Gary Vodicka brags that he could live off the interest of his settlement with SMU. Really? REALLY really? I don’t think so. I asked someone who’s better with numbers than I to do the math. His back-of-envelope figuring:
The settlement is taxable — either as a capital gain (if it relates to damages to a capital asset, such as a house) or ordinary income (if it relates to, say, loss of income). Let’s give him the benefit of the doubt and assume that it’s taxable at the most favorable long-term capital gains rate of 15%. But first, we have to figure in the attorneys’ fees — of 40% of the recovery (after expenses). I believe that most people could live comfortably on $120,000 after taxes ($10,000 per month to spend), meaning that they would have to earn around $160,000 in interest (assuming an effective tax rate of 25%, figuring in the graduated rates), because interest is taxable as ordinary income. Finally, you have to calculate what the yield is on your super-safe, retirement-protected investment that produces your interest. The 10-year Treasury bond is yielding 3.8%. So working backward:
1. $160,000 / .038 = $4,210,526 in 10-year Treasury bonds.
2. $4,210,526 / .85 (the inverse of the long-term capital gains rate) = $4,953,560 in pre-tax, after-legal-fee recovery
3. $4,953,560 / .60 (the inverse of Friedman’s legal fee cut) = $8,255,934
I would be willing to bet $8,255,934 that he did not recover $8,255,934 from SMU in a settlement. Ergo, he can live on a whole lot less than $120,000 per year after tax — or he has no clue how much he’s going to have left after Larry Friedman and Uncle Sam take their cut, and he doesn’t understand how fixed-income-producing assets work.
