In everybody's dreams, we would all love just to be able to kick back and live off our holdings. Though a dream for many, whether it be from real-estate holdings, or equities, people fantasize about being able to retire young, retire rich (and perhaps pursue a life of philanthropy, a more spiritually meaningful career, or plain happy sail the days away).
We'd all love to be able to do so, but for many people it simply is not feasable. We've got bills to pay, a lifestyle to maintain, and sometimes (not forgetting the "non-monetary" value we find in our working environment) just feel 'obliged' to stay on.
But when would it logically be unnecessary at least to continue to work? In other words, when would your yearly cash gains from your holdings exceed your yearly wage?
Let's assume your wage is, say, a generous $100,000 a year (you can use any figure though, but I'll us 100k). So what we would need is a cash inflow of at least 100k per annum. And note how I make the criteria cash (i.e. in the form of dividends), since it really isn't a stress-free retirement if you were still a trader and still had to flip your holdings now and again. So we require 100k in dividends per year.
On average the dividend/price ratio is somewhere around 5% (correct me if I'm wrong), so assuming you're holding a safe and stable holding that could be expected to generate inflation-adjusted dividends into the foreseeable future (imagine CocaCola, Woolworths, or a mix of "blue chips" like that) - so we could conclude your holdings would have to be:
$100,000/5% x 100% = $2,000,000
So your holdings would have to be worth about $2,000,000 for you to live off a $100,000 per annum dividend payout assuming a 5% dividend yield.
Now how long would it take you to get a whopping (and to some of you aussiestockforum stars, I'm sure a not so whopping!) 2 million?? Well that depends on your current net worth.
[Please correct me or provide an alternative formula her is you wish!]
Assuming your holdings make a very optimistic market average return of 20% per annum, and starting with a float of say, $20,000 (not such a big grubstake assuredly, but imagine a cash float [ed. By the way does anybody have any figures on the average cash net worth/holdingsof Australians?]), we would need to multiply our humble little float by 100 times.
To work out how many years, we need to find how many times 1.2 multiplies by itself to give a figure close to 100. To do so we could need to multiply 1.2 x 26 times by itself to get 100 (and hence multiply it with 20,000 to produce 2,000,000). Hence it would take 26 years to become a dual-millionaire, and be able to retire (assuming also of course that "$100,000" will buy you what you want in 26 years! Unlikely assuredly, but we did not factor inflationary effects into our market returns figure - i.e. we considered absolute 20% returns.
While sobering, this of course does not take into account the effect of contributing to your pool of investments from outside your portfolio, which I'm sure would exponentially decrease the time to make it to retirement. Indeed it would only take 100 years to generate an arithmetically derived fiure of 20,000,000! assuming a mere $20,000 net cash flow salary a year (undoubtedly we wouldn't want to take that long). So the compounding way certainly sounds a lot more appealing!
Food for thought I guess before quitting our day jobs! (At least for us mere non-millionaire mortals!)
PS: Does anybody have the formula for calculating X no. of years, given the yearly return, the starting float, and the desired ending float? I didn't take finance (due to the excessive amounts of maths involved! ) If so that would be appreciated