Discussion in 'Professional Trading' started by TheStudent, Apr 22, 2010.

  1. If you assume that you want to fund a standard of living that you've cost out at $50,000 a year in present value terms for the next 30 years, how much do you need?

    There are many ways to approach this calculation, and I am curious as to what people think.

    One popular way is to take the yield on rental property and invert it to get a multiple. eg 4% yield after costs = 25X, therefore you need $1.25MM. The assumption is that the rental yield will be strongly correlated with inflation. Obviously this is a very conservative figure since you still have the principal after 30 years, which should also be inflation protected for the most part.

    Another conservative approach is to simply multiply the number of years by the annual cost. This is very conservative as it assumes you only return inflation on your principal, which you can roughly achieve by rolling into Treasury Bills.

    Any other approach that assumes a higher return & hence a correspondingly lower initial principal will usually have to take volatility into account. What this usually means is you have to look at path dependencies and withdrawal rates, and work out some kind of survival rate to crystallize the risk involved. This is where most advisors reach for a monte carlo simulator.

    Any other thoughts / approaches?
  2. Use the following steps to determine the cash flow you need beginning now. I eliminated a capitalization requirement except for the margin requirement in the caveat. I've done this with additional features like multiple college educations for retired professional athletes and their current spouses (including the generation gap wills).

    1. Determine the date where the 30 year period begins and the inflation adjusted 50K value is reached.

    2. Set up a MEC level payment for your contract beginning now to achieve that point in step 1. The sub steps for this step include:

    2a. Shop the market.

    2b. Minimize the face value.

    2c. Minimize the time duration to BE (comparing capital creation to payment.

    2d. Compare payment/production curves for optimizing.

    3. Since the cash value will rapidly exceed the target extraction (after its initiation) you have during the 30 years, extract all surpluses and donate them to solve local problems.


    4. Write a will that will finance relatives two generations out all tax free.


    Trading 1 contract in ES will probably suffice for creating the cashflow for the MEC payments in 1. (Google linq for a contrary opinion on the caveat.)
  3. 1) Do you attend Rutgers or Syracuse?
    2) If you get involved with "work" that you actually enjoy, whether or not it's trading, the calculation will take care of itself. :cool: