If you assume that you want to fund a standard of living that you've cost out at $50,000 a year in present value terms for the next 30 years, how much do you need?
There are many ways to approach this calculation, and I am curious as to what people think.
One popular way is to take the yield on rental property and invert it to get a multiple. eg 4% yield after costs = 25X, therefore you need $1.25MM. The assumption is that the rental yield will be strongly correlated with inflation. Obviously this is a very conservative figure since you still have the principal after 30 years, which should also be inflation protected for the most part.
Another conservative approach is to simply multiply the number of years by the annual cost. This is very conservative as it assumes you only return inflation on your principal, which you can roughly achieve by rolling into Treasury Bills.
Any other approach that assumes a higher return & hence a correspondingly lower initial principal will usually have to take volatility into account. What this usually means is you have to look at path dependencies and withdrawal rates, and work out some kind of survival rate to crystallize the risk involved. This is where most advisors reach for a monte carlo simulator.
Any other thoughts / approaches?
There are many ways to approach this calculation, and I am curious as to what people think.
One popular way is to take the yield on rental property and invert it to get a multiple. eg 4% yield after costs = 25X, therefore you need $1.25MM. The assumption is that the rental yield will be strongly correlated with inflation. Obviously this is a very conservative figure since you still have the principal after 30 years, which should also be inflation protected for the most part.
Another conservative approach is to simply multiply the number of years by the annual cost. This is very conservative as it assumes you only return inflation on your principal, which you can roughly achieve by rolling into Treasury Bills.
Any other approach that assumes a higher return & hence a correspondingly lower initial principal will usually have to take volatility into account. What this usually means is you have to look at path dependencies and withdrawal rates, and work out some kind of survival rate to crystallize the risk involved. This is where most advisors reach for a monte carlo simulator.
Any other thoughts / approaches?
