All posts by Tom Canfield

What is your benchmark for returns for 2021?

It’s a week or two past the time of year that most of us judge how well our portfolios performed for the past calendar year. This post shows the nominal and real returns Patti and I earned on our portfolio in 2021and over the past seven years from the start of our financial retirement plan. Our nominal return for calendar 2021 was 17.3%. I think that’s a good benchmark for you to use to judge how well you did in 2021. Our real return, adjusting for 7.0% inflation, was 9.6%.



I waited to assemble the returns for our portfolio until the inflation rate for 2021 was released this week. I wanted to get a more accurate picture of the real return rate we earned for the year. I use the Morningstar site to get returns for the year – calendar year returns are posted the day after the last trading day of the year – and this site to get the details on CPI.


If you hold a similar portfolio – basically index funds – your portfolio return will be similar. My friend, George, and I compare each year. We have the exact same mix of stocks and bonds. He differs because he holds a different US Total Stock fund and a different international stock fund than I do. Over the past five years we differ in average return rate by 0.01%. I’m glad that I’m ahead, otherwise I’d never hear the end of it!



My friend, Fred, has what I consider to be a contorted portfolio of 14 funds designed by his financial advisor. It is not as simple for him to gather all the returns and put them in a spreadsheet to add up and find how his total portfolio return stacks up to 17.3% for our simple, four-fund portfolio. (This likely is something his advisor likes.) I went through the pain to calculate his portfolio return, and I calculate that he lags by three percentage points in return for 2021. He was heavily tilted to small and mid-cap stocks and that was a wrong tilt for 2021. He holds two actively managed technology funds than managed to badly underperform their peer index fund. And that excludes the advisor fees he pays. He also has a lower mix of stocks than I do and that would mean he lags by another point or so.


My guess is that most retired folks, like Fred, lag our 17.4% return by more than two percentage points, and that’s a problem for them. That difference cumulates to A LOT of money over time. A LOT less happiness over time.


You can see our results for the last seven years on this one sheet here.


= My observations ==


Patti and I formally started our retirement plan in December 2014 with our first withdrawal for spending in 2015. It’s been a very good seven years.


• Our portfolio return has been positive for five of the last seven years: both nominal and real returns. Returns in all those five years been greater than the expected return rate for our portfolio. The average real return rate (8.3%) is roughly two percentage points greater than our expected return rate (6.4%).


• Stocks have outperformed bonds by a wide margin – on average by almost 9 percentage points real return per year (9.6% vs. 0.7%). Bonds outperformed stocks in two years, most significantly by 8 percentage points in 2018. This year, the real return for stocks was almost 21 percentage points greater than bonds (12.7% for stocks and -8.0% for bonds).


• The 85% mix of stocks in our portfolio means Patti and I have realized about 14% more happiness over seven years relative to having had a mix of 75% stocks. The greater return meant we calculated to a greater annual Safe Spending Amount and have a larger portfolio now. My view is the 85% is no less risky than 75%, but I have my head and emotion – hopefully – focused on the risk of not having enough to support our spending desires in a future year, not the annual variations in portfolio value.



Conclusion: 2021 was another really good year for stock returns. Not so for bonds. We all have to be happy with 2021 on an absolute scale. Patti and I earned 17.3% on our Investment Portfolio. I think that’s a very good benchmark that you can use to judge your relative results. You should be no lower than 15.1% in total. If your portfolio return is less than this, something is amiss. You should be figuring out how to get closer to an appropriate benchmark of performance for your portfolio.


Will 2022 be a good year or the start of the Most Harmful Sequence of returns in history?

You can find predictions for the stock market ranging from 2022 as the start of the Most Harmful Sequence of returns in history to it’s going to be a normal year. Morningstar and others predict we are very close to THE STEEPEST drop in stocks in history. And I mean STEEP. Last month, I attended presentation by Stu Hoffman, past Chief Economist at PNC. Stu always has an annual projection for the stock market. He predicts that 2022 will be good year, barring an unforeseen, earth-shaking event. Who should you believe? What should you do?


== Returns will be negative, big time ==


I wrote about the recent Morningstar report the last two weeks (here and here). It’s based on Morningstar’s long-term predictions of low stock and bond returns. Last summer I summarized an article at Morningstar (here and here) that listed eight forecasts of low future stock and bond returns from the likes of Blackrock, JP Morgan, Morgan Stanley, Morningstar, Schwab and Vanguard.


Morningstar clarifies the predictions. It’s clearer to see the impact. Morningstar predicts low returns for stock and bonds for the forever future, not just the next decade. Stocks soon will crash farther and faster than they ever have in history. We retirees can soon expect to ride along a Most Harmful Sequence of return that is much worse than the Most Harmful Sequence over the last 151 years. To survive the coming firestorm, Morningstar suggests retirees should cut their withdrawals for spending by about 25%; investors and retirees need 33% more than they thought they needed for a desired level of spending. OUCH. OUCH. OUCH.


== It will be good: a year of +10% ==


I went to a presentation by Stu Hoffman of PNC in early December. Stu was Chief Economist for decades. His title now is Chief Economic Advisor. He is parttime and has none of the stress of Chief Economist. He loves this new role. I’ve attended Stu’s talk in early December for at least the last 15 years. I reported on his predictions a year ago. Stu was right that 2021 would be a good year for stocks: Stu predicted +10% and stocks and they were up more than +20%. Stu and almost all economists in missed the inflation. He predicted it would be a heavy lift to reach 2% inflation, and here we are at ~7% inflation.


Stu predicts +10% for stocks again. He predicts the S&P 500 index will be above 5,000 by next December; it was roughly 4,550 when Stu gave his talk, and it’s 4,700 now. Here are his underlying thoughts about the US economy and therefore corporate profits. His predictions assume continued progress on COVID and no wrenching geo-political events.


The US economy was unusually strong in 2021. GDP declined by more than 15% in early 2020. Our economy rebounded and surpassed the level before COVID in spring 2021. Stu forecasts strong 4% growth in 2022. We have not regained all the jobs lost in 2020. Job growth will be strong, and we’ll regain the jobs lost sometime this summer. The Fed will stop its purchase of bonds by spring – that stops the flood of new money in circulation which has not abated since January 2020. The Fed will raise the interest rate it charges banks three or four times starting in September; increases will be small. (The Fed announced similar plans in late December).


Interest rates will remain low, but they will increase. Bond prices move in the opposite direction of interest rates. Expect no more than about 0% total return on bonds. Inflation will abate to the 3% to 4% level a year from now.


After adjusting for inflation, his prediction is that real stock returns will be about +6% to +7%, near their long-run average. Bond yields will be negative -3% to -4% well below their long-run average.


