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How much money do I need to make in order to generate 1k/month for the rest of my life?

Is that even possible? If yes, in what way?

Edit: I am 30 years old.

samouray
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    Let's assume for the moment that you could live on $1000/month next year. Did you consider that $1000/month in 2050 won't have the same purchasing power as $1000/month in 2020? Any constant dollar amount per month might not be the right kind of goal. – Chris W. Rea Sep 28 '19 at 18:20
  • Related: Saving for retirement: How much is enough? – NotThatGuy Sep 29 '19 at 13:11
  • If you believe in your country stock index will follow the trend, then putting your saving into index ETF will speed up some figures shown by the answers. – mootmoot Sep 30 '19 at 08:00
  • Similar question answered here: https://money.stackexchange.com/questions/91561/how-much-capital-is-necessary-to-live-on-5000-mo/108424#108424 – Chris Degnen Sep 30 '19 at 08:55
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    How can this question possibly be answered without knowing the age of the person? – Zulan Sep 30 '19 at 11:56
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    @Zulan: Stackexchange sites don't really encourage short numerical answers, or questions where the expected answer is a number. So for example "as a rough order of magnitude it's low-ish 6 figures, but here's how to find out..." is an answer. Then for a fuller answer mention that there's a difference between just plain $1000 and 1000 inflation-adjusted dollars. Extreme case where the answerer is more confident than they probably should be: a formula or actuarial table with age as an input variable would answer the question without knowing the questioner's age. – Steve Jessop Sep 30 '19 at 14:47
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    ... all of which said, if the questioner's user picture is at all representative, I don't think their exact age is needed, since their time left to live can be approximated at infinity without making a huge difference to the answer ;-) Basically, an indefinite endowment isn't really all that much more expensive than a 70-year annuity, or a lifetime annuity for someone in their 20s or 30s today. For practical pensions purposes you need to answer a whole load of questions: age is just the start. – Steve Jessop Sep 30 '19 at 14:50
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    @Zulan: For most ages, the infinite solution is really close to the real answer. – Joshua Oct 01 '19 at 16:20
  • @SteveJessop I understand a generic answer is good, but a generic answer with exemplary calculation based on the basic parameters is even better, is it not? – Zulan Oct 02 '19 at 07:46
  • Regarding the "infinite" i see three issues 1) The longer the time the weaker the fundamental assumptions about the economic system, just look at changes to it within in last lifespan. 2) I believe it is fair to assume the majority return will go into beating inflation. I also think adjusting payout to inflation is the only fair way to answer this question. For 50 years vs infinite annuity, simply assuming 5.7%, the difference is in fact negligible (196k vs 206k). But if I assume only 2.7% due to inflation, the difference is significant (330k vs 444k). (I just used 91 year S&P 500 averages) – Zulan Oct 02 '19 at 07:47

8 Answers8

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Endowment manager here. An endowment is a large lump of money that is invested to create "forever income". They are held by universities and the like, and there are countless billions of dollars in them. They are also very tightly regulated, including how they are invested.

To the astonishment of most novices, not only are they allowed to be heavily in the stock market, that is mandatory. A skittish endowment manager who hides in municipal bonds would be sued by the state's attorney general.

They are invested mainly in ordinary stocks, mutual funds, ETFs, bonds etc. - which you can buy also.

Endowments are intended to be forever funds, and are designed to weather the ups and downs of the stock market. A prudent amount of money may be drawn down every year, regardless of how the market is doing. The prudent amount is deemed by law to be 4-7%, with a careful eye on growth and inflation.

Keep in mind this assumes less than 1% for the fund's overhead expenses. Keeping overhead to a bare minimum helps massively. My personal investments are at about 0.20%, my personal "endowment" (DAF) is 0.76%. If you walk into EdwardJones and say "do this for me", they could take 2.5% or more, which in this example means you need twice as much money to do the same thing.

Let us say 5% or 1/20. That means the corpus must be 20 times that.

To withdraw your $1000/month or $12,000/year, you need 20x that, or $240,000 of initial investment in the fund.

This will "automatically" adjust for inflation if properly managed.

These numbers are low enough that taxes won't be a big issue. Heck, $12,000 is your standard deduction these days. But even if taxes were an issue, a little strategy can cause them to be long-term capital gains, which are taxed gently many places.

