$500,000 * 0.04625 = $23,125.00 (per year)
$23,125.00 / 2 = $11,562.50 (every 6 months)

In order to match the coupon payments cited of $4,625.00, Bill would have had to have purchased $200,000 T-Notes.

$200,000 * 0.04625 / 2 = $4,625.00 (every 6 months)

This is a huge difference in the amount of principal tied up, since as written Bill has six times $500,000 or a cool $3 million. In reality, though, I assume he only has $1.2 million in T-Notes.

As far as inflation, Bill needs to add to his principal every year. Bill took home ($4,625.00/month)*(12 months) = $55,500.00 for the year (gross). Assuming the numbers given are for 2006, according to the Bureau of Labor Statistics inflation calculator Bill needs an annual income of $57,358.81 in 2007 just to match inflation.

If he can maintain the 4.625% coupon interest then Bill needs to increase his T-Notes from $200,000 each to about $206,700, or his total invested principal from $1.2 million to $1.24 million.

That’s a difference of $40,000. But Bill’s income was only $55,500! It is impossible for him to “beat inflation” or even “keep up with” it given these numbers unless he’s only living on $15,500 a year. And that doesn’t buy a lot of golf after living expenses.

Of course if Bill really does have $3 million invested that gives him an annual income of $138,750, and if he is only living off of $55,500 of that then he has $83,250 left over to add to his principal. That means next year he’ll have an annual income of $142,600, of which he’ll still need $57,359 to live off of, leaving $85,241 to invest. This is just shy of the $86,038 ($83,250 adjusted for inflation) necessary to “last in perpetuity”. (Or at least another year, as I didn’t extend the analysis any further.)

In reality, though, Bill doesn’t need an income stream from interest only that is immune to inflationary erosion. At some point he won’t be able to play golf anymore and eventually he will expire. (Hopefully not anytime soon!) Leaving “several million dollars” to his heirs is a wonderful gesture, but there’s no reason he can’t tap into his principal. The catch of course is to be able to have the principal’s lifetime not fall short of our own lifespan and leave us penniless.

The overall premise is still interesting, though, especially as it avoids state and municipal (but not federal) income taxes. It would be interesting to compare this T-Note strategy to, for example, Fidelity Freedom Income Fund, a mutual fund designed for people who have retired before 1998. The asset allocation for this fund is 40% short term (money market and short-term bond), 20% domestic equities (stocks), and the balance in fixed income (bonds). It includes U.S. Treasury bonds such as T-Notes, to be sure, but only as a piece of a larger puzzle.