== What to believe? What to do? ==


I personally don’t believe in the doomsday forecasts. I pointed out in the two prior blog posts that some in the doomsday crowd have predicted the same dismal future and have been wrong for about ten years in a row. The forecasters never explain why they think their predictions are so far off the mark. They just keep repeating the same doomsday prediction year after year. I’m not sure why they fail to reflect on their misses.


I have no idea how 2022 will turn out. Returns over the past three years have been terrific, and I certainly don’t expect another +15% year. But a very good year for nest eggers is one that is not a Harmful year. Patti and I have had no Harmful years in the last seven since the start of our plan in December 2014. We’ve had two years of negative returns on our portfolio – 2015 and 2018. I did not view the -1.7% real return on our portfolio in 2018 as a red flag. I do not expect that 2022 will be a harmful year.


However, the Safe Spending Rate (SSR%) we use to calculate our Safe Spending Amount always assumes that we’re at start of the Most Harmful Sequence or that we’ve been riding on it. Returns in 2021 earned back more than any of us withdrew for our spending in 2021, and we therefore know that 2021 was not the start of the Most Harmful Sequence. We all are assuming 2022 will be the first year. I am not looking at the SSR% I used a month ago thinking that I shoujld lower it, because of the dismal future predicted by Morningstar and others.


Conclusion: You can find a Very Wide range of predictions for returns for 2022. Some think the market is way, way overvalued and it will crash. Others think our economy is strong, corporate profits are increasing, and stock returns will be in line with their historical average. I stick with the latter predictions. Or more specifically, I’m not lowering the Safe Spending Rate (SSR%) that I used last month to calculate the Safe Spending Amount for Patti and me for 2022. I see no real reason for you to lower the amount you withdraw for your spending now: use the SSR% I provide in Nest Egg Care.

DO NOT consider using a lower Safe Spending Rate that I provide in Nest Egg Care!

Last week I summarized a report by Morningstar, The State of Retirement Income – Safe Withdrawal Rate. It suggests that Safe Withdrawal Rates should be cut by 25%. Retirees need 1/3rd more than they thought they’d need for a happy retirement. My friend Jay emailed me, “We’re all f*&ked.” NO. NO. NO. NO. NO. Do NOT buy into Morningstar’s predictions of a FAR WORSE future that would say the Safe Spending Rates (SSR%s) that I provide in Nest Egg Care (NEC) are far too high. (See Chapter 2 and Appendix D). DO NOT entertain the thought that you should lower the amount you withdraw for your spending! DO NOT think you need lots more money for a happy retirement! The purpose of this post is to give my views of why I think Morningstar report has missed the boat and is incorrectly striking FEAR into hearts of many retirees.


 == Morningstar’s DARK, DARK financial future ==


#1) Stock returns will average 2.4 percentage points lower per year in the forever future than in the past; bonds will average 2.3 percentage points lower in the forever future.


• My take: I don’t see any good justification for the forever reductions in stock and bond returns. I see no logic for the prediction for stocks at all; one may judge that that they are overvalued now, but Morningstar predicts a 30% lower average return forever. I can buy the argument that bond returns will be depressed – interest rates are rock bottom; they can only increase; bond prices move in the opposite direction; the total return for bonds (interest reinvested and price change) may be very low for years. But we’ve already had more than four decades of 0% cumulative return for bonds in the past. Why assume that the forever average will be ~0%?


#2) The variations from average returns will be the same as in the past. A stock return that was 18 percentage points below the ~7% average real return for stocks in the past will again be 18 percentage points below the predicted average 5.6% real return. The result will be 2.4 percentage points lower.


That means we could lower the complete history of annual stock and bond returns by those percentage point declines and have an accurate representation of the future Morningstar predicts. Returns have varied from their averages for long periods of time. I show how a few historical patterns of return would change from Morningstar’s predictions. Wow!



• My take: Morningstar provides NO logic as to why they think the statistical measure of variations in return will match the past. As a result, I think the adjustments to those historical patterns of return are just not credible. I’d generally think the variations in return would be lower given the lower average returns. If I’m correct, their calculation of the Safe Withdrawal Rate (SWR) would change – resulting in greater SWR than they recommend.


#3) Morningstar concludes we don’t have enough data to determine what exactly is THE Most Harmful Sequence of return to use to find what’s safe to withdraw for any period of time.


• My take. I disagree with their value judgment. The 1 worst out of 151 historical sequences of return is definitely good enough for our planning. Morningstar provides no clear logic as to why the worst out of 151 is not good enough to use as the Most Horrible Sequence in the calculations of Safe Withdrawal or Safe Spending Rate.


We have a very good record of stock and bonds returns since 1871; we have very fine-grain data from 1926 to the present. We have data on essentially all 151 sequences of return – some complete and some partial. For example, we have 132 complete 20-year sequences of return ranging from 1871-1891, 1872-1892 and so forth up to 2002-2022. But we can determine if any of the 19 partial sequences are candidate for Most Harmful. None of the past 19 years can be the start of a Most Harmful Sequence in history. And for ANY number of years! Returns have been too good; any declines – even the -37% decline in 2008 – were more than recouped in a few years; it took five years for stocks to get back to the start of 2008 +30%. Candidates for Most Horrible don’t do that for at least a decade.



The Most Harmful Sequence in history starts in 1969: that’s the real start date for the sequence with the deep -49% dive for stocks in 1973-74. This sequence is the Most Harmful Sequence for all periods greater than ten years and for a wide range of mixes of stocks vs. bonds. I’ve described this sequence here and here. Here is another display. When I look at all that I conclude, “That’s a REALLY A HARMFUL SEQUENCE. It has to be darn close to what anyone might expect EVER. Why should I spend time and effort to try to construct a sequence of returns that might be more harmful?”


#4) Morningstar concludes one needs to use a model to be able to find THE Most Harmful Sequence.


The model generates many sequences of return that might occur over the foreseeable future – perhaps, even, in the next 1,000 years. They input two numbers into the model: the average annual return for a period of years and a measure of annual deviations of return. The model then generates what it thinks is the complete range of future sequences from the almost impossibly horrible sequence (perhaps 1 in 10,000 chance) to top of the Everest sequence (10,000 out of 10,000). Morningstar picks a sequence or group of sequences at perhaps the 1st percentile (the 100thsequence of 10,000) and uses that as their choice of THE Most Harmful Sequence for the calculation of the Safe Withdrawal Rate for 30 years.


• My take. I place no credence in result of their model. Morningstar provides no description of what this return sequence looks like as compared to the 1969 sequence. Morningstar should say,


“Our model assembled 10,000 sequences, and we picked the sequence at the 1st percentile of sequences that we deem as THE Most Harmful Sequence of return.


We compare that sequence to the actual most harmful sequence since 1871: that sequence started in 1969. The sequence we pick is worse (or, ‘basically the same as’ or ‘better’) than the 1969 sequence.


