I had the distinct pleasure of spending time with my wife’s family this week. Between catching up on life events and helping with a few household chores, my father-in-law (let’s call him John) took the opportunity to ask his financially-minded visitor a question directly pertinent to his own immediate goals.
“How can I use my investments to cover the bills in retirement?”
I knew that John is a CPA and a knowledgeable investor who has actively traded his family accounts for years. So as a well-educated student of retirement finance, I naturally jumped in to an explanation of safe withdrawal rates, retirement spending methods, and how portfolio theory can be used to tweak the numbers to safely spend a certain percentage of his portfolio every year without fear of running out of money over his expected lifetime. John listened intently and replied with a deceptively simple follow-up question:
How do you guarantee that level of investment income every year?
That’s a terrific question, and the simple answer is you don’t have to. But that’s the exact moment I recognized my own investing bubble. The internet these days contains more information than ever about every nuance of retirement finance, but the gap between the theory debated by eggheads and John’s completely rational income-driven paradigm is just as perfectly normal as it is surprisingly wide to bridge.
I was talking about systems theory, and he just wanted to directly replace income. Which makes perfect sense! And I imagine many of you may have the same question.
So rather than jumping into a painfully long series on every possible way to tweak the numbers, let’s start with the basics. If you’ve ever wanted to know how to safely move beyond depending on regular work income to pay the bills, this article is for you.
Perhaps the single most impactful development in the financial world over the last several months is the rapid onset of high inflation. After a decade of particularly low inflation that even pushed negative in some countries, the ugly specter of quickly rising prices came roaring back late last year and has only gotten worse. As recently as March 2021, the annualized inflation in the US was at a historically typical 2.6%. But just one year later it skyrocketed all the way to 8.5%. That’s the highest it has been since 1981, and we can all feel its effects. Everything is just way more expensive today.
With consumer prices making news worldwide, it’s easy to feel helpless. Massive price tags on basic staples like food, gas, and rent have a way of humbling even the most efficient money manager and stressing household earners to the limit. And many investors with lots of money saved up no longer feel so confident either as both the stock and bond markets break under the weight of the new economic normal. It’s really tough out there!
While I don’t have a magic wand to make your grocery bill more affordable, I’m happy to help where I can. So let’s tackle the investing side. Not every asset and portfolio responds to inflation in the same way, and by learning more about how they operate we can find an asset allocation suitable to weather the current storm.
One of the things I like about the safe withdrawal rate is that it’s a rare financial metric that accounts for the worst case. While everyone else was comparing withdrawals to average returns, William Bengen had the foresight to study every investing period he could find and determine the maximum amount of money that a retiree could have safely withdrawn over 30 years even in the worst possible timeframe to retire. By flipping the problem from an exercise in chasing ever-shifting averages to studying worst-case scenarios, Bengen’s safe withdrawal rate really did make life after accumulation a lot safer for retirees.
Look at the title image of a pair of grain silos and imagine your comfort level with them filled with just enough grain to barely make it through an average year. Now picture them with enough grain to survive the worst famine on record. That’s a huge difference, and Bengen’s new perspective completely changed the way people think about retirement.
As helpful as that is, however, not everybody is in the phase of career and life where retirement is an impending concern. But I still find the approach enlightening, so let’s expand our thinking. Have you ever wondered what a similar metric might look like for accumulators seeking to guarantee long-term success in uncertain markets? Put another way, what percentage of your crop must you save in those silos every year in order to fill them by a certain date? And if the stored grain grows and shrinks on its own like money invested in stocks and bonds, how would that affect the results?
If that type of question feels as interesting to you as it does to me, this article is for you.
When looking for opportunities to make new connections, there’s something to be said for looking like you know what you’re doing. One time when I was browsing the produce section of the local grocery store for a few peaches to add to the basket, a young kid sheepishly approached and asked for some friendly advice.
“Could you please explain how to find a good peach? I’m supposed to get some but have no idea what to look for.”
Now I realize people strike up random conversations at the store for all sorts of reasons, but I could tell he was out of his element. I got the impression he was under orders to bring home a certain list of items and was truly lacking the knowledge to do it correctly, and I was particularly impressed that he took the initiative to ask for help. I’m no chef by any means, but I was happy to offer my own experience of selecting them by feel and smell and letting any peach that is a little hard ripen for a few days before eating. With a few nice ones in-hand, we went our separate ways to enjoy a future sunny afternoon with a really tasty fruit.
Thinking back on that experience, I’ve always been keenly aware of how important it is to not only suggest an idea but to also offer enough information to make it actionable. So many financial voices lecture about investing concepts only to stop at the theoretical stage without bridging the gap to how normal people can act on those ideas. Sometimes it’s out of self-interest when their end goal is to drive readers to hire them for their financial services. Occasionally you run across a noble but detached research type who revels in unraveling the data but never actually makes the connection to anything that applies in the real world. And of course some people just like to talk without always fully understanding what they’re talking about. But regardless of the motivation, truly helping people is about so much more than simply convincing them that they should buy peaches without explaining how to actually do it. You have to take that next step.
