Author Topic: Estimate how long money will last withdrawing $x amount?  (Read 8926 times)

lascott

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Estimate how long money will last withdrawing $x amount?
« on: January 28, 2015, 11:07:42 PM »
A friend and I were having a discussion about retiring early at some point.  Say you wanted multiple income streams with LendingClub being one of them.

Let's say you wanted to invest some amount into LendingClub that lets you withdraw $2000/month for 8 years (i.e. from age 51.5 to 59.5). Assume 8% interest [avg(C,D,E) here https://www.lendingclub.com/info/demand-and-credit-profile.action ]

Does this sort of online calculator give you a ballpark estimate? Would you need to let it calculate $2100/month just to be safe and deal with more LC nuances[update - ie. payoffs, reinvestment lag, no interesting w/money in cash account]. Note that the "Ending Account Balance" is near zero because I'm assuming you would "use it all up" vs having a perpetual $2000/month. I'm talking about just for an 8 year span until age 59.5.

http://www.calculatorsoup.com/calculators/financial/future-value-investment-account-calculator.php

« Last Edit: January 29, 2015, 11:23:23 AM by lascott »
Tools I use: (main) BlueVestment: https://www.bluevestment.com/app/pricing + https://www.interestradar.com/ , (others) Lending Robot referral link: https://www.lendingrobot.com/ref/scott473/  & Peercube referral code: DFVA9Y

AnilG

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Re: Estimate how long money will last with drawling $x amount?
« Reply #1 on: January 29, 2015, 12:21:14 AM »
You need to calculate Present Value of regular cash flows. Use a discounted cash flow model or amortization calculator. The calculations are exactly same as you are taking out a mortgage of $X that will be paid of in 8 years at 8% annual interest and monthly payment of $2,000 that will pay off the original mortgage amount.

Monthly payment = $2,000
Payment Periods = 8 years x 12 = 96 months
Monthly interest/return/discount = 8%/12

The $X (PV) is what you will need today in Lending Club to generate a desired monthly cash flow assuming the annual returns are same as you expected.
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Fred

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Re: Estimate how long money will last with drawling $x amount?
« Reply #2 on: January 29, 2015, 12:50:07 AM »
LC fees are 1% of the payment (principal+interest).  The calculator's fee is 1% of account -- typical for investments in mutual funds, however, this is much higher than LC fees.

Tick the "Print Schedule" check box to see what's going on.

lascott

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Re: Estimate how long money will last with drawling $x amount?
« Reply #3 on: January 29, 2015, 01:02:41 AM »
Thanks for the input guys. I'll study this some more based on your input. It was the 1% fee that I was trying to "account" for ... or thought I needed to (i.e. some of the other nuances of LC:  payoffs, reinvestment lag, no interesting w/money in cash account).

I found $141,500 number in a couple of different calculators worked. This is much different than $125,000.

Savings Withdrawal Calculator
http://www.bankrate.com/calculators/savings/savings-withdrawal-calculator-tool.aspx


Amortization Calculator
http://www.calculator.net/amortization-calculator.html?cloanamount=141500&cloanterm=8&cinterestrate=8&printit=0&x=58&y=10
« Last Edit: January 29, 2015, 10:11:22 AM by lascott »
Tools I use: (main) BlueVestment: https://www.bluevestment.com/app/pricing + https://www.interestradar.com/ , (others) Lending Robot referral link: https://www.lendingrobot.com/ref/scott473/  & Peercube referral code: DFVA9Y

AnilG

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Re: Estimate how long money will last with drawling $x amount?
« Reply #4 on: January 29, 2015, 01:24:11 AM »
Good job! Basically, you are trying to create an annuity that will give out regular constant payments. This is how income trusts and cash flow based investment partnerships work.

