Three ways to make your money last
Bond yields are crappy.
Future equity returns are forecasted to be lower than the past – maybe 3% or 4% real return.
We’re collectively living longer on average (that’s good).
When it comes to investing there are always headwinds. Plan for them.
This means making your money last is important. Very important. These are three things you can do about it and what we’re considering.
1. Spending less
I get it, you’re not happy with this one. Neither I am really. The reality is this can make your retirement nest egg last longer, if you’re careful on what and where you spend your money. When it comes to our future spending we’re prepared to live on less – if we have to. The old 4% SWR* (safe withdrawal rule) is probably more like 3% going-forward.
*The SWR guideline stems from a now famous 1994 study by William Bengen, an American financial planner. Bengen concluded the highest withdrawal rate that would have allowed a retiree’s portfolio to weather any market calamity in the previous decades; would be 4%, over a 30-year timeline, assuming the withdrawals also increase with inflation over time. So, historically a $1 million portