Now that you’re retired (or nearly so), you face the big question: will you outspend and outlive your portfolio? The answer: it depends on four uncertainties we all face – four interlocking pieces of a puzzle – how much we spend; how we invest; market returns; and life span. We’re in control and decide the first two. That leaves the last two that are not in our control.
With four uncertainties, how do we find a spending rate that will never deplete our portfolio for as many years as we want? Nest Egg Care first employs a planning trick – it always assumes we retirees will face the most horrible sequence of market returns in history. It can’t be worse; it can only be better. We then use a Retirement Withdrawal Calculator – fixing the decisions as to how to invest – and find, for any number of years we want, the spending rate that won’t deplete a portfolio. The final step is to go back and change the key parameters of how to invest to see their effect on safety and on the amount of money we’d accumulate if market returns don’t turn out to be most horrible.
The result is that you solve the puzzle: you lock in both the number of years with zero probability of depleting your portfolio and the potential amount of money you would have and be able to spend when market returns aren’t most horrible. The result for many is a safer plan than they have currently constructed and also greater spending than they thought possible. Those two statements appear to be in conflict, but they aren’t.
Nest Egg Care leads you through the key decisions for your retirement financial plan in four CORE steps. You CHOOSE your Safe Spending Rate: for once it’s better to be older. You OBEY the two critical rules as to how to invest. You RECALCULATE the amount you can safely spend: it can only get better – increase over time; it’s almost certain that we’ll experience a better sequence of market returns than the horrible one we always assume that drives our Safe Spending Rate and Safe Spending Amount to a low level. You EXECUTE: keep it simple. Nest Egg Care recommends a shockingly simple investment portfolio that you’ll follow for the rest of your life.
Once you trust the calculation of your annual Safe Spending Amount – your Safe Spending Rate times your Investment Portfolio – you’ll know you can “pay yourself” and spend (and gift) it all in the year; there’s actually no logic to save any of it: you’re already at zero probability of depleting your portfolio. Since your monthly “paycheck” rolls in like clockwork, you’ll start the year focused on, “What the next fun thing to do.” And, typically, later in the year you’ll find yourself asking, “Who should benefit from our increased giving this year? And how much?” Because one thing is certain: you’ll enjoy your retirement more when you gift to your loved ones and/or fund your favorite causes while you’re still around to appreciate the positive impact you’ve made.
Tom Canfield leads you through the steps. You’ll clearly see his plan and how it plays out over time. You get updates in Tom’s blog posts and on the center button below. Start now, and you’ll well be on the way to maximizing the joys of retirement.
TOM CANFIELD made his first investment at age 10 when he purchased five shares of Patterson Dental Supply. As the value of his holdings grew through several corporate acquisitions, he patiently added savings from summer jobs and eventually earned enough to pay for a semester of graduate school. That early experience has been the model for Tom’s approach to investing. He’s been a saver for as long as he can remember. Because his time horizon for when he needed the invested cash for spending was decades away, he invested solely in stocks, reinvested dividends and rode the inevitable compound growth in value over a long period.
Tom earned an electrical engineering degree from Purdue University and an MBA from Harvard University. He enjoyed considerable success as an entrepreneur — and as a mentor for entrepreneurs. He founded and operated Equity Catalysts LLC and served as president and CEO of The Enterprise Corporation of Pittsburgh, which helped match start-up technology companies with angel investors and other resources. He also was adjunct professor of entrepreneurship at Carnegie Mellon University’s Graduate School of Industrial Administration (now the Tepper School of Business).
He has been a partner of Social Venture Partners Pittsburgh since its launch and is a founder of NurturePA, Inc., which supports new parents by promoting infant emotional development and early literacy. He also serves on the board of Propel Schools, and he works with several other nonprofits to help them arrange their displays of financial results so they can see their performance trends more clearly.
Tom and his wife Patti live in Pittsburgh. Determining their Safe Spending Rate, and spending accordingly, allows them to enjoy walking vacations, including a visit to England’s Lake District. Nest Egg Care is Tom’s first book.
What questions might I try to answer?
I’ll try to respond personally or in the Nest Egg Care blog.
I don’t think it’s that many hours to complete your retirement financial plan, and I think they will be some of the most satisfying and valuable hours you will spend. It does takes time to absorb that you can trust your plan, since your spending will likely change (more than you’re are spending now) and your investing will change (much simpler than the way you are invested now). It’s not easy to grasp that SIMPLER is better – our brains are just not wired that way.
