The real problem with any of the so-called ‘safe withrawal rates’ that we explored yesterday – with 4% currently being perhaps the most popular amount advocated – is that they all assume a fixed annual spending amount, but are actually generated by a totally volatile (some would say random) portfolio.
We’re trying to fit a square peg (fixed annual spending) into a round hole ( a ‘random walk down Wall Street’) 😉
But 7m7y readers have an even more fundamental problem with planning our ‘retirement’ based on this type of common industry wisdom: we are planning on retiring early, hopefully, with a very large Number and a soon Date!
Most retirement models assume a 30 to 35 year retirement lifespan …
… I don’t know about you, but I retired at 49 and intend to live AT LEAST another 40 years 🙂
Many of my readers will be aiming to reach their Numbers even sooner .. and, may expect to live even longer!
The bottom-line: traditional retirement planning models don’t work, because we need money that will last as long as we do … we need a Perpetual Money Machine, because we don’t know how long we will live once we stop working.
A Perpetual Money Machine is anything that:
a) Protects your capital over the long-run, even allowing for the ravages of market changes and inflation, and
b) Produces a reasonably reliable stream of income, that also (at least) keeps pace with inflation.
Neither stocks nor bonds – the traditional tools of retirement investing – fit the bill for us:
1. Stocks are too volatile, and the income tends to be artificial (e.g. so-called dividend stocks attempt to fix the level of dividend provided even as the company’s profits fluctuate).
[AJC: Raiding marketing, R&D, and other seemingly non-essential budgets in lean years in order to protect the dividend stream is – to my mind – the mark of a poorly run company]
2. Bonds provide a very safe return, but the % returned each year is too low, meaning – at least, to me – an unnecessarily reduced lifestyle, especially after allowing for reinvestment to try and keep up with inflation.
That’s why my Rule of 20 is exactly that: a planning rule, NOT a 5% spending rule!
[AJC: Otherwise, I would have called it the 5% Rule, d’oh!].
In other words, my advice for PLANNING your Number, is to decide what initial income you want and multiply that by 20 in order to find your Number …
… but, my advice for LIVING your Number is to turn on your Perpetual Money Machine and live off whatever it happens to produce, after allowing for taxes and provisions against inflation and contingencies.