"How to Tell if Your Retirement Nest Egg Is Big Enough"

Taylor Larimore · Post by **Taylor Larimore** » Tue Aug 23, 2016 12:13 pm

Bogleheads:

Dr. Bill Bernstein, who will be on our Panel of Experts at next month's Boglehead Convention, has written this very important article about our stock/bond allocation in and near retirement:

How to Tell if Your Retirement Nest Egg Is Big Enough

Best wishes
Taylor

Miriam2 · Post by **Miriam2** » Tue Aug 23, 2016 1:06 pm

Thank you Taylor for posting this! What I love about Bill Bernstein (among many things) is his writing style. He really packs a punch with few words, a dose of humor, and underlying warmth, pointed to the issue.

livesoft · Post by **livesoft** » Tue Aug 23, 2016 1:15 pm

PSA: Article is from January 2015.

Taylor Larimore · Post by **Taylor Larimore** » Tue Aug 23, 2016 2:07 pm

livesoft wrote:PSA: Article is from January 2015.

livesoft:

Good investment advice is timeless (with a few exceptions).

Best wishes.
Taylor

nedsaid · Post by **nedsaid** » Tue Aug 23, 2016 3:08 pm

This was a very good article by Dr. Bernstein. It raises a good point about people perhaps being too aggressively invested near or in retirement. As I looked at the formula in the article, I felt a lot better about my own retirement. Pretty much, if you take your retirement income pre-tax needs and subtract pension and Social Security income you get the annual needed withdrawals from your portfolio. Dr. Bernstein called that residual living expenses or RLE. He said that if you have 25 years worth of RLE in your portfolio, you have won the game. For a 65 year old, that gets you to 90.

I am being conservative as the article said that 25X RLE was the minimum for a 60 year old.

I was happy to see that I am getting closer and closer to that 25X number. It sounds like a good rule of thumb.

One has to allow for inflation but even 30% stocks in a portfolio should take care of that over 25 years.

Since July of 2013, I have been on a program of what I called "mild rebalancing." I actually have been doing mild de-risking as my portfolio went from 69% stocks to 66% today. Had I done nothing, I would probably be at 73% or so today. I am very close to what Fidelity, Vanguard, and T Rowe Price recommend for somebody my age.

convert949 · Post by **convert949** » Tue Aug 23, 2016 3:36 pm

As they sometimes say " I represent that remark". I retired at the end of 2007 with a 60/40 portfolio at age 57. It could have been worse as my now "former" Ameriprise guy thought I was too conservative but I luckily overruled his advice.

Tough watching 30 years of work go down by one third but I had enough in fixed income to weather the markets... As a result, as the markets recovered, I gradually took money off the table once I was back to even. I am a big fan of Dr. Bernstein and have heard him on a couple of occasions at Bogleheads 11 and 12.

I am, however; hoping for a clarification on a point he brought up in the article. In past readings, he seemed to indicate that some portion of dividends could be counted towards establishing your base income and therefore your minimum RLE. He has omitted dividends in this particular paper. In addition, he does not define what is "basic" in the RLE.

In addition, I am curious about his statement that "a 65 year old retiree with the minimum of 20 x RLE should have no more than 50% of his portfolio in equities". I remember him saying that your RLE (net of SS, Pension/SPIA and 50% of dividends) should be in ultra-safe assets (I read as fixed income) and that your excess can be invested any way you wish (risk portfolio). His comment above from this article seems to counter his previous comments.

Anyone care to weigh in?

Namashkar · Post by **Namashkar** » Tue Aug 23, 2016 5:46 pm

Anything considered to be "very important" by Taylor Larimore and specifically written by Dr. Bernstein has to be absolutely perfect.

I am 66 years old already in retirement and nearly meet all three criteria with a 50/50 AA.

1. If you have won the game, stop playing (Dr. Bernstein).
2. Invest the amount you cannot afford to lose in a quality index bond fund and the rest in equities (Sir Taylor Larimore).
3. The rule of thumb - 110 minus your age in bonds and rest in equities.

