A hypothetical for you finance/math wizards

[Asimovian]

My wife and I were having one of those daydream/hypothetical discussions about winning big money in Vegas (we go next weekend, so it could happen, right?), and we got on the subject of generating enough interest to live off of.

I figured that to live beyond comfortably, travel and keep up maintenance on the house we'd build (do you have any idea what it costs to pay a full-time mechanic to handle the upkeep on an in-home bowling alley?), we'd want to have $150,000 per year. Granted, we'd probably need less than that, but this is hypothetical anyway.

Now, let's say that the taxes on our winnings have been taken out, we've spent all the up-front money we need to spend on building the home we want, any cars we're planning to buy, etc. And after all that, we've got $20 million left. We want to have some money to do some aggressive investing and what not, but outside of that, we want to put away enough money in the type of investment least affected (over time) by market conditions possible to guarantee that we can collect $150k every year to live off of. As far as we could determine off the top of our heads, the right type of investment in this case would be a CD since we're guaranteed to keep the same rate of interest that existed on the day we bought the CD (is this correct?). Again, we realize that this isn't the necessarily the wisest manner of investing, but we're most interested in guaranteeing ourselves that dollar amount in return.

I'm terrible at calculating anything beyond simple interest, so my question to you is this: if we took today's interest rates and bought a one-year CD, how much would we need to put into the CD in order to earn $150,000 on it?

If you enjoy the thought experiment and want to expound about better ways to invest and the assocated figures with doing so, I'm more than happy to read about that as well. But first and foremost, I'm looking for a dollar-amount answer to my question above.

Many thanks!

[IAmNotSpartacus]

$20 million at 3% grosses you $600k per year, if we use the presidential candidates paying 20% effective tax rate on their income as a guide then you'd be looking at having $480k/year to play ball with.

[Asimovian]

Originally Posted by IAmNotSpartacus

$20 million at 3% grosses you $600k per year, if we use the presidential candidates paying 20% effective tax rate on their income as a guide then you'd be looking at having $480k/year to play ball with.

Thanks! I probably should have phrased my question more carefully, though. What I meant to ask was, what is the minimum I'd need to put away in order to secure the $150k in interest? I don't want to invest the entire $20 million.

[Fuzzy Dunlop]

Originally Posted by Asimovian

Thanks! I probably should have phrased my question more carefully, though. What I meant to ask was, what is the minimum I'd need to put away in order to secure the $150k in interest? I don't want to invest the entire $20 million.

Well if I can avoid critiquing your assumptions or making things more complicated, the answer to the question as you posed it is pretty simple. To earn $150,000 in perpetuity requires $150,000/r dollars where r is the rate you plan to earn per period (year). If CDs are paying 3%, you need to buy $5 mm worth of CDs.

If the algebra isn`t obvious to you, it's just simple interest: i = p*r. How much principal do you need to earn i? p = i/r.

[Exapno Mapcase]

Originally Posted by IAmNotSpartacus

$20 million at 3% grosses you $600k per year, if we use the presidential candidates paying 20% effective tax rate on their income as a guide then you'd be looking at having $480k/year to play ball with.

It's much higher than that.

this page shows them paying 25-34% over the past two years.

The calculation for the OP is pretty straightforward.

1% of $1 million is $10,000.

To get to $150,000 you can multiply by 15 and see that it requires a 15% return. Or you can multiply by 15 and see that you need to start with $15 million.

Or you can do any two numbers that when multiplied equal 15. As Fuzzy Dunlop wrote, 3% of $5 million is $150,000. (3x5=15.) So is 5% of $3 million, and 2% of $7.5 million and so on and so on.

Don't try to make things complicated for yourself. Start with a basic, easy calculation and work your way up from there.