How to retire with more money and less worry
Reprinted courtesy of MarketWatch.com
Published: April 25, 2018
To read the original article click here
Probably the biggest source of financial worry for retirees is whether they will have enough money to meet their needs without running out of money.
Read: You’re probably going to live longer — what if you can’t afford it?
Although there’s no way to guarantee you can live like a king forever, I’ve learned enough in the past half-century to know that it’s eminently possible to live well in retirement with only minimal (if any) risk of running out of money.
How do you get to this wonderful place?
A great deal of it depends on what you do before you retire. The rest depends on what you do once you have retired.
Before you retire
The two most important things before you retire are pretty simple (although not always easy).
•First, save as much money as you can, for as long as you can, starting as early as you can. I can’t overemphasize how important this is.
•Second, make sure you have the habits and attitudes necessary to live on less money than you have available. No matter how much or how little you have, learn to be satisfied while you spend less than you could spend.
I’ve discussed these two things elsewhere, and I recommend you check out this article: Double Your Retirement Income in Five Years.
If you do those two things and do them really well, you should be in better-than-average shape for retirement.
But you also have to invest your money well and take money out of your portfolio in a savvy manner.
With the rest of this article, I’ll focus on those two items.
When you retire
While you’re working and accumulating retirement assets, your primary task is to build and grow your nest egg.
But when you reach retirement — actually starting in the years before you retire — your job becomes more defensive. At some point, protecting what you have gradually becomes more important than increasing what you have.
Defense is king, and you may need to adjust your portfolio.
Although many retirees invest in S&P 500 index SPX,
Many decades of market history suggest that you’re likely to do considerably better in the long run if you use ETFs and index funds to spread their equity risk among thousands of companies, in 10 tried-and-true asset classes (only one of which is the S&P 500).
You can learn all about that in this article about asset allocation.
The most successful investors also take the time to figure out how much of loss they can tolerate and invest an appropriate percentage of their portfolios in fixed income funds. You can learn how in this recent article.
It also makes great sense to take your retirement distributions only once a year, at the first of January, so you don’t second-guess the market and its short-term moves through the year.
And finally, each January I recommend you increase or decrease your annual distribution depending on what the market has done in the past 12 months. This point is more good news than bad, by the way, because historically the market goes up in two out of every three years.
There’s nothing radical about any of these recommendations; they are essentially common sense.
If you have saved substantially more than you absolutely need to meet your expenses (many people would say that means your portfolio is worth considerably more than 25 times your annual cost of living), you can afford to take the flexible distributions I just described.
On my website, in a series of tables, I show the hypothetical results of fixed and flexible distributions for someone who retired at the end of 1969, using actual returns and actual inflation.
There’s not room here for much detail, but let me point to a few lessons.
Assume you retired on Dec. 31, 1969 with a portfolio of $1 million, from which you needed $50,000 to live in 1970. Assume also your portfolio was 50% equity and 50% fixed income — a fairly sensible combination for many retirees.
If you had all your equities in the S&P 500, Table A (below) compares the results of fixed distributions and flexible distributions for some selected years.
Table A: Results from S&P 500 index equity portfolio
| Year | Fixed schedule portfolio value * | Fixed schedule distribution | Flexible schedule portfolio value * | Flexible schedule distribution |
| 1970 | $1,000,000 | $50,000 | $1,000,000 | $50,000 |
| 1975 | $886,718 | $68,807 | $893,227 | $44,661 |
| 1980 | $960,032 | $101,809 | $1,138,538 | $56,927 |
| 1985 | $958,243 | $139,834 | $1,692,447 | $84,622 |
| 1990 | $832,131 | $167,444 | $2,696,370 | $134,818 |
| *Value calculated at start of year |
If instead you chose to fully diversify your equity investments across 10 different equity asset classes as I described in the asset allocation article referenced above, here’s the same information.
Table B: Results from fully diversified equity portfolio
| Year | Fixed schedule portfolio value * | Fixed schedule distribution | Flexible schedule portfolio value * | Flexible schedule distribution |
| 1970 | $1,000,000 | $50,000 | $1,000,000 | $50,000 |
| 1975 | $946,254 | $68,807 | $948,553 | $47,428 |
| 1980 | $1,457,456 | $101,809 | $1,597,326 | $79,866 |
| 1985 | $1,965,639 | $139,834 | $2,436,111 | $121,806 |
| 1990 | $3,433,503 | $167,444 | $4,444,481 | $222,224 |
| *Value calculated at the start of year |
It doesn’t take much study to see that the portfolio values in the second table are much more favorable than those in the first. The entire reason for that difference is the diversification in the half of the portfolio that’s devoted to equities.
In both tables, the portfolio fared better when distributions were flexible instead of fixed.
And in both tables, the early years of distributions were higher in the fixed schedule. That happened because the 1970s pitched a double-whammy at investors: unusually high inflation and a severe bear market.
A different starting year would have produced different results. And unfortunately, you can’t know in advance what will work best.
As the first table shows, the combination of non-diversified equity investments (all in the S&P 500) and fixed distributions was a surefire recipe for running out of money. By 1990, you were taking out 20% of your portfolio for just a single year’s living expenses.
Very soon you would be in very hot water.
The second table is also quite sobering. Even if you invested properly and took the flexible distributions, the market battered your portfolio so badly that you had to live on less than your initial inflation-adjusted $50,000 target for a long time.
This takes me back to the very first piece of advice in this article: Start with more money. Do whatever it takes to postpone retirement until you have over-saved.
If your retirement needs were $50,000 and you started with $1.5 million instead of $1 million, your 5% flexible distributions would give you plenty of wiggle room, and you’d never fall below the $50,000 mark, at least in this scenario.
In the long run, a strategy of flexible distributions is far preferable to one based on fixed distributions. I like to think of it as an “ultimate retirement luxury.”
But that luxury is only available to those who retire with savings that are “more than enough” to meet their needs. (See my “Before you retire” advice above.)
This whole topic is extremely important for retirees and soon-to-be retirees. Learn more about it in my podcast “The Ultimate Distribution Strategy.”
Richard Buck contributed to this article.
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