We conclude that our sequence should be the one used to determine a Safe Withdrawal Rate for retirees. (or, ‘We conclude the 1969 sequence is a very good sequence to use as THE Most Harmful Sequence.’)


“Here is how we would describe the difference in the sequences: …, …, ….”



Conclusion: I DO NOT BUY the predictions of permanently lower stock and bond returns. They are not credible enough to change my conclusion that the ONE Most Harmful Sequence in history – the sequence that starts in 1969 – is valid for our financial planning. That sequence determines the Safe Spending Rates (SSR%s) that I show in Nest Egg Careand that you can verify with FIRECalc. NONE of us should lower the percentage we are withdrawing from our portfolio for our spending. NONE of us should conclude we don’t have enough money now to be able to enjoy our retirement.

Should Safe Spending Rates (SSR%s) be 25% lower?

I spent a lot time this week trying to understand the details of a new report from Morningstar, The State of Retirement Income – Safe Withdrawal Rate. I summarize the 59 page report. Morningstar predicts much lower stock and bond returns for the foreseeable future. The forecasts are similar to those in this post: 5.7% real return per year for stocks and .4% real return for bonds; these are about 2.4 percentage points lower than historical returns for both. Morningstar translates those lower average returns to find that Safe Withdrawal Rates should be 20% to 25% lower than those calculated using historical returns – the calculations in Nest Egg Care and elsewhere.


== Terms and Definition ==


Morningstar uses the term Safe Withdrawal Rate (SWR). I’ll use that here. (I use the term Safe Spending Rate or SSR%.) I define that the Safe Withdrawal Rate is the withdrawal rate for spending that results in NO CHANCE that a portfolio will deplete to a level that would not support a full withdrawal for a desired number of years. Patti often asks, “Will we run out of money?” I answer, “No, at the rate we spend, we have No Chance of running out of money before 2036. You’ll be 88, and that’s well past my life expectancy.”


(A withdrawal rate is the initial withdrawal amount divided by portfolio value; the amount thereafter adjusts for inflation, maintaining its spending power over time.)


== Finding the SWR ==


The clearest method that finds a Safe Withdrawal Rate for a given number of years tests a withdrawal rate (and mix of stocks and investing cost) against the actual most-horrible sequence of stock and bond returns in history. A portfolio will deplete the fastest on the most horrible sequence. That sequence will result in the lowest withdrawal rate that provides a full return for a desired number of years: the Safe Withdrawal Rate.


== Much lower future stock and bond returns ==


Morningstar predicts the real rates of return for stocks and bonds will be much lower over the next 30 years than they have been from 1926 to the present, roughly 2.3 percentage points per year lower for both stocks and bonds. This is 30% lower for stocks and 87% lower for bonds – almost to the point of 0% real return for the foreseeable future. OUCH. The predictions are consistent with those of others that I wrote about in this post and this post.



Morningstar assumes the same variability in returns over time. Historically, a year of -9.9% return for stocks varied by -18 percentage points from an 8.1% average return. The same kind of year in the future will have the same -18 percentage variation, but it will be from the lower 5.7% average return. The historical -9.9% return is predicted to be -12.3% return.



== What’s the impact on SWR? ==


Morningstar suggests retirees should use a 22 to 25% lower SWR than they would use if it had been calculated using historical returns. The “4% Rule” should be the “3% Rule”. Morningstar would say the SSR%s in Nest Egg Care are too high; the results you find at FIRECalc are too optimistic.


The simplest way that I can explain the impact is to apply their prediction of lower returns for stocks and for bonds to the actual Most Horrible sequence of returns in history. I’m going to lower the annual return rates in that sequence and find the new Safe Withdrawal Rate.


The Most Horrible sequence is our not so good-looking friend, the sequence of returns starting in 1969. It’s the Most Horrible for a very wide range of mix of stocks and all periods longer than ten years. It ALWAYs depletes a portfolio the fastest and results in the lowest withdrawal rate for a desired number of years: the Safe Withdrawal Rate.


I’ve described this sequence before. It starts with the steepest six-year decline for stocks in history, -44% real return. It has 0% cumulative return for stocks for 14 years, and 0% cumulative return for bonds in 15 years.


== I lower the rates of return ==


My choice for stock and bond returns reproduces the original “4% Rule”. A 4% withdrawal rate will provide 30 years of full withdrawals for a wide range of stock mixes. The SWR is greater for shorter periods. The SWR is also pretty darn constant for a wide range of stock mixes..



To see the effect of lower average returns, I simply lower each annual return in the 1969 sequence: stocks by -2.4 percentage points and bonds by -2.3 percentage points. (I’ll describe that seqence next week; we may be talking about 30 years of 0% cumulative return for stocks and for bonds!) I then use my spreadsheet to find the new withdrawal rate that gives the desired years of full withdrawals. That’s the new Safe Withdrawal Rate. The SWRs are lower by 22% to 25%, depending on the number of years. I show the result for one mix of stocks, but the declines apply to other mixes.



The corollary is that a retiree needs to have 25% to 33% greater portfolio value to support a desired Safe Spending Amount than he/she may have calculated or found up to now.


== Change the definition of Safe? ==


Morningstar suggests, “It really isn’t all that bad.” It suggests you could choose a spending rate that isn’t Zero Chance of depleting a portfolio. They suggest that you could use a spending rate that is successful 90% of the time. To say it differently, you could accept a withdrawal rate that will fail 10% of the time. Example: there are 76 20-year historical sequences of return 1926-2020. Rather than using the Most Horrible sequence for your withdrawal rate – the one that starts in 1969 – use the withdrawal rate you get using the 7th worst sequence of returns.


Oh, my, I’d have trouble even asking these questions, “You want me to use a spending rate with a 10% chance that I’ll run out of money? And you aren’t telling me the earliest that I could run out of money. How exactly do I tell Patti that at the rate we’re withdrawing from our portfolio, there’s a 10% chance that we’ll run out of money before we die. How do I explain that?”



Conclusion: Morningstar published a report, The State of Retirement Income – Safe Withdrawal Rate. Morningstar predicts stock and bond returns will be almost 2½ percentage points lower than their historical average since 1926. Real stock returns will average 30% lower and bonds will average 87% lower – almost 0% real return for the next 30 years. The implication for retirees is that current Safe Withdrawal Rates using historical returns are too high. I calculate that Morningstar states that current SWRs are 22% to 25% too high. The corollary is that a retiree needs to have 25% to 33% more portfolio value to support a desired Safe Spending Amount.


What’s the story you tell yourself this time of year?

I typically use December 15 as a day I take a different look at our portfolio. I’ve described my imaginary “bottling day” in prior posts. Here’s one. I recast the performance of our portfolio into three holding periods or groups of wine barrels or buckets if you like those analogies. You can see my table here, but the purpose of this post is to state the story I want to tell my thinking brain about our financial retirement plan.


