About a month ago we looked at an article by William Bernstein and Edward McQuarrie that contrasted people who die with a lot of unspent money and people who Yolo through their retirement without needing or wanting a robust financial cushion in the bank.
Jason Zweig touched on it in a column this week that included snippets from an interview he did with Bernstein and McQuarrie. There wasn't much that was new in the article but a couple of good tidbits.
“BMWs, fancy clothes and Birkin bags aren’t lifestyle choices, they’re IQ tests.”
From Bernstein, this is obviously about consumerism and spending habits. I don't know which form of overspending, buying too much crap or simply living beyond your means with fixed expenses, is more common but excessive spending is a huge obstacle to retirement success. I realize that is an obvious thing to say but someone you know might benefit from hearing the obvious.
There was a statistic cited that the stock market over the very long term has a 6.2% real return (real return meaning after inflation). If you don't have a great margin of safety in your retirement numbers I would plug in whether that gets it done for you or not and then I would discount that by 150 or maybe 200 basis points to 4.7-4.2% real return.
There was one other idea that I would touch on that got torched in the comments. Having enough is probably more than you think they said. Ok, sounds reasonable. "If your investment portfolio is 50 times your annual spending, you can stop worrying about whether you’ll run out of money." The comments mostly took that literally, I did not. Despite the words investment portfolio being included, I took that as a starting point for planning.
I think of it this as an early step to understand someone's numbers. If someone says they need to take out $60,000 and they have $930,000 in the bank earning nothing, then they 15 and a half years' worth. The default cash option at Fidelity and Schwab each pay effectively zero for taxable account. Someone telling me $60,000/yr for 8 years, well cash might be ok (inflation might be an issue on the back end). Someone who is 54, retired and says it needs to last until they are 90, that might be tough but it is context. It's an early step to figuring out what your asset allocation should be.
The person only needing the $930,000 to last for eight years might need a little in equities but not much. The person needing it for 35 or 40 years needs a lot more in equities.
Most people are going to need some sort of normal allocation to equities in order for their retirement math to work. If 60% is the most common equity target, then maybe "normal" starts at around 40-45%. We obviously spend time trying to figure out how to build the portion not in equities. If the non-equity portion can be built into a modest compounding engine with less volatility than bonds with duration then having a little less than 60% in equities becomes mathematically more feasible.
If even 40-45% in equities is too much, then creating other income streams becomes very important which is why is spend so much on that topic too.
We all have to solve this for ourselves and once you realize there's an infinite number of ways to solve retirement, it can be motivation to spend more time figuring out your best path.
The information, analysis and opinions expressed herein reflect our judgment and opinions as of the date of writing and are subject to change at any time without notice. They are not intended to constitute legal, tax, securities or investment advice or a recommended course of action in any given situation.
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