Quote:
Originally Posted by LWJ
Ok. A question. For those who have retired without a pension (and, not counting SS) what percentage of your net worth do you use as an annual spend?
Example: say I have $1mm. Do I use 5% or all the way down to 3%?
I have been grinding on this (and other) related questions for a couple of years. Talking with the Advisor in two days. Last year, I challenged him to plan my retirement.
Wife didn’t buy it...
I think, as Higgins said above, I am “working for free.” Also, the FIRE calculator says I am golden.
Push me over the decision edge.
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I've looked into this question pretty carefully because it seems the 3%/4%/5% rule is either wildly undervalued or obscenely reckless, depending on your circumstances. There is a better approach, especially if you have higher assets.
Think of your retirement assets in three buckets. The first bucket is your long term investments - stuff you don't want to touch for several years. The second bucket is your short term assets. This is what you're going to need for the next two, three or four years, whatever you think you don't want exposed to the vagaries of the market. The third bucket is what you're going to spend this year.
The most sophisticated way to manage your draw-down is to put the proper amounts in each bucket. Over time you're best staying in equities because they've always returned the highest return, but again, this is over time. So you can go way up or way down with your long term money, but as long as you have the wherewithal and assets to hold your equities in a down market, you're better off keeping your long term money money in equities, specifically a couple of low fee index funds that follow the broader market. You'll almost never get a better net return from a managed fund or an active advisor than a low-fee S&P index fund. Since the great depression, the longest period of time the stock market has gone without recovering its previous high following a bust is five years, and the more typical cycle is closer to two years. In other words, the historical record is that if you can hold all your investments in the S&P 500 for five years, you will recover your investment even if you invested at the very peak. So the idea is that you hold all of your assets that you can do without for between three to five years in your long term equity bucket.
Second, to mitigate risk but still maximize your returns, you calculate what you spend each year and put the number of years you feel comfortable taking out of the equity market and putting it into safe, stable, but low/no risk investments to preserve capital. Think utilities and bonds. If you think you need three years' cushion to ride out a stock bubble bursting, they you put three years' spend into bucket two. if you think you need five years, you put in five. The idea is that you're still earning something on this money, but it's at very little risk and won't lose much even in a bursting bubble environment.
Finally, you take the money you anticipate spending in the next year and put it someplace completely safe that sacrifices return for security. Ninety day Treasury bills, money market funds, CDs, mattress covers, whatever makes you comfortable you can draw on that money immediately no matter what the economy looks like.
So, if on the first of the year you take out a year's expenses and put it in your savings account, rebalance your short term buckets to fund 2-5 years' contingency money and leave the rest in your long term investment fund, you're pretty insulated from market moves and you still get the benefit of long term capital appreciation.
Each year you look at the net increase or decrease of your investment fund and adjust your budget accordingly. In good years you'll earn far more than you take out, in down times you tighten your budget a bit and live on your contingency money. If the market is down you don't refill your contingency money (bucket number two) until it's drawn down, so you keep as much as possible in the market for the inevitable rebound. In good years you may want to take a few more dollars out and enjoy a treat.
The result of this plan is that you don't necessarily draw down the value of your investments even though you are able to withdraw more than four or five percent of your total investment value.