== Two things I learned this year ==


• I read the book, A Thousand Brains this year. (See this post.) I learned we fundamentally have two brains: a rational, thinking brain and an emotional, intuitive brain: this is similar to the concept in the book, Thinking, Fast and Slow. I learned that in times of stress my emotional, intuitive brain can easily overrule my rational, thinking brain. It’s going to kick in BIG TIME with fear and anxiety when something is wildly different from the usual pattern of life – it will go into panic mode when stocks nosedive, as an example. It will want to make decisions that are the exact opposite of what is appropriate.


I want to keep telling my thinking brain that I’ve made the right decisions that control the risk of outliving our money. I want my thinking brain to RULE and make the right decisions when times are tough.


• I also want to reinforce the new way I want to use bonds in the future. Bonds are insurance that I’ll use in difficult times. That’s a new model of behavior I want my thinking brain to follow. Here’s the story I’m telling myself this week.


== The right view of risk and I control it ==


I’ve got the right model of risk in my head. Risk is the uncertainty that Patti and I will outlive our money. Patti and I control that risk. 1) We will never spend a dime more than I calculate is a safe to withdraw our nest egg for our spending. 2) We invest to keep close to 100% of what the market will deliver in the future. 3) We have an action plan when things get rough.


My risk point is many years in the future. I have many years with No Chance of depleting our portfolio. My choice this year is to have 14 years of Zero Chance of depleting our portfolio. That choice­ determined the spending rate I just used for our 2020 spending. (Maybe it’s really 17 years from this recent post.) Fourteen years carries us to Patti’s age 88. I’d be 91. I see a hockey stick with shaft length representing the Zero Chance years. We’re locked in on 14 years.


Patti and I have shaft length equal to 14 (or more) years: Zero Chance of depleting our portfolio. Chances increase when we are in our late 80s or 90s, but the chances of one of us being alive then are low, low.


I DO NOT want my brain to think that risk is short-term variability of returns. The financial industry reinforces this view; they want to be paid to be the calming force when their clients’ emotional brain panics. Short-term dives in returns – the -35% dive for stocks in March of 2020 is an example – have nothing to do with our hockey stick and its shaft length. I want my thinking brain to look at the good graph that reinforces that it is a long game. I want it to reject the bad graph the financial industry likes to show.


Hey, brain, look at the graph on the right. NOT the one on the left.


== Many piles of money ==


I want my brain to see that Patti and I don’t have one pile of money. We have many. I want it to look at this loaf of bread: we eat one slice a year. Each has a different holding period: a holding period is the number of years we’ll hold on to an investment before we sell it for our spending. I just sold a ~5% slice two weeks ago. I’ll sell another slice the same time next December. I’ll sell another slice two years from now, and so on. I could view that I have 20 slices. My life expectancy is less than 11 years and Patti’s is 14. I conclude I’m being VERY prudent in the amount I spend per year.


Patti and I have many slices. We’ll eat one per year for the rest of our lives.


== We’ve planned for the WORST CASE ==


I get to that low 5% spending rate, because we could be starting now on the Most Horrible sequence of stock and bond returns in history. We don’t have to invent a Most Horrible sequence of return. The worst in history is Most Horrible in my view.


That sequence starts with a six-year period of -45% real cumulative return for stocks, the worst in history. It also has a five-year period of -30% cumulative real return for bonds, the worst in history. Both are 0% cumulative return for at least 14 years. It’s almost statistically impossible to construct a sequence with those events. I’m convinced I’m using the WORST-CASE scenario for my planning. I’ve driven out market uncertainty. All of us will ride a better return sequence. An average or normal sequence of returns is MUCH BETTER.


== Investing cost is darn close to 0% ==


My decision on our investing cost is the second key to predicting how long our money will last in the face of the worst sequence of return. High-cost kills. I’ve driven our cost to lower than low with my choice of broad-based index funds. We keep 99% of what the market delivers before consideration of cost. We may pay 1/20th of what the average investors pays; those folks are giving up more than 15% of what they can safely spend or leave to their heirs.


== Bonds are insurance ==


My choice of mix of stocks and bonds is the third – and least impactful – decision that affects how long our money will last. I can actually lock in the number of years of Zero Chance of depleting our portfolio at any mix of stock and bonds by wiggling the spending rate.


Our mix of stocks really tells us how much more we will have when stock and bond returns aren’t Most Horrible. The mix of stocks that I picked for Patti and me has driven the high increase in our pay from our nest egg. We also have 25% more real spending power in our portfolio than we started with seven years ago.


Bonds are insurance. I have three years of bond insurance. When stocks fall off a cliff, I’ll sell bonds, not stocks, for our spending. I’m buying time for stocks time to recover. I plan on using my insurance in a one-in-ten-year event of Very Bad stock returns – -12% real return or worse. It’s very rare that I would have to tap all three of insurance payments during retirement. The chances are, though, that I will at least see one Very Bad year.

Our insurance policy pays us the cash for spending when stocks have cratered. Gives us a year for them to recover.


== Happiness is 46% real increase in pay ==


Our pay from our nest egg can only get better. l always calculate to a real increase in pay when Patti and I earn back more than we’ve withdrawn for our spending. We earned back more than we withdrew in five of the last seven years. We have +46% greater pay for 2022 than for 2015, the first year of our plan. (Every retiree following Nest Egg Care has calculated to +15% real increase in pay over the last two years.)


Future returns may not be as good as they have been over the past decade or so. Stock returns have been well above average since 2009. Since we’re withdrawing each year for our spending, we’re always putting stress on our portfolio. Patti and I are older. We withdraw more. We stress our portfolio more than younger folks. We may never earn back enough to calculate to another real increase in spending. Our portfolio value may decline. But that does not mean we’ll ever have to lower our current pay. We won’t be unhappy if it never increases for the rest of our lives.



Conclusion: Every December 15 I recast the performance of our portfolio arranged in three broad holding periods. I did this on the 15th, but I decided this week to write down the things I wanted to reinforce in my thinking brain. When times get rough – stocks fall off a cliff – my emotional brain could take over and make dumb decisions. I want to my thinking brain to RULE when times get rough. I want it to understand that Patti and I have a solid financial retirement plan.

Use this sheet next year for your Recalculation of your Safe Spending Amount for 2023

Here’s a spreadsheet that you can download and use to Recalculate to see if your Safe Spending Amount (SSA) will increase in real spending power for 2023. (SSA; See Chapters 2 and 9, Nest Egg Care [NEC]) This sheet is similar to the one I provided last year; I revised it slightly. You can also find this sheet in the Resources section of the web site.


== One significant change ==


I apply my design mix to my total portfolio: the amount I had as of November 30 after withdrawing our full-year SSA for 2022. I no longer have a Reserve hidden under our bed that I keep separate from the rest that I called our “Investment Portfolio.” (See Chapters 1 and 7, NEC.)