Next step is for you to worry about volatility in monthly cash flow. The 8% average annual return is over 8 years. The $2,000 per month cash flow assumes that your monthly return will always be constant at 8%/12. But monthly returns will never be same every month. The variations in the late and charge off from month to month that will make your monthly cash flow fluctuate. You need to create a loan loss reserve from which you can withdraw when the cash flow during the month drops below your threshold and put into loan loss reserve when cash flow is above your threshold to smooth out the fluctuations in monthly cash flow.
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PeerCube Thoughts blog https://www.peercube.com/blog
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lascott

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Re: Estimate how long money will last with drawling $x amount?
« Reply #5 on: January 29, 2015, 10:39:58 AM »
Good job! Basically, you are trying to create an annuity that will give out regular constant payments. This is how income trusts and cash flow based investment partnerships work.
Yes, an "annuity" with much less invested to get $2K out, and something I can watch, and something without "excessive" fees. :)

Next step is for you to worry about volatility in monthly cash flow. The 8% average annual return is over 8 years. The $2,000 per month cash flow assumes that your monthly return will always be constant at 8%/12. But monthly returns will never be same every month. The variations in the late and charge off from month to month that will make your monthly cash flow fluctuate. You need to create a loan loss reserve from which you can withdraw when the cash flow during the month drops below your threshold and put into loan loss reserve when cash flow is above your threshold to smooth out the fluctuations in monthly cash flow.
Curious. I figured with $141,500 @ ~$50/note is 2830 notes of diversity. $2000 = 40 $50 notes (1.4% of total). I thought it would balance out over the years as that many notes would be a "smooth" income stream. I was just guessing if whatever tool I use that I tell it to only reinvest any money over $2000 that I would just pull out $2000 out of the "cash account bucket" and let it refill.

What you saying makes a lot more sense and would seem to be a bigger risk for an investment in the stock market that could fluctuate a lot annyually. That is the other early retirement piece of income using a Trad IRA before 59.5 -- using Substantially Equal Periodic Payments (SEPP) (aka rule for 72t).  Here you have to take out a very specific amount every year regardless of the state of the market. For that time of account/situation you would need a reserve (bucket) that you could pull from even in a down market so you are not forced to sell more "shares" at a lower price.
Tools I use: (main) BlueVestment: https://www.bluevestment.com/app/pricing + https://www.interestradar.com/ , (others) Lending Robot referral link: https://www.lendingrobot.com/ref/scott473/  & Peercube referral code: DFVA9Y

brycemason

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Re: Estimate how long money will last with drawling $x amount?
« Reply #6 on: January 29, 2015, 11:20:51 AM »
You may need to consult with a southerner for drawling annuities.

lascott

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Re: Estimate how long money will last with drawling $x amount?
« Reply #7 on: January 29, 2015, 11:24:39 AM »
You may need to consult with a southerner for drawling annuities.
That was funny. Took me a second to get what you meant.  Re: Title had "with drawling"
Tools I use: (main) BlueVestment: https://www.bluevestment.com/app/pricing + https://www.interestradar.com/ , (others) Lending Robot referral link: https://www.lendingrobot.com/ref/scott473/  & Peercube referral code: DFVA9Y

rawraw

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Re: Estimate how long money will last withdrawing $x amount?
« Reply #8 on: January 29, 2015, 11:36:43 AM »
I think the current period of low delinquencies has you complacent.  Past due rates and the resulting return is not constant and 8 years is a fairly long time

lascott

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Re: Estimate how long money will last withdrawing $x amount?
« Reply #9 on: January 29, 2015, 11:54:28 AM »
I think the current period of low delinquencies has you complacent.  Past due rates and the resulting return is not constant and 8 years is a fairly long time
I always appreciate your injections of reality in our current dream world. I'm fairly conservative in the notes I invest in so I hope this lets me do better than average. Still even if I change it to 7% that is only a $5,500 difference ($147K vs $141.5K). I was already planning on putting above that as a cushion.

