ETA a second thought that I forgot the first time around: The 4-5% withdrawal assumes you’ll have an investment return of 8-10% before taxes, so you are withdrawing partly interest income and partly principal.
[/QUOTE]
If you are withdrawing 5% and earning 10% - aren’t you going to be increasing capital each year?
So lets say you saved $1,000,000 and earn 10% (I think that’s a high return to plan for, but its easy numbers)
You earn $100,000 in year one
You withdraw $50,000
You have $1,050,000 in capital in year two
You make $105,000 in year two, withdraw $52,500 (the $2.5k covers cost of living increases between year one and year two), and now have 1,102,500 in capital.
[QUOTE=Dangerosa]
If you are withdrawing 5% and earning 10% - aren’t you going to be increasing capital each year?
So lets say you saved $1,000,000 and earn 10% (I think that’s a high return to plan for, but its easy numbers)
You earn $100,000 in year one
You withdraw $50,000
You have $1,050,000 in capital in year two
You make $105,000 in year two, withdraw $52,500 (the $2.5k covers cost of living increases between year one and year two), and now have 1,102,500 in capital.
[/QUOTE]
The difference between what’s withdrawn for expenses and what you earn accounts for (a) variable returns in any given year (it won’t be 8% every year – some years it’ll be 16%, some years it’ll be 0%); (b) taxes; and (c) the vagaries of chance.
[QUOTE=Stitchglass Slide]
Okay, I’ve got to ask. What on earth is a Reverse Mortage? Your house somehow earns income for you? I can’t quite picture it.
[/QUOTE]
It’s sort of like an annuity with the house as the payment.
The bank will pay you, say, $1000 each month, and when you die, they get your home.
If you live a long time, it stinks for the bank. if you die next year, they just got your house for $12000.
[QUOTE=kurilla]
The difference between what’s withdrawn for expenses and what you earn accounts for (a) variable returns in any given year (it won’t be 8% every year – some years it’ll be 16%, some years it’ll be 0%); (b) taxes; and (c) the vagaries of chance.
[/QUOTE]
Sure but if you get 8-10% and withdrawl 4-5% you aren’t withdrawing principal, just interest. Unless I missed something in your earilier post.
[QUOTE=Trunk]
It’s sort of like an annuity with the house as the payment.
The bank will pay you, say, $1000 each month, and when you die, they get your home.
If you live a long time, it stinks for the bank. if you die next year, they just got your house for $12000.
[/QUOTE]
Both reverse mortgages I’ve been in the know about allow the surviving family members 6 months to pay the original loan and interest back. Then you get to keep the house. Easy to do if the person dies early on. Not so much when your loved one outlives his or her expectancy.
[QUOTE=Dangerosa]
Sure but if you get 8-10% and withdrawl 4-5% you aren’t withdrawing principal, just interest. Unless I missed something in your earilier post.
[/QUOTE]
I probably wasn’t as clear as I could’ve been, because there are so many variables. If you have a string of low-return years, you could end up dipping into the principal. If you have a string of high-return years, you’re absolutely right.
[QUOTE=Dead Cat]
. This also means your money can be passed on when you die, whereas with most annuities, if you die the day after purchasing them you get diddly squat for your £200k you put in..
[/QUOTE]
Well, if I die, I’ll get squat for any investment. But you can purchase annuities with a survivor benefit or those with a guaranteed pay-out period.
[QUOTE=DrDeth]
Well, if I die, I’ll get squat for any investment. But you can purchase annuities with a survivor benefit or those with a guaranteed pay-out period.
[/QUOTE]
Sure, I’m aware of that. But if you build in these guarantees you’ll nearly always get an even lower annuity rate.
But you can purchase annuities with a survivor benefit or those with a guaranteed pay-out period.