The change follows the logic in this post: I clearly view bonds as insurance that I may or may not have to use during retirement.


• In all normal years from the start of our plan I Rebalance back to our design mix to maintain our original level of insurance. I’ve rebalanced back to 85% each year for Patti and me.


• In an abnormal year (none since 2008, 14 years ago ) I’ll solely sell bonds for our spending. At a mix of 85% stocks and roughly 5% withdrawal rate, Patti and I have three years of insurance.


An abnormal year is when we are hit by a tornado. I set the mark for a tornado as -12% or worse real return for stocks. Tornados have hit ten times in the 96 years since 1926: call it a one-in-ten-year event. I’ll solely sell bonds for our spending, and I’ve used one-year of insurance. I won’t replace it in a future year by rebalancing back to our initial design mix. I’ll have two years of insurance, meaning I’ll have a greater mix of stocks. I hope to heck that I never use our insurance and Really Hope not to use it more than once during retirement, but chances are that we all will be hit at least one time in our retirement.


There are no other significant changes from the sheet last year; some of the text is clearer, I think.


== Store it prominently ==


My file name is “ 1201 22 SHORT FORM Calculate SSA for 2023.” (I also have the file for the LONG FORM for the total history since 2014 in the same folder.)


I’ve stored both those sheets in a folder called “  1201 22 Calculate SSA for 2023.” I skip a space or two before the text so they display in the order I want. That folder is in the big folder “Investments and Tax” in my Documents.



== Set up the sheet==


You’d change this sheet enclosed to reflect your plan:


1) List your securities in cells C30 to C33. You’d change the math in cells D30 to D33 that reflect your decision on mix/weights of the securities you own. You can refer to a small table to the right of those cells.


2) Enter your Multiplier for cell C21. (I show .80 as an example.) It won’t be the same as the one you used last year. You have more after your withdrawal this year than you did after your withdrawal last year. This assumes you did not take out some of your More-than-Enough for year-end gifts or donations.


3) Enter your age adjusted SSR%s for cells C14 and D14 that you get from Appendix D, NEC. I show the ones for Patti and me on the sheet. I describe how I get the life expectancy calculation for this in this post: I use the Social Security Life Expectancy Calculator for Patti and round the years for November 30.


== During the year ==


I’ll look at this sheet in early August when I make my first attempt at tax planning for 2022. I’ll get an idea of our SSA for 2023. I’ll estimate how much securities I will be selling in December and figure out where it is best to sell them: Traditional IRA, Taxable account or Roth IRA.


In mid-October when Social Security announces the Cost-of-Living Adjustment for the year, I’ll enter inflation in cell C28.



Conclusion. I Recalculate each year to see if I’ve earned a real increase in our Safe Spending Amount for the upcoming year. If not, I stick with last year’s amount and inflation adjust it. (You can Recalculate less frequently if you like.) I enclose in this post a short-form spreadsheet you can set up now for your Recalculation next year.

How big is your retirement pay raise for 2022?

If you use November 30 to calculate your Safe Spending Amount (SSA) for the upcoming year, you AGAIN calculated to a healthy real increase for your spending in the upcoming year. Patti and I calculate to an 11% real increase for next year; our SSA has increased by 46% in spending power from the start of our plan (See Chapter 2, Nest Egg Care [NEC].) All nest eggers have a new “the worst it will ever be”. The purpose of this post is to provide a quick summary of my calculation to our 11% real increase in our SSA for 2022.



This year marks the fifth real increase in our SSA in the seven years that I’ve recalculated from start of our plan in December 2014.



I show details of our calculation for all years on my long-form spreadsheet. Here is the pdf. I also entered five data points in the short form spreadsheet that you can download; I tweaked this version from the one I provided last December 10. Use that short-form spreadsheet if you recalculate using the same 12-month period that I do. The spreadsheet has a hypothetical Multiplier to show how you get to your total SSA for 2022; you’d use your Multiplier that you set last December.


If you want more detail, I described the calculation steps and annotated my long form sheet in last year’s post. I also discuss the calculation steps in Chapter 9, NEC.


== I’ve almost completed my year end tasks ==


I sold securities to get the total that I’ll withdraw. Stocks dipped from right before Thanksgiving, so the task of selling did not feel good this year; I will never pick the perfect time to sell. I polished the cash and tax planning that I first drafted in August. After a couple of transactions settle, I will distribute/transfer money from our Traditional IRAs to our Taxable Account: our RMD less QCD + any other that I want to withdraw. I will withhold my estimated taxes for 2021 when I transfer. I rebalanced in our Traditional IRAs to get back to the proper percentages of the four securities we own. After we receive our December “paycheck” from last year’s SSA, I’ll change our Automatic Withdrawal schedule at Fidelity for the monthly paychecks to arrive in our checking account throughout 2022.


I rebalance in our IRA accounts. I don’t incur capital gains and tax when I rebalance.


== Highlights ==


• Our nominal return rate for the year was 18.5%. With inflation near 6%, our real return rate was 11.9%. Our real return for stocks was 15.2% and -6.5% for bonds.



• Two factors led to 11% real increase in our SSA.


1. We earned back more than the 4.85% we withdrew for our SSA last year. The 11.9% real return on our portfolio means we have 7% more in real spending power this November 30 than we had before our withdrawal for our SSA last year. I therefore have More than Enough for our current SSA: that always leads to a real increase in SSA. (The alternative is that I could withdraw some of the More-than-Enough and not increase our SSA as much or at all.)


2. Because we recalculate to More than Enough, we can apply our greater, age-appropriate SSR% to our portfolio to calculate our SSA. In essence, we’ve ripped up the old plan that assumed the Most Horrible sequence of returns started December 1, 2020. We are starting the first year of a new plan that assumes the Most Horrible sequence of returns started a few days ago. Our age-appropriate SSR% on this plan is 5.05%, a 4% increase from the prior 4.85%.


The combination 7% greater portfolio value and the 4% greater SSR% leads to the 11% real increase in our SSA.


• Our SSA is 46% greater in real spending power than at the start of our plan. Our first SSA for 2015 was $44,000 per $1 million portfolio value. It’s $64,200 for 2022 in the same spending power. Inflation makes the nominal dollar amount $73,600 that I can pay out this next year.


• Our portfolio on November 30, before my withdrawal for 2022, is 27% more in real spending power than it was before our first withdrawal for spending in 2015. On the basis of a starting $1 million in December 2014, I’ve withdrawn $351,000 in spending power and have $272,000 more in spending power than I started with.


• I’ve recalculated seven years to see if our SSA could increase in real spending power. I’ve recalculated to a real increase in five years. Portfolio returns were poor in two years, and I only inflation-adjusted the prior SSA. Over those seven years, the real return on our portfolio averaged 8.6% per year, while our expected return for our mix of stocks vs. bonds is 6.4%.  You’ve also had a very good last seven years – actually more than that.