Regards,

Namashkar

TimeRunner · Post by **TimeRunner** » Tue Aug 23, 2016 6:31 pm

Deleted

Sandman62 · Post by **Sandman62** » Tue Aug 23, 2016 9:06 pm

So how do you calculate your RLE shortfall if your pensions aren't COLA'ed? Just do a spreadsheet and deflate the pensions throughout each year of retirement? So instead of each year being the same, our RLE would go up each year by inflation. Then just total 'em up til age 90?

IIRC, the Fido RIP tool generated a chart that showed all income streams from now through retirement, i.e. pensions, eventual SS, and retirement account withdrawals - presumably accounting for inflation? Maybe I can just total up RLE shortfall from that?

Katie · Post by **Katie** » Tue Aug 23, 2016 9:32 pm

Thank you. Always good to hear a reminder of some basic, solid advice - especially as I inch towards retirement.

Trader/Investor · Post by **Trader/Investor** » Tue Aug 23, 2016 9:50 pm

If you have won the game, stop playing

To me that means no stocks no bonds just CDs and money market. Because I have ultra low expenses/single/debt free I am over 80x RLE. But when RMDs kick in next year at age 70 it will drop to 50x. But that is without adjusting for inflation. CDs and money market would take a burden off any inflation related expenses going forward. Still, for both explicable and inexplicable reasons, I troop on playing the game.

rgs92 · Post by **rgs92** » Tue Aug 23, 2016 10:06 pm

My takeaway from this is that 35 times expenses makes the most sense.

overst33r · Post by **overst33r** » Wed Aug 24, 2016 7:59 am

rgs92 wrote:My takeaway from this is that 35 times expenses makes the most sense.

That would be a 2.8% SWR, seems awfully conservative.

Random Walker · Post by **Random Walker** » Wed Aug 24, 2016 9:44 am

I'd like to make a plug here for Monte Carlo analysis. It's an outstanding way to get a sense of where one is, likely outcomes, and the tremendous dispersion of outcomes. Obviously the inputs matter tremendously, but it is possible to make reasonable assumptions. When I did this exercise, I was surprised how little effect asset allocation had on the outcomes and how great an effect spending rate had. The exercise gives one a sense of the tradeoffs involved: AA, spending rates, maximizing terminal value, not going broke. For example increasing % equities increases the mean amount at age 85 but also increases the likelihood of running out of money.

Dave

Brian 2016 · Post by **Brian 2016** » Thu Aug 25, 2016 1:24 pm

I enjoyed reading this article and it aligns with my retirement strategy. I retired a few months ago at age 59 and am fairly conservative at 40/60% stock/bond mix since I have no pension and will not take Social Security until full retirement age or later. I'm worried about the sequence of returns in my early retirement years, but once I start pulling SS I may bump up my S/B mix to 45/55 or 50/50.

Brian

Grt2bOutdoors · Post by **Grt2bOutdoors** » Thu Aug 25, 2016 1:45 pm

Trader/Investor wrote:If you have won the game, stop playing

To me that means no stocks no bonds just CDs and money market. Because I have ultra low expenses/single/debt free I am over 80x RLE. But when RMDs kick in next year at age 70 it will drop to 50x. But that is without adjusting for inflation. CDs and money market would take a burden off any inflation related expenses going forward. Still, for both explicable and inexplicable reasons, I troop on playing the game.

How does an RMD of 3.4% translate into a 37.5% decline in the total value of your RLE? Further, if your RMD is that high, there is no rule requiring you to spend all of it, you are free to save it after-tax as well.

Johnnie · Post by **Johnnie** » Thu Aug 25, 2016 1:47 pm

In one of his podcasts Merriman said something that has stuck in my mind: He's never met a retired person who wished he had saved less for retirement.

The context made clear there is another side, which is the mistake of working longer than you want simply to rack-up a bigger score. So in the end it remains a tough judgement call. But that framing does help clarify some questions.

Like this: If I have enough to stop working at 66, but could add a meaningful cushion by remaining in a job I enjoy until 68, should I remain? That looks like a "Yes." (But longer than that would feel like cutting short my season for leisure.)

