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$50k annual income from how much (and allocation) in investments?
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Australia Sucks Offline

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RE: $50k annual income from how much (and allocation) in investments?
The 3% rule mean your capital will last a lifetime under most scenarios is what the retirement calculators will generally tell you.

Also its the level (partly based on empirical observations and partly based on experience) in which you can safely live purely from yield without having to sell down any of your investments. If you are using a 4% or 5% rule and investing in developed economies its likely in some years you may have to cash out some of your gains but with the 3% rule, generally speaking you are living purely from income.

In Australia where our stock market is biased towards income/yield (as opposed to the U.S.A. market when companies wherecompanies are reinvesting more of the earnings or buying back shares) you can invest in a self selected portfolio of stocks with reasonable growth prospects or even an index fund and get a dividend yield of 3-4% (with some tax imputation credits attached). Also if you buy houses in important cities in Australia (excluding Sydney and Melbourne which are overpriced) in middle class suburbs you can generally get 2-3% net yield. If you add some stocks to your investment allocation so you then have a mix of property and stocks then your overall yield will be north of 3%.

In the U.S. stock market currently most of the Blue Chip stocks with predictable earnings (and a good outlook) and a long track record of consistently increasing dividends are trading on dividend yields of between 1 and 3.5% (with most towards the lower end of that scale) therefore in the U.S. stock market if you want a relatively safe 3% yield where the income will grow nicely over time you probably need to throw some small to mid cap stocks into your portfolio mix. For example the following article lists some examples of dividend payers in the S&P 500 which are examples of the types of stock I just described. Out of the 14 stocks in the article only 2 pay a dividend yield of above 3%. So like I said you will probably need to look outside of the S&P 500 (at least for part of your portfolio) if you want a safe and increasing yield above 3%.

Ideally you want to be in a position where you have reliable income that is enough to cover your expenses so you don't have to sell down any of your capital. Hence the 3% rule. The 3% rule is just a rule of thumb, a highly shrewd and energetic stock picker can find growth investments on much higher yields. Also when stocks are very cheap e.g. 2008-2010 its easier for anybody to find higher returning/yielding investments and therefore in that environment you can use a 4% or even 5% rule.

In current market conditions (and indeed on a through the cycle average) for an investor of normal skill level who wants their capital to last forever (that way you eliminate longevity risk and also leave an inheritance) and who wants to solely spend the income, a 3% rule is a good general rule of thumb.
(This post was last modified: 02-04-2018 12:02 AM by Australia Sucks.)
02-03-2018 11:34 PM
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RE: $50k annual income from how much (and allocation) in investments? - Australia Sucks - 02-03-2018 11:34 PM

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