How much money do you need?

[grandgnu]

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In order for someone to be rich, many others must be poor.

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If you're below average, yes, I would consider it poor.

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What a great argument. The man is keeping all the poor people down, and by poor, we mean the bottom half of all wage earners, regardless of what their actual income is. In your world, the economic crisis would never change, because there will always be below avg, even if everyone were millionaires.

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If everyone were millionaires, then inflation would kick in to account for it, and they'd still wind up being poor.

[mackthefork]

$500,000 and I would never need to work a stroke again.

Mack

[mackthefork]

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$3M isn't nearly enough to up and quit. Unless you do a good job investing.


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Thats nonsense, a retarded monkey with an FT and a pin could make that pay out 180k a year, if you earn that and still can't save, well theres no helping you.

Mack

[Jim T]

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This is the only reasonable approach to look at the problem. 6% nominal return is pretty reasonable, say munis or the like, and 3% inflation is reasonable as well. 25% for taxes seems is much too low, though - keep in mind that you're talking $600k in income the first year, and it goes up (in nominal terms) thereafter.

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I'm no expert on the subject, but I believe that certain types of interest (i.e. muni bonds) aren't taxed; dividends, certainly, are taxed at the lower 15% federal rate. Moreover, the first chunk of your $600K is taxed at a much lower rate. So long as you live in Nevada, Florida, or another state-income-tax-friendly jurisdiction, I'd think your overall tax rate could easily be well under the 25% rate you suggest -- and very likely under 15%.

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My rule of thumb is that you can expect to make ~1.5%/year in real, after-tax returns that are sustainable indefinitely. It surprised me at first that the number was so low, but that's the way it worked out. So, for me, ~$8-10M and a paid-off house.

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That's a very conservative set of assumptions. I suspect a real sustainable rate of return is higher than that; and my number is correspondingly somewhat lower.

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He also ignores the fact that a lot of your investment return will be "paper profits" and hence untaxed in the year it is earned. For a simple example, if you invest your 10 million completely in a stock, and it appreciates 600K (and doesn't pay dividends), you aren't taxed on anywhere near that basis unless you are foolish enough to continually roll it over.

Again keeping it simple, let's say that you bought a million shares at 10.00 and it ends the year at 10.60 at which point you sell 10,000 shares to give you 106,000 cash for the year. You are only taxed on the 6,000 profit you realized on the sale. Your tax rate for that first year would therefore be ZERO. As more and more of your nest egg is comprised of profits and less and less of the original principle, your tax rate would obviously increase. However, you should easily be able to keep it under 10% for a very very long time.

[Analyst]

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He also ignores the fact that a lot of your investment return will be "paper profits" and hence untaxed in the year it is earned. For a simple example, if you invest your 10 million completely in a stock, and it appreciates 600K (and doesn't pay dividends), you aren't taxed on anywhere near that basis unless you are foolish enough to continually roll it over.

Again keeping it simple, let's say that you bought a million shares at 10.00 and it ends the year at 10.60 at which point you sell 10,000 shares to give you 106,000 cash for the year. You are only taxed on the 6,000 profit you realized on the sale. Your tax rate for that first year would therefore be ZERO. As more and more of your nest egg is comprised of profits and less and less of the original principle, your tax rate would obviously increase. However, you should easily be able to keep it under 10% for a very very long time.

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I forgot that munis are tax-exempt, even from federal taxes. I don't know the current rates for these bonds, but would just guess they're in the range of 5-5.5% or so. Note that federal bonds and notes are currently in the ~4-4.5% range, and with 3% inflation gives around the rate of return that I mentioned. Munis would boost the return to 2-2.5%, a pretty big difference for the slight increase in risk.

As to the paper vs. immediately taxable profits, no, I didn't ignore that at all. For the purposes of this analysis, I assumed that the investor (me, in this case) wanted a guaranteed, no-risk, perpetual income stream; hence, the preference for bonds and income vs. capital gains. I'm well aware of the risk-return and tax tradeoffs between stocks and bonds, and it's quite likely that a 20-something (especially one who just won the WSOP) would weight their portfolio in preference of stocks.

Note, though, that Howard's tax numbers are in general off. If the $600k is in fact totally taxable, the overall federal marginal rate climbs hits 33% once you hit $180k or so even if you're filing as married. Even without paying state taxes, without working the math I think an overall rate 25% is actually somewhat on the low side.

[anduril]

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Quotes like that make me happy, that I live in Canada.

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Yes, because we all know how well socialized medicine works. Enjoy your $12/litre gasoline and your 15% sales tax.

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lol SHIP IT

[Wake up CALL]

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Note, though, that Howard's tax numbers are in general off. If the $600k is in fact totally taxable, the overall federal marginal rate climbs hits 33% once you hit $180k or so even if you're filing as married. Even without paying state taxes, without working the math I think an overall rate 25% is actually somewhat on the low side.


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His numbers as presented are indeed accurate. Capital gains will never be taxed at the highest rate, nor will stock dividends.

[Howard Treesong]

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Note, though, that Howard's tax numbers are in general off. If the $600k is in fact totally taxable, the overall federal marginal rate climbs hits 33% once you hit $180k or so even if you're filing as married. Even without paying state taxes, without working the math I think an overall rate 25% is actually somewhat on the low side.

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I was assuming that you're taking advantage of the 15% federal rate on dividends; you're quite correct if we're talking about active income. I would hope that with an investment principal of $10M, you would try to take advantage both of the lower dividend rate as well as the lower cap gain rate; it would be criminal IMO to pay full freight, especially at incomes where the deduction phaseout kicks in.

Retirement plans (DC plan, 401(k) plan, plus some others) are a great tax reduction mechanism: the investment gains are tax-free until you withdraw, so you can get the advantage of compounding returns -- and then you have some discretion about withdrawals -- which permits tax flexibility in later years.

[Derek in NYC]

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Capitalism sucks.

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Spoken like a guy who doesnt have two nickels to rub together. Get a job, work for a living, and stop expecting to be taken care of by anybody.

[grandgnu]

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Capitalism sucks.

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Spoken like a guy who doesnt have two nickels to rub together. Get a job, work for a living, and stop expecting to be taken care of by anybody.

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We ain't looking for a hand out, we looking for a hand up!

Seriously, I'm not rich, but myself and my fiance' both work and we aren't in excessive debt. But, I don't own a home and it will be a long time before we can afford one I believe.