Nest Egg Care has 14 chapters that total 102 pages. So that’s about 8 pages per chapter. Not much. You’re taking small bites of the apple, not big ones. The book tries to lay out your decision points clearly. It calls out where you have work tasks and decisions to record on your Plan Worksheet; you’ll see the worksheet I completed for our plan. A narrative at the end of each section, “The Patti and Tom File,” describes how we applied the CORE principles, and you’ll see how our plan is playing out for us.
I found no good answers to the questions of How Much is Safe to Spend and How Do I Invest now that I’m retired. Too few retirees can answer those questions. Oh, this game of Spend and Invest is sure different from the game of Save and Invest that we all have played for years. But the answers for Spend and Invest are tractable, and retirement can be better if we know the answers. My friend Larry asks, “Do we ever stop worrying?” And I argue the answer clearly is, “YES.” It’s a much happier retirement when we are worry free and can focus on “What’s the next fun thing to do,” and, typically, later in the Iyear, “Who’s going to benefit from our increased giving this year. And how much.” For Patti and me, giving now has been most rewarding: we can see we are helping those we love, in particular. Basically, I hope this book makes you happier, too. You can read more on this topic here and here.
Once you complete your Plan Worksheet, I think you’ll have a spending and investing plan that is 1) safer than the one you have now and 2) will almost certainly provide more for you and your heirs over time. Those two statements sound like contradictions, but they aren’t. Beginning portfolio values and results are stated in constant dollars and in terms of $1 million starting portfolio. In the book you’ll see a comparison of plans of two who are the exact same age. Most would judge each plan as reasonable, but one is safer by a factor of four in the out-years, and at expected sequences of return that plan provides $500,000 more. Safer. And More.
I assert there are four key uncertainties for our financial retirement plan: what’s safe to spend; how do we invest; future market returns; and life span. In that mix, we decide and control the first two. Those two are interlocked pieces of the puzzle: we have to decide both of those together. Once we fit those two together correctly, we can then squarely face the two uncertainties that we do not control: future market returns and life span.
RMD% is the the IRS stated percentage that those 70 1/2 and older must distribute from their IRAs in a year based on their balance at the end of the prior year. It’s designed to eventually capture taxes on the amount that was initially tax deferred and all subsequent growth that was tax deferred. Your RMD% increases with age. The amount of RMD will also vary depending on the year-end value of your IRA accounts.
SSR% is calculated to give you the safe amount you can spend – in constant dollars; it adjusts for inflation independent of variations in your Investment Portfolio. (You have to follow a couple of key investing rules.) Your SSR% is always greater than your RMD% in the year you start your plan. (Patti and I now are at a SSR% of 4.6% for 2017 spending as compared to my RMD% of 3.91% for 2017 and 0% for her.) And, obviously, since you are applying your SSR% to your total, your Safe Spending Amount is far more than the amount you withdraw from your retirement accounts using your RMD%.
The book uses two key tools to get us to our Safe Spending Rate (SSR%), and they in turn get us to our Safe Spending Amount (SSA). The first is a Retirement Withdrawal Calculator (RWC). You’ll find several 100,000s in search results for that term on the internet, but we retirees must use calculators of a certain kind. The book relies on one workhorse calculator that tells us more than any other I could find and one other to verify its basic results. I’ll add a couple of posts on the details of how RWCs work.
The second key tool is a Probability of Living Calculator. As uncomfortable it is to think about our planning horizon, often called “Retirement Period,” we need to understand the probabilities that we (or at least one of us if planning for two) will be alive in the future. Our perspective of the number of years feeds into the decision of our Safe Spending Rate.
Sorry about that. I decided it was important to use color in the book, especially to get an understanding of Retirement Withdrawal Calculators. Use of color drives the print cost outta sight. I think you’ll find the price worth the couple of lattes you might have to skip. (And that statement of perhaps $500,000 more for you is not a frivolous claim!)
I divided the book into four CORE principles. CHOOSE your safe spending rate: for once it’s better to be older. OBEY the rules: two are critical. RECALCULATE: it can only get better. EXECUTE: keep it simple. You can read more about the CORE here.
Nest Egg Care suggests we must Enjoy More. Now. The sands of time are running. Faster than we’d like to think. I suggest three keys get us to a more enjoyable retirement.
1) You must Understand the CORE; you’ll do that by reading Nest Egg Care and completing your Plan Worksheet.
2) You must Trust and Pay Yourself your annual Safe Spending Amount (SSA). It may take some time for it to sink in that that annual amount you calculate is truly safe; that you know the amount is almost certain to increase in the future; and that saving any of it now doesn’t really make logical sense.
3) Focus on Fun and Giving. Those are two tasks that my wife and I focus on. You’ll particularly have more joy in retirement more when you give to those you care about and are still around to appreciate the positive impact you’ve made. You can read more here.