IS money' (time=money) so

Marriage = money x money
or
Marriage = money²

and since 'money is the root of all evil' (money=√evil) thus

Marriage = (√evil)²
or
Marriage = evil

So I put it that without money, we cannot come to the conlusion that marriage is evil!


But that's just MY thoughts; I have it on good authority that I'm loopy as a loon...grains of salt will be mailed out for consumption at the time of dwelling upon my ramblings.

 

Due to UK house prices, $1million US, coupled with my current property value, would just about get me to my intended top of the housing ladder.

It's difficult to predict inflation and therefore how much you need to be earning in, say 50 years time. However, (and these are extremely rough figures)looking at the past 25 years, the average salary has gone up by about 10 times (From about £2000 to £20,000. Using this as a guide, would mean in 50 nyears time, the average salary would be around the £2m mark. Hardly bears thinking about does it!

 

I believe that no man, no man in the entire world, need more money than what he need to live and then a wee bit to actually be able to do something. Millionaires disgust me.

 

@ Register - Actually you pretty much need to be a millionaire by the time you retire. If you take a million dollars, assume an aftertax rate of return of 3% on savings, and assume that you will live for forty years, that would give you only $42,000/year after which you are broke. Actually the 3% after tax rate is probably a bit too high given that you would most likely be invested in GICs or other low risk instrumnets at retirement age so you would probably end up with slightly less than that.

 

@JSBB – it’s actually even worse than that, because your example doesn’t take inflation into account. If you use a 2.5% annual inflation factor, that $42,000 you get in year 40 is only worth about $15,000 in today’s dollars.

If you want to factor in inflation, a simple rule of thumb is to assume that the rate of inflation equals your after-tax rate of return (probably a reasonable assumption if you’re investing conservatively as JSBB suggests). In that situation, you are getting no “real” return on your money, because the interest you earn is just allowing you to keep up with inflation. So in JSBB’s example, you would just take the $1,000,000, divide by the 40 years that you want it to last, and you get $25,000. You would be able to spend $25,000 in the first year, $25,000 plus inflation in the second year, the Year 2 amount plus inflation in the third year, etc. Another way to think about it is to divide the $1,000,000 into 40 separate investments of $25,000, and spend one investment (plus the interest it’s earned since day 1) each year.

 

Yeah, with inflation your $42,000 annuity gets pretty worthless by the time you reach your 90s. Amusingly, the vast majority of pensions work on a non-inflation adjusted % of your salary before retirement basis so anyone out there who is relying on the old company pension to take care of them had better hope they don't live too long.

I checked out current GIC prices and the current GIC rate is only 3% to begin with. After tax that is around 1.8% to 2.2% depending on tax bracket. Inflation is actually just under 2% right now meaning that you may have a negative real after tax return on GICs. If we round it to a zero real rate of return that actually does reduce your 40 year payout to Splunge's $25,000/year in present $ terms. That might cover your basic living costs but when those high medical costs for drugs etc. start kicking in you can forget about that. The alternative is to go for more risky investments to get the rate of return up but if you have a set back at that stage of your life then you will be in big trouble - which is why investment advisors normally start you with high risk stuff when you are young and move you more towards GICs and other low risk instruments when you approach retirement.

That being said I would say that you would need at least $1.5 million to comfortably retire. I would set the target minimum at $2 million myself, but I suppose that I am used to a relatively high standard of living.

Edit: I am actually a bit surprised at how poor the GIC payouts are. I would have expected that the rate had gone up to the 4% range given the way the mortgage rates have gone up over the last couple years. The mortgage rates are starting to creep down again so the GIC rates will probably end up going down too - given that inflation is unlikely to go down by much we are probably looking at real after tax rates heading towards -1% on low risk investments. Not good.

[ November 24, 2006, 19:25: Message edited by: JSBB ]