Millionaires, Billionaires, and Teachers

[Geee]

American Thinker:

Our President likes to use the phrase "millionaires and billionaires." A person whose net worth is $1 million or more is a "millionaire."

Most of us working stiffs have trouble thinking in terms of net worth; we are more used to the concept of annual salary. How does net worth translate into annual income, or vice versa? In round numbers, the annual income equivalent is 4% of an investment nest egg. So if you have $1 million socked away, consider that to be equal to $40,000 income every year.

Now this "4% rule" is based on a planning horizon of about 30 years, meaning it is used primarily for retirement planning, or people over 50. If you're young, you should probably go with, say, government bond yields. Today's 30-year US bonds yield about 2.8%. So if you are more like 30 years old, your $1 million life savings is more like an annual income of $28,000.

(By the way, this investment-income equivalence exercise is the same as pricing an annuity. I dare you to try to price an annuity. There are many web sites that will tell you how to build a watch, but virtually none tell you the time. I'll save you some research: the 4% rule is not far from the mark.)

So in round numbers, let's say a $1 million investment nest egg is equal to an annual income of $40,000. Suddenly, $1 million doesn't seem so rich. That relationship can be turned around: if you have an annual pension of $40,000, you are effectively a millionaire, especially if that pension is adjusted for cost of living