I’m happy that returns have been good, but I’m really not trying for MORE. I JUST DON’T WANT TO RUN OUT OF MONEY. I’m happy when we’re not hit with a Really Bad year for stocks. Our worst year in the last seven, 2018, was just -1.7% real return for our portfolio; that’s a good year in my mind,  because it wasn’t a Really Bad year. I hope we keep avoiding them, but the chances are that we will hit one sometime. The 46% real increase in our SSA means I have a low level of anxiety if we’re hit. It is very easy for Patti and me to lower our spending + gifts/donations; that’s a Big Boost to safety of our plan. We are not going to outlive our money.




Conclusion. I calculate our Safe Spending Amount for the upcoming year based on our 12-month returns ending November 30. All retirees who follow the steps in Nest Egg Care calculate to a healthy real increase in their SSA for 2022. Ours is +11%, and that’s +46% from the start of our plan eight years ago. This post shows the detail of our calculations and provides a spreadsheet that you could use to calculate your SSA for 2022.

Are you CELEBRATING the new high-water mark for your portfolio?

I set December 1 to November 30 is my “calculation year.” On the morning of December 1 I’ll calculate and find our Safe Spending Amount for 2022 (SSA; see Chapter 2, Nest Egg Care [NEC]). That will be a very good day. Patti and I will reach another high-water mark for our portfolio on our calculation date. I’ll calculate to another real increase in our SSA. ALL OF US should CELEBRATE, whether we have started our retirement plan or not. We are all at a high-water mark of portfolio value. Our SSA calculated now is the highest it’s ever been. It’s also the worst it will ever be for the rest of our lives; the math used to calculate our SSA uses the worst case assumption for future stock and bond returns; our SSA can’t get worse; it can only get better. The purpose of this post is to explain why ALL OF US – particularly for those who have not yet retired – should be ecstatic for the for SSA we calculate now.


== We’re retired: our new SSA ==


Next week Patti and I will take our eighth withdrawal from our nest egg for our SSA. It will be the sixth real increase in eight years. I’ll update this sheet in the post next Friday.


I withdrew 4.85% from our portfolio last December for our spending in 2021. I can see now that our real portfolio return – calculated for the 12-months ending November 30 – will be more than double that. I’ll have more in real spending power this December 1 than I had before my withdrawal last December 1. I have More-Than-Enough for our current SSA, and therefore our annual SSA moving forward has to increase in real terms (unless I decide to take out a lump of the More-Than-Enough to spend or gift).


When we’re retired, we’re always asking, “Was this year the start a Most Horrible sequence of returns?” The answer for this past 12 months is obviously “NO!” A Most Horrible sequence of returns cannot start in a year that you earn back more than you withdrew the prior year; you’ll always calculate to an SSA with greater spending power. The Most Horrible sequence of returns may start this December 1, but it clearly didn’t start last December 1.


== Your first SSA ==


If this year is the start of your plan and you are withdrawing for your first SSA, you should be happy as hell. You may think, “Wow, we’ve had three FANTASTIC years for stock returns. The SSA I calculate now is WAY BETTER than I thought it would be just last year. Is the market at a peak? Maybe I shouldn’t withdraw my calculated SSA, and I should pay myself – or ourselves – less that I calculate for 2022.”


Don’t do that! I think that is a natural concern given the returns these past three years. But we have no indication that the 12-month period beginning December 1 is the start of a Most Horrible sequence. Yes, inflation is higher than the last 30 years, but the economic conditions now are far better than at the start of Most Horrible sequences. We all may experiences a decline in real portfolio value next year or we may not, but it is WAY TOO EARLY to think about spending less than your SSA. We older folks only have a limited number of years left, and we should pay our full SSA to ourselves to ENJOY retirement when we are younger.


== Your first SSA, say, in a year from now ==


I owe my thinking here to my friend Jay, who is planning to start retirement in one or two years: that’s when he’ll take his first withdrawal for his SSA. Here’s the conclusion: if your first full withdrawal for retirement is in the future, you should calculate your SSA NOW as if you were withdrawing this December 1 for your spending in 2022. That SSA is the worst it will ever be – even if the market declines from now to when you actually take your first withdrawal, say, two years from now. This sounds flakey, but the logic is clear.


My friend Jay suggests a thought experiment. Patti and I visited the Einstein Museum in Bern Switzerland about six years ago. Einstein discovered his theory of special relativity by constructing a thought experiment. Jay is my new Einstein. Here’s the thought experiment:


Jay and Ray are identical twins. They look at their portfolios at the end of this November, and they have the exact same amount, $1 million; it’s their high-water mark. They have identical portfolios, holding the index funds, weights and mix recommended in Nest Egg Care. They both decide they want to take a full withdrawal for spending in 2022.


They email me and ask me to help them calculate their Safe Spending Amount to withdraw the first week of December for their spending in the upcoming year. They both are of good health, and they both agree that 19 years – through 2040 – for Zero Chance for depleting their portfolio makes sense. (See Chapters 2 and 3, NEC.)


I look up their Safe Spending Rate (SSR%) in NEC (See Appendix D) and find it’s 4.40%. I email back and say to both, “You can withdraw and totally spend/give $44,000 from your nest egg over the next 12 months. That’s in addition to your Social Security and other income. That $44,000 is the WORST it will ever be. It will at least adjust for inflation in future years. It’s unlikely that you are starting out on a Most Horrible sequence of returns, and chances are that you’ll calculate to real increases in your SSA over time. (See Chapter 9, NEC.)”


I don’t hear from them for a year. It’s December 1, 2022. Ray emails me, “Tom, help me. What can I withdraw now?” The 12-month period has not been good. Their real – inflation-adjusted – return on their portfolio return is -12% (mine, too!). That’s similar to 1969, the start of the actual Most Horrible sequence in history. Let’s assume inflation was 0%, just to make the explanation simple.


I email back to Ray. I think Jay must have the same question, so I email him, too. I give both the same answer, “You don’t calculate to a real increase in your SSA for spending in the upcoming year based on the poor returns this past year. You have no adjustment for inflation this year. You should withdraw the same $44,000 that you did last year and you can spend/give it all in the next 12 months.  Yep, this was a bad year, and this could be the first year of the start of a Most Horrible sequence of returns, but we don’t know that. Remember your 19 years of Zero Chance of failing to be able to take a full $44,000 of today’s spending power is still intact.”


A few days later, Jay emails me, “Hi Tom, I failed to tell you: I actually changed my retirement date. I kept working at my parttime gig last year. I decided that I wouldn’t travel much. I lived off my Social Security and my other income. I did not withdraw anything from my portfolio last year, and I did not add to it.”


