The 0% ‘safe’ withdrawal rate …

What % of your retirement ‘nest egg’ can you safely withdraw each year, to make sure that you money lasts as long as you do?

Many would say that this is a question best answered by highly educated practitioners of the highly specialized field of Retirement Economics, who will give you an answer – or, more likely, a range of answers – accurate to many decimal places.

But, I can give you a single answer …

… one that is accurate to at least 17 decimal places, yet I am not an economist of any kind.

You see, Retirement Economics is an oxymoron.

Why?

First, let me give you an excellent example of what retirement economics is …

In his blog dedicated to pensions, retirement plans, and economics, Wade Pfau provides the following chart:

It superimposes two charts:

- one shows descending survival rates for men, women and couples who retire at age 65.

For example, if you retire at 65, there’s only a roughly 18% chance that at least one of you will live past the age of 95. Reduce that to 90, and there’s a 40% chance that one of you will survive.

- The other is an increasing probability that your money will run out before you do the larger the % you withdraw from your retirement portfolio.

For example, if you only withdraw 3% from your portfolio (if invested in the exact 40%/60% mix of stocks and bonds assumed by Wade) then there’s almost 0% chance that you’ll run out of money by the time you reach 95 (and a small chance thereafter).

But, there’s a 30% chance that you’ll run out of money by age 95 if you increase that ‘safe’ withdrawal rate to just 5%.

You’re supposed to use these ‘retirement economics’ to make decisions like:

“Well it’s very likely that either my wife or I will live to 95 and we don’t want our money to run out, so we’ll invest all of our savings in a 40% stocks / 60% bonds portfolio, and we’ll only withdraw 3% of it each year just to be sure that our money won’t run out.”

That seems like sound economical judgement for the average person …

… BUT, you are not average!

For better or worse, you are … well … you.

Besides the obvious [AJC: who says you want to wait until you're 65 to retire?!], when YOU are 95 (albeit in the 10th percentile), how happy will you be if your money has either either already run out or there’s a reasonable chance that you will soon be out of money, hence out of care?

I would argue that only a 100% chance of your money outliving you is acceptable.

Even then, only with a LARGE buffer, so you never need to worry about even the possibility of your money running out!

In my opinion:

Only a 0.00000000000000000% withdrawal rate is acceptable.

Now, 0% does not mean withdrawal nothing, but it does mean having a sustainable, self-regenerating supply of income; this is not as hard to achieve as you might think.

For example, you can create an ongoing stream of income from:

1. Inflation protected annuities (albeit expensive)

2. TIPS (albeit a low return)

3. 100% owned real-estate (albeit, needs management)

4. Dividend stocks (my least preferred as they are sometimes a sub-par investment that tends to rise-fall with the markets).

Remember, when you retire, you want not only ZERO chance that your money runs out, but you don’t even want to get anywhere near to zero by a wide margin.

Don’t you?

… another man’s poison!

To some people, it seems that I promote high-risk strategies. For example, long-time reader, Josh says:

I wondered over to your blog to see what’s new and after reading a few posts I realized why I don’t visit anymore, and it’s because your articles are drenched in pro-debt/leveraged strategies. This is something I don’t agree with and don’t practice. I do understand the mathematical ramifications of using debt to leverage yourself, it’s just something I plan to do without.

Firstly, what Josh is saying isn’t quite true …

… in fact, I don’t recommend debt to anybody. What I have said is that I don’t believe in the anti-debt lobby.

There’s nothing evil about debt per se, it’s if/how/when you apply it that counts.

For example, I have variously had:

a) a little debt: on my various buy/hold properties

b) a lot of debt: in my finance company (for a finance company, cash is like stock … you need as much of it on hand as possible)

c) no debt: all of my other businesses were ‘bootstrapped’ and self-funded

I should point out that Josh is a stock investor; he has made a small fortune (turned a couple of $k into one $m or so while still at college) buying pharmaceutical ‘penny stocks’ … I wonder how many people would consider that risky?

One man’s ‘sensible investment strategy’ is surely another man’s poison

One man’s lean …

I don’t know if you follow the startup scene, but you will see a huge movement to the concept of ‘lean startups’ as championed by Steve Blank and Eric Ries.

However, one man’s lean is just another man’s bootstrap.

That’s not exactly correct: bootstrapping a company generally means starting it without much / any outside finance and launching it on the smell of an oily rag.

For example, Guy Kawasaki famously started Truemors with just $12,107.09 …

… if you know Guy [AJC: he's an early Apple employee; founder of garage.com one of the original Silicon Valley angel investing firms; and, author of a number of 'must read' business best-sellers including 'Art Of The Start'] he could certainly afford to pay more to start his business … a lot more … he just chose not to

On the other hand, creating a Lean Startup is more about talking to customers before spending money than simply looking for ways to cut costs. But, there’s nothing new in this … it ‘s just – or should be – common sense.

Let me explain with an example from my own business life …

When I first came up with the idea for my business – the one that I eventually ran in the USA, Australia, and New Zealand and subsequently sold for many millions – I had NO experience in the field.

It was just an idea that I got from working in a slightly-related industry (via my other business that I still own today).

However, rather than jump out and launch it, first I did a few things:

1. I found a business in the USA that had the same idea and had been ‘doing it’ for at least 10 years. I tracked them down and flew to the USA and met with the founder. He happily helped me understand the business.

That’s when I undertook my first ‘pivot’.

A pivot is another one of those sexy, new-fangled terms for something that every startup founder who eventually succeeds fully understands (and, those who fail have never worked out for themselves) that says: your first idea sucks.

It’s only once you TALK to clients and competitors that you will KNOW what to build. And, my original idea was not IT.

2. Aside from a new perspective on how to build my business idea, the second thing that I got from the US business’ founder was some industry data. But, it was for the USA.

Being an analytical type of guy, I decided to find out what these numbers would look like for Australia. Basically, they were to support our marketing message by providing backup industry data. Since there wasn’t any in Australia, I set out to adapt the US version by doing my own research.

Once I had this research in hand, I decided to try my hand at writing my own press release (I couldn’t afford a PR agency) and sent the 4 page report that I wrote out to a couple of business magazines.

By some miracle, I ended up with a full page article (including photo of a very young-looking AJC) in Australia’s most prestigious business weekly (think Forbes for Australia). I was quoted as “Australia’s Expert”, yet I hadn’t even handled one single transaction!

3. On the back of that article I was approached to produce a 2-day course on the subject matter of my report. The company was affiliated with a major Australian university (people attending my course received credits towards their professional accreditation) and I was paid $1,000 per course to deliver it! Yet, I still hadn’t handled even one transaction.

Those things not only proved that my idea – and, unique approach (as taught by my new US colleagues) would work in Australia, and that there was definitely market demand … it also brought me my first 5 ‘Fortune 500′ customers!

So, I had found an idea, researched the best way to implement the idea, promoted the idea, sought market feedback (i.e. was somebody prepared to pay money to learn about and/or use the idea), and signed up my first customers …

… only THEN did I set about to build the actual business: hire staff, build software, etc., etc..

Now, that is what Lean Startup really means