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Uncertainty and My Retirement Plan

I’ve shared the contents of my portfolio before, but last week a reader asked me to share my retirement plan.

That’s a bit of a tricky question to answer because I’m 27 with no aspirations of early retirement. So what follows must come with the obvious caveat that things could change dramatically in the decades before I actually retire.

For example, as you’ll see below, my plan involves TIPS and inflation-adjusted lifetime annuities. But I don’t know with certainty that those things will even be available for purchase 35-40 years from now.

So rather than saying that this is my exact retirement plan, it’s probably more accurate to describe it as what my wife and I would do with our money if we were in our 60s right now and already retired or planning to retire in the very near future.

The Plan (as It Stands Today)

  1. Delay Social Security to age 70 for both spouses (getting a few years of free spousal benefits by filing and suspending for one spouse);
  2. If the resulting income is not enough to satisfy our basic spending needs, purchase inflation-adjusted lifetime annuities (making sure to stay under the applicable state guarantee association limit) to satisfy the shortfall;
  3. Invest any remaining money approximately 50% in stocks and 50% in bonds, with the bonds being primarily TIPS;
  4. Withdraw somewhere in the range of 5% per year from that stock/bond portfolio; and
  5. Revisit the plan every year to see if the withdrawal rate or anything else needs to be adjusted.

The Goal: Not Running Out of Money

This plan is focused on not outliving our money. There’s no significant intention to leave behind an inheritance at all. If we had a stronger motivation to leave behind an inheritance, it would likely make sense to annuitize less, have more in stocks, and (most importantly) use a lower withdrawal rate.

Why a High Withdrawal Rate?

A 5% withdrawal rate is higher than is normally considered “safe.” The reason I’d be comfortable with this choice is that the plan involves satisfying all of our basic expenses with inflation-adjusted sources of income that will last our entire lives (i.e., Social Security and lifetime annuities). As a result, the distributions we take from the remaining portfolio will be “bonus” income, meaning that we can cut them (all the way to zero if necessary) if the portfolio ends up declining quickly in the first few years of retirement.

The Need for Flexibility

The last point — revisiting the plan annually in case we have to eliminate withdrawals — is likely the most important part.

Because much of our net worth will be tied up in annuities and Social Security, we won’t have the liquidity that many other retirees have. As such, while it’s OK if the non-annuitized portfolio declines fairly quickly at the start, we cannot let it go all the way to zero. We need it as our emergency fund.

Managing a retirement portfolio is tricky because there are so many unknowable factors: stock returns, bond returns, the sequence of each, inflation, how long you’ll live, how your spending needs will change over the course of retirement, Social Security changes (if any), tax law changes, and so on.

My intention with the above plan is to reduce the reliance on good investment returns by using inflation-adjusted, lifetime sources of income for our most important expenses. But that still leaves several sources of uncertainty — hence the need flexibility.

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Comments

  1. Planned withdrawals in retirement that are in the neighborhood of 5% are not unreasonable provided that you (A) monitor its impact on a regular/annual basis; AND, (B) be willing and able to adjust your plans if it shows significant enough signs of not being sustainable. It sounds like you have that covered. The 4% rate is based on it failure rate of about 5% for a 30 year period (that’s about a 95% chance you could have withdrawn more). A 5% rate will have a higher rate of failure but still be more likely to work than not work over 30 years.

  2. I think your plan is prudent, but do have a question. Rather than waiting until both of you are 70 to draw SS, assuming that the lower earning spouse retires early, why not have that spouse begin SS at 62 or immediately upon retirement if later than 62? Then when the higher earning spouse reaches full retirement age (or 70 if one can afford to wait that long) the lower earning spouse can switch over to the higher paying spousal benefits.

  3. Dylan: Thank you for consistently reminding us that “not spending enough” is an undesirable outcome too. 🙂

    Spokane Al: That’s certainly one option. However, the amount of spousal benefits that would be received (after switching to spousal benefits) would be reduced as a result of claiming that spouse’s own benefit at 62. (This discussion on the Bogleheads forum — specifically the post from sscritic — provides an explanation of how this works.)

    Rather, our plan (as explained in the third section of this article) would be to have one spouse file at 67 (and suspend until 70 to allow benefits to continue to grow) and have the other spouse file for spousal benefits at 67, then switch to his/her own benefit at 70.

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