Coaching Buyouts and Contract Extensions Thread

[Cincydawg]

A while back, like 20 years, I tried to figure what I thought I'd need to maintain a "lofty" lifestyle, I came up with $20 million.  Interest rates were higher of course.  I personally don't aspire to owning a G5 or yacht or second mansion etc., so the figure came in fairly low (!!!).

One thing I think I'd enjoy is a part time personal chef, a guy or gal who would come twice a week maybe and prepare something pretty tasty, and then clean up.  Some chefs in Paris were doing this when their place was closed.  I like to travel, and I'd spend a chunk on that, these rental jet service things looks neat.  And of course I'd donate $10 million to the UGA football program for no reason.

[MrNubbz]

  And of course I'd donate $10 million to the UGA football program for no reason.

Had you been more generous 2 years back perhaps Fields would have stayed.Instead he jumped at my offer of a case of Natty Lite Tall Boys,a box of Jimmy Dean frozen microwaveable sausage/egg/cheese biscuits and a 1yr subscription to our Area 51 Premium Lounge.Some bagman you are - no Yuengling for you

[Cincydawg]

Yeah, Fields could well have won an NC at UGA.  Fromm had an off year as a junior, partly because our WRs were missing or not very good.

[medinabuckeye1]

If I had a net worth of $5M right now I'd consider myself rich--I could tell my boss to GFY and even if I never worked again, could live a VERY nice life off of passive income on that $5M.

I'm not disagreeing with you per-se, but I wanted to chime in here particularly because of the massive gap between your definition at $5M and:

I think you need close to a hundred million to meet my definition, 

I think you are both right, but it is worth exploring (to me anyway).  

When I think of "really rich" I think of people who might see Robin Leach knocking on their door (for those too young for this reference he did a show called "Lifestyles of the Rich and Famous" for many years).  By that definition, @bwarbiany 's $5M isn't even in the ballpark and even @Cincydawg 's $100M probably doesn't get you there.  

$5M sounds like a LOT of money and it is but it depends on lifestyle and location.  If you are happy/comfortable living an upper-middle-class life in Midwestern suburbia you can do that for a lifetime on $5M.  If you want to cavort with movie stars and live in a hillside mansion overlooking Hollywood . . . $5M will not pay the annual taxes and maintenance on the house let alone buy the house or pay for the lifestyle.  

The current yield on 20 US Treasuries is 1.46%.  Thus, if you invested your $5M in 20 year US Treasuries, you'd have an income of $73K.  One could certainly live on $73K/yr but Robin Leach will NOT be knocking on your door.  There are a few other things to consider, @bwarbiany mentioned "never worked again" and that is probably part of most people's definition (or at least not HAVING to work).  That $73K is BEFORE taxes and if you aren't working you have some other issues to contend with such as:

• Healthcare:  You could easily spend $23K/yr on healthcare.  
• What to do?  If you aren't working you might want to travel or take up some hobby.  Travel is expensive and hobbies can be depending on what your tastes are.  

By the time you pay taxes and buy health insurance that $73K is going to be down to probably $40K or less but lets call it $48K "take home".  That is $4,000 per month.  Like I said, you can live on it, but you aren't living a life of luxury.  If you want to (lets say) go to Paris, you can afford it but you'll probably need to fly coach, plan your trip in advance to hunt for deals, etc.  When I think of the "Wealthy" I think of some guy who can call his travel agent on Thursday morning and say "Hey, I want to take the wife (or g/f but not both) to Paris for the weekend, set it up."  THAT Paris trip is going to cost a fortune.  Somebody with $5M in the bank obviously could afford it, but certainly not very often because it would chew up a not insignificant portion of the principle.  

The long-term average on 20 year treasuries is roughly 3x the current yield so instead of $73K/yr you would be looking are $219K/yr.  Now we are getting into a higher-end lifestyle but Robin Leach still isn't knocking on your door and you still are not living in a mansion overlooking Hollywood.  

