Balancing present needs with future aspirations.
The Johnsons, earning $450,000 annually, faced the challenge of simultaneously funding three children's college education and maximizing their existing $2.1 million retirement accounts. They needed to identify investment strategies that could generate consistent, predictable income without jeopardizing their long-term financial security or requiring extensive active management. The cost of college was a daunting prospect.
Using the Residual Income Calculator, we identified a portfolio of dividend-paying stocks and real estate investment trusts (REITs) that generated an average annual yield of 5.5%. After accounting for the Johnsons' cost of capital (estimated at 3.5% based on their debt and investment risk profile), the residual income amounted to 2%, translating to roughly $35,000 annually based on a $1.75M investment. This income stream directly funds 75% of their projected annual college expenses, giving them significant peace of mind.
The Residual Income Calculator allowed us to input the investment's potential income, the cost of capital (weighted average), and calculate the excess return. This was supplemented by analysis from the Tax Equivalent Yield Calculator to compare investments across tax implications.
$35,000 annual income stream contributing to college expenses and improved financial stability.
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