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Do You Have an Investment Backup Plan?

Last weekend, I read Larry Swedroe’s latest book The Only Guide You’ll Ever Need for the Right Financial Plan. (Excellent book, by the way, for the intermediate/advanced investor.)

One point Swedroe makes repeatedly throughout the book is that you need a “Plan B” if you’re going to be investing in risky securities like stocks. Specifically, you need to be prepared for a scenario in which:

  1. Stock returns over your retirement are far less than their historical averages (and lower than the returns you were planning on), or
  2. You face an unlucky sequence of returns — namely, a bear market at the beginning of retirement — that leaves your portfolio at just a fraction of its original size while you still (might) have 20+ years of retirement to go.

In other words, you need to have a specific plan for what you will do if it looks like your portfolio is no longer going to be able to sustain the rate of spending that you originally planned on. For example, “If our withdrawal rate gets above X% before age 70, we’ll _____.”

“Plan B” Options

The most likely forms of backup plans are simply ways you can cut your spending or increase your income. For example:

  • Take vacations half as often,
  • Sell your home and move into something less expensive, or
  • Get a part-time job or start a business.

Investment “Plan B”

But what if you don’t want to go back to work or significantly reduce your spending? Is there any way to adjust your portfolio so that it can fund a higher withdrawal rate?

Moving more money into stocks may work — if you get lucky and the market comes roaring back just when you need it to. Or, it could backfire completely if the market continues to perform poorly.

Moving a large portion of your portfolio into TIPS would reduce your risk. But their payout is rather low. An all-TIPS portfolio is unlikely to sustain a withdrawal rate that’s already unsafely high.

In short, if you’re looking at a dangerously high withdrawal rate and you’re absolutely unwilling to cut spending or go back to work, annuitizing your portfolio may be the only way to ensure you don’t outlast your money.

Of course, as we’ve discussed several times here, annuities have their own drawbacks:

Plan B Stinks. What’s My Other Choice?

What if you’re unwilling to cut your spending, unwilling to get a job in retirement, and unwilling to annuitize your portfolio?

If that’s the case, then you probably shouldn’t be taking investment risk at all. I’d say that your best bet is to use a portfolio comprised largely of TIPS and to plan from Day 1 to use a very low withdrawal rate.

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  1. Larry Swedroe’s books are all excellent. He also has a great blog on

  2. In this economy it seems like you need a backup plan for your backup plan. Good suggestions though, I see many retired people taking up part-time jobs, and they are a breath of fresh air over teenagers.

  3. I’m right in line with Steve here. I’m just scared to invest my money at this point because of how volatile the economy is. Still though, I think annuitizing is a great idea for a portion of your money, but you still need to keep some in an even more ultra safe place (maybe even a CD). Call me a scaredy cat, but even just a little risk is not worth it right now for me. I want multiple backup plans!

  4. Hey folks! Here comes the cavalry – we’re safe. Here’s why. Consider what an annuity is:
    – you give them all your money;
    – you never see it again;
    – you can’t bequeath it to your heirs;
    – they give you, say, 7% per year.

    If you’re prepared never see the money again, why not buy the top 10 stocks quoted in Investors Business Daily and write (sell) call options that expire in one month’s time against that stockholding – that’ll give you 2% to 3% per month.

    Yes that’s right – per month.

    If the portfolio value of the stocks collapses in value you won’t care because you still own the shares, and so next month you can sell options against your stocks for a 2% – 3% return.

    And remember you were quite happy to never see your money again if they just paid you an annuity at, say, 7% per year? Well with this excellent plan you can pass on the entire portfolio – all those stocks are in your name, to divide up as you like.

    You can even tell your kids how to make the 2% – 3% a month on that portfolio – it only involves 2 mouse-clicks every 30 days – click on the option, then click on the Sell-to-open button.

    I guess I ought to write about this amazing alternative to annuities – its simple and it works consistently.

    And if you were willing to say goodbye to your money entirely (in return for an annuity) then the actual day-to-day value of your portfolio is irrelevent – it doesn’t matter what it’s mark-to-market value happens to be at 10am today – it is merely the way you get that monthly income from selling (writing) call options.

    Very neat – and nobody seems to know about it. Until you come to this blog, of course. 🙂

  5. For other readers: A major difference between KC’s proposed plan and buying an annuity is that in one case the payout is guaranteed by an insurance company, and in the other, it isn’t guaranteed by anyone at all.

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