I have a degree in music, so obviously I like numbers. (What? Music is math.)
Suppose you had ten million dollars. Suppose you invested that ten million dollars in such a way that you could guarantee a return of ten percent per year. That's a reasonable rate of return, producing a million dollars, before taxes.
Let's take off 40% for taxes. Now you have $600,000 coming in every year.
Suppose you hired 5 programmers at $90k annually. They can work from home, so $90k is a solid developer salary in the US for anywhere but Silicon Valley or New York City. Suppose you spent the other $30k for administrative expenses, including insurance and 401(k).
What could you do with five full-time developers? (That's an order of magnitude more paid full-time developers than Parrot and Perl 6 have, combined.)
Well, I didn't major in music, but I do work in finance. Realistically, if you have $10,000,000 and want to preserve it, a safe withdrawal rate is probably under 4% a year. Even if you have a higher rate of return on average, you need to bank it in the good years so that you don't eat into principal in the bad years (like we're having now). Spending $1,000,000 in a year when you already lost 20 - 30% on your $10,000,000 leaves you with a lot less to grow back when the market recovers. (And a 33% drop requires a 50% rebound just to get you back to the same place you started.)
Still, it's good to think just what would be necessary to permanently endow a programming team...
-- dagolden
Re:The assumption on returns is too high
chromatic on 2008-12-08T05:32:44
I'm considering a moderate rate of return averaged over a seven to ten year span. My personal finances follow that pretty well, though I do practice dollar-cost averaging (which really helps). I also estimated the tax burden higher than I think it will actually be; there should be ways to reduce that for producing free software.
Re:The assumption on returns is too high
dagolden on 2008-12-08T11:00:15
It all depends on what time period you want the income to last and what your risk tolerance is for running out prior to the end of the period. (This is equivalent to the question faced by retirees -- how much can I spend to last me X years?) If you're only thinking the money needs to last for 7 to 10 years, then a higher withdrawal rate is feasible.
Google for "sustainable withdrawal rate" or "portfolio success rate" and you'll find articles like these:
- How to Best Utilize Your Post-Retirement Portfolio
- A comparative analysis of retirement portfolio success rates: Simulation versus overlapping periods
You also need to consider what time period you're using for estimating future investment returns and the stability of those returns. (For example, US Dow Jones has had a 3% return or so since 1998.) You can't count on an average return over the time period -- the safe withdrawal rates take into consideration the risk that returns could significantly lag long-term averages for years.
-- dagolden