HomerJ · Post by **HomerJ** » Thu Aug 25, 2016 2:02 pm

Johnnie wrote:In one of his podcasts Merriman said something that has stuck in my mind: He's never met a retired person who wished he had saved less for retirement.

Weird... who hasn't heard the opposite anecdote that doctors have have never met a person on their deathbed who wished they worked longer?

The context made clear there is another side, which is the mistake of working longer than you want simply to rack-up a bigger score. So in the end it remains a tough judgement call. But that framing does help clarify some questions.

Like this: If I have enough to stop working at 66, but could add a meaningful cushion by remaining in a job I enjoy until 68, should I remain? That looks like a "Yes." (But longer than that would feel like cutting short my season for leisure.)

Yes, it is indeed a tough judgment call. Personally, I'd never work 2 extra years in my late 60s... When you only have 0-20 years left (NOTE the zero), and probably 0-10 years left of good mobility, spending two of those years at work seems very wasteful.

But if the job is very easy, and you enjoy it very much, and you get a ton of vacation time... Maybe.

Usually, the discussions around here are people in their 50s, wondering if they should work 2 more years. I think there's more of a buffer there, in time, so that working a bit longer makes more sense.

tennisplyr · Post by **tennisplyr** » Thu Aug 25, 2016 6:55 pm

HomerJ wrote:
Johnnie wrote:In one of his podcasts Merriman said something that has stuck in my mind: He's never met a retired person who wished he had saved less for retirement.
Weird... who hasn't heard the opposite anecdote that doctors have have never met a person on their deathbed who wished they worked longer?

The context made clear there is another side, which is the mistake of working longer than you want simply to rack-up a bigger score. So in the end it remains a tough judgement call. But that framing does help clarify some questions.

Like this: If I have enough to stop working at 66, but could add a meaningful cushion by remaining in a job I enjoy until 68, should I remain? That looks like a "Yes." (But longer than that would feel like cutting short my season for leisure.)
Yes, it is indeed a tough judgment call. Personally, I'd never work 2 extra years in my late 60s... When you only have 0-20 years left (NOTE the zero), and probably 0-10 years left of good mobility, spending two of those years at work seems very wasteful.

But if the job is very easy, and you enjoy it very much, and you get a ton of vacation time... Maybe.

Usually, the discussions around here are people in their 50s, wondering if they should work 2 more years. I think there's more of a buffer there, in time, so that working a bit longer makes more sense.

+1
Agree, retired at 61 and never looked back. Now 66 and the years are flying by. I probably could use more money but who cares. Chasing the dollar makes no sense for me.

Trader/Investor · Post by **Trader/Investor** » Thu Aug 25, 2016 7:25 pm

Grt2bOutdoors wrote:
Trader/Investor wrote:If you have won the game, stop playing

To me that means no stocks no bonds just CDs and money market. Because I have ultra low expenses/single/debt free I am over 80x RLE. But when RMDs kick in next year at age 70 it will drop to 50x. But that is without adjusting for inflation. CDs and money market would take a burden off any inflation related expenses going forward. Still, for both explicable and inexplicable reasons, I troop on playing the game.
How does an RMD of 3.4% translate into a 37.5% decline in the total value of your RLE? Further, if your RMD is that high, there is no rule requiring you to spend all of it, you are free to save it after-tax as well.

Maybe I am missing something? My expenses (after SS) rise from $25,000 annually to $40,000 next year because of the taxes on my RMD. Unfortunately for me, 92% of my retirement nest egg is in my IRA.

Lynette · Post by **Lynette** » Thu Aug 25, 2016 8:45 pm

.....

nedsaid · Post by **nedsaid** » Thu Aug 25, 2016 8:53 pm

Lynette wrote:Taylor, thanks for posting. I am retiring this year and I am so busy that I haven't checked my allocation lately and did not realize that it was time to pay attention. So I made a rough estimate and transferred some money to bonds - very unscientific - but thanks - I'll make a better calculation when I'm retired and have all the time in the world ...