Then there is another issue, inflation.  Inflation has been so low for so long that most people don't really think about it anymore but it exists and every year it degrades your purchasing power.  If you are retiring at age 80 and inflation remains under control then it will not be an issue for you and your $5M nest egg.  OTOH, if you are in your 20's or 30's and/or if we get back to double-digit annual inflation like we experienced in the late 70's and early 80's then inflation is a major issue for you.  Annual inflation from 1973-1982:

• 6.2% 1973
• 11.0% 1974
• 9.1% 1975
• 5.8% 1976
• 6.5% 1977
• 7.6% 1978
• 11.3% 1979
• 13.5% 1980
• 10.3% 1981
• 6.2% 1982

Suppose you started out with $73K or $219K per year in today's dollars in 2020 then we experienced exactly that level of inflation over 10 years from 2021-2030.  By 2030 your $73k or $219k would only be worth $29K or $87K.  So if you started with $73K by year 10 you probably wouldn't even be able to afford healthcare and if you started with $219K by year 10 you'd be down to just a little more than the $73K we just talked about.  Even at more typical rates inflation can take a big bite out of your purchasing power:

• at 2% inflation your purchasing power is cut in half every ~34 years
• at 2.5% inflation your purchasing power is cut in half every ~27 years
• at 3% inflation your purchasing power is cut in half every ~22 years
• at 3.5% inflation your purchasing power is cut in half every ~19 years

None of those are too awfully alarming if you are 80 in year one but if you are 35 in year one . . .

In order to hedge against inflation I would say that you probably need to put about 20% of your gross earnings back into principle (ie, increase your $5M by 20% of your gross earnings each year).  NOTE, I said gross so it comes BEFORE taxes.  Now even the $219K starts to not look like all that much:

• $219K in annual earnings on your $5M at long-term average 20 year US Treasury Yield of a little under 4.5%
• $43,800 back into principle (20% of gross)
• $54,750 Taxes (this is probably a low estimate for Federal, State, and Local Taxes, 25%)
• $20,000 healthcare (this is probably a low estimate unless you are old enough for Medicare)
• $100,450 "take home"

That $100,450 works out to a little under $8,400/month.  That is a good life in Midwestern suburbia.  It will, as you said, keep you in late model Honda Accords.  You will not be driving Ferraris, cavorting with movie stars, or living in the hills over Hollywood and Robin Leach will not be knocking on your door.  


So, what about stocks?  Well stocks typically return a lot more than treasuries but they are also a lot more volatile.  Returns:

• The Dow Jones Industrial Average started on May 26, 1896.  From then through May 25, 2018 (123 years) it averaged a return of 5.42%.  
• The S&P 500 began as the "Composite Index" in 1926 and the average return on that from 1926 through 2018 was about 8%.  

The problem is the volatility.  If you have $5M at the depth of a major long-term trough in the market then you are loaded.  If you have $5M at the crest of a major long-term peak in the market, not so much.  If you had put the equivalent of $5M in a roughly average group of stocks in 1929 and just left it there you wouldn't have seen a balance of $5M again until the 1950's.  It took roughly 25 years for a 1929 investor to get back to even.  Now if you had put the same $5M in at the depth of the depression in the 1930's you'd have been VERY wealthy by the time the Germans bombed Pearl Harbor and you'd have been able to live a life of luxury by the time WWII ended.  Either way you'd probably be dead by now.  

Some more recent examples (using DJIA and -for simplicity- assuming that you buy on NYE):

• If you put your $5M in at the end of 1999 you were still under water on 12/31/2009 and only BARELY above that on 12/31/2010.  That is a decade of basically zero return.  
• If you put your $5M in at the end of 2002 it roughly doubled by 12/31/2013.  
• If you put your $5M in at the end of 2008 it more than doubled by 12/31/2014.  
• If you put your $5M in not long after Kennedy was assassinated (12/31/1965) you were STILL underwater at the end of Reagan's first year in office (12/31/1981) and you wouldn't have doubled your money until 12/31/1987 (22 years).  

[Cincydawg]

I live off my investments (which have had a banner year oddly enough).  I just started taking SS, it's still a bit of a surprise to me when that money shows up in my account. 

I told the wife if we won the lottery, I wouldn't move.  I like where we live.  Obviously there are some truly swanky condos near us, but not with this kind of view.  I might buy a cool car, but our GTI meets my needs.  Any money I have that I COULD need in five years is pretty much in "cash" despite the negligible yields.  Any I might need in 5-10 years is in pretty safe boring investments, Coca Cola etc.  After 20 years, I have some Apple and Costco etc. as I don't expect to need that money "sooner" and any market decline should recover before I need to rebalance.  I dabbled with buying Tesla two years ago and didn't.

