The impact that the following sums of money would have on your life

In My Humble Opinion
141

Close our eyes, stick our fingers in our ears, and ignore the terror. More to the point:
[ul]
[li]Keep working until 65 or so, for starters. That gives us that much longer to build the current retirement savings. [/li][li]Invest a buck or two on the occasional Powerball ticket (hey, 2 bucks of fun imagining what we’d do, it’s worth it for the entertainment value). [/li][li]Keep our high life insurance policies in place as long as we can afford them (if we kicked off right now, it wouldn’t yield 10 million but would yield well over 1M. Best not to tell the kids that :D). [/li][li]Hope the parents don’t need much more assistance than they do now. If one or both required a nursing home, it would have to be a Medicaid home and I get the impression those are hellholes, but we simply Could Not Afford to pay for that care.[/li][/ul]

I’ve occasionally had a session with a retirement planner through one of the big brokerage houses. I always start off with “just tell me when I have to die”. Supposedly, ignoring parental expenses and a big nest egg for the kids, we’re OK - but only assuming we continue to work another 10ish years and the financial markets don’t go totally toes-up.

All the numbers I threw out there were basically WAGs and with very generous assumptions, and ignored taxes, inflation, growth of principal, reduction in outflow due to paid-off mortgage and so on - I wasn’t trying to come up with real-world numbers, just trying to illustrate why for some people, a 10M windfall wouldn’t necessarily be the easy “set for life, retire NOW” choice. That said, I was trying to be somewhat realistic on costs.

Assisted living for the kids: as noted, not needed - they’re physically capable of caring for themselves, just not developmentally able - as in, remembering to pay the bills, remembering to shower (blech). These are evolving skills - both are college age - but a trust fund we would set up should have some provision for a limited bit of oversight. The grandparents, if they needed a nursing home / assisted living: we know from a friend’s experience that a nice facility starts at a minimum of 5-6K a month per person (mother with Alzheimer’s). 2 parents = 12K a month. There’s 150K a year right there. Skilled nursing facilities might be even more costly - my friend’s mother is not bedridden.

Bottom line: If we had 10M in the bank right now, could we retire right away? Almost certainly even with our family constraints. But I’d want to sit down with a planner and figure it out before we did anything like quitting our jobs.

142

No there isn’t one answer. But again those simulations are almost always run for older people, or younger people looking ahead to when they are older and then cutting themselves loose from the work force.

In this case some people answering the question are young now, would (hypothetically) receive the money now, and if it’s ‘a huge amount’ perhaps cut themselves loose from the workforce now, for life. My point is that when you stretch the time period from a young age to end of life, the effect of uncertainties of return and lifespan become so large that it doesn’t matter relatively as much if you assume you spend down the principal or not. Or IOW assuming you don’t spend down the principal is a fairly minor cushion of conservatism.

Or in terms of simulation v simple assumption, there’s a bigger ‘garbage in, garbage out’ problem when you’re trying to estimate expected returns and lifespans for younger people, it’s big enough of a problem for older people. Note, the simulation your guy ran did not consider ‘every possible outcome’. It had some assumption about the expected return, in rough terms the average of all the paths. That’s a very important assumption, much of the controversy about this topic centers on that assumption, and it’s a much harder assumption to make if the person is young, because the time span and accompanying uncertainty is much greater.

If you’re interested in the academic literature on this, Wade Pfau is an author you might check out (not a lot of Wade Pfau’s around to confuse things :slight_smile: ) Some of his papers can estimated that at today’s low expected returns and longevity uncertainty as little as 1.5% might be a safe withdrawal rate for normal retirement age, and assuming they spend down all the money. The point of his papers is that annuities are useful to cover the longevity part of the risk (but annuities aren’t practical for younger people). Some people think his calculations are too pessimistic, others note that his research is partly funded by ins co’s. (who, of course, sell annuities). But OTOH some of the canned simulations advisers use assume historical returns as the norm, the middle path if you will of the many simulation paths. That’s an aggressive assumption given how much lower bond yields and stock earnings yields are now compared to the historical average. And again for say age 25 to death, this assumption problem balloons.

I’d stick with saying that a young person who strikes it rich and is considering not working the rest of their lives, the prudent assumption for income from the windfall would be the ‘triple net’ (after expenses, taxes and inflation) expected return times the principal. A reasonable estimate for that return for a balanced portfolio (significant % bonds) is only 1-2% now, so something like $150k (increasing with inflation) is the ballpark ‘pretty safe’ income for life to assume from $10mil for a younger person. Still much better than a sharp stick in the eye.

