Battle royale game Fortnite has become a phenomenon. The video game played by roughly 250 million players worldwide has generated billions of dollars and an obsession for gamers of all ages. But the real headline at the end of July 2019, was Bugha, a 16-year old American boy who took home the grand prize of US$3 million during Fortnite’s World Cup finals at the Arthur Ashe Stadium in Flushing, New York.
This raises the question, can Bugha retire at the age of 16? Will his prize money, roughly US$1.5m after taxes, last for a lifetime which in his case is another 60.7 years, according to the US Social Security Administration’s Actuarial Life Table?
Retirement is probably the last thing a 16-year-old worries about and frankly most actual or wishful retirees find it daunting and impossible to estimate how long their assets might last given the long time horizon and market uncertainty involved.
There is no simple answer, but there is a simple model Quantifeed developed to provide tailored solutions to an individual’s unique retirement challenge so even a 16-year-old can plan a retirement strategy easily.
Let’s use Bugha’s example as an illustration. For Bugha to retire at the age of 16, we will need a few basic input values. One is the starting capital, US$1.5m in this example; a second one is the targeted annual withdrawal amount. We assume that Bugha consumes US$60,000 per year, the median household income in his home state Pennsylvania and equals to 4% of his starting capital after taxes. A third parameter is the investment strategy chosen.
With a long horizon and assuming Bugha likes to take risk given he’s a Fortnite player, we consider a pure equity investment modelled on the S&P 500 Index, which over the past 20 years has returned on average 7.1% p.a., including dividends, with an annualised volatility of 14.6%.
Our calculations show that with such an investment, there is an 64% probability the funds will last 61 years or longer. But also, a 10% probability that funds will be used up in 26 years or earlier in a bear market scenario.
If the potential shortfall is a concern, our model shows that a de-risked portfolio improves the prospects of capital sustainability under the most adverse market conditions.
Investing in a moderately conservative portfolio, such as the one Quantifeed has in its family of Target Risk strategies, a mix of fixed income, equity, and REITs, with an historic return of 4.1% p.a. and volatility of 4.7%, would extend the bear market horizon from 26 to 42 years. And the probability of the capital lasting longer than 61 years is increased to 66%.
Our framework invites the user to engage and play with different parameters. The interaction shows that, for example, when annual consumption is reduced to US$52,000, the capital would last 61 years with a probability of 90% or more.
Many retirees, although more likely in their sixties than their teens, find themselves assessing their life savings against their life expectancy and lifestyle expectations. By quantifying these dimensions, Quantifeed’s engine helps everyone achieve their investment goal with a sustainable retirement solution – we call this ‘wealthcare’. In fact, all of us should undertake such a quick ‘wealthcheck’ even years before retirement, to get an idea of how long we need to wait under different market scenarios.
|Investment||Income p.a.||Bear market horizon||Probability of lasting
61 years or longer
|S&P 500 ETF||60,000||36 years||81%|
|Quantifeed Target Risk Moderately Conservative model portfolio||60,000||42 years||66%|
|Quantifeed Target Risk Moderately Conservative model portfolio||52,000||59 years||90%|