In that same practical spirit, I’m really excited to share a new tool that I’ve been working on for a long time. If you’ve ever explored Portfolio Charts and found an asset allocation that looks perfect for you but struggled to figure out how to act on that knowledge, I now have just the thing to help. I call it the Fund Finder.
A loved one passed away recently, leaving the rest of the family scrambling to deal with all of the things nobody is ever truly prepared for — funerals, estates, and caring for other family members affected by the loss. Everyone gets their turn eventually, but you’re never truly ready. It just happens, and you’re thrown in the deep end to sink or swim.
This particular family member had a lot of pets, and one of the responsibilities that fell on my brother and me was the job of rounding them up and taking them to a local adoption center to help them find new homes. Dealing with cute cuddly animals surely was more joyful than coping with the hard realities of death, so we happily took the job. Arriving at the home with a sense of purpose, we opened the door expecting a gaggle of furry creatures excited to be held and fed.
The dogs were naturally suspicious at first, but once the food came out they softened up and were as sweet as can be. A few belly rubs and a short ride later, and they were well cared for and ready for adoption.
And then there were the cats.
There must be a lot of anti-bond sentiment circulating these days, as my inbox has been lighting up lately with questions about whether bonds still make sense to investors. It started last year when Ray Dalio got on a roll and made a series of rather provocative comments about how he thinks you’d be crazy to hold government bonds and how cash is trash, too. It accelerated as interest rates continued to drop to new lows. And it has reached a bit of an apex as bond returns have taken a pretty decent hit in the last few months. Was he right? Should you sell all your bonds now before it’s too late?
Unless you’ve been living out in the wilderness for the last few weeks, there’s a pretty good chance you’ve heard about the recent events with GameStop. The idea of everyday people using social media to band together and soak predatory hedge funds makes for a great story, and it has already driven a crazy amount of previously uninterested investors towards exploring what it would take to ride the same wave.
One such inquiry from a good friend was a bit of of a wakeup call. The same person who never before expressed the slightest interest in investing suddenly wants to know how to buy the next potential short squeeze stock he saw people talking about online. This article is not only for him, but also for the many other people new to investing who are wondering the exact same thing.
This is awesome! How do I join in! 🚀🚀🚀🚀🚀
Contrary to what you might expect from a guy who writes extensively about low-risk index investing, I’m not going to try to talk you out of it. It’s your money, I’m sympathetic to the underlying motivation that goes way beyond making a quick buck, and some investing lessons are best learned through good old-fashioned experience. But there are definitely some massive risks lurking in the shadows just waiting to take down naïve investors who may not fully understand what they’re getting into. So if you’re following the GameStop news and considering getting in on the action, here’s how you can do it responsibly without going full Leeroy Jenkins.
I’m a big fan of asset allocation. Rather than slaving over daily market news to chase fleeting profits and avoid unpredictable losses, smart investors can create an intelligently constructed portfolio that grows and protects their hard-earned money with low stress and minimum effort. Like following a simple recipe to bake a cake from scratch, all you have to do is purchase a handful of low-cost ingredients, combine them in the right proportions, and let chemistry, heat, and time do all the work. Simple but sophisticated portfolio ideas designed by some of the best minds in the business can help you meet your important life goals while freeing you to focus your own energy on the things in life that truly matter. And with just a small amount of coaching, anyone can do it!
What’s not to like?
Well, to be honest there is one thing that has always sorta rubbed me the wrong way. It’s not a problem with the strategy itself, but an inherent communication issue dripping in bias that I believe subtly chases off a lot of people new to the concept. Asset allocation has a marketing problem, and it all comes down to terminology.
While I know lots of people who enjoy watching house hunting shows, browsing real estate listings, and imagining life in a new home, I have yet to meet a single person who doesn’t loathe the process of moving. From finalizing the deal on the new place, unloading the old one, packing all of your stuff, arranging the move, and coordinating the timing of every step all while continuing to work your day job, moving can be really stressful. It’s enough to drive many people to reevaluate whether it’s all worth it and just be happy where they are.
Transitioning to a new portfolio can often be equally tricky. Sure, the actual move is just a matter of clicking a few buttons on a computer screen rather than loading your entire life into a truck. But that’s just one step in a long and detailed process. Figuring out the best way to move your money while minimizing taxes and dealing with the uncertainty surrounding future market returns makes moving portfolios a complicated and emotionally-charged endeavor. What if you mess up? What if your new portfolio loses money the moment you buy in?
When in doubt, doing nothing really isn’t such a bad choice. But staying the course isn’t always the wisest decision when that course was set years ago before you really knew what you were doing. It’s ok to change plans when you grow as a person and learn new information, and there’s no reason to let fear and uncertainty get in the way. So no matter whether you’re finally pulling cash out of storage or considering a strategic portfolio change, let’s talk about how to plan a thoughtful financial transition.
In July of this year NASA is planning to launch the next mission in their ongoing series of journeys to Mars. Named Perseverance, the robotic explorer is built on the successful design of the Curiosity rover that has been wandering the Red Planet since 2012. A machine capable of long-term exploration of another planet is a true engineering marvel, but controlling it remotely is not even the hard part. After decades of practice, even the requirements of launching devices out of the pull of Earth’s gravity are pretty well-known. But do you know what is still a real challenge even for the best rocket scientists?
Sticking the landing.