Dandy wrote:I think Wm Bernstein had a good approach. I believe for age 65 it was having 20 to 25 years of residual expenses in safe investments (e.g. short term bond funds, CDs etc). Residual expenses was defined the extra money needed to meet living expenses after any pension, social securtiy or annuities. You might have to add a year for every year under 65.
The problem for those not in or close to retirement it is difficult to get a good read on what your residual expenses might be at retirement.
This approach can lead to the "moving target" I alluded to above. Not saying it's a bad idea, but it might be impractical.
Let's assume a typical retiree, 65 years of age in early 2007. He or she calculates that $1,000,000 in "safe" money (a CD ladder and/or short-term bond funds) at 5%/annum will generate the "nut" to which Dr. B. refers, at an inflation-adjusted SWR starting at 4%. Any investments in equities are "gravy on top". All well and good.
Now, fast-forward to early 2013. That CD ladder constructed back in early 2007 has begun to roll. The ladder now generates half the interest it did back when started, as rates on CDs have fallen. The amount that retiree would need "now" to generate the same "nut" has increased substantially, even after discounting for age and lower-than-expected inflation. You can play with various numbers on a mortgage or annuity calculator, or do it by hand. I suspect short-term bond funds would have fared better in a falling-rate environment, but how much?
How many retirees would be in a position to add significantly to the CD/bond fund position the first five years into retirement? FWIW, I retired back in late 2006 (at age 59 1/2) and did such a calculation, using a more modest interest-rate assumption (3%), and have still found it necessary to increase the fixed-income funds to offset rates.