http://www.bankrate.com/calculators/savings/savings-withdrawal-calculator-tool.aspx


https://www.lendingclub.com/info/demand-and-credit-profile.action
Tools I use: (main) BlueVestment: https://www.bluevestment.com/app/pricing + https://www.interestradar.com/ , (others) Lending Robot referral link: https://www.lendingrobot.com/ref/scott473/  & Peercube referral code: DFVA9Y

rawraw

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Re: Estimate how long money will last withdrawing $x amount?
« Reply #10 on: January 29, 2015, 12:09:28 PM »
Only reason I bring it up is that the number seems to be really important once you are living on it (unless your bills are 800 a month or something).  I don't think 8% is unreasonable, but if you had a 2008 happen in your 8 year time horizon you may end up doing significantly different than that.  I like Anil's suggestion of building a loan loss reserve to offset those times.  You could aim for a 8.5% and save the .5% every year, for example.  I think even A and B loans had really low returns on LC during the crisis, but they were still positive.  This really is only important based on the required accuracy for your living situation.  If your bills were 1900 and you are doing 2000, then I'd be concerned and want to take some precautions.

lascott

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Re: Estimate how long money will last withdrawing $x amount?
« Reply #11 on: January 29, 2015, 01:17:14 PM »
Only reason I bring it up is that the number seems to be really important once you are living on it (unless your bills are 800 a month or something).  I don't think 8% is unreasonable, but if you had a 2008 happen in your 8 year time horizon you may end up doing significantly different than that.  I like Anil's suggestion of building a loan loss reserve to offset those times.  You could aim for a 8.5% and save the .5% every year, for example.  I think even A and B loans had really low returns on LC during the crisis, but they were still positive.  This really is only important based on the required accuracy for your living situation.  If your bills were 1900 and you are doing 2000, then I'd be concerned and want to take some precautions.
Appreciated you taking the time to make that response.
Although I'm only above average in my financial knowledge (obvious by many of my post), I am a pretty good researcher and have studied retirement personal finance for 20+ years. I do learn new things every few months tho so I keep reading and researching.

I think a safe and happy early (pre-59.5) retirement needs a few of these types of things and this is what I'm planning.
  • No mortgage
  • Reasonable car payment for a long term car a few years before you retire (or pay cash for mental freedom).  Auto interest < LC investor interest.
  • Multiple sources of income
    • Self: 401K made into a rollover IRA and use SEPP/72t to get a fixed income until age 59.5
    • Spouse: 401K made into a rollover IRA and use SEPP/72t to get a fixed income until age 59.5
    • LendingClub investor income and take monthly amounts to deplete it at roughly age 59.5
    • Ability to take contributes (but not gains) out of ROTH IRA without penalties.
  • Modest ($10K) Emergency fund in something like Ally Online Savings (0.99% compounded daily)
« Last Edit: January 29, 2015, 05:21:41 PM by lascott »
Tools I use: (main) BlueVestment: https://www.bluevestment.com/app/pricing + https://www.interestradar.com/ , (others) Lending Robot referral link: https://www.lendingrobot.com/ref/scott473/  & Peercube referral code: DFVA9Y

AnilG

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Re: Estimate how long money will last withdrawing $x amount?
« Reply #12 on: January 29, 2015, 03:36:02 PM »
Good luck in your FI/ER journey. I am sure you are aware of /r/financialindependence, Boggleheads, Early Retirement Extreme, and Money Mustache.

Rawraw and I agree on importance of maintaining constant cash flow when you are depending on that cash flow for living. In this case, I don't believe it really matters whether you aim for 8% or 7% or 6% average return. What matters more is that you are able to maintain the smooth cash flow in the short term i.e. accommodate the variability in returns from one month to another, from one year to another. Take a look at term "Volatility Gremlins" that does much better job of explaining the impact of return variability.

http://www.capitalideasonline.com/articles/index.php?id=1764

One factor, you may need to consider is that you are aiming for smooth cash flow for 8 years while the loans are 3 and 5 year duration so you will need to reinvest some of the monthly payments you receive from Lending Club. This is where gremlins may show up. The months where you have lower monthly payments (higher charge offs and late loans), you will have lower amount to reinvest after taking out the "constant" cash flow. This lower reinvestment will result in smaller monthly payments in future months. A few such cycles will get your plan off-track unless you have some sort of reserve to compensate for the variable amount for reinvestment as well as withdrawals.

