It seems that some of the replies to OP completely miss the point of this type of strategy. Essentially, it is a method for deriving an asset allocation based on the timing and amount of anticipated portfolio withdrawals.
Part of the confusion comes from our lazy habit of talking about someone’s portfolio as being equal to a multiple of their “expenses” — like, 25x expenses, or 30x expenses. But what matters for asset allocation is the timing and amount of anticipated portfolio withdrawals. If you plan to withdraw $100,000 in year one, you will fund it with a very different portfolio than if you plan to withdraw it in year 30.
If anticipated income and expenses were going to be unchanged every year throughout retirement, then the OP’s method would give you a static asset allocation. But in the real world, it is very common for both income and expenses to vary a lot during retirement.
Here are some examples of situations where portfolio withdrawals can vary a lot from year to year, or where the “times expenses” formulation is otherwise confusing or inappropriate:
* Person who retires before age 70 but doesn’t start Social Security until age 70.
* Married couple where one person has started Social Security but the other hasn’t.
* Married couple where one person has retired but the other still has a job.
* Person who moves from a full-time to a part-time schedule for a few years before retirement.
* Person who has a mortgage going into retirement (perhaps because it has a super low interest rate) and expects to pay off the mortgage during retirement.
* Person who wants to execute Roth conversions during the first few years of retirement.
* Person whose annual expenses are substantially covered by Social Security and pensions.
Anticipated portfolio withdrawals in each year during the period you are planning for is what is relevant, not “expenses,” or “best guess of average annual expenses over the planning period.”
Bill Bernstein is getting at some of these issues when he talks about the portfolio needing to cover a specified amount of “residual living expenses” or “RLEs” — which is basically what you have to withdraw from the portfolio after taking into account income from other sources, such as employment, pensions and Social Security.
Part of the confusion comes from our lazy habit of talking about someone’s portfolio as being equal to a multiple of their “expenses” — like, 25x expenses, or 30x expenses. But what matters for asset allocation is the timing and amount of anticipated portfolio withdrawals. If you plan to withdraw $100,000 in year one, you will fund it with a very different portfolio than if you plan to withdraw it in year 30.
If anticipated income and expenses were going to be unchanged every year throughout retirement, then the OP’s method would give you a static asset allocation. But in the real world, it is very common for both income and expenses to vary a lot during retirement.
Here are some examples of situations where portfolio withdrawals can vary a lot from year to year, or where the “times expenses” formulation is otherwise confusing or inappropriate:
* Person who retires before age 70 but doesn’t start Social Security until age 70.
* Married couple where one person has started Social Security but the other hasn’t.
* Married couple where one person has retired but the other still has a job.
* Person who moves from a full-time to a part-time schedule for a few years before retirement.
* Person who has a mortgage going into retirement (perhaps because it has a super low interest rate) and expects to pay off the mortgage during retirement.
* Person who wants to execute Roth conversions during the first few years of retirement.
* Person whose annual expenses are substantially covered by Social Security and pensions.
Anticipated portfolio withdrawals in each year during the period you are planning for is what is relevant, not “expenses,” or “best guess of average annual expenses over the planning period.”
Bill Bernstein is getting at some of these issues when he talks about the portfolio needing to cover a specified amount of “residual living expenses” or “RLEs” — which is basically what you have to withdraw from the portfolio after taking into account income from other sources, such as employment, pensions and Social Security.
Statistics: Posted by Nahtanoj — Sun Jul 07, 2024 3:21 am — Replies 26 — Views 3838