Confused by my 401(k) calculations ...

[SyZ]

So, at 31, if I have 22k in my 401(k), and make 18k a year contributions at 7% with a 75% employee match up to 5%, I would have over 3 million in it at 66. This also ignores a) the 18k being risen, and b) the catch up after 50. Still, let's just say 3 million is the balance.

If I were to theoretically take all that (since I would also have savings of my own, a pension, SS) and buy a perpetuity, how much would I get?

Well, I have no idea of the rates on perpetuities and can't seem to find anything easily on Google, so I'll just say 7% to match the S&P's typical performance:

X/.07 = 3,000,000 -> X = $210,000 annually (for simplicity's sake)

Bringing back to today's value, assuming 3% inflation -> $210,000 / (1.03)^34 = $76,869

So, unless I messed up, in (probably) a worst case scenario, I can get $76,869 in today's dollars annually when I retire, forever? Meaning, I'm completely financially secure (and then some) before I even factor in other investments and annuities?

[MDM]

Yes, that's a reasonable estimate, with all the qualifiers on what might happen in the next 35 years.

See Immediate Annuities - Income Annuity Quote Calculator - ImmediateAnnuities.com for some estimates.  E.g., if you were 66 today and had $3,000,000, you could buy ~$195K/yr for life.

[SyZ]

So the math difference (all rough numbers, of course) is $15k, $195 instead of $210. I realized after my post, there's obviously a fee from the bank / entity who sets this up. I.e. - they take my $3m, agree to give me $195k a year because they're planning to make $210k a year off of it.

Extending this further ... wouldn't a great way to make sure FIRE works be to just purchase an increasing perpetuity aligned with your current level of spending, factoring in inflation?

Meaning, if you need $20,000 a year currently, you can retire when you're able to buy an increasing perpetuity of, say, $25,000 a year now and increasing 3-4% a year forever

[johnny847]

One thing to consider: if you have kids, buying an annuity like this can be disadvantageous, as the insurance company doesn't pay out to your children when you die.

[bryan995]

Yes - this is my understanding as well.

The money dies with you.
Hence why these annuities are a terrible deal.

Even if you do not have children/family, you can at least leave it to some sort of a charity/foundation!

[SyZ]

In the link provided, there is an option to purchase one that leaves the benefit to a beneficiary when you die ..

[Proud Foot]

What do you want to happen with your nest egg once you are deceased?  Ignoring the annuity for a moment, would you leave it all to your children/relatives or would you leave it all to charity?  With $3m and receiving $195k per year you would be able to set aside some to pass on to your children/relatives.  You could also look into a Charitable Gift Annuity.  Once you die the remaining balance is passed on to a charity of your choice.

[SyZ]

That's going to depend on if I'm ever able to find somebody who can tolerate me and, amazing enough, fathom having children with me

I actually just looked at my portfolio for the first time in a while:


Jan 1, 2016 to Jul 8, 2016

 Your Rate of Return
 
7.70%
 
Gain $1,307.15 


The stock market crashed this year and then Britian left the EU, right?

[MrMoogle]

The stock market crashed this year and then Britian left the EU, right?

The market certainly has not crashed this year.  And Britain has not left the EU.  They voted to leave, but who knows if/when it'll actually happen.

[MissNancyPryor]

S&P closed at a record high today.  Brexit flu lasted about 3 days. 

[cheapass]

S&P closed at a record high today.  Brexit flu lasted about 3 days.

Off topic, but does anyone else find it amusing when the talking heads are all high fiving each other because the market is at an ALL TIME HIGH AGAIN!! WOOHOOOO!

Even in a flat economy, or one contracting at less than inflation will set record highs, year after year, until the end of time lol. It's not a huge achievement. Kind of like how movie blockbusters are BREAKING RECORDS.. but ticket prices are also increasing, so that's to be expected. Not a novel event by any means.

[devan 11]

Inflation is 2.5% .  Gains from Brexit for me was over double that.  Mainly co-incidence, but I was mostly cash waiting on the Brexit outcome. I made inflation, my SWR, and more this week.  I'll take the small victories as they come.

For the OP.  Perpetuities paying 7%?  Sounds high.  What is wrong with a diverse set of index etfs?

[Gimesalot]

A couple of points on annuities:

Yes in theory they should work like you say, but if you die a year after you bought your annuity, you estate is out all of that money.  You can buy an annuity that transfers to your estate upon your death, but then your payout will probably be lower than you would like due to fees. 

Remember, these companies have tons of statisticians and the like working to make sure that the company makes money.  This means, you pay them money.  If you are responsible enough to save $18k a year in your 401k, then I bet you are responsible enough to only spend 4% of your nest egg per year.

[ooeei]

A couple of points on annuities:

Yes in theory they should work like you say, but if you die a year after you bought your annuity, you estate is out all of that money.  You can buy an annuity that transfers to your estate upon your death, but then your payout will probably be lower than you would like due to fees. 

Remember, these companies have tons of statisticians and the like working to make sure that the company makes money.  This means, you pay them money.  If you are responsible enough to save $18k a year in your 401k, then I bet you are responsible enough to only spend 4% of your nest egg per year.

This^

It's like what I tell people when they complain about headaches with extended warranties or phone insurance.  These companies aren't in the business to lose money.

[Ricksun]

Don't forget that although very rare, the company itself can go bankrupt as well.  There are guarantee backstops in place by each state (Think FDIC but for insurance), but depending on your investments, the value of your annuity may exceed the limits.

Rick