Lynette, I very much enjoy reading your posts. Wish you well on your soon approaching retirement. It sounds like you did the exact right thing. I am 57 and am wondering when I should do some serious de-risking. If the market takes a 20% to 30% tumble between now and your retirement, you will be feeling really, really good about your decision.

HomerJ · Post by **HomerJ** » Thu Aug 25, 2016 9:02 pm

Trader/Investor wrote:
Grt2bOutdoors wrote:
Trader/Investor wrote:If you have won the game, stop playing

To me that means no stocks no bonds just CDs and money market. Because I have ultra low expenses/single/debt free I am over 80x RLE. But when RMDs kick in next year at age 70 it will drop to 50x. But that is without adjusting for inflation. CDs and money market would take a burden off any inflation related expenses going forward. Still, for both explicable and inexplicable reasons, I troop on playing the game.
How does an RMD of 3.4% translate into a 37.5% decline in the total value of your RLE? Further, if your RMD is that high, there is no rule requiring you to spend all of it, you are free to save it after-tax as well.

Maybe I am missing something? My expenses (after SS) rise from $25,000 annually to $40,000 next year because of the taxes on my RMD. Unfortunately for me, 92% of my retirement nest egg is in my IRA.

Well, you'd have a lot less than $2 million if you had been paying taxes on it all along, so I wouldn't begrudge the government too much.

But your numbers don't look right... You'll be paying at a very low rate. 3.4% of $2 million is $68,000... Taxes on that (from the 2015 IRS Tax Table) is $12,800. But that's not counting any deductions at all. So it should be somewhat lower; using a quick on-line tax calculator it looks like taxes will be more around $9,800.

But you're right... it will be a big jump in expenses, since you're starting from such a low point.

But congrats on being in such a good financial situation. All your hard work, savings, and thrift has paid off. You might even want to spend a few dollars from that RMD each year to celebrate...

Church Lady · Post by **Church Lady** » Thu Aug 25, 2016 9:25 pm

Hi, Trader/Investor

You missed this bit:

Take a few minutes. Add up your basic annual expenses, and make sure to include the taxes
you'll owe on required and voluntary withdrawals from your retirement accounts and the income
and capital gains in your taxable accounts.

You could do this:
taxable expenses = pre-tax expenses/(1-federal marginal rate - state marginal rate)
where the marginal rates are expressed as decimals,

and calculate RLE from that. This overestimates taxable expenses because it doesn't take exemptions and deductions into account, and it doesn't account for reduced tax rates on qualified dividends and long term capital gains, and so on. It does allow for the possibility 100% of income comes from tax deferred accounts.

It's just a rule of thumb; the results are just a guideline. I believe the correct use of such rules is to help you decide if you are close enough to your 'number' to seriously invest time and effort into figuring out whether you've arrived.

Good luck!

Trader/Investor · Post by **Trader/Investor** » Thu Aug 25, 2016 9:30 pm

HomerJ wrote:
Trader/Investor wrote:
Grt2bOutdoors wrote:
Trader/Investor wrote:If you have won the game, stop playing

To me that means no stocks no bonds just CDs and money market. Because I have ultra low expenses/single/debt free I am over 80x RLE. But when RMDs kick in next year at age 70 it will drop to 50x. But that is without adjusting for inflation. CDs and money market would take a burden off any inflation related expenses going forward. Still, for both explicable and inexplicable reasons, I troop on playing the game.
How does an RMD of 3.4% translate into a 37.5% decline in the total value of your RLE? Further, if your RMD is that high, there is no rule requiring you to spend all of it, you are free to save it after-tax as well.

Maybe I am missing something? My expenses (after SS) rise from $25,000 annually to $40,000 next year because of the taxes on my RMD. Unfortunately for me, 92% of my retirement nest egg is in my IRA.
Well, you'd have a lot less than $2 million if you had been paying taxes on it all along, so I wouldn't begrudge the government too much.

But your numbers don't look right... You'll be paying at a very low rate. 3.4% of $2 million is $68,000... Taxes on that (from the 2015 IRS Tax Table) is $12,800. But that's not counting any deductions at all. So it should be somewhat lower; using a quick on-line tax calculator it looks like taxes will be more around $9,800.

