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Retirement Discussions / Retire Well on Less
|Subject: Size does matter||Date: 10/23/2003 9:07 PM|
|Author: workwayless||Number: 162 of 1488|
The size of your portfolio, that is. Investing for those who have portfolios totaling $500k or less calls for different strategies than for the more affluent ERs. Why, you may ask? Because those with less money are less able to take on risk.
In the book, Cashing in on the American Dream, the author illustrates this situation by describing what he calls the Coin toss theory. It works like this:
You and I agree to play a game. I toss a coin into the air and it lands. If it comes up heads, you pay me a dollar. Tails, I pay you the dollar. Would you like to play? Sure, you say. After a couple of rounds, I up the stakes to $10 and you still want to play. OK after a few more rounds, I want to up the stakes to $250k. All of a sudden you're ready to quit the game. $250k is half of your entire net worth. If you lost the bet, it could drastically impact your lifestyle. You likely have to have to return to work. OTOH, winning the round doesn't have much of an upside. It wouldn't change your life that much. After all, you already are retired and living within your means.
Now let's say a second person who had a net worth of $10 million was playing the same game. The wager is only 2.5% of his net worth. If he took that bet, a loss probably wouldn't make him happy but would likely result in no impact to his lifestyle.
IMHO the size of your portfolio doesn't matter when it comes to a SWR rate based on historical returns. A $20k annual withdrawal from a $500k portfolio is just as safe as a $80k withdrawal from a $2 million portfolio. However, the eternal question is “will the future bring something worse than has happened in the past?” If it did, then an affluent ER could very easily reduce his or her WR without making major changes to their lifestyle. That would not likely be the case for the less affluent.
So here's my ideas for living on the income from a smaller portfolio:
- Try to pick investments with less volatile returns. Choose mutual funds over individual stocks and index mutual funds over actively managed funds.
- Try to make your spending predictable and inflation-proof as possible. One way to do this is to pay off your house.
And the good news is that over time, your tiny portfolio will likely grow into a large one.
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