The usual saw is save 25x spend 4% and Bob’s your Uncle. Nothing of course is said about spending because spending is left to daydreaming. Lounging on the beach, traveling the world hacking credit cards, starting a little bizzy on the side to make pin money, why I can feel the Tahitian breeze and taste the Chipotle Tequila Colada as I write the words.
Then you think about your parents and aunts and uncles and grand parents and great grand parents and realize they are either dead or in some stage of dying, not all at once but eventually they start dropping like flies. Guess what’s going to happen to you kemosabe and it’s going to happen to your wife too. It’s inevitable, just like taxes and it ain’t necessarily cheap. I wrote a post on it here.
Your chance of getting cancer for example is 1/3 and once got, your chance of dying is 1/5. That means 4/5 live, but whats the quality of life and cost of palliative care if any? Your chance of being wiped out financially is 42% and the average expenditure per year is $92K and your odds are the same as your wife’s odds meaning the odds multiply. You could of course draw the royal flush and both become terminal together which would wipe you out twice as quickly. So the Trinity plan was $40K per year with enough leverage to extend your 25x out to 30x or maybe a little more in case the dreaded early SORR come up and bites you on the patootie. You of course are the master of the universe, save half and retire early. You’re leverage balloons since instead of making a mere 5 extra times, you now need to make 25 extra times to cover your extra 25 year extension added onto your original retirement. Why do you think early retirees have all their dough in stocks? Because it’s the only way to make the excessive leverage needed to reach nirvana. They talk a good game about very long averages bla bla bla. No one has the real skinny on a 50 year retirement.
But wait you say I have real estate to which I say good deal. But wait you say I’m a media mogul my blog clears 12K per year to which I say I’m digging that. But the deal is where does the $92K per year cancer money come from? Being sick is expensive and you can’t substitute aspirin for chemo and rads and surgery. Where especially does it come from when what you have is already levered out the wazoo? Who’s paying for your ol’ lady when you used up all the cash? And oh yea the government wants those taxes you deferred NOW. They have a boon dogle to fund or some paper pushers age 50 retirement.
You embarked on the retirement with a plan priced to perfection, and you threw away 25 good earning years in pursuit of leisure. One method to come up with $92K is to save for the eventuality in fact likelihood of this scenario. You do that by completing your retirement portfolio and then embark on creating an insurance portfolio, 2 separate portfolio products. The retirement portfolio product pays for retirement. If you want Tahiti, stash enough in the retirement product to pay for Tahiti. The insurance product is there to pay for the $92K haircut independently from the retirement product. Both products consist of principal and interest. You can fund them serially or in parallel to taste. I won’t go into detail. When the FIRE community got pissed off at ol’ Suze O, this scenario is what she was taking about. Either FIRE or Suze is in denial and I’m not talking about rivers. As for me I have an insurance portfolio carved out of my net worth. It cost me about an extra $1.2M reached by age 70 to satisfy my conception of security. It consists of both principal and interest. It’s wrapped in Roth wrappings and will continue to grow side by side with my retirement portfolio. It will remain unmolested until one of us pulls the brass ring when it will kick into gear. If It grows excessively (praise God) I can drain a little for a retirement rainy day, like the retirement account running out of money. At that point it’s all purpose insurance. I’m not paying an insurance company for my insurance, I’m paying myself. Pound sand Buffet!
4 Replies to “Retirement Blueprint or a Tale of Two Portfolios”
It never hurts to have another portfolio. I have zero desire to have an all equity portfolio like some in the FIRE crowd. I think they just didn’t save enough to need to do that. Even Buffett wants his widow to have 10% in short term government bonds.
It will be very instructive to see how your retirement fares. So far so good eh?!
Last year I made 10 years worth of expected retirement income. This year I’m down 1 year’s worth and a year closer to the pearly gates. I’d call that swimming in progress. All equity is a sign of over leverage IMHO. If you need that kind of return for your portfolio to go the distance you didn’t work long enough IMHO.
I was doing some research and analysis and it turns out over the past 18 years which has included 2 recessions bonds have paid on the average 3.9%/yr and the S&P 500 only 5%/yr including reinvestment of 2% dividends and the S&P is a 4 times more risky bet. If you take out the dividend to live on that’s only a tiny bit more that 3% growth/yr for 18 years. If you take out 2% dividend and sell 2% for your 4% you’re making like 1% per year. If you’re levered and were planning on 8-10% your’re suckin a lot of wind wind. That’s a lot of risk to pay for a little extra dab of return. Calamity is latin and confers the sense of destruction and there isn’t anything you can do to mitigate the magnitude like some travel card hack or belt tightening when the hospital holds out it’s hand and says 92 thousand please.
The two portfolio plan is definitely a safer approach to retirement. I too plan to treat my Roth accounts as my insurance fund. If nothing bad happens requiring unfunded expenditures it becomes a legacy account. At this point I consider my Roth underfunded and pre-tax overfunded so between now and 70.5 I can optimize the distribution through Roth conversions.
We’ll tackle the FIRE world together GF! Thanks for your comment.