But you're right... it will be a big jump in expenses, since you're starting from such a low point.

But congrats on being in such a good financial situation. All your hard work, savings, and thrift has paid off. You might even want to spend a few dollars from that RMD each year to celebrate...

Thanks HomerJ Unfortunately any deductions will be pretty much be counterbalanced by now having to pay taxes on 85% of my meager SS. State taxes will be around $1400 (no taxes on first $41,100) But thanks since you got me to recalculating and my taxes may be a tad lower than I was expecting albeit still a big jump in expenses.

abuss368 · Post by **abuss368** » Thu Aug 25, 2016 10:56 pm

Many thanks Taylor!

randomizer · Post by **randomizer** » Fri Aug 26, 2016 12:08 am

Miriam2 wrote:Thank you Taylor for posting this! What I love about Bill Bernstein (among many things) is his writing style. He really packs a punch with few words, a dose of humor, and underlying warmth, pointed to the issue.

Agreed. Highly recommend Mr Bernstein's works.

in_reality · Post by **in_reality** » Fri Aug 26, 2016 12:26 am

Taylor Larimore wrote:
How to Tell if Your Retirement Nest Egg Is Big Enough

Personally I will just ask my sweetheart what she thinks. If she says it's big enough then that's that.

cherijoh · Post by **cherijoh** » Fri Aug 26, 2016 5:20 am

Trader/Investor wrote:If you have won the game, stop playing

To me that means no stocks no bonds just CDs and money market. Because I have ultra low expenses/single/debt free I am over 80x RLE. But when RMDs kick in next year at age 70 it will drop to 50x. But that is without adjusting for inflation. CDs and money market would take a burden off any inflation related expenses going forward. Still, for both explicable and inexplicable reasons, I troop on playing the game.

The part I highlighted makes no sense to me. RMDs can be reinvested if you don't need them for spending. They are not expenses so how would they count as part of a residual living expense?

HomerJ · Post by **HomerJ** » Fri Aug 26, 2016 8:59 am

cherijoh wrote:
Trader/Investor wrote:If you have won the game, stop playing

To me that means no stocks no bonds just CDs and money market. Because I have ultra low expenses/single/debt free I am over 80x RLE. But when RMDs kick in next year at age 70 it will drop to 50x. But that is without adjusting for inflation. CDs and money market would take a burden off any inflation related expenses going forward. Still, for both explicable and inexplicable reasons, I troop on playing the game.
The part I highlighted makes no sense to me. RMDs can be reinvested if you don't need them for spending. They are not expenses so how would they count as part of a residual living expense?

He will have to pay income taxes on the RMDs, and he's counting those taxes as increased annual expenses (which is correct).

With $2 million in an IRA, RMDs will force him to pull $68,000 out a year, and he'll have to pay $10,000 or so in taxes each year on that money. He can then, indeed, re-invest the remaining $58,000 and not spend it, but his portfolio will indeed go down $10,000 a year every year from the added "expense" of higher taxes.

But at his age, with his low expenses, none of it really matters. 50x or 80x... At 70 years old, it's massive overkill in any case.

rai · Post by **rai** » Fri Aug 26, 2016 11:06 am

Thanks for posting, how does this article pertain if you have not yet won the game? For example: 50 years old (with 10-15 years from retirement - flexible) and maybe 50-60% of what I'd like to have at retirement?

trueblueky · Post by **trueblueky** » Fri Aug 26, 2016 11:09 am

Another way to calculate would be RLE(1 - marginal tax rate). 80(1 - .25) = 60 after tax RLE.

So the often quoted 25x RLE could be 25(1 - .25) = 18.75 after taxes. It depends on your tax bracket in retirement and how you think about it. Tax impact on SS is another consideration.

Incendiary · Post by **Incendiary** » Fri Aug 26, 2016 1:10 pm

Namashkar wrote:Anything considered to be "very important" by Taylor Larimore and specifically written by Dr. Bernstein has to be absolutely perfect.

I am 66 years old already in retirement and nearly meet all three criteria with a 50/50 AA.