Chris W. Rea
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Harper - Reinstate Monica
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  • This answer is only applicable to U.S markets though? What about Europe for example? – Cloud Oct 01 '19 at 09:41
  • @Cloud Harper picks 5% as a more or less reasonable number. Depending on the market you might need to select a different draw value as a prudent value. If you are actually managing the endowment then juridistiction matter, but for a beneficiary it's basically a purchased product. – Taemyr Oct 01 '19 at 18:14
  • Exactly Taemyr. By the way I love the accidental "Cloud Harper" lol... @Cloud I don't know the Europe stock markets well enough to know how they perform. At first blush I would expect them to be comparable to US. But you can always invest in the US market, just currency exchange rates then become a factor. Of course USD is the world's reserve currency, so it's pretty safe... – Harper - Reinstate Monica Oct 01 '19 at 19:26
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    @Cloud the reasonability of "$1000/month" depends very much on what country --- a fortune in say Lesotho but poverty in Singapore. So you must simply factor in taxes... E.g., EU neighbours Belgium and Holland differ, the second taxing wealth itself the first the capital gains; and many countries have different outlooks on this (some say savings are what remains after being taxed, so taxing again would be wrong; and the capital gains are differently taxed from 'labour'). – user3445853 Oct 01 '19 at 19:32
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What you are describing is a lifetime annuity. You pay a lump sum now and then get a fixed amount until you die.

Included in this calculation are estimates of (1) how long you will live (2) how much your money will earn when invested. Both of those are difficult to estimate, so in order to be confident you don't run out of money before dying, you must do one of the following:

  1. Massively overestimate how much you need to invest today. Lots of money will be left over, probably, when you die.
  2. Purchase an annuity from a financial intermediary. That's what they are for. That will offload the risk that you will live a long time to the annuity provider. Some people who buy the annuity will die early and others will die late, so you don't have to overestimate. The company bears the risks.

My suggestion is to call up your favorite financial services provider, tell them your age, and ask how much a lifetime annuity will cost (tell them when it will start paying as well). They will give you a better quote than random people on the internet will.

farnsy
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    +1 but worth noting there are lots of annuity types. The opening paragraph describes "single premium immediate annuity" which has the feature of being the most commoditized and thus cheapest due to competition. – user662852 Sep 29 '19 at 01:00
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    Purchasing an annuity does not eliminate risk, because you have no way of knowing what your actual living expenses will be in future, and if you develop a medical condition, they might significantly increase. In that situation, having "no savings, and only a guaranteed income that is too small" is not a good financial situation to be in. – alephzero Sep 29 '19 at 14:21
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    @alephzero The OP said nothing about living expenses. They asked only about getting $1000 a month for the rest of their life. What you have said is true, but not part of the question. – farnsy Sep 29 '19 at 17:48
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    best quote: the risk that you will live a long time – Aequitas Sep 30 '19 at 00:01
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    @Aequitas being alive definitely costs a lot more money than being dead. Being barely alive is even worse. I remember a morbid joke that if you are to shoot a burglar, you shoot to kill. – Nelson Sep 30 '19 at 01:44
  • @Nelson That morbid joke has a hint of reality to it, I believe: in some jurisdictions, homeowners are protected from criminal repercussions when they shoot a burglar; but they are not protected from civil repercussions: the burglar can sue for damages. – jpaugh Oct 02 '19 at 16:57
  • There's also the risk that the annuity provider (essentially an insurance company) will go bankrupt, in which case most if not all is lost. See: https://www.investopedia.com/articles/insurance/09/insurance-company-guarantee-fund.asp – CJBS Oct 02 '19 at 18:02
  • @CJBS True. Not every risk can be easily hedged. The best we can do is minimize our risk subject to our budget constraints. – farnsy Oct 02 '19 at 22:53
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There’s a general “rule of 4%” for investing. It means that a given sum invested in a total market Index fund can usually generate 4% a year indefinitely. Using that rule, $300,000 would generate $1000/mo.