“I will take my first withdrawal for my spending now. You just told me I could withdraw $44,000. I talked to Ray and he tells me you said the same to him. I have $880,000 portfolio value; that has to be a bit more that Ray has because of his withdrawal last year. Do you agree that I can still take a withdrawal of $44,000?”


I tell Jay, “Yep, Jay, take the $44,000. You’re in the same basic boat as Ray. You both – actually all of us – may have ridden the first year of what may turn out to be a Most Horrible sequence of returns. That was the assumption that got you to your $44,000 SSA a year ago. You knew you could withdraw the $44,000 each year – adjusting for inflation – for your spending through 2040. In that worst case you’ll beat 19 years by a bit or you’re able to withdraw a shade more than Ray because you have a bit more in your portfolio than Ray does now. But let’s keep it simple, Jay: stick with $44,000.”


What I’m not going to do: I’m not going to apply a 4.40% SSR% (Jay’s one year older, but let’s assume that his SSR% did not change.) to a lower portfolio value than his high-water mark of $1,000,000. I’m not going to apply 4.40% to his current $880,000 portfolio and tell him he can only take $38,700 withdrawal for his SSA. That would be incorrect.


I’ll show exactly how this works – the detail calculations – in an upcoming post, but I think you have the basic logic if your first full withdrawal for spending is in a future year:


1. You can only ride the Most Horrible sequence of returns once. If you’ve had a down year or cumulative down years from your high-water mark – meaning you can’t calcuate to a greater, real SSA – you may be riding on the Most Horrible sequence of returns. But you never recalculate your SSA on the basis of lower portfolio value. It remains the same in real spending power. To recalculate would be applying the worst case assumption (your age appropriate SSR% that assumes you are starting anew on the Most Horrible sequence) on top of what already may be the Most Horrible sequence of returns.


2. The math of your plan really starts at your most recent high-water mark of your portfolio value. Assuming you use my November 30 calculation date in the future, you should calculate your SSA next week as if your first withdrawal is on December 1 this year. That’s your high-water mark, too, and the SSA you calculate NOW is the worst it will ever be for the rest of your life.



Conclusion: We all have reached a high-water mark for our portfolio value, and we all should CELEBRATE. Next week I’ll calculate to greater, real SSA than this year’s. Our new SSA is worst it will be for the rest of our lives; it will at least adjust for inflation in future years.


Someone who is starting their retirement plan now, withdrawing their first full SSA for spending in 2022, should similarly use their age-appropriate SSR% applied to their current high-water portfolio value. The SSA they calculate is the worst it will ever be; it will at least adjust for inflation.


Someone who thinks they will retire in, say, a year or two, has also really started the math of their plan now. They should calculate their SSA NOW– even though they won’t withdraw their SSA from their portfolio. The SSA they calculate is also the worst it can ever be; it will at least adjust for inflation in future years. That amount is  the minimum they’d withdraw for their spending when they really start retirement.



How much more will you pay for Medicare Premiums in 2022?

Those of us on Medicare pay Part B (medical insurance) and Part D (prescription drug) premiums directly to Medicare. If you receive Social Security like Patti and me, your premium is deducted from your gross Social Security benefit. This post describes the premium increases you’ll pay in 2022 and the income thresholds from your 2019 tax return that you filed by April 15, 2020 that can trigger higher Medicare premiums.


I use the income thresholds stated now as a guide to my final tax planning that I do this week for my 2021 tax return. I’ll sell securties in about ten days to get the cash for our Safe Spending Amount for 2022 (SSA; see Chapter 2, Nest Egg Care.) I get a close estimate of my total income – Adjusted Gross Income – for 2021. I’ll have a good idea of how close I am to the current thresholds that trigger higher Medicare premiums. But I won’t know in detail since there’s a lag: my total income on our 2021 return will  determine if we will pay premium increases  in 2024, and those thresholds won’t be announced until November 2023. But if I stay under a current threshold, I’ll be under a future threshold.



You also need to plan where you will get your cash for your spending. You want to estimate your total income for the year, and you want to compare that to the income thresholds just announced. You don’t want to carelessly cross an income threshold on your 2021 tax return that would result in higher Medicare premiums in 2024.


== Part B: 14% increase ==


We all pay at least the same minimum Part B premium, which increased 14% from about $148 per month to about $170 per month – to a total increase of about $260 per year. That’s not a deal breaker for all of us with a nest egg, but that $22 increase in cost is more than the cost of living adjustment from Social Security for the average recipient. The minimum Part D premium you pay is based on the plan you’ve chosen. These are two good detailed explanations: here and here.


== Triggers of higher premiums ==


Your your MAGI – Modified Adjusted Gross Income – on your 2019 tax return (You’ll filed that in the spring of 2020. ) determines if you pay more Medicare premiums for 2022. Five thresholds result in greater Medicare premiums. Each threshold is a tripwire. Cross a tripwire by $1 and you pay the added premium. For this next year, a person with REALLY HIGH income in 2019 who blew by all five tripwires will pay about $6,000 more; $12,000 more for a couple.



This year Medicare inflation-adjusted the thresholds of income that trigger higher premium payments and states it will adjust the thresholds for inflation in the future. This is a new, good process; thresholds did not adjust each year, meaning that inflation alone was pushing us towards higher premiums.


== Current thresholds are my guide ==


I use the current thresholds as a guide to my tax planning now for my 2021 return, even though I know they’ll inflation adjust in future years. I’ll calculate our Safe Spending Amount (SSA) for 2022 in less than two weeks. I’ll finalize my plan as to where I will get the cash that I’ll have by the end of December. I have three sources for cash. Each source has a different tax consequence. My choices determine our MAGI for our 2021 tax return. I may be able to adjust the source of our SSA to avoid crossing a threshold that would result in higher premiums. See recent blog posts here and here.




Conclusion: This week Medicare announced premium increases for 2022. The increase was 14% for the base, Part B (medical insurance) premium. That’s greater than the 5.9% Cost of Living Adjustment for the gross Social Security benefits for 2022. All of us who receive Social Security and are on Medicare will see less than 5.9% net increase.


Medicare also announced the income levels on your 2019 tax return that can trigger higher premiums that you would pay in 2022. Cross a threshold or tripwire by $1 of income and you can pay $1,000 or even $1,000s more. I keep those tripwires in mind for my planning now on our 2021 tax return. I can adjust our taxable income when I decide my of mix of three basic sources for cash for our upcoming annual Safe Spending Amount (SSA).

Is my choice of 85% stock mix risky?

I’ll rebalance back to my design mix in the first week of December. I want to review my choice, since the math has changed slightly as I described in last week’s post. I will now apply my choice of mix of stocks vs. bonds to our total portfolio, not the ~95% portion that I describe as our “Investment Portfolio” in Chapters 1 and 7 in Nest Egg Care [NEC]. I decided on 85% mix of stocks. To some, a mix of 85% sounds risky. The purpose of this post is to explain that I think that my choice of 85% mix of stocks – coupled with my spending rate – is NO RISKIER than any other mix I might consider.