143

I don’t believe 1-2% is anything like a reasonable return on a portfolio. Here’s my rate of return on my 401k over the last 13 years, ever since I started working for my current employer;

Last 3 Months 7.75%
1 Year 2.71%
3 Year Annualized 6.8%
5 Year Annualized 7.83%
10 Year Annualized 7.91%
Since Inception 9.25%
Calculation Start Date = 05/13/2003*

A lot of those years are in a zero interest rate environment, but the return over the last three years is almost 7%.

There were some bad years in there for sure, between 1/1/2008 and 1/1/2009 my rate of return was -35.6% and between 1/1/2009 and 1/1/2010 it was -44.3%, but as long as you don’t panic and lock in your losses by selling into a down market 10 million is more than enough to ride out any little bumps in the road. Averaging 4% is dead easy, maybe a little too conservative, but a safe estimate.

144

This brings to mind what I was going to say to the people who said you can only count on 1.5%. Sure, if you want an absolute, guaranteed, fixed income every year, you don’t want to withdraw 4%, because then you’d be withdrawing principal in the down years. But you can certainly average more than 4% over the long haul, and just keep a large cash fund on hand to weather any down years (which can then be replenished during the above-average years.)

Can you say what these estimates that investment earnings will be lower from now on than their historical average is based on? Because if it’s based on the fact that the market’s returns have been below their historical average for the past few years, well, there have been down periods before. The principle “past performance is not a guarantee of future results” goes both ways.

145

If you’re not sure if you can retire on $10M, you’re wrong. You can. Yes even you that’s thinking you have some circumstances that exempt you.

The hypothetical up page where you pay for 24 hour care for 4 people in perpetuity and assume a low rate of return still leaves $30k a year after taxes without touching principal!

146

I don’t know; I couldn’t follow Mama Zappa’s calculations. I found them confusing and vague. But it seemed to me her hypothetical was based entirely on spending down the principal, with no investment income whatsoever.

147

You misread it. It falls $30K short of paying for the youngest generation (the special-needs kids) and the oldest generation (the destitute elderly parents), and provides zero for the middle generation (the lottery winners).

Those are exceptional circumstances, though, and someone in those circumstances will soon be out of them. Senior citizens have an average assisted-living stay of 21 months; if there’s a stay in skilled nursing after that, it tends to last no more than a couple of years. So it’s likely that the lottery winners would only need to keep working for another 5 years or so, after which the financial burden of caring for their parents would end and those funds would become available for their own use.

148

Yep - I wasn’t intentionally being confusing, I tried not to be too vague - but since I wasn’t trying to pull together firm numbers, there’s no way to avoid that to some extent.

And yes, there’d be some investment income - at a very conservative estimate it’d probably be safe to assume 2% a year. We’d do our best to live off the income but some principal spend-down would probably be involved at some point especially in the worst case scenario. If, say, we used 1 million for immediate stuff (pay down mortgage, 2 new cars, house upgrades / repairs, whatever), that leaves us with 9 million. 2% of that is 180,000 a year. If we’re living on 150,000 a year, and spending money to support the parents and/or kids, there’s a fair chance we exceed the 180,000 especially if something catastrophic happens. Then the next year, we have less than 9 million, so the income is lower, and so on.

I was not trying to say “we can’t retire if we have 10 million bucks”. I was trying to illustrate that you can’t simply look at that big pile of moolah and instantly know you are Set For Life. If you don’t go through a thinking exercise like that, including the worst case scenario, you run the very real risk of being in trouble in 10 years.

149

Don’t your parents have any funds of their own? Or was their retirement plan “hope our kids succeed financially?”

150

No it’s the opposite, and this also addresses Bill Door’s comment. Not in the last few years but last few decades returns have been high. That doesn’t automatically mean they then have to be low, if the high returns were fueled by rapid growth in earnings/dividends. But a lot of good returns in fact came from stocks getting more expensive relative to earnings, and likewise a lot of bond return (which has been spectacular the last few decades) was from yields dropping. But those yields, stock earnings yields and bond yields can only drop so far. A middle of road expectation doesn’t assume a further tailwind from rising valuations. A reasonable argument could be made to expect a valuation headwind, but I’m not considering that.

Also Bill Door you are taking the gross return perhaps minus expenses. Note how I said, more than once, I’m considering the return after expenses, taxes and inflation. If you get a $10mil windfall you can’t put it in a 401k and have it grow tax deferred. You’ve got to pay taxes on interest (or accept much lower tax exempt interest), dividends and capital gains if you realize them. And there’s inflation, the $150k initial withdrawal needs to grow at inflation.

