Investing
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Let me commend you on a very succinct question, and on having put together $2 million.
But the answer to your question is very involved. You might start by reading over the relevant sections of this site, going to Dory's FireCalc, etc. A short answer, though, is that you probably cannot invest $2mm to produce $100,000 without taking some risks. You could concentrate in REITs paying at least 5%, but there are risks there.
To do this in passive investments, and assuming your $100,000 is to increase with inflation, requires a 5% withdrawal. When you use the Safe Withdrawal Rate Calculators, you will find that this is often a losing strategy if you hope to continue the withdrawals over 30+ years.
In any case, it will require you to do some work to come to grips with your true situation. A drop to a $70,000 withdrawal would improve things very much.
Mikey
If a person has $2 million to live off of, they don't have much of a problem, especially because it is hard to imagine how they would be able to spend the inflation-adjusted equivalent of $100,000 per year for the rest of their life.
But assuming that you are in your 50's, here's what you could do. Use $1 million to purchase an immediate payment lifetime annuity from a highly rated insurance company. That will pay approximately $70,000 per year. Much of it will be a non-taxable return of capital, but the payment won't increase with inflation.
Then, take the other $1 million and invest about half in stocks (mostly, a low cost index fund) and half in TIPs. According to FIRECalc, this would permit an inflation-adjusted withdrawal of $38,000 per year for 35 years with over a 95% chance of success. And even if, in the doubly unlikely events that you lived for another 35 years and that part of the portfolio became depleted, you would be too old to be able to spend that much money (except for nursing services, which will probably be paid by Medicare by then and in any event can be covered by purchasing long term care insurance).
But assuming that you are in your 50's, here's what you could do. Use $1 million to purchase an immediate payment lifetime annuity from a highly rated insurance company. That will pay approximately $70,000 per year. Much of it will be a non-taxable return of capital, but the payment won't increase with inflation.
Then, take the other $1 million and invest about half in stocks (mostly, a low cost index fund) and half in TIPs. According to FIRECalc, this would permit an inflation-adjusted withdrawal of $38,000 per year for 35 years with over a 95% chance of success. And even if, in the doubly unlikely events that you lived for another 35 years and that part of the portfolio became depleted, you would be too old to be able to spend that much money (except for nursing services, which will probably be paid by Medicare by then and in any event can be covered by purchasing long term care insurance).
You did something seriously wrong in using FIRECalc. Your strategy only produces a 51% success rate. Using a return of 2.5% for the TIPs (which is achievable now by buying long term TIPs) produces a success rate of 57%.
If you want to increase your probability of success in FIRECalc without giving up on the idea of withdrawing $100,000 per year initially, I'd suggest using its features such as eventually selling your house and reducing your future annual withdrawals (inflation-adjusted). For a 30 year planning period, increasing the percentage of your portfolio allocated to stocks will also substantially improve the probability of success.
Unless the TIPs are in a tax-advantaged account, you need to pay income tax each year on both the interest and the increase in the principal amount.
If you want to increase your probability of success in FIRECalc without giving up on the idea of withdrawing $100,000 per year initially, I'd suggest using its features such as eventually selling your house and reducing your future annual withdrawals (inflation-adjusted). For a 30 year planning period, increasing the percentage of your portfolio allocated to stocks will also substantially improve the probability of success.
Unless the TIPs are in a tax-advantaged account, you need to pay income tax each year on both the interest and the increase in the principal amount.
C
Cut-Throat
Guest
Seeker,
Yup, reducing the withdrawal number to 80,000 will give you 100% - If you use a different inflation calculation I get around 97.7%.
You're in the ballpark. - That is the funny thing about planning for 30 years. A 1% change of return or inflation makes a Huge difference over 30 years. Same with increasing or reducing withdrawals by 5 G's a year.
Of course there are other things to fill in these uncertainties that I have as a Backup plan. Reducing Withdrawals, Reverse Mortgage is another.
Yup, reducing the withdrawal number to 80,000 will give you 100% - If you use a different inflation calculation I get around 97.7%.
You're in the ballpark. - That is the funny thing about planning for 30 years. A 1% change of return or inflation makes a Huge difference over 30 years. Same with increasing or reducing withdrawals by 5 G's a year.
Of course there are other things to fill in these uncertainties that I have as a Backup plan. Reducing Withdrawals, Reverse Mortgage is another.
ShokWaveRider
Give me a museum and I'll fill it. (Picasso) Give me a forum ...
I would like to know what the recommendations for $1m would be. I need about $50k a year to be happy.
Oh! And where do you find a Fixed annuity that pays 7% these days?
Ian
Oh! And where do you find a Fixed annuity that pays 7% these days?
Ian
This is probably just my conservative nature, but I personally would never give up 2m in return for an annuity. IMO, immediate annuities are best for elderly retirees who have such limited resources that they cannot meet their basic expenses otherwise. Personally with 2m, I would just scale back my living expenses until FireCalc showed a 100% success rate, drop my withdrawals down a bit more to allow a fudge factor, and live on that budget. If the portfolio grows due to a good bull market at the start of the retirement, you can always take out more later on.
BTW, if you are not used to managing your own portfolio, there is no need to hurry the decision. You can afford to take the time to learn how before acting. There is no need to rush into a decison.
BTW, if you are not used to managing your own portfolio, there is no need to hurry the decision. You can afford to take the time to learn how before acting. There is no need to rush into a decison.
The most important investment principle that I believe in is diversification. If a retired person is not too financially sophisticated -- to the extent that they can at least re-balance their portfolio annually to maintain an appropriate asset allocation -- then it makes sense to put a part of their assets into an immediate payment lifetime annuity. The main disadvantage of these is that they leave no residual value for beneficiaries, unless you set them up in a way that provides a minimum number of payments to a survivor -- but that necessarily reduces the annual payment. The annual payments on an immediate annuity for a person in their 50s from a good company such as TIAA-CREF amounts to about 7% of the "up-front" premium, assuming that the numerous options for continuing payments to spouses are not used.
This does not mean that this is an "investment" with a 7% rate of return. The "return" actually consists of a combination of a return of capital and interest. The "interest" component amounts to about 4% annually -- which not coincidentally is close to (but a little less than) the return on long-term government securities.
If you have $2 million to invest, there are a lot of "reasonable" ways to do it -- and also an infinite number of risky (stupid) ways. Mainly, be sure to diversify it into a mixture of investments sold by reputable institutions that charge reasonable fees, such as Vanguard, TIAA-CREF, and the U.S. Department of the Treasury.
This does not mean that this is an "investment" with a 7% rate of return. The "return" actually consists of a combination of a return of capital and interest. The "interest" component amounts to about 4% annually -- which not coincidentally is close to (but a little less than) the return on long-term government securities.
If you have $2 million to invest, there are a lot of "reasonable" ways to do it -- and also an infinite number of risky (stupid) ways. Mainly, be sure to diversify it into a mixture of investments sold by reputable institutions that charge reasonable fees, such as Vanguard, TIAA-CREF, and the U.S. Department of the Treasury.
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