The good news is I have more money now than when I retired in 2012 despite drawing it down for expenses.  Of course I know that may well not keep up, inflation is a worry for sure.  Property tax is a chunk, the HOA adds up about the same, I have a smallish loan on the condo.

I'm fortunate to be as rich as I really want to be.  I did scrap pretty hard back in the day to make is possible.  

[betarhoalphadelta]

So I look at it this way...

Agreed that $5M isn't going to get you the Beverly Hills mansion life. 

But you start with $5M. Take a hit up front and (California prices) spend $1M on a house--for cash--and clearing out all volatile bills (any debt, car payment, etc). Mortgage/rent and car payment is a HUGE portion of most people's monthly nut. Get rid of that and you have dropped your cash flow requirements significantly. 

Granted, now your initial net worth is down to only $4M, but you own your home free and clear so your largest monthly expense is gone. 

As you point out, you need to find investments that yield you better than 20-yr T-bills. Most of that $4M should be in stocks, not bonds. Granted, of COURSE you're taking risk there. But without a house or car payment, even in SoCal, do you think you can live on $100K/year? Probably and still live pretty well, including travel, entertainment, etc. So if $3.5M of your remaining $4M is in diversified stock investments and your remaining $500K is in shorter-term liquid investments, you're betting that your $3.5M will grow faster than you deplete your liquid assets. That bet may not work out, but you're not putting everything in low-yield T-bills. 

If that $3.5M is in an S&P index fund and it's earning 8%, by rule of 72 it should double every 9 years. Which means that you've basically had to spend $900K on an investment base that should have grown to ~$7M over that time (minus the extra $400K you had to take out, of course). 

There's of course risk there, and to some extent I'd be working on becoming a VERY astute investor if I had that kind of net worth and no day job--I dare say investment strategies would become a hobby of mine. 

And your choices aren't merely stocks or bonds. A former coworker of mine moved [back] to Boise and got out of the electronics industry and got into the property investment world. I get his email newsletters periodically about the investment properties he's offereing shares in. Putting money into, for example, his investment property offerings would be a good diversification from the S&P at relatively low risk. 

To be perfectly honest, I'm not at an age where $5M would cause me to quit my job, I think. I'm 42. I like my job, I'm good at it, and it's not like I'm in a coal mine ruining my health to do it--and the pay is great. I might get bored. My guess would be that I'd take it easy, spend a lot more time traveling, but keep working another 8-10 years and devote my free time into turning that $5M into closer to $10M so that the remaining life after 50 was a LOT more flush. 

But I'm pretty sure I could live quite well on a net worth of $5M if I never worked another day in my life. 

[Mdot21]

Rich = ultra high net worth individual = $30 million. 

Anything at that level or above is rich imo.

[medinabuckeye1]

FWIW, @bwarbiany , I don't disagree with any of that.  I just wanted to point out that $5M definitely wasn't what I think most people would think of as "super rich".  

I'm slightly older (45) but if I suddenly inherited $5M from some long-lost rich uncle I didn't know I had, my reaction would be about the same as yours.  I wouldn't quit my job in part because I like it but also in part because I'm not sure that I'd want to live the rest of my life on the return that I could get out of $5M.  

What it would do for me is this:
First, I'd stop saving for retirement.  Adding the $5M windfall to what I have already accumulated would mean that I didn't need to worry about that anymore.  That would give me a lot more disposable cash every year.  

Second, I'd live off my full income (instead of my income less savings for retirement) so my lifestyle would improve somewhat immediately.  

Third, I'd figure (by rule of 72 like you did) that my newfound $5M and my preexisting retirement savings would both double roughly every 8-10 years.  Now I know going in that if this is the crest of a peak then it is going to be more like 16-20 but barring something cataclysmic on the level of the Great Depression, I'd probably see my nest egg double by no later than my late 60's.  At yours or my age that means that we could pretty safely plan on a very comfortable retirement starting sometime in our 60's.  If the market over the next 15-18 years is particularly good, we could easily retire at 60.  If it is not so good over the next 15-18 years we could still easily retire by our late 60's.  

Even in my Great Depression example:
Assume 1929 = 2020, then

• 1954 = 2045, break-even
• 1959 = 2050, more than doubled

So even in a scenario of the Great Depression repeating itself we'd still break even by the time we were 67/70 and double our money by the time we were 72/75.  

[betarhoalphadelta]

We all agree that $5M isn't "super" rich. 