A rule of thumb with a theoretical basis is that the real expected return of stocks (ie accounting for inflation but not expenses or taxes) is 1/CAPE, the cyclically adjusted price earnings ratio, ie you take for example the last 10 yrs’ earnings to smooth out earning cycles. The CAPE is ballpark 25 now for US stocks, 4% real expected return.

A classic ‘balanced’ portfolio is 60/40 stock/bond, and hard IMO to imagine being more aggressive than that if you’re taking a windfall at a young age and cutting yourself loose from the work force for life. The US govt issues inflation adjusted bonds, the 30yr ones yield around inflation plus 0.8%, the nominal 30 yr bond pays 2.55%, on both you pay tax. So call the long term inflation expectation 2.55-.8=1.75%, though that’s probably too low, due to quirks in that market it probably understates it; most people think inflation will be at least 2% in the long run, it was 3% over the last 100 yrs.

With income off $10mil you’re talking fairly high tax rate, call it 25% overall (though this could vary widely depending on situation, and differ between stocks and bonds, I’m simplifying, eyes are probably glazing over as it is).

So roughly stock return is 4%+1.75%=5.75% nominal. Say .25% expenses. Then 25% tax on 5.25%= 3.93% after tax, subtract back the inflation= 2.2% ‘triple net’.

Bond return is 2.55%, no expenses, 25% tax>1.9%, ‘triple net’= .16%

60/40 mix would be .62.2+.4.16=1.38%, expected return of a) balanced portfolio not just stocks, b) subtracting expenses, c) subtracting taxes, d) subtracting inflation.

You could play with the various assumptions which is why I said 1-2%.

Expecting the returns of the last few decades is aggressive for stocks, it’s outright wishful thinking for bonds.

151

That seems a little harsh. For many people who grew up in the 40’s and 50’s the expectation that they would work forty years for a single corporation, retire at 65, and live out their golden years with a pension and social security was normal. There was some significant culture shock when this went away, and the early 401k and IRA savings limits didn’t help. I’m assuming Mama Zappa’s parents didn’t trade their 401k for a handful of magic beans.

152

My since inception on my biggest 401k is over 12% - I’ve had it since 1999. Most of it is an S&P index fund with low fees. My personal investment account is at 10% annualized - since 2011. That’s self directed - again, most of it is a S&P index fund - it holds more bonds since its the money I’d go to first if I needed it.

I’m not sure how anyone could get 1-2% on a portfolio when you can make that investing in utilities just off dividends without breaking a sweat. It isn’t like people are suddenly going to get rid of their electricity or gas (or cell phones, or stop using gasoline). And if they do, I have bigger problems that my retirement.

153

They have Social Security and nothing else (long tale there). They’re fortunate that 2 of their 3 adult kids are in a position to help, otherwise they literally would not have enough to live on.

Ignoring their specific situation: a LOT of people go into retirement in no better shape than that, and the safety net is often relying on the adult kids to help out.

Regardless: I didn’t mean for the thread to turn into “MZ whining she wouldn’t be rich enough” - my posting was just an attempt to show that even with a mind-boggling amount of cash, you have to put a lot of thought into its impact in the short and long terms.

154

Well, you aren’t going to pay much tax on the first million invested, your withdrawl will be small enough that you’ll be in a low bracket. Even the second million at a 4% withdrawal rate isn’t going to be tax heavy. I figure 50% taxes, because its easy, but the truth is, most people aren’t going to end up anywhere near that.

155

I don’t understand where you mention 50%, is that a typo? I picked 25% as a reasonable estimate of the taxes on investment returns on $10mil. You don’t just have to pay tax on what you withdraw, but the income you reinvest to keep up with inflation. Like I said one could quibble with the assumptions at the margin, but you’re not going to get far above 2%
a) on a balanced portfolio, a person quitting work at a young age because they got a $10mil windfall can’t prudently be 100% in stocks, any kind of stocks.
b) after subtracting expenses.
c) after subtracting tax, it will have a noticeable impact.
d) after subtracting inflation.

For example you said above you can make more than that ‘not breaking a sweat’ with stock dividends but in fact even 100% ‘safe dividend payer’ stocks is too risky if you’re totally depending on your investments, not trying to grow investments while also getting a paycheck (or getting social security/pension covering a lot of your expenses). Nor does that statement account for taxes on the dividends, and you still need growth after subtracting dividends to overcome inflation.

