Enough to Walk Away

Does it ever seem like saving enough money to exit the paid workforce is too daunting? How much does it really take to walk away from it all? How big a pile of loot do you need to walk away?

Enough to Walk Away: in 2 parts

Part One: How much money do you spend?

How much you spend each year, or how much you want to spend each year, is half the equation. If you have a giant mortgage, a vacation home, a revolving garage of luxury cars, expensive travel tastes, and kids in private schools, then the size of the pile of loot you need is going to be pretty large. But there’s research out there that says that once you hit a household income of $75,000 per year then the incremental increase in happiness flattens out.

The other thing to think about when you’re looking at that $75,000 number is how far that will take you if you don’t have kids in private school, you’re debt free, you’re not leasing a new luxury car every 3 years, and you’re in a position where you don’t have to save another dime.

Think about it: for most people who are trying their hardest to exit the rat race their two largest expenses are probably savings and taxes. If you have a household income of $150,000 a year and you’re saving 20 percent of it and have another 30 percent that goes to Federal, FICA, State, and local taxes, you’re left with $75,000 for living expenses.

Now if you drop your income down to $75,000, it’s all from investments, and you’re not saving a dime then you’re left with about $66,000+ for living expenses after taxes. Your income dropped in half but your standard of living effectively only dropped by 12 percent. And $66,000 after taxes will go quite a ways towards living a good life.

Part Two: How to generate an idiot-proof income that covers Part One.

Part two of this fun exercise it to calculate how much is required to generate enough annual income to cover the number from Part One. We’ll start with the simplest solution: a 60/40 portfolio of equity and bonds that uses ACWI and AGG as its component pieces. This portfolio has a decent shot of keeping pace with inflation, won’t expose you to too severe of a drawdown, and provides an okay yield to fund your lifestyle.

At the current yield of the two components you’d need $3,400,000 to generate $75,000 per year in dividend income. The math is simple: just divide your number from Part One by the sum of (0.6 * (current yield of ACWI) + (0.4 * (current yield of AGG)).

$3,400,000 is a lot of money to most people so there are two levers you can pull to reduce it:

  1. Live on less money. If you only need $50,000 per year then the size of your portfolio can drop to $2,300,000.
  2. Focus on yield (but don’t be stupid). If you can generate an average yield of 4 percent then your portfolio drops to $1,875,000.

If you combine the two approaches, $50,000 and a 4 percent average yield, then your portfolio drops even further to $1,250,000. This number is still big for most people, but not insurmountable.

Wait, this isn’t about trading?

You might be taken aback by my suggestion to put your money into a 60/40 index portfolio and just periodically rebalance it while living off the dividends. The reality is that you need to have enough money to collect enough dividends to live on without requiring the outsized risk-adjusted returns that you’re hopefully getting from trading. At some point you or a loved one will get sick and you won’t be able to trade, you’ll lose your edge because the markets constantly evolve, or you’ll simply want to do something else with your time.

Because that’s life.

1 thought on “Enough to Walk Away”

  1. Just my two cents: Unfortunately taxes are not holistically reflected (dividend) into your article. The reference to the 20% salary savings for the “worker” is also overlooked, which more people NEED to do…

    Article is a good read that would be even better with a bit more clarity and additional data points. ACWI’s dividend has been a bit more unpredictable/inconsistent whereas AGG is a bit more stable (however we’ve also been in a Bull market for the past 10+ years that is starting to deteriorate).

    Keep up the great work. Appreciate the articles, thoughts, insights.


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