Live the Core
Posted on September 29, 2017

Nest Egg Care describes four CORE principles for your financial retirement plan. I think you will find the workbook is straightforward and simple to follow. Nest Egg Care gives you a worksheet and shows you the one I completed for our plan. The resulting plan is very simple. I’m able to compress our complete plan to a 3″ by 5″ card that I’ve tacked to the side of my computer. Here’s a short overview of the four CORE principles.


1. CHOOSE your Safe Spending Rate (SSR%). For once, it’s better to be older.


Your spending rate is a constant-dollar amount (the numerator) divided by $1 million starting portfolio (the denominator). “Constant dollar” means your spending amount retains the same purchasing power over time, adjusting similarly to the way Social Security payments adjust. The annual amount you spend is independent of variations in your portfolio value.


We use a Retirement Withdrawal Calculator (RWC) to give us key information that will lead to a Safe Spending Rate (SSR%). The correct kind of RWC to use tells us how a portfolio fares for a given spending rate over a wide range of sequences of stock and bond returns we may face. The sequences of returns RWCs build will range from the worst in history to the best. We pick our SSR% to be safe even in the face of HORRIBLE future sequences of returns.


Each spending rate has a number of years of zero probability of depleting a portfolio and then a rising probability in the years thereafter. The plot of the probabilities looks like a hockey stick: a shaft of years of zero probability of depleting a portfolio, an inflection point, and a rising blade angle thereafter. Lower spending rates have longer shaft lengths; greater spending rates have shorter shaft lengths. You’ll pick a stick (SSR%) with a long shaft length if you are younger. If you are older a shorter shaft length makes sense. As the years pass in retirement, it’s almost certain that you’ll have opportunities to play with shorter and more fun sticks (greater spending rate) than the one you initially start with.


Nest Egg Care recommends how you should pick your stick (SSR%). The planning “trick” is that we always pick a spending rate that assumes we will experience the most HORRIBLE sequence of returns that an RWC builds. By assuming the worst, we’ve eliminated “market uncertainty” or “market return risk” from our planning; returns can’t be worse; they can only be better. We are always planning for the worst, and as time passes we adjust to a greater SSR% when we find we haven’t been riding along one of the most HORRIBLE sequences. But every time we adjust, we again assume we will then face one of those most HORRIBLE sequences.


The Safe Spending Rate (SSR%) you pick will have zero probability of depleting for many years – generally two decades or more – and roughly 1-in-50 chances of your outliving and outspending your portfolio in the years thereafter. Those probabilities did not budge my or my wife’s worry meter. You’ll also learn the best steps to take during retirement if your want to or need to lower those out-year probabilities.


You use you SSR% to calculate your annual Safe Spending Amount (SSA), or you use your SSR% to tell you how much you need for a desired spending level. Nest Egg Care shows you the math.


2. OBEY the Rules. Two are Critical.


RWCs have implicit assumptions built into them as to How to Invest. You have to follow the How to Invest rules explicitly if you are to trust that your SSR% is really safe. If you don’t follow the rules, you are distorting the shape of the hockey stick (SSR%) that you think is safe. You can distort it to the point that it is unsafe. Do NOT do that.


The first and most important rule (that almost no one really tells you about) is that you must match as nearly as possible future market returns. All RWCs assume market returns to build the sequences of returns we may face in the future. We all incur costs when we invest (e.g., costs of ownership of mutual funds), and we must have a low net Investing Cost (a subtraction from market returns). We have two options to be low cost: invest in inherently low cost index funds or invest in actively managed funds that overcome their greater inherent costs. Nest Egg Care comes down on the side of index funds.


The second rule is that you want and need a Reserve that’s apart from the amount you use to calculate your SSA. The Reserve is your buffer to carry you through a period of “bad variability,” particularly in stock returns. RWCs tell us we are safe in the face of horrible sequences of future returns, and 80% of the sequences they’ve built have at least two years of “bad variability” built into them. But it will be emotionally difficult for us when we are first hit: “bad variability” can shake our belief that we are truly safe.


When we are hit, we will tap the Reserve for our spending, not our portfolio we used to calculate our SSA. The plan is to replenish the Reserve when stock returns rebound.


3. RECALCULATE. It can only get better.


It’s almost certain that you won’t face the horrible sequence of returns that drove your initial choice of SSR% and resulting SSA to a low level. When you ride a better sequence you will accumulate more than is needed for your current SSA. If you ride along an average sequence of future returns you can expect to be able to spend perhaps twice your initial annual SSA. Nest Egg Care shows you how to recalculate to see if you are able to safely spend more. I suggest you recalculate at least every three years, but you can recalculate annually if that is not too burdensome. I do, and you can follow that calculation each December on this site.


If you aren’t on a path of depleting your portfolio, you’re going to be faced with delightful dilemmas: once you trust your SSR% and annual SSA calculation, you will know that it makes little sense to save any of your annual SSA; saving is just driving your future probabilities to almost ridiculously low levels. Nest Egg Care recommends that you “pay yourself(ves)” your complete SSA each year. Your objective by the end of the year is to not have one dime left: you’ve spent or gifted it all.


It’s a better retirement with more joy and meaning, I think. Your focus will typically be at the start of the year, “What’s the next fun thing to do?” And, typically later in the year, “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 around to appreciate the positive impact you’ve made.


4. EXECUTE. Keep it Simple.


Picking the right investments is simple, and the portfolio Nest Egg Care recommends is shockingly simple. It’s so simple that I find I personally have to fight human nature and biases that lead us to think that the appearance of complexity (e.g., holding many types of mutual funds) is better than simplicity (holding just a few that in turn own a piece of every security traded in the world). Another bias we have to fight is the urge to fiddle, tweak and change our portfolio to give ourselves a sense that we are proactively exerting control over the future. That’s really an illusion.


You have initial organization tasks at the start of your plan. You need to get all your financial resources organized in one place. You want to make sure you and your life partner can see it all. You want to arrange and label your investment accounts so it’s very easy for you to understand once you’ve logged into your portfolio page. Nest Egg Care shows you an example that makes most sense to me.


Annual maintenance tasks are straightforward. Nest Egg Care provides a sample checklist and two spreadsheets that will help. You’ll recalculate to see if your SSA can increase; you’ll sell securities most tax efficiently to get your upcoming SSA in cash; you will rebalance back to your strategic mix of stocks and bonds; you’ll adjust your monthly “paycheck” from your investment account to your checking account. These tasks should take no more than an hour or two at the end of the year. Less, once you get the hang of it.


Understand the CORE. Trust your SSR% and pay yourself your SSA. Focus on spending to enjoy more now; gift what you don’t spend to those you care about. Do these things, and you’ll maximize the joys of retirement.

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