Update on how much do I need to stop worrying

While I was working on organizing my non-probatable assets, I read few personal finance blogs.

All say about the same:
Trinity study is obviously the best or the most popular study to determine your withdrawal rate to make sure the money will last trough the retirement time. And that is 4% withdrawal rate on $3,000,000 saved.

Some people, especially in the comments section, were concerned about market downturns which no one can ever predict.

That made me think about the market downturns.
I went to the stock charts and checked how deep did the market go while recent market "crushes".

The drawdown was about 50% for indexes. It was more variable for stocks. 

Here are some of my thoughts on how to combat that:

Option 1: The downturns are temporary. I can sit them out.
Especially if I accumulated for many years and the average price will not be the top price. The 50% decrease will be  from the top price (and not from the average price) and that will not be as critical after years of accumulating. 
   
Option 2: I can increase my magic number from $3,000,000 to $5-6,000,000. That number appears to be difficult to reach, because I don't know if I even reach the $3,000,000. And I will have to call it the "super-magic number".

But if the downturn is about 50% only from the top price and it might be only about 30% from the average, I might need only approximately 30% increase in the magic number and that will be approximately $4,000,000. This is still very far out but looks more doable.

Option 3: I could create an additional source of income. Dividends would be one option. Dividends, in most cases, are paid during marked downturns and can help to bridge that time. I can't think of any other realistic options working full time.

Rules of 72, 114 and 144

Conservative estimates of 1% per year for returns of my investments are really very conservative. I am sure they are not realistic, in a good way.

After maxing out all tax advantaged options I will have to start taxed investment accounts.


It is interesting to make some estimates for different rates of return, which are more realistic than 1%.

I found some "rules"  for quick estimates of approximate calculations.

Rule of 72

1) Estimate of time to double your money based on growth rate.
Example:
Expected growth rate: 10% per year
Time to double your money: 72/10=7.2 years.

2) Estimate of needed growth rate for purpose of doubling your money
Example:
Targeted time for doubling money: 5 years
Needed yearly growth rate: 72/5=14.4%


Rule of 114  

1) Estimate of time to triple your money based on growth rate.
Example:
Expected growth rate: 10% per year
Time to triple your money: 114/10=11.4 years.

2) Estimate of needed growth rate for purpose of tripling your money
Example:
Targeted time for tripling money: 5 years
Needed yearly growth rate: 114/5=22.8%


Rule of 144  

1) Estimate of time to quadruple your money based on growth rate.
Example:
Expected growth rate: 10% per year
Time to quadruple your money: 144/10=14.4 years.

2) Estimate of needed growth rate for purpose of quadrupling your money.
Example:
Targeted time for quadrupling money: 5 years
Needed yearly growth rate: 144/5=28.8%


Using those rules I see that with my very conservative estimates of 1% growth I will not go far.

My own conservative example:
Growth rate 1%
Time to double the money: 72/1=72 years, very long time.
If I can get at least 5% yearly growth in my "challenge" account that will double the money in 14.4 years. 





 

What to do after you maxed out all tax advantaged opportunities?

After I maxed out all tax advantaged options, there is nothing else left for me then to open a taxable investments account.

What taxes would I pay on investments in a taxable account?

A taxable account is funded with post-tax money.
The interest, dividends and capital gains are taxed every year. 

1. Interest
It is taxed at ordinary income tax rate according to you tax bracket.


2. Capital gains and Qualified Dividends (2018)
Ordinary dividends and short term capital gains are taxed at ordinary income tax rate.

Qualified dividends  and long term capital gains are taxed at reduced rates: 

There is an additional 3.8% Net Investment Income Tax (or Medical Surcharge Tax) for capital gains, and dividends.
It applies to modified adjusted gross incomes exceeding $200,000 for singles and $250,000 married filing jointly.  



I am thinking of opening a separate "challenge" account in which I will try to learn how with certainty to achieve more than 1% yearly returns on my own. In this account I will not use indexing. 
Majority of my investments is in index funds at this time. Indexing is supposed to make more than 1% returns per year with relatively high certainty. 
The "challenge" account will be for trying it on my own. I will add a link to it here as soon as I start with that.