1. If you have won the game, stop playing (Dr. Bernstein).
2. Invest the amount you cannot afford to lose in a quality index bond fund and the rest in equities (Sir Taylor Larimore).
3. The rule of thumb - 110 minus your age in bonds and rest in equities.

Regards,

Namashkar

Shouldn't #3 be 110-age in equities and rest in bonds?

SeeMoe · Post by **SeeMoe** » Fri Aug 26, 2016 2:27 pm

A couple with, say, $133,000.00 in total pensions and about $1,500,000.00 in a 45/55 AA with a $90,000.00 a year cost of living expenses average, should be okay. Even with an annual 2.5% inflation rate. Especially if they have some COLA in their pensions. Good to know.

SeeMoe..

Dandy · Post by **Dandy** » Fri Aug 26, 2016 3:28 pm

What Dr. Bernstein didn't mention in the brief recap of his idea was that he recommends very safe fixed income not the usual Total Bond fund but short term bonds/especially Treasuries, Individual TIPS ladders, CDs etc. At least that is what I recall. The "excess" over the Residual expense portfolio could be invested any way you choose even 100% equities.

I like this bottom up approach to determining retiree allocations (if you have enough) vs guessing that 50/50 or 40/60 top level allocation is conservative enough. It is grounded in your actual expense needs which may mean you should adjust the "safe" fixed income part of your portfolio for any significant expense changes.

Youngblood · Post by **Youngblood** » Fri Aug 26, 2016 3:48 pm

Dandy wrote:What Dr. Bernstein didn't mention in the brief recap of his idea was that he recommends very safe fixed income not the usual Total Bond fund but short term bonds/especially Treasuries, Individual TIPS ladders, CDs etc. At least that is what I recall. The "excess" over the Residual expense portfolio could be invested any way you choose even 100% equities.

I like this bottom up approach to determining retiree allocations (if you have enough) vs guessing that 50/50 or 40/60 top level allocation is conservative enough. It is grounded in your actual expense needs which may mean you should adjust the "safe" fixed income part of your portfolio for any significant expense changes.

Yes, this to me speaks volumes in regards to the safety of bond funds. The risk/reward of Pascal's wager might apply to both stocks and long term bond funds and perhaps even the Total Bond fund at present values and rates.

YB

Taylor Larimore · Post by **Taylor Larimore** » Fri Aug 26, 2016 4:59 pm

What Dr. Bernstein didn't mention in the brief recap of his idea was that he recommends very safe fixed income not the usual Total Bond fund but short term bonds/especially Treasuries, Individual TIPS ladders, CDs etc. At least that is what I recall.

Dandy:

In his latest book, "If You Can" Dr. Bernstein recommends three funds:

Vanguard Total U.S. Stock Market
Vanguard Total International Stock Market
Vanguard Total Bond Fund.

Best wishes
Taylor

burt · Post by **burt** » Fri Aug 26, 2016 5:35 pm

Taylor, thanks for reminding people of this article.

I recently retired at age 60 with a modest income over 40 years and modest savings.
A bad sequence of returns is a big deal for me.
30/70 stock/bonds is my sleep well at night point.
Just want to make sure I can afford a restaurant once a week.

burt

Dasnyc · Post by **Dasnyc** » Fri Aug 26, 2016 8:04 pm

Katie wrote:Thank you. Always good to hear a reminder of some basic, solid advice - especially as I inch towards retirement.

+1.

Artsdoctor · Post by **Artsdoctor** » Fri Aug 26, 2016 8:09 pm

Bill Bernstein's perspective is extremely healthy and worth remembering:

Low yields are driving some people crazy -> people chucked fixed income and fled to stocks for yield -> pushed up the value of stocks way beyond what should've occurred with fundamentals -> those with a healthy equity allocation did extremely well, better than they should have -> portfolio value is higher than you would've thought (you're richer than you calculated) -> take some of those proceeds off the table and suck it up when you're having to endure the current low yields.

There's a lot of investor psychology in that paragraph, and you ignore it at your own peril.