From here, though, let's look at the numbers: https://dqydj.com/average-median-top-net-worth-percentiles/

• The 90th percentile of household net worth is $1.2M. 
• The 95th percentile is only about double, at $2.6M. 
• To reach my $5M number, you're somewhere between the 97th and 98th percentile.
• The "1%", i.e. the 99th percentile, has a household net worth of $11.1M.

I'd venture that a net worth of $5M should be considered rich. You're in the top 3% of all households in the nation. I'd call that in the realm of "merely" rich. Garden-variety rich. But rich nonetheless. 

[Cincydawg]

Garden variety rich, I like it.


At some level of wealthy you have some ability to influence significant areas of interest, like athletics.

[medinabuckeye1]

We all agree that $5M isn't "super" rich.

From here, though, let's look at the numbers: https://dqydj.com/average-median-top-net-worth-percentiles/

• The 90th percentile of household net worth is $1.2M.
• The 95th percentile is only about double, at $2.6M.
• To reach my $5M number, you're somewhere between the 97th and 98th percentile.
• The "1%", i.e. the 99th percentile, has a household net worth of $11.1M.

I'd venture that a net worth of $5M should be considered rich. You're in the top 3% of all households in the nation. I'd call that in the realm of "merely" rich. Garden-variety rich. But rich nonetheless.

Agreed.  

The other part of this is whether or not you are still working/earning (other than from investments).  

If you were a very highly paid surgeon, attorney, or somesuch who made $2.5M/yr but you were a spendthrift whose net worth was only $1M you'd be below the 90th percentile in net worth per the figures you just posted but you'd be WAY above the 90th percentile in annual income because even those 1% people with a net worth of around $11M aren't making $2.5M annually in investment returns.  

What is rich?  What is super-rich?  Someone with a $2.5M annual income and ~$1M net worth is spending nearly all of their take-home pay on living expenses.  That is much closer to "Lifestyles of the Rich and Famous" than someone with 10x their net worth living on the investment returns on conservative investments of $10M.  

OTOH, if both are involved in accidents that leave them disabled so that they can't work that sucks for both but it isn't much of a financial burden for the person with $10M in assets and no earned income because he didn't have any earned income to lose.  For the person with $1M in assets and $2.5 in earned income that is devastating.  

Your same percentiles but for income instead of net worth:

• The 90th percentile household income is $201,000.  
• The 95th percentile household income is $271,000
• The 99th percentile household income is $532,000
• That $5M in 20 year US Treasuries is $73k or 52nd percentile.  

So if you had $5M in 20 year US Treasuries your wealth would be in the 97-98th percentile but your income would be around the median.  OTOH, the high earning individual from my example above with $2.5M in annual earnings and only $1M in net worth would be EASILY within the top 1% in earnings but not even in the top 10% in net worth.  

I guess I think of it this way.  You aren't REALLY rich until returns on your net worth invested in fairly conservative investments get you into the 1% so you need enough assets to generate $532k in annual income to hit my definition.  At the current, 1.46% 20 Year US Treasury Yield that would take about $36.4M.  

[Cincydawg]

That seems reasonable, but of course if we compute REAL income, you can't get there at all without riskier investments.

[Cincydawg]

Imagine you are 70 and have a burn rate of a million a year (AT).  You might live to be 100, so you'd need $30 million to spend a mil a year (presume any income merely adjusts for inflation).

I once looked at annuities, some of them make some unbelievable claims.  My adviser said they were not believable.

[betarhoalphadelta]

I guess I think of it this way.  You aren't REALLY rich until returns on your net worth invested in fairly conservative investments get you into the 1% so you need enough assets to generate $532k in annual income to hit my definition.  At the current, 1.46% 20 Year US Treasury Yield that would take about $36.4M. 

I guess I don't define "rich" as purely passive income that would *still* make you a 1%er. 

I get your point about the difference between income and wealth. Which of course is the question of what sort of lifestyle you need to maintain in a passive income scenario. If you're trying to maintain a very high-income lifestyle, you need a LOT more wealth than if you're trying to maintain a middle class or upper middle class lifestyle. 

That guy who had $2.5M in earned income and only $1M in net worth clearly has a very high end lifestyle, and he's going to need obscene amounts of wealth eventually to maintain it as a passive income. 

For me, I live an upper-middle class life. $5M in the bank would probably be enough to sustain that. $10M would definitely do it. $30M would sustain a lifestyle unlike any I've ever known.