I have been engaged with income trusts/LLPs/funds with constant income stream. We spend quite a bit of our time on managing this variability, figuring out right amount of reserves, and adjustments that need to be made on monthly and quarterly basis. Most of the strategy and methodology is proprietary. But instead of focusing on average returns, I suggest you focus on two main things: the withdrawals to reinvestment ratio and the coverage of future non-payments from late and defaulted loans.

Also, take a look at some of the technical literature on fixed-income annuities. You are creating annuity for yourself, you might as well learn how professionals develop annuity products.

Appreciated you taking the time to make that response.
Although I'm only above average in my financial knowledge (obvious by many of my post), I am a pretty good researcher and have studied retirement personal finance for 20+ years. I do learn new things every few months tho so I keep reading and researching.

I think a safe and happy early (pre-59.5) retirement needs a few of these types of things and this is what I'm planning.
  • No mortgage
  • Reasonable car payment for a long term car a few years before you retire (or pay cash for mental freedom).  Auto interest < LC investor interest.
  • Multiple sources of income
    • Self: 401K made into a rollover IRA and use SEPP/72t to get a fixed income until age 59.5
    • Spouse: 401K made into a rollover IRA and use SEPP/72t to get a fixed income until age 59.5
    • LendingClub investor income and take monthly amounts to deplete it at roughly age 59.5
    • Ability to take non-gains part out of ROTH IRA without penalties.
  • Modest ($10K) Emergency fund in something like Ally Online Savings (0.99% compounded daily)
---
Anil Gupta
PeerCube Thoughts blog https://www.peercube.com/blog
PeerCube https://www.peercube.com

Randawl

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Re: Estimate how long money will last withdrawing $x amount?
« Reply #13 on: January 29, 2015, 10:20:37 PM »
I think the current period of low delinquencies has you complacent.  Past due rates and the resulting return is not constant and 8 years is a fairly long time
I always appreciate your injections of reality in our current dream world. I'm fairly conservative in the notes I invest in so I hope this lets me do better than average. Still even if I change it to 7% that is only a $5,500 difference ($147K vs $141.5K). I was already planning on putting above that as a cushion.

http://www.bankrate.com/calculators/savings/savings-withdrawal-calculator-tool.aspx
...
https://www.lendingclub.com/info/demand-and-credit-profile.action
...


This may have already been mentioned, but keep in mind that the ANAR "Historical Returns" by grade that LC is displaying includes a great deal of notes that have not completed and some that are quite young.  You should really be looking at only completed loans for a return estimate, because your portfolio will eventually fully mature.

lascott

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Re: Estimate how long money will last withdrawing $x amount?
« Reply #14 on: January 30, 2015, 01:21:19 AM »
This may have already been mentioned, but keep in mind that the ANAR "Historical Returns" by grade that LC is displaying includes a great deal of notes that have not completed and some that are quite young.  You should really be looking at only completed loans for a return estimate, because your portfolio will eventually fully mature.
Thanks. From LendingRobot it looks like 6.5% may be a good conservative number for mature notes. My filters are pretty strict so I think I can do better, tho.

https://www.lendingrobot.com/#/resources/charts
http://i.imgur.com/MaJXjcY.png
Tools I use: (main) BlueVestment: https://www.bluevestment.com/app/pricing + https://www.interestradar.com/ , (others) Lending Robot referral link: https://www.lendingrobot.com/ref/scott473/  & Peercube referral code: DFVA9Y