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Lumifer comments on Open thread, June 20 - June 26, 2016 - Less Wrong Discussion

6 Post author: Elo 21 June 2016 02:45AM

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Comment author: Lumifer 27 June 2016 02:48:58PM 0 points [-]

And if you want to get there in, say, 20 years, you better save about $3,000 a month.

Your math is a bit off -- you're forgetting that your savings also grow at 4%/year while you're accumulating them. So if you save $2,000 / month and can get stable 4% return (after taxes), in 20 years you will have $612K.

The whole calculation, though, is based on guaranteed returns and if your returns are actually volatile (say, the mean is 4% with noticeable standard deviation), the situation changes.

Comment author: gjm 27 June 2016 03:40:39PM -2 points [-]

And of course all these calculations are ignoring inflation.

If inflation is, say, 2%, then

  • to get out $2k/month with 4% nominal returns you need $1.2M rather than $600k; or
  • to get out $2k/month with $600k, you need 4% real returns or about 6% nominal. And
  • the equivalent of $2k/month now is about $3k/month in 20 years. On the other hand,
  • your savings can reasonably be expected to increase in line with inflation too.
Comment author: Lumifer 27 June 2016 04:00:37PM 1 point [-]

Yep, so far we've been talking about nominal sums without considering their real purchasing power.

The proper question of what is the sum of money that one can live off as a rentier to maintain a certain standard of living and how much needs to be saved for how long is... complicated.

Comment author: gjm 27 June 2016 05:01:10PM -2 points [-]

Yup. The most sophisticated approach I've seen, which is clearly not actually sophisticated enough, is to guess at possible trajectories of future investment growth by some process along the lines of random sampling of past stock market returns, and then choose a sum that leads to you not running out of money in, say, at least 99% of those trajectories.

Comment author: Lumifer 27 June 2016 05:23:05PM 1 point [-]

It's a better start than simple compounding interest calculations :-)

To approach this from another side, one can buy an annuity (which provides a stream of income for the rest of your life). You need to save as much as is needed to buy such an annuity and then you're good (mostly). However I understand that these annuities are not... attractively priced, especially if you want one which adjusts your income stream for inflation.

Comment author: gjm 27 June 2016 07:31:49PM -1 points [-]

That is also my understanding, and I doubt the annuity market has the properties required to make its prices reflect any sort of reality.

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