Dandy · Post by **Dandy** » Fri Aug 26, 2016 9:44 pm

In his latest book, "If You Can" Dr. Bernstein recommends three funds:

Vanguard Total U.S. Stock Market
Vanguard Total International Stock Market
Vanguard Total Bond Fund.

Taylor I know you have great love for the Total Bond fund and the 3 fund portfolio. I'm sure Dr. Bernstein is also a fan. But I believe when he discusses what to invest in retirement when you have enough aka when you have won the game stop playing he doesn't mention the Total Bond Fund.

Re: what fixed income Dr. Bernstein recommends in the withdrawal stage:

Interview with Christine Benz: Interview at a recent Boglehead conference

"The next stage that I deal with illogically enough is last phase, the distribution phase, because the person who is retired and has no more human capital left can't make up for a bear market. And if that person gets a particularly bad sequence of returns--that is, stock returns that are poor--early in retirement, then they may be in very deep trouble if they have an aggressive portfolio.

So, the concept that I talk about in the book is that of a liability-matching portfolio, which is a stream of [Treasury Inflation-Protected Securities] or an annuity or of at least short bonds, depending upon how much sheltered assets they've got, that will take them through retirement, which should be fairly sacred. And then, every bit of money they have on top of that can be invested in risky assets, which may not be very much since they may need every last dollar they have saved to retire."

White Coat Investor Website: 11-5-2012
How Much Is Enough

Bernstein recommends a rule of thumb, based on annuity payouts and spending patterns late in life, that you should have 20-25 times your residual living expenses (after pensions/Social Security) invested solely in safe assets. No stocks at all. This should be in TIPS, SPIAs and short-term bonds. If you have more than that, that’s your “risk portfolio,” which he describes this way..."

I agree that the Total Bond fund is a very good fund and have invested in it for almost a decade and now essentially do the same as part of the Balanced Index Fund. But, I think Dr. Bernstein has an excellent idea of securing your retirement with 20-25 years worth of residual expenses in "safe" fixed income (if you have enough assets). It makes some sense to base your retirement allocation on safeguarding your portfolio first then having a risk portfolio for growth rather than guessing that some top down allocation will be ok.

Best Wishes and thanks for your long and valuable guidance provided in books and on this forum.
Dandy

TheTimeLord · Post by **TheTimeLord** » Sat Aug 27, 2016 11:01 am

HomerJ wrote:
Johnnie wrote:In one of his podcasts Merriman said something that has stuck in my mind: He's never met a retired person who wished he had saved less for retirement.
Weird... who hasn't heard the opposite anecdote that doctors have have never met a person on their deathbed who wished they worked longer?

That is why I disregard the deathbed anecdote. Yes, in the last moments in life when you have paid for everything and their is nothing left to buy or do you would undoubtedly want more time. But for the decades of your retirement you likely would want more money.

bb · Post by bb » Sat Aug 27, 2016 11:25 am

with 20-25 years worth of residual expenses in "safe" fixed income

In the age of no pensions having 20-25 years invested with no risk does not seem
practical for middle class. Think that would translate into never retiring or
maybe retiring at 65. A plan to work until 65 for Fortune 500 companies
seems like a bad plan.

On the other hand if RLE equates to food, shelter, clothing so the food is not Alpo
then possibly Berstein's approach and variable withdrawal are not all that different
in practice.

Dandy · Post by **Dandy** » Sat Aug 27, 2016 7:29 pm

In the age of no pensions having 20-25 years invested with no risk does not seem
practical for middle class.

A fair point - the approach was for those who had enough and that might mean fewer people in the future since their income floor may be lower.

While I don't believe Dr. Bernstein directly addressed this - there may be value in having fewer years in "safe" investments, say 15, and then withdraw all/more from the "risk" portfolio in years when that portfolio does well. That might, in time, stretch the 15 years closer to 20.

