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Comment by Dilpil | Hacker News Reader

How exactly does one make six percent a month from safe investments?

six percent a month

Six percent annually.

That said, it is a fantasy, unless you intend on your retirement getting cut short by death prior to you exhausting your money. The standard recommendation for someone who is much older (i.e. can rely on death to moot insolvency with greater probability) is that the safe withdraw rate is 4%.

With a withdraw rate of 4% and a standard mix of stocks and bonds you can be fairly confident that, assuming the future looks something like the past, you will not run out of money within your lifetime. (Most people will in fact see their money "go infinite", i.e. their portfolio expands faster than their withdraw rate and when they eventually pass away their heirs and government get to toast their name quite a bit. However, the prudent investor doesn't plan on being "most people", they plan on being the unlucky sod who bought at the top and sold at the bottom.)

Consider the context. He's not talking about an invulnerable plan for when you can no longer work. He's just sort of playing with numbers to see if you can live without a job by being somewhere heap & what that would look like.

Some of the applications sound a lot more like a careers break, vacation, or a few years off to volunteer.

Naturally, you'd need to consider how much you need, what are acceptable risk & such depending on your application.

His high low estimates for how much you need also vary almost 7/1.

And let's not overlook that it's 4% before taxes. So in reality, closer to 3%

capital gains aren't taxed @ 25%.

minus inflation...

Inflation gets figured into the withdrawal rates - you subtract the inflation rate from your nominal return to figure your real rate of return, and then the real rate is whatever passive income you have available to live on. I'm guessing that the 4% withdrawal figure is calculated by figuring a 7% average nominal return (seems to be a common historical number for balanced portfolios), subtracting 3% inflation, and the remainder is a 4% real return. So you can pull out 4% of your portfolio each year and have it maintain the same real value, after inflation.

A 7% average return would require more exposure to volatile assets (like equities) than is prudent for those investing for over a potentially short time like retirement. One must also consider morbidity risk, currency risk and interest rate risk.

I think it is most prudent for non-investing professionals who want to live this life to buy two annuities, one denominated in the currency of their home country and the other denominated in the currency of their new country.

Annuities have counter-party risks...

This is true. But would you trust the average retiree to shrewdly manage their money over the average highly regulated AAA rated insurance company?

Long treasuries will get you over 4 percent right now,

http://finance.yahoo.com/q?s=tlt

...that's as safe you'll get.

Insured munis at 5

http://finance.yahoo.com/q?s=pza

Emerging at 6

http://finance.yahoo.com/q?s=emb

Junk at 13

http://finance.yahoo.com/q?s=jnk

Mix and match.

That's 4% nominal returns though - you have to subtract inflation from that. TIPS are going for less than 2% yield.

For 3% inflation, you need 7% nominal returns to make 4%. You're already into pretty risky territory there.

The biggest problem with the 6% figure is that it ignores inflationary pressure. If you're stuck with extremely low risk investments (as you are once retired), you should really be looking at levels around 1 to 2% over inflation. At 2% over inflation (long term rate around 5%), withdrawing 6% annually (growing the withdrawal amount to keep up with inflation), you'll only last about 20 years, assuming no mishaps. Withdrawing 4%, the commonly recommended value, lasts more like 35 years; the average American retirement isn't that long, but it has a significant increase in expenses at the end.

"you'll only last about 20 years" 20 years is long enough to take on a fair amount of diversified risk, which up's your return, which let's you take on more risk etc.

Also a 60 - 40 stock/bond is actually safer than a pure bond portfolio because of inflationary risks and has a higher expected return over 10+ years. The only real trick is to avoid single investments, be they a stock or an industry.

Until recently that was close to the interest rate from a basic savings account in Australia.

One doesn't. The article suggests 6% annually.

That's currently a slight stretch given interest rates in most OECD nations, but definitely achievable without effort over a longer term (eg, 6% pa for 10 years).

Yeah, as many have pointed out, I meant per year. Still a fantasy.

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