Actually not breaking a sweat would be investing in long term govt bonds. That’s as close to actually no risk as you can get. And it pays you 0.8% after inflation, before taxes.

Individual investors tend to overestimate expected returns, also often selectively over estimate what they’ve earned in the past. Advisers don’t make a big point of disabusing them of it, because a lot of people if told realistically about expected returns now will say ‘oh why even bother?’ But they really should bother. However if a person is getting a windfall at a young age and saying ‘this is enough to never work again’ they have to be more realistic, which is what I’m laying out.

To resummarize, a good estimate of expected return of stocks is 1/CAPE. There’s no reason to think higher dividend paying stocks get a much higher total return than lower dividend rate stocks, or else nobody would buy low dividend payers. :slight_smile: 1/25=4% is a reasonable estimate of the expected real return of stocks from here, it was higher in the past, but that PE multiple was rising, and it can’t keep doing so forever. Then if you have to pay tax, and put a significant % of the money in bonds for safety at 0%-ish real returns in today’s market, 1-2% real is not especially pessimistic. I think you guys with due respect are tending to think of this in different contexts than the one here (eg. 401k where the tax on returns is deferred, or person who is investing 100% in stocks to supplement a pension/SS, or the low tax rates people in low brackets pay, etc).

For a $10mil windfall at a young age, a prudent assumption to make the money last indefinitely, and a young person’s lifespan is basically ‘indefinite,’ would be 1-2% a year, with the withdrawal amount growing with inflation. If the person is already 60, then it could be more. But 4% even for older people is a historical result that worked in a period where realized returns were higher than expected returns are now.

156

PS, maybe to go over the concept of expected return. It means something like the center of gravity of a plot of all future possible returns. We have no idea where on the plot the actual realized return could end up. But we can estimate that center of gravity, by formula’s like the one I gave, and others tend to broadly agree based on the high valuations of stocks now. And bond yields are just much lower they were, that’s a fact not subject to debate.

When I say ‘can’t get more 2%’ IOW I mean can’t realistically estimate the after expense, after tax, after inflation expected return of a balanced portfolio as more than that. Could the actual realized return (geometrically) average more than that in the long term future? Of course, it could be much more, but it’s about as likely to be less. That’s where in fact my 1-2% ‘triple net’ return assumption isn’t that conservative. It’s taking the midpoint as the planning assumption. A conservative person would want to plan for less than the midpoint. OTOH there’s some conservatism in assuming no spend down of the inflation adjusted principal (too much conservatism if the person is 65 already, but not very much if the person is 25, as I illustrated in a post above).

157

$1,000–buy a nice piece of jewelry and donate half
$10,000–have a 2 week European vacation and donate half
$100,000–buy a horse and the extra money would pay for whatever horse needs for the rest of his life
$1M–AMF, I’m retiring
$10M–I can’t even imagine

158

Nothing on any of these. They are nice sums, but not enough to splurge and change my life over. I’ll do nothing different for the first 2, and maybe a new TV with $100k and/or computer.

I’d start learning how to invest. New car, fix up the house, buy some luxury items around the house

Quit job and retire. Live like I do now and stretch out the money until I die

159

$1,000 – breathe a sigh of relief that saving up for my car tax payment won’t be looming over my head anymore. Go have a milkshake.

$10,000 – Buy some new clothes (nothing crazy, just replacing worn and old items). Get a nice pair of work shoes. Splurge a little on some stamps and stationery, and a nice $40 afghan knitting loom instead of the cheap plastic one I have. Put the rest in my savings account.

$100,000 – Pay off my student loan debt. Celebrate paying off my student loan debt by taking a few domestic trips to visit friends. Get my hair dyed rainbow colors and get the tattoos I’ve been wanting. Put the rest in savings and probably have enough to move out and get my own apartment.

$1 million – All of the above, but buy a house instead of get an apartment. Take a trip to Europe. Put the rest in savings for whatever I need next.

$10 million – All of the above, and get a financial advisor to properly invest my money so I can have that cushion of “This job is treating me like shit and making me cry every day? I’m not trapped and can leave and then figure out my next move.” Give as much as is prudent to charity out of the interest that the money earns.

160

On the issue of pensions, correct me if I’m wrong, but I thought the phenomenon of pensions going away manifested as companies’ ceasing to offer pensions to new hires, not failing to pay out the pensions to those to whom they’d been promised. Were there really large swaths of people who spent 40 years working for a single corporation, having something about a pension in writing the whole time, only to retire and have the company not honor that?