Unpopular Opinion
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A very conservative rate of return on investments would be 5% per year. With $2.8M, 5% is $140,000/year. So, someone with $2.8M invested would, conservatively, earn $149K per year without touching the principal.
Rate of return and dividends are not the same thing. Dividend payouts are usually closer to 2-2.5% for an index fund loke the S&P500. At those rates, you'd nees closer to $5 mil/$100k of desired annual income. For the regular stocks, in order to get that money, you'd have to actually sell shares, which means your earning potential off the stock decreases over time (in addition to the buying power of that money decreasing over time as well). It takes about $11 today to buy what would cost $1 in 1960...if we assume a linear trajectory for inflation, that $100k you'd pull in from that $5m would be worth less than $10k by the time our hypothetical athlete reached 75. While I can't see into the future, i don't imagine there will be many job opportunities for a 75 year old who's been out of the job market for 50 years and $10k/year probably won't even be enough to feed themselves.
Interesting. I didn't realize that dividend rates are so much lower than rate of return. Why are they so much lower? Does that mean that your money is only growing at 2-2.5% in an index fund or does that mean that your investment is growing at the same time as you are taking out a portion of your returns as a dividend?
I'm just starting to learn about investing as I try to shift some of my savings towards long-term investments. I think I need to find a fee-based financial planner to get me pointed in the right direction.
First, I'm not qualified or certified to give financial advice. I can't and won't provide any investing advice... Basically, IANAL, but for investing instead of legal stuff.
So, say I start a publicly traded company called Goople. You buy 10 stocks in Goople for $100 per share. So you have $1000 total in Goople stick now. Since I'm a hypothetical business genius, the stock price quickly grows to $150 a share. You now have $1500 in stock value, but you don't get a check for $500... you just have an asset that has grown in value. If you want to get $500 in cash, you'd need to sell some of your shares. Sometimes, you can buy and sell fractions of stocks, but for this example, we'll say you can only trade full stocks...so at $150/share, you need to sell 4 stocks for $600...you're broker will take a cut and you'll likely have to pay taxes on that $600 so we'll say you end up netting $520. Now you have some cash, and you have 6 shares of stock left. Now, originally, the stock going up $50 meant you made $500 dollars (increase in stock value x shares held). Now, if the stock goes up another $50....you only make $300 because you only have 6 stocks left. Now, even if the market rate stays the same, your absolute earnings have decreased. This is what makes selling stocks to love on untenable... the more stocks you sell, the slower your returns grow. Dividends are when the company pays you a quarterly or annual payment based on the stocks you own and the performance of that stock, even if you never sell a share. If the company has a bad quarter or year, you dont get paid either...sonif you're trying to survive off dividends, you (or your broker) need to pay WAY more attention to the company's financials and forecast or you might not have enough money to survive. Usually, companies want to pay the lowest dividends they can because dividends come out of the company's profits. Smaller companies that are growing will pay little/no dividends because they want to reinvest that money back into the business to fuel growth. Additionally, many dividend-paying companies are running high debt ratios, so your dividend payments are likely to go down when interest rates increase because the company needs more money to service that debt. Rising intereat rates also make borrowing more expensive for you, so the easiest way to offset those dividend losses - going into debt yourself - is also harder to do.
You are correct and definitely using a conservative estimate, like you said. ETF/index funds have an average return of 7-10 percent according to a quick search. These are often considered one of the safest investments you can possibly make, too.
Returns aren't dividends. You can only capitalize those returns by selling your shares, which decreases the rate at which your portfolio grows and incurs additional tax liability.
Yea but the point is that you get 140,000 dollars of return per year on 2 million dollars principal. You can easily cover the taxes and live pretty comfortably from that. You don't need to grow your portfolio at that point if you don't want to.
You could go the route of investing in stocks with dividends, as well. Most people who live off of their investment returns do a mix of both.
You have to sell 140k worth of stock each year to get that much. That means that each year, you have fewer stock, so you see a diminishing return on that.
What? Maybe I am missing something, but I don't think so.
You start with 2 million. You make 140,000 profit and have 2,140,000 total. You sell 140,000. You still have 2 million to make another 140k next year.
You are just using your profit immediately and keeping your portfolio the same as your initial investment. It doesn't diminish, it just doesn't grow because you are using the profits for expenses.
You have the same amount of money invested in the market, yes... but you have fewer shares. If you have 100 shares and the stock price goes up $5 per share, you made $500. Then, you sell 10 shares to access that money, and now, if the stock goes up $5 again, you only make $450. If you want to keep your income the same, you're gonna decrease your share amount each year...if you wanna maintain your actual spending power, it's gonna go down even faster.
I see what you are saying. I'm not saying that investing all of your money in index funds and then selling your profits every year is by any means the smartest way to invest money. It was more just to illustrate how easy it is to make profit with the kind of money that NFL players are given, even if their careers are short.