What's a Million Dollars?
Not as much as you think. If you wanted to live off it forever, you would be living on about $50,000 after taxes, nice, but not what you would have guessed I'm sure-- not exactly lifestyles of the rich and famous.
How did I arrive at that annual net income? Well, one million dollars invested prudently, should get 7-8% or $70,000-80,000 (these days who knows . . . )-- take out federal, state, and municipal taxes and you are looking at about $50,000.
Another question is could you live without touching the principal of $1 million? This is why you hear about lottery winners who go broke-- they eat the principal. They buy cars, houses, take vacations, and give gifts to friends and relatives. Problem is there are on-going costs associated with cars and houses-- meanwhile, the principal is disappearing.
So a million dollars is nice, but not as nice as $5 or $10 million . . .
Categories: Personal Finance, Investments, Frugality, Personal Philosophy
Tags: Personal Finance Frugal Investments Frugality Personal Philosophy
I liken money to rain. You need to get a good soaking on a regular basis to be any good, but a huge downpour is often wasted. Just like you observe about some of the lottery winners. They blow it and then it's just like they never had a dime to begin with.
Once a woman won the lottery and she did lots of things with her money - mostly spent it. They only thing she did that was responsible (according to what was reported in the news) was to pay back a loan. Soon after she received the money, it was gone.
The state came along and told her that she no longer qualified for public assistance, so there she was with no money and no public assistance, but she still had her financial obligations including several children to support.
Often we think of $1 million as a lot of money. It is if you know how to manage your finances. No amount of money is sufficient if you don't have a clue.
Clair
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My wife often says, "Money only makes you more of what you really are . . . good or bad, responsible or irresponsible."
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Consider this: In 1959 one could get along reasonably well (not luxuriously) on $5,000 a year. Banks paid out 5% interest, so having a hundred thousand in the bank would provide a livable income. So, if you had had that much, and if you had taken out the 5000 every year, things would have been fine for a while. But, fast forward to 2009 and you might need 5000 a month; and you have to search nowadays to find 5% that’s not risky. So, you would need over a million to match what $100,000 would have done for you 50 years ago.
The point of this is to say that if you have a million, you need some calculation that allows for it to grow in the future.
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As for returns, equities historically have returned about 12% and fixed income about 8%. I might also use instruments with income guarantees-- I know of some with 6% and 7.25% guarantees. It can be done . . . but growing principal would certainly help as opposed to eating it.
More interestingly, you have touched upon something that I talk about from time to time . . . the effect of double incomes in today's world versus the 1950s-1970s. My thesis is this: Once women started to take career oriented employment and received more equivalent pay to men (I am not criticizing this) there was much greater disposable income in American households which created an inflation of prices-- particularly in housing and convenience goods and services. Just 18 months ago I kept hearing people complain they had been "outbid" for a house (little did the "losers" know that the "winners" may have done them a favor because the house is probably underwater right now). Additionally, as more women entered the workforce , convenience products and services exploded. It really created a seismic shift. I know there were many other factors, but I think you would agree it ushered in quite a few changes.
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By 6% an 7.25% income guarantees, do you mean annuities?
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Yes. Under the right circumstances-- like investing a million dollars to last a lifetime, they can be ideal. Virtually unlimited, upside market potential, and 6% or 7.25 % if the market goes to hell in a handbasket . . . like now.
There are other ways it could be done as well (corporate bonds perhaps), but with a little more risk involved.
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