Size matters. No sleazy thought please. Rather, Singapore Man of Leisure had an interesting article on Size Does Matter for Income Plays where he blogged about an investment approach to reap a $50,000 per annum income. The question he posed was, just how much capital would be needed to do this?
He offered a few possibilities and discussed the implications of: (a) $1 million at 5% yield; or (b) $500K at 10% yield. His conclusion however was to go with (c) $2 million at 5% yield. Why? Because the earlier options all hinged on the assumption that the portfolio do not diminish due to a fall in market value. So doubling up the portfolio provides a buffer in case the portfolio should collapse by 50%.
I thought maybe there's a solution to this involving less capital. I'm making an assumption from historical past that any collapse of that magnitude would likely see a recovery within 5 years. With that assumption, I could keep 5 years worth of cash at half of $50,000 (i.e. $25,000) per year, and add that to $1 million at 5% yield. So that way, even if the portfolio collapse by 50%, it would still generate $25,000, and can be topped up by another $25,000 from the safety buffer. Hence, the total portfolio needed is simply $1 million at 5% yield plus $250,000 in cash.
As an after thought ... come to think of it, with $2 million at an expenditure of $50,000 a year, that's 40 years worth of retirement budget! If one is already at age 55, I guess there's no need to invest or do anything hairy with it? The only risk is living too long, specifically, beyond age 95.