The discussion in this post is similar to the discussion on mix in Chapter 8, NEC, but I use a more detailed spreadsheet rather than results from FIRECalc to show why my choice of 85% mix of stocks clearly makes sense.


== The basic conclusion of this post ==


Any mix of stocks can give you the exact same predictability of a minimum, acceptable future portfolio value. You have to spend a little less now to hit the target with a greater mix of stocks. But you gain an advantage from a greater mix of stocks, because you can expect MUCH GREATER future portfolio value in all but the Most Horrible sequences of stock and bond returns in history. MORE portfolio value is a good thing; it means you can spend or gift more during your lifetime and at death.


== Three critical assumptions ===


You have to buy into three critical assumptions to agree with me that 85% mix of stocks can be just as safe as the conventional mix of 60% stocks that is most often recommended to retirees.


1. Risk is the uncertainty of the end point you want to achieve. The end point we want when we are retired is to have enough portfolio value that allows us to spend to truly ENJOY and know we won’t outlive our money.


Here’s a football analogy. You want your favorite football team to hit a minimally acceptable scoring margin at the end of the game. You don’t care about quarter-by-quarter scoring, the number of first downs, or other game statistics. We just want to know that a minimally acceptable end result is – as close as possible – totally predictable.


2. You use worst case planning to eliminate the uncertainty of market returns. You assume the worst sequence of returns imaginable. If your team hits your target of minimum scoring margin playing in the THE WORST playing conditions ever, you know it will only be better in all other playing conditions.


3. You use the actual Most Horrible sequence of stock and bond returns in history as the worst sequence of returns we could ever imagine. It’s really bad. We don’t have to imagine or construct a worse sequence. It’s the coldest white-out blizzard in history. And your team wins by the desired scoring margin.


Example: Patti and I decided that we wanted 19 years of Zero Chance of depleting our portfolio at the start of our plan in December 2014; see Chapter 2, NEC.) The endpoint was enough portfolio value at the end of the 18th year to allow a full withdrawal for the 19th year in 2033. That’s our minimally acceptable scoring margin.


We used the Most Horrible sequence of returns ever. That’s our white-out blizzard. We use a Retirement Withdrawal Calculator, and we found we would hit our target at a constant-dollar withdrawal or spending rate of $44,000 per $1 million initial portfolio value – we lable that as a 4.40% spending rate. (See Chapter 2, NEC.) Yes, that’s not exactly the same as truly knowing that we won’t outlive our money, since we both could be alive or one of us could be alive after 2033, but we also know the actions we can take during retirement to extend the Zero Chance Years beyond 2033. (See Chapter 4, NEC.)


== You lock in with three decisions, not one ==


Most financial planners talk about risk in terms of one decision: your mix of stocks vs. bonds. But you eliminate risk – the uncertainty of not having an acceptable portfolio value in a future year – by three decisions: your spending rate (a constant dollar amount relative to your starting portfolio value), your investing cost (the overall expense ratio of the securities you own); and your mix of stocks and bonds.


You can hit the exact same minimally acceptable target of portfolio value in future year by a mix of those three decisions. In this post I fix investing cost at 0.10% (You are invested almost solely in index funds.) I can then find the tradeoff between spending rate and mix that hit the exact same target for portfolio value.


A slightly lower spending rate and a greater mix of stocks hit the EXACT same endpoint of portfolio value in a future year. Given that you’ll have greater portfolio value with greater mix in all other potential sequences of return, you want to favor slightly lower current spending and greater mix of stocks.


== The numbers ==


I use the same spreadsheet and Most Horrible sequence of returns in history to track portfolio value over time that I used in recent posts starting with this one. You sell bonds solely for your spending in years when stocks have cratered, and you don’t adjust back to your original mix of stocks vs. bonds. I set the base case at 75% stocks for this post; that’s the minimum mix of stocks that I think you should consider.


I use the example of 20 years of full withdrawals for spending. That means I want enough at the end of the 19th year for the withdrawal for the 20th year. I set the target for portfolio value at the end of the 19th year as $60 relative $1,000 initial portfolio value. That $60 will ensure a full withdrawal for the 20th year, but there won’t be enough for a withdrawal for the 21st year.


I show two spreadsheets here that hit the $60 at the end of the 19th year: 1) for the base case of 75% and 2) for 85% mix of stocks. A 3% lower spending rate at 85% stocks hits the target.


I ran spreadsheets for a wide range of mixes to find the the spending rate for each that precisely matched the end target. The first table is the summary of stock mixes and spending rates the precisely hit the desired target. The second table shows the tradeoff of lower spending amount vs. future portfolio value at expected returns for stocks and bonds. See both of these tables on this pdf.



What do these tables tell us for this example for 20 years?


1) In no case does a mix of less than 75% make sense. At lower than 75% mix of stocks, you have to lower your spending rate and your expected portfolio value will be less. That’s a losing combination: worse now and worse in the future.


2) At mixes greater than 75%, you have to spend less now but your expected gain – averaged over all future years – is about five times more than your lower spending. I like those odds.

== 15 years ==


I run the same exercise for 15 years of full withdrawals for spending. I get a similar answer. I can hit the exact same desired minimum portfolio value at 85% mix of stock by spending a little less than if my mix was 75%, for example. And I have the potential about 3 times more in portfolio value than I give up in current spending. That’s less gain potential than for 20 years solely due to fewer years of compounding of returns.


== It’s a value judgment ==


The Safe Spending Rates (SSR%s) that I provide in Appendix D, NEC are lower than those I obtain from my spreadsheet, as I describe in this post. For example, I post 4.30% SSR% for 20 years, and the spreadsheet shows that is 25 years of full withdrawals. See here for more detail. That means if you stick to the SSR%s posted in NEC, you are more than safe for the number of years you pick and you therefore are free to pick any mix of stocks vs. bonds.



I chose 85% because it feels right to me to hold three years of bonds as insurance. I can solely spend bonds for three years when stocks crater. I’m just uncomfortable with holding fewer than three. It is rare event to have three years when stocks crater in a retirement period, but as we see in the sequence starting in 1969, those Horrible years can come in bunches.



Conclusion: Your financial risk is the uncertainty is outliving your money. You can lock in a minimum-acceptable portfolio value in a future year that guarantees you’ll have enough for a full withdrawal for spending. You lock in with your decisions on spending rate, investing cost, and mix of stocks vs. bonds. This post shows that you can slightly lower spending rate and increase your mix of stocks and hit the exact same, safe future portfolio value in the face of the worst sequence of returns for stocks and bonds in history. Safety is locked in with a number of choices. You should always favor a greater mix of stocks, since you gain the potential for far greater portfolio value at all but the Most Horrible return sequence imaginable.