How to live well – or better – in the face of death

A well-known joke about retirement expenses occurred to me while reading a recent article.

First person: “How are you set for your retirement income?” “

Second Person: “I’m fine as long as I die by Friday.” “

Yes, I have a dark sense of humor.

But with interest rates on savings nearly zero, dividend yields disappearing and bubble anxiety rampant in everything from houses to stocks to used cars, a bit of dark humor. seems pretty healthy to me.

What can we do other than laugh in the dark?

The article, written by Christina Benz and John Rekenthaler at Morningstar and supported by a very comprehensive review of safe withdrawal rates for retirement portfolios, tells us that taking pocket money from retirement savings can ruin you. if you spend more than 3.3% per year. , corrected for inflation.

It’s not a lot.

That’s low enough to crush a lot of retirement dreams, maybe most.

Granted, the authors bend over backwards to say that there are ways to push that number over the 4% that we learned was safe in 1995, but most people just won’t want to do the whole thing. DIY and the heavy needed. lift by themselves.

There are, however, a few takeaways that can help us keep it all together in a Couch Potato investment project.

Rule # 1: The middle path when it comes to asset allocation is the best.

Now, like in previous studies of portfolio survival rates, it turns out that you can’t go too far wrong with a 50-50 split between stocks and bonds. Hold more stocks than bonds, and the ups and downs in stock prices are more likely to kill your portfolio. But if you own more bonds than stocks, inflation will kill.

Advisors can argue about being 60-40, 50-50, or 40-60, but the fees they charge will likely be more than any difference they could make. Over a 25-year period, for example, the Morningstar article shows a safe withdrawal rate spread of 3.4% to 4% for allocations ranging from 100% stocks to 100% bonds. For spreads of 70% equities to 20% equities, the safe withdrawal rate is stuck between 3.9% and 4%. That’s a deviation of one-tenth of 1%.

Obviously, paying for magic asset distributors is a losing game. You’ll get the best value for money (and the best disposable income) by minimizing investment expenses with index funds and having a 50-50 mix of stocks and bonds.

Rule # 2: Minimum required distributions are the way to go.

There are several ways to safely increase your annual spending, but they ignore a crucial fact: Most retirees have most of their money in retirement accounts. If you owned a business and sold it, you could have most of your assets in regular taxable accounts, but for most people the elephant in the asset room is your 401 (k) or some other plan. tax-deferred.

Like it or not, your annual withdrawals are dictated by the IRS.

People with a lot of money like to complain about it and feel overwhelmed by their tax bills. But most people spend most of their retirement wanting to withdraw more than the minimum required distribution from their accounts.

The downside to minimum required distributions is that they fluctuate more than distribution methods that you cannot use. It can be annoying, but it is outweighed by a big advantage. Since the minimum distributions required are based on life expectancy, you will never run out of cash. You may have less retirement income than you expected, but you won’t go bankrupt.

Rule # 3: The safer you are, the more money you will leave behind.

Confirming what researcher Michael Finke identified years ago, the study found that there was a direct relationship between the rate of safe withdrawal and the amount of money left after 30 years. If you want to be sure that you don’t run out of money 90% of the time, it will also be certain that you are leaving a lot behind 90% of the time.

The minimum distributions required provided the highest expense rate and lowest asset balance at the end of 30 years. You may not be able to grow up. But you can go further.

Rule # 4: The Angel of Death is a big fake factor in your favor.

The safety standard in Safe Withdrawal Rate research is a portfolio that survives 30 years of withdrawals 90% of the time. The study mentions that 30 years is much longer than most people live after retirement at age 65. Unfortunately, the study does nothing with this fact.

But our mortality has a big impact on whether we’re actually going to run out of money because of our spending rate.

According to financial planner Michael Kitces’ life expectancy and mortality calculator, for example, a 65-year-old man and woman have only a 1% chance that they are both alive at 95. There is an 84% chance of both being dead and a 16% chance that one of them will still be alive.

This means that we are really only talking about a 1.6% chance that someone will live to see the 10% failure.

As retired researcher Michael Finke pointed out long ago, you will only experience bankruptcy if your wallet fails and you are still alive.

Accept a 20% failure rate and there is a 3.2% chance that a person will be alive to experience it, but the withdrawal rate will have increased from 3.3% to 3.9% .

It sounds like a good bet.

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