I read a lot. I read things that make me think about growth and life and behavior. I read things that make me think about the markets. I love to read about the brain, psychology, and what makes a human tick. Almost all of it, save for the 15 or 20 minutes I read ‘Nate the Great’ or ‘Cloudy With a Chance of Meatballs’ with my 3rd grader, will come from the non-fiction genre. Warlocks and superheroes are cool but if I’m reading, my preference is to learn something that I can apply down the road. I wasn’t always a reader. When I was young I’d much rather run around outside, pretend my pedal bike was a jetski jumping over waves, or chase a ball of some sort but as I’ve grown I’ve always thought that $15 or $20 spent to hear someone else’s view or life experience is some of the best money I can spend. Reading that last sentence just made me realize why I didn’t have 13 year old girls begging for my attention in middle school. Man, I was a NERD! The PizzaHut Book It! program didn’t hurt my appetite for reading either. After all, I’m just a fat kid who will do anything for pizza.
I’ll read a lot from other advisors and planners and market participants because there is usually something that I can glean from their thinking that will help me and our clients. Everything I read goes through a filter. Some of it I really like and hold onto for a long time. Some of it I’ll disagree with and never touch again. Some of it challenges me to see something from a different perspective. Very little of it stirs me to the point of disagreement where I’ll want to rant.
This week I came across something different. A prominent, well known, personal finance author talked about how withdrawing 8% a year from your nest egg is fine. Just so we’re clear, it couldn’t be further from fine (unless he suggested withdrawing 9% a year). It is such an egregious suggestion that I couldn’t just sit with it.
When we talk about retirement income we’re talking about what we call a ‘withdrawal rate’. Take the lump sum of money that you’ve accumulated and the question becomes ‘what amount of money can I withdraw per year without running out of money?’ That’s a difficult question to answer concretely because there are a few unknowns you must deal with. First, how long are you going to live? None of us have a crystal ball and so that answer is largely unknowable. Secondly, what will be the sequence of forward returns. Again, we live in an uncertain world in which knowing that answer is impossible. Our asset mix matters. Our behavior (when we buy and when we sell) matters. Inflation matters. There are a host of things that make the seemingly innocuous question of ‘how much can I spend’ ridiculously difficult to pinpoint in the real world.
Potentially dating back to the first abacus, financial planners have thought through the fact that you can probably spend 4% and be safe. I say probably because I HAVE NO IDEA WHAT THE FUTURE WILL HOLD even if we have lots of historical data to prove 4% is a safe withdrawal rate. Doubling that to 8% and calling it safe is intellectually ridiculous. Please don’t take 8% from your nest egg. There might be a period of time that it would work, after all…I believe in growth…I believe in innovation…I believe over time markets go up and to the right, but that will likely be the exception and not the rule when it works. I also find it hard to imagine that it will work for the amount of time that you will live off of that nest egg (ie: over a 30 year retirement).
We generally subscribe to the 4% rule at the Mancino Utz Group but we also realize how life works. Sometimes spending, just like market returns, can be lumpy. We can have years where we must replace a vehicle and a daughter gets married. Sometimes those two things can happen in a year where we already planned our 30-year wedding anniversary in Hawaii. It’s life. Remember that whole section where we talked about unknowable things in the future? While we subscribe generally to the 4% rule, we hold much more firmly to the idea of constant communication and monitoring in the distribution phase of your investments. We don’t want to blast out a 4% or an insanity ridden 8% distribution rate on a podcast and never talk to you about it again. We want to walk with you, and talk about it, and tweak it, and fine tune it as you enjoy your money.
Speaking of reading, here’s a few I’ve read over the last year or so that the reader on your Christmas list might enjoy with some buzzwords in parenthesis:
- Unreasonable Hospitality (small, gifting intentionality matters)
- Freezing Order (Russian craziness)
- Pappyland (Bourbon and family)
- Thinking in Bets (Gambling and making decisions)
- Chip War (everything semiconductors)
- The Cost of These Dreams (sports stars and what it cost them to get there)
- Psychology of Money (homerun…read it)
- Winterdance (Iditarod…uh--no thanks, it’s cold enough in Pittsburgh)