Growth-per-year is one of those fictional numbers that investors play with when they are feeling anxious or hopeful. Say you invest $1,000,000 of your hard-earned money in the stock market. How much can you expect that money to grow over the next year? How much over the next two years? Three years? Five years? Ten years?
No one wants to be pinned down because you cannot predict how the stock market will move in the short term. In fact, you really cannot predict how it will move over the next 50 years. We just know from 100+ years of tracking stock values that the markets tend to decline, recover, and then build up wealth. The cycles might run every 5 years for a while, then every 10 years, and then get stuck for 15-20 years.
Assuming you diversify your holdings and reinvest dividends, etc. I usually figure you can grow your wealth about 2% in a given year. Some years will be better but 2% growth should be easy to achieve. But you have to diversify your investment. You can’t just put all that money into an index fund.
For example, since 1975 the Dow Jones Industrial Average has had 10 negative years — years in which the total value of the index SHRANK. The worst year was 2008 when the Dow Jones lost about 1/3 of its value. Had you been counting your investment for income that year, and had you placed it all in the Dow Jones, you would have eaten a hole in your capital.
If you want to put your money into the stock market and retire, living off the income, you need to structure your investments so that they return at least twice what you intend to withdraw. That will keep your principle relatively stable but it doesn’t allow for much growth.
If you want to live on $250,000 a year (plus growth for inflation) you’ll need to invest $12.5 million at a structure that has a 98% probability of earning 4-5% growth a year. That is not interest, that is growth.
This kind of number crunching is what I call “the Lottery Game”. If I win $20 million in the lottery, how much money do I need to invest so that I never have to work again? Assuming you take the cash option and get to keep about $11 million of your winnings, you won’t have enough to start paying yourself a $250,000 salary and protect your investment.
So if you don’t have $12.5 million lying around, you’re not likely to inherit it, and you don’t win it in the lottery your chances of paying yourself a base salary of $250,000 for life are non-existent.
I keep my growth estimates conservative because I don’t like buying dreams. Dreams come to an end and if you invest in them too much they turn into nightmares.
By the way — the Dow Jones went through three years of negative returns from 2000 to 2002. So don’t even hope you can predict a “safe window” for your investments. The longer you leave them alone the more time you’ll have to build up enough wealth to weather almost any financial storm.