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Ben Carlson’s column today is a reprint of a method for sustainable retirement spending. You start by calculating your spending requirements in retirement (although I don’t see an allowance for inflation) and have four year’s worth set aside in cash or cash equivalents by the time you retire. Then there are rules for when you withdraw from cash or stock, and when you replenish cash. It sounds like the remainder of the portfolio is all in stock. I didn’t follow that method, as I only have 50% of my portfolio in stock, but it is an interesting approach, and worked for him, despite starting retirement in early 2000.
I am not in a position to comment on this because I don’t rely on investments for income, but it’s something I think about. I can’t imagine myself dealing with the issue and all the variables to consider regarding withdrawals and investments.
People who read and write on HD are different. Far more involved. I wonder how more financially average people deal with all this.
Do they attempt to follow the – often conflicting – advice of the so-called experts? Are they turned off to annuity income streams because some guru says they are a bad investment?
I know one thing, a steady, guaranteed income stream is peace of mind.
So true. With 110% guaranteed income and now needing our retirement accounts we have piece of mind
Imagine your two favorite financial gurus issue new review articles today and you read them both, found their ideas and reasoning compelling, but their messages are quite different from each other. What do you do? Which one is right?
I think its useful to understand each writers’ goals, and interpret their ideas through that lens. For example, Bill Bernstein has explicitly stated that the goal ought to be, once retired, to not run out of money. Some authors prefer keeping smaller cash and short term bonds allocations, with most in stocks. Their goal, at lest implicitly, is to maximize long term portfolio growth. So, maybe they are both “right”, depending on what your own goals are. I try to remind myself what my own goals are, in order to avoid acting on emotional reactions to the non-stop financial media reports. (Charlie Munger: “Don’t do anything stupid”).
Many fellow commenters wisely point out that one difficulty with applying general rules of thumb, is that some of us have very modest nest eggs, while a few at the other end of the spectrum have more money than they could ever spend.
I read articles from prominent financial figures to understand their thinking and reasoning, not to implement their ideas. My approach is straightforward: I know my financial situation better than anyone else. With my education, business background, and experience in finance, I’m fully capable of managing a portfolio aligned with both my risk tolerance and capacity for risk.
Constantly shifting between investment philosophies is counterproductive. The key is to construct a solid plan and maintain discipline. Financial articles should inform your thinking, not dictate your actions.
The best portfolio isn’t the most sophisticated—it’s the simplest one that accomplishes your specific objectives.
Yep
Good points. I’m with Bernstein, I want the money to last. I want it to last longer than I do – dying with zero would be way too stressful!
I wouldn’t follow this plan as written myself, nor the AAII version Mark writes about, because I wouldn’t want everything other than four or five years spending in equities. That is far more exposure to volatility than I want. Instead, my asset allocation specifies 50% in stock funds, and I rebalance when I take my RMD. If I noticed I was off by 5% or more I would rebalance then, as well. Currently I am spending about 1%, if/when I get to 4% maybe I will reconsider.
I find all these discussions about various rules for spending to be very interesting. As I consider their advice, I find myself having to put them into the context of the amount of retirement assets which a person has to help judge their validity. What I think I am saying in a round-about way, is if you don’t have a meaningful amount of retirement assets, all the rules won’t help you. And, if you are really flush with $$, the rules don’t really apply.
Or, said another way, if you have enough retirement assets to cover 25 years of spending (excess of SS/pension), then putting 4 years of spending into MMFs or CDs and following this plan will no doubt work. However, if funding your 4 years of expenses takes most of your bucks, you might struggle over your retirement.
Interestingly, the 4% spending rule also works if you have 25 years of spending covered……:-)
I’m totally with you. Essentially the true “secret”, if there’s really such a thing, to successful retirement is accumulation first, and risk management (the spending rules) second.The rules are really guardrails for the Sufficient Portfolio, designed to prevent the failure of a plan that is otherwise sound. They cannot rescue a plan that is fundamentally underfunded.
Thanks Kathy. I just read Ben’s article. Noting the story isn’t his own experience but that of a friend and fellow financial writer John, most of the post is actually John’s words, including the below (bold is in the original):
“Please note that what I say below is based on the following two key assumptions about the stock market.
As John says, these are important assumptions. Also, what about sideways markets? These can last a lot longer, though the impact of selling in them is much less. I don’t care to do the math, but I know personally want more of a buffer than four years.
To each their own. Still a useful piece, the important message in which is having “enough” cash.
AAII has an article (membership might be required) that expands upon this strategy, emphasizing the primary objective of preventing forced selling of equities during down markets to generate cash for spending.
The strategy is structured as follows:
1. Establish a “Safe Bucket” with 3–4 years of planned withdrawals before retirement.
2. Maintain the rest of your portfolio fully invested in equities.
3. On a yearly basis (designated as a “decision day”), assess the market conditions.
4. Compare the S&P 500 level to its all-time high.
If the index falls by more than x% (adjust the threshold based on your preferences), that year is considered a down year.
5. In normal (upward or stable) years, withdraw funds from your equity portfolio. Refill the safe bucket to 4 years’ worth of spending (as outlined below in 7).
6. In down years, withdraw funds only from the safe bucket. Avoid selling equities during the downturn and maintain a defensive stance until the market recovers.
7. Rebuild the safe bucket gradually after recovery. Accumulate half of the shortfall each year for two years. Pause rebuilding if another downturn occurs.
There is also a three bucket portfolio designed by Bill Bengen. 1-2 years of cash needed to top off any income above Social Security, annuity or pension to meet annual spending needs. The balance up to a total of 10 years in short term bonds. Finally any left over dollars in equities. Refill each bucket unless the market is down, instead spending from cash first, then if necessary from bonds. The reasoning is that the majority of down markets recover within a decade.
Should we assume “holding 4 years of expected expenses in cash” would mean expenses over and above Social Security and annuity etc. Is that right?
Yes, that’s right.
I read Jane Bryant Quinn’s book “How to Make Your Money Last” 2-3 years before retiring. One of her central tenets was holding 4 years of expected expenses in cash in a “bucket” if I recall to weather any potential severe market downturn to help one sleep well at night. At the time Jane mentioned that most severe market declines historically didn’t not last longer than 4 years (I’m sure there are exceptions). I would include some inflation factor on those 4 years (she may have mentioned this as well- I last read the book about 8-9 years ago). Ben Carlson’s article seems to be a rehash of her approach to holding a set # of years in cash/CDs/ST T-Bills, via a bucket approach which Jane advocated. I do hold a minimum of 4 years expenses in Cash/ST fixed income. The cash bucket is meant to be a holding within ones overall fixed income allocation.
If you have not read this book, it’s worth a read (for pre/early retirees) even though it’s a bit dated (appears a second edition came out in 2020).
Kathy, thanks for pointing out Carlson’s post. I agree with the author’s approach and his conclusion, that it is better to keep a cash reserve of actual living expenses, rather than a rule-of-thumb figure. It’s essentially the same advice that Jonathan gave many times, to hold about five years’ worth of expenses in cash or cash equivalents, like short-term government bonds.
I agree. Hold _ years of expenses in cash is much more useful than hold _ percent.
I suppose I am doing a version of it, as I have a five year CD ladder. I just have bonds as well as stock in addition.