Rocky
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    The only Rule of 4% that I've ever seen is for retirees to withdraw 4% of their investment assets every year. – RonJohn Sep 28 '19 at 23:02
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    @RonJohn That seems applicable here... –  Sep 29 '19 at 00:38
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    @Michael not true, since Rocky's answer is all about interest income, whereas the Rule of 4% means to withdraw 4% of $300,000 leaving you with $288,000 which grows to $299,520. Withdraw another 12,000, let the remainder grow 4% and you've got $299,021 at the end of the second year. Rinse, wash and repeat. You can do that for a long time, but not forever. More importantly, you'll be withdrawing that $12,000 even during down swings like the dot com bust and 2007/2008. – RonJohn Sep 29 '19 at 01:10
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    @RonJohn: That's why it's based on somewhat less than the average return (adjusted for inflation)... so that in the good years it will grow enough to make up for the effective increase in withdrawal during the bad years. – Ben Voigt Sep 29 '19 at 04:35
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    @RonJohn If you let it generate the 4% before you withdraw it you can do it forever. Of course, you won't get an even 4% every year – JollyJoker Sep 29 '19 at 12:40
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    Why is it approx 4% when 7% is often quoted as the approx return on long-term equity investments? E.g. S&P500 index. – Oliver Angelil Sep 29 '19 at 13:01
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    @OliverAngelil: As a simple example, suppose that you have an investment which returns 5% and 15% in alternate years. Then in the long term your rate of return will be very nearly 10% (about 9.89%). But if you withdraw 9.89% of your original principal every year you'll lose about 0.25% of your principal a year. In short, fixed withdrawals make variable returns riskier. – Micah Sep 29 '19 at 19:13
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    The 4% rule comes from the Trinity study. It was expected the money will last 30 years across all the market conditions known at the time. With a good market, the money can last much longer. – NL - Apologize to Monica Sep 29 '19 at 21:35
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    @OliverAngelil its 4% because the 7% average return can provide you a safe 4% after inflation (at avg of 2.1% IIRC) and reduced capital from taking some out. – gbjbaanb Sep 30 '19 at 08:58
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    @RonJohn You don't need it to last forever, just until you die. – Barmar Sep 30 '19 at 14:57
  • @OliverAngelil There's a lot of missing context here. The Rule of 4% is that if you consistently withdraw no more than 4% each year, your money will still grow over any 30 year period. This rule is based on looking at the stock market average over US history. There's no 30 year period where it didn't grow by at least 4%, including periods spanning the great depression. – jpaugh Oct 01 '19 at 15:14
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    @OliverAngelil Actually, my understanding of the 4% rule was wrong, too! I just updated the answer with a (hopefully) more reliable source than that one podcast that one time.... – jpaugh Oct 01 '19 at 15:20
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Simple math that all (and I mean all) depends on the interest rate.

  • At 1%: (1000 x 12)/0.01 = 1200000
  • At 2%: (1000 x 12)/0.02 = 600000
  • At 3%: (1000 x 12)/0.03 = 400000
  • At 4%: (1000 x 12)/0.04 = 300000

Of course, interest rates change, so you'd have to be conservative with your forecasting, and 1000/month isn't very much at all.

The elephant in the room is inflation. 20 years from now, 1000 units of currency (said because the actual currency isn't relevant) won't buy as much as it does now.

nick012000
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RonJohn
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    This assumes the OP will live forever. The right calculation should use up all the principal by the end of his/her life. – farnsy Sep 28 '19 at 21:28
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    Knowing exactly how long you are going to live is a little tricky though, most people will admit. I wouldn't like to be 80 and completely out of money because I assumed I'd have died by then. – Eric Nolan Sep 28 '19 at 21:57
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    @farnsy so do all the answers, because as Eric Nolan mentioned, we don't know how long we're going to live. – RonJohn Sep 28 '19 at 23:01
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    It's much easier to estimate how long you will live than, for example, what the return on your investments will be over the rest of your life. You can build in some padding in case you are the exception. By mentioning this I didn't mean to imply your answer is worse than the others (in fact, it's better, in my view). – farnsy Sep 28 '19 at 23:11
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    if you're going to live more then 30-40 years, it's almost irrelevant if you burn down the pricipal or not – Christian Sep 29 '19 at 09:51
  • @farnsy OP didn't specify that the net sum should be zero upon death... That $1000 a year generating machine could be inherited. – Mars Sep 30 '19 at 00:17
  • So kinda getting stuck on a technicality--that doesn't even exist. – Mars Sep 30 '19 at 00:18
  • Not really a technicality. If the OP wanted $1000 a month forever, they would have said that. Forever and for the rest of one's life are quite different things--the OP may be 97 years old. The two are well-defined and very distinct problems with different solutions. If the difference between a perpetuity and a lifetime annuity seems irrelevant to you, more power to you. It's not to me and I don't think you should suppose it is for the OP unless you are told so. – farnsy Sep 30 '19 at 01:12
  • @farnsy How do you know that OP won't live forever? Technically, it COULD happen with the right technological advancements. – Onyz Sep 30 '19 at 11:06
  • @Onyz. Agreed. In that case, it would be very smart indeed to have purchased a lifetime annuity. :) – farnsy Sep 30 '19 at 15:17
  • @farnsy an LA that actually earns 4% would be super popular. – RonJohn Sep 30 '19 at 15:29
  • @farnsy Actually, the original 4% rule only assumes 30 years, not forever. – jpaugh Oct 01 '19 at 15:24
  • @jpaugh and RonJohn Did you mean to talk to someone else? I have said nothing about the 4% "rule" nor a 4% annuity. The formulas in this answer are for a perpetual cash flow at varying rates. – farnsy Oct 01 '19 at 15:56
  • @farnsy No, I was responding to your first comment. Using 4% (as this post does) gives a 30-year (or more) time-limit. Since RonJohn didn't refer to any time limit, I'm left to assume the 30-year limit was implied. His comments elsewhere leads me to believe he was not referring to a perpetual arrangement, in fact. – jpaugh Oct 01 '19 at 17:34
  • @jpaugh This comment simply solves for the amount of money required, if it always paid a given rate, to produce 1000 every month forever without eating the initial capital. There is no implied end date here. What he says elsewhere is not part of this answer and should not be considered. Rocky's answer about the 4% rule and related comments are so flawed they are, in my opinion, not worth discussing. – farnsy Oct 01 '19 at 22:52
  • @farnsy If that's true, then I know much less about the topic than I thought. Rocky's answer seems the most grounded in reality to me, in no small part because "buy an annuity," without further qualification or alternatives presented, just sounds like sales-speak. – jpaugh Oct 02 '19 at 17:01
  • @jpaugh I can't say how much you thought you knew, but buying an annuity is certainly the cheapest and lowest risk way to achieve what the OP asked. Other answers are mostly off topic (harper), incorrect, impractical, or don't achieve what is wanted. Virtually every word in Rocky's answer is wrong in one way or another, as are many of the follow-up comments. RonJohn's answer at least implicitly acknowledges that if you do it yourself, at any amount, you are gambling. – farnsy Oct 02 '19 at 22:51
  • @farnsy When you talk about risk, it's really important to remember that the question, as stated, is extremely simplistic. The opportunity cost of not doing it yourself is also a very real risk, and not something that should be taken for granted. – jpaugh Oct 03 '19 at 20:36
  • @jpaugh I'm not clear on what opportunity cost you are referring to. When using a third party, the primary risk is counterparty risk (the risk that they will default). This is discussed in the comments of my answer. The other cost is any premium charged by the third party that will not go to your heirs. For this reason I discuss both DIY and annuity solutions in the answer I gave. RonJohn's answer abstracts from these ideas, so it's odd to discuss them here. – farnsy Oct 04 '19 at 20:55
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Given the other answers here, if you actually have $300,000 to $1,200,000 in cash sitting around, you might consider purchasing a house. I own a rental property near Fort Hood, TX originally purchased for about $110,000 and now valued at $150,000 and it earns me about $1,100 a month. You have to subtract some upkeep from that (typically about $600 to $1,500 a year in the nine years I've owned it), but it still seems a lot cheaper than purchasing a lifetime annuity. The nice thing about rent is it already goes up with inflation, typically faster than your maintenance expenses.