In any event this approach was for those who have enough and does not really work for others. It is a shame that pensions have or will go the way of the rotary phone - that part of the safety net is very much appreciated and needed.

naha66 · Post by **naha66** » Sun Aug 28, 2016 3:13 am

bb wrote:
with 20-25 years worth of residual expenses in "safe" fixed income
In the age of no pensions having 20-25 years invested with no risk does not seem
practical for middle class. Think that would translate into never retiring or
maybe retiring at 65. A plan to work until 65 for Fortune 500 companies
seems like a bad plan.

On the other hand if RLE equates to food, shelter, clothing so the food is not Alpo
then possibly Berstein's approach and variable withdrawal are not all that different
in practice.

That is what I take RLE to equate to. My SS and small pension will cover my RLE + a few extras. I will keep about 10% in a short term bond fund and the rest in my 55/45 AA +/- 5%.

IlliniDave · Post by **IlliniDave** » Sun Aug 28, 2016 5:09 am

This is probably the first time I've ever read something by Dr. Bernstein and came away more encouraged than discouraged/fearful!

I'm planning to retire early and and am in a situation where my RLE from retirement day (somewhere between age 52.5 and 55) and 70 is much higher than my RLE from 70 onward. Actually, if I assume that what the SS calculator tells me my benefit will be at age 70 if I retire at the end of this year, my RLE after SS starts is 0. My RLE estimate is based on what I think is a pretty reasonable ~33% increase over what I'm currently spending. I'm sitting at about 25.8x average RLE from today to age 70, and 40.8x average RLE from today to age 80, without considering the modest bump in the nest egg I expect via selling my current home and downsizing/relocating when the day comes. If I start looking at the average RLE beyond 80 the multiple keeps going up. My goal has been to achieve 40x average RLE from 55-70.

Regarding AA, I'm in the ballpark of 70/30 now, and my takeaway from the article is that 70/30 is not a bad place for me to be. I may still, as a function of some PE triggers I have in my IPS, dial down a little more. I've also left an opening to dial down equity exposure a little when I pick a firm date to pull the plug. For me it's impossible to predict where I'll be mentally/emotionally when I start firming up that date.

Call_Me_Op · Post by **Call_Me_Op** » Sun Aug 28, 2016 5:59 am

bb wrote:
with 20-25 years worth of residual expenses in "safe" fixed income
In the age of no pensions having 20-25 years invested with no risk does not seem
practical for middle class.

I did not interpret his recommendation the same way you did. I think he is saying (in this article) that once you have enough, reduce your equity allocation appropriately. He is not saying zero equities. Now, I know in other writings, he has been more extreme on this.

Sconie · Post by **Sconie** » Sun Aug 28, 2016 6:45 am

Incendiary wrote:
Namashkar wrote:Anything considered to be "very important" by Taylor Larimore and specifically written by Dr. Bernstein has to be absolutely perfect.

I am 66 years old already in retirement and nearly meet all three criteria with a 50/50 AA.

1. If you have won the game, stop playing (Dr. Bernstein).
2. Invest the amount you cannot afford to lose in a quality index bond fund and the rest in equities (Sir Taylor Larimore).
3. The rule of thumb - 110 minus your age in bonds and rest in equities.

Regards,

Namashkar
Shouldn't #3 be 110-age in equities and rest in bonds?

One would certainly think so.

WolfgangPauli · Post by **WolfgangPauli** » Sun Aug 28, 2016 9:08 am

The tough item for me to reconcile here is how much to put into bonds right now. Certainly, interest rates are going up and bond prices will deflate significantly. Do you 1) Keep in cash and wait or 2) just put into bonds figuring the coupon payment increase will offset the decrease.

I am not a market timer at all but at age 54, the horizon is getting shorter and one thing you know for sure 1) The market is at the "high end" of speculative returns (i.e., P/E does a reversion to the mean and we will see some decreases) 2) Interest rates are virtually at the bottom. 3) CDs pay almost nothing.

What to do with cash?

TheTimeLord · Post by **TheTimeLord** » Sun Aug 28, 2016 9:22 am

This is essentially what I have done be limiting the amount of equities I hold by an absolute dollar amount instead of using an AA to determine how much is invested in equities. This has forced me to repeatedly harvest gains over the past several months that would have been left in the game had I been following an AA methodology.