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$50k annual income from how much (and allocation) in investments?
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Brodiaga Offline
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RE: $50k annual income from how much (and allocation) in investments?
This is not financial or tax advice.

You can use 80% VTSAX, 20% VBTLX portfolio (Alternatively, if you want to diversify internationally you can use total world stock index VTWSX instead of VTSAX or use separate index funds for US and Intl).

The 4% rule: 50K/4% = 1.25M

According to this rule, this is what you need to generate 50K per year adjusted for inflation going forward for at least 30 years. Generally, if you are good for 30 years it's likely that you can generate this income for life, though nothing is 100% guaranteed when it comes to predictions.

Some people argue that the 4% rule is not conservative enough. Another, more conservative rule of thumb is based on the PE10 (CAPE) ratio which is a pretty good predictor of future stock returns for the medium term (there is no perfect predictor obviously, but at least PE10 has a pretty good negative correlation with returns for the next few years).

PE10 for the S&P500 (which is 80% of VTSAX) is currently 33.8
Based on this ratio, a rule of thumb is to use 1/PE10 instead of 4%.

50K/2.95% (or 50K X 33.8) = 1,69M
This is what you need according to this more conservative rule. Notice that this is very close to what Australia Sucks wrote above.

50K includes all the taxes you pay per year which shoudln't be much on capital gains (could even be 0 for a two person household at this level).

What if the market crashes? Don't sell low, just keep your stocks and sell bonds in the meantime. VBTLX has been relatively stable, so let's assume it remains stable in case of a major crash. What you do is keep selling bonds while stock prices are down. At 20% bonds, you have 5 years worth of expenses using the 4% rule (25 year's worth X 20%). More using 1/PE10 rule. Just keep selling bonds, rebalancing back to 20% bonds and hoping that the market recovers by the time you do so. If it doesn't, you can keep selling remaining bonds, but obviously there is no guarantee that stocks will recover within a certain time period. If you can't stomach 80/20% stocks/bonds allocation, use 70/30% or something more conservative, but the more conservative you are the more you'll miss out on potential gains.

This post is US-specific and the portfolio has a US home country bias which makes sense if you live in the US and spend US dollars in retirement. If you plan to live overseas when retired, you need to keep currency exchange risks in mind (e.g. the local currency appreciates and you need more dollars to keep the same lifestyle) In this case, perhaps you should consider diversifying more internationally.
(This post was last modified: 02-02-2018 01:09 PM by Brodiaga.)
02-02-2018 12:28 PM
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RE: $50k annual income from how much (and allocation) in investments? - Brodiaga - 02-02-2018 12:28 PM

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