Ask the Readers: Tell me about a Ridiculous Purchase

June 20, 2016 by Mr. 1500 Days

UPDATE: We have a winner for the “Guess my stupid purchase” contest. More details next week…

I am planning on buying something ridiculous that will set me back about $500 (queue Mrs. 1500 rolling her eyes). If this thing works, it will provide me with hours and hours of enjoyment. I won’t tell you what it is now, except that is has to do with balls and will make me a better player (I fully realize this sounds dirty). $10 Amazon gift card if you can guess it! Tune in next week for the answer.

Anyway, first we must get to the previous question.

Three weeks ago, I asked you about 5%. The question was this:

Would you take a 5% rate of return for the rest of your life?

The Financial Samurai had stated in a recent post that he’d take if for the rest of his life:

If I could get a steady 5% overall net worth return every year, I’d probably take it.

When I asked the question, I purposefully left out the issue of inflation to spice up the conversation. I was hoping that The Samurai would chime in and he did:

The thing people have to realize is that inflation and interest rates will likely be low for decades to come. Information, technology, experience, productivity, and international monetary coordination are the reasons.

5% a year is 3% above the current risk free rate of return. If you can earn 5% with little to no risk, that is HUGE on a decent financial nut.

Here is what the rest of you had to say.

Many of you would not take 5%:

I want to know how the The Russian Guy gets 10%!:

I assume it’s a tricky question, but I wouldn’t go with 5% when I can get 10% average.

Big No from Mr. Tako:

5% only looks good in today’s environment.

If you could go back in time to the 1970’s and ask this same question, they’d laugh in your face. Of course they wouldn’t take it! With long term bonds returning 10-15%, 5% looks like a terrible joke. That was the 1970’s.

Fervent Finance:

No I wouldn’t unless I was much older. I’m too young, dumb, and greedy I guess. Why settle for 5%?

Even Steven:

I’d pass. I think major reason being if today someone gave me the option to have an add-on CD at a fixed rate of 5% I would add it to my portfolio but not make it my entire portfolio. I prefer the risk of the stock market and the historical return it provides. The difference in 5% and 8% a year compounded annually has a vast difference especially as you get to year 30 and 40.

And, in the “I would take it” camp:

I like what Income Surfer had to say:

We would absolutely take a steady 5% annually on part of our portfolio, provided it was a safe and guaranteed return. With the rest of our portfolio, we would seek the lumpier returns we typically experience. A 5% nominal return exceeds the typical rate of inflation over the last 100 years, so it would allow your purchasing power to grow. You’d feel like an idiot in the 1970s and early 1980s…..but a rock star at many other times

ZJ Thorne:

A guarantee makes planning life easier. It may not be the wisest choice, but I would take it. And sleep better for it

Physician on FIRE:

I would take 5% guaranteed with the 25x expenses that makes me FI, knowing I could live with a 5% withdrawal rate indefinitely without drawing down from principal.

Money Beagle:

I think I would take it at this point. Remember it would count on savings and cash which right now earns zero for most people, and probably less than 1% if you’re on the high end.

Personally, I also think that the stock markets are going to be flat or at a smaller yield than normal over the coming decades.

Steve from ThinkSaveRetire:

Hell yeah, I’d take a guaranteed 5% for life (even knowing that my investments will probably net me more). Why? Because if I desire more dollars in the future, I can add to that pot of money, and while the 5% remains the same, the number of dollars that I get out of it increases. Percentages rock.

Reader Jeff has a smart answer:

This 5% for me would all depend on my age/place in life.
20’s – Nope
30’s – Nope
40’s – Nope
50’s – Maybe (only if financial independence was a year or two away to avoid a major crash for security/planning purposes)
60’s – Yep (in retirement, would rather worry about what I am going to do tomorrow than watch my bank account and stressing over annual returns)

And me

Before I asked the question, I did a lot of thinking about whether I’d take 5%. For my answer, I’ll assume the number doesn’t adjust for inflation. My investment egg is worth about $1,100,000, so 5% would give me about $55,000 the first year. Since I only need about $40,000 to live on, the 5% would be more than enough. In 12 years when my home is paid off, I’ll need $12,000 less, making it that much better.

Making 5% is even more tempting given the current state of the stock market. Mr. Bull Market has had a long run and valuations are high. Jack Bogle himself has said that we should expect only a 6% return for the next 10 years. I think that even 6% may be an optimistic number, so 5% is very tempting.

However, I wouldn’t take it. Over the next 4 to 5 decades that I have left to roam the planet, I think I can do better than 5%. Not much better, mind you. I’d take 7% in a heartbeat and maybe even 6%. I just can’t pull the trigger on 5% at this stage in my life or portfolio. If I had $2,000,000 or was over 50 years in age, my answer may be different…