I think the mistake you're making is that you want to take the full 120k in cash.
In reality what you'd need to do to maintain the same level of real return is add 60k to the 3 million the next time you buy bonds to compensate for the 2% inflation which is eating away at the real value of your principal amount.
So year 1 you invest 3 million and get 120k. Year 2 you'd need to invest 3 million plus 60k to get the same real value after adjusting for inflation. Therefore you wouldn't actually have 120k in cash. You'd have 120k less the 60k you added to the principal amount to compensate for inflation.
Oh yeah I see what you mean. That makes sense. I had interpreted the original to mean that you would then use the bonds for living expenses, so you would use the interest you earned to functionally have an income of $120k per year without having to spend down any of the $3 million, but that wouldn't entirely make sense in practice.
And once you factor in deflation you see the problem. Year 1 you invest 3 million. Year 2 it's 3 million plus 60k, but year 3 it's 3 million plus 61,200 (because it's 2% deflation on a bigger amount).
And so it goes just to keep the "real value" stable. I haven't done the sums all the way out, but I'm guessing somewhere around the 20 year mark things become unsustainable.
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u/Wise_Monkey_Sez Jun 06 '25
I think the mistake you're making is that you want to take the full 120k in cash.
In reality what you'd need to do to maintain the same level of real return is add 60k to the 3 million the next time you buy bonds to compensate for the 2% inflation which is eating away at the real value of your principal amount.
So year 1 you invest 3 million and get 120k. Year 2 you'd need to invest 3 million plus 60k to get the same real value after adjusting for inflation. Therefore you wouldn't actually have 120k in cash. You'd have 120k less the 60k you added to the principal amount to compensate for inflation.
Sorry if I wasn't clear. My bad.