Of course, you don't need to save up the full purchase amount, either. You do need a sizable down payment for a pure rental purchase as opposed to a house you intend to live in, but I'm not sure it's possible to borrow money to purchase a lifetime annuity at all.

Adam Acosta
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First, there's the issue of how much money you have to earn versus how much money you have for your endeavor after taxes. And then there's the issue of taxation on the yield. You can adjust the numbers per your current and anticipated futures tax brackets.

From a U.S. perspective:

Money market are variable. At the current rate of about 2%, you'd need $600k to generate $1k per month.

You could get about 6% from selective investment grade preferred stocks. Since they are tied to interest rates, that yield would vary modestly as rates change and issues are called. You'd need $200k for that. With some active swapping of issues (reallocation), in most years you could bump that yield to 10% and sometimes even better if there's an interest rate cycle (pre 2008). Preferred stock ETFs have provided about 5.5% return over the past 10 years.

There are a variety of annuities that provide lifetime income. A fixed annuity would be the obvious choice. You'd have to check to see what current rates are.

A variable annuity would be another possibility. The money would be placed in sub-accounts (similar to a mutual fund). I don't know what the current offerings are but historically the guaranteed deferred income component has been 5-6%. You'd get the higher of the two values (market investment versus the deferred guarantee). I had one with a 10% guaranteed deferred side growth. It's a lot more complex than a description here can provide but essentially you're paying higher fees and therefore under performing the market in return for guaranteed income for life.

Bob Baerker
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This question is unanswerable as there are many important variables:

  • How many years you expect to live
  • What you expect to happen if you live less or more than that
  • Whether you want exactly $1000 or can tolerate some variation
  • How much work you expect to do to keep the money flowing
  • How much security you want against unexpected catastrophes such as the economy collapsing
  • Your tax situation

All of these have a huge impact. If you can tolerate a lot of risk, even 170k invested in stocks will generate about what you want. But obviously there will be months when you actually get 0, or even lose money. Meanwhile, you can get a certificate of deposit at 0.5% which is very reliable and takes no work but you will need 2.4M for the income you want. And this is all before considering taxes.

Money Ann
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Usually the best investment for a start is buying a house/apartment, if you don't have one yet. The rent you pay every month could easily amount to $1000/month, and it will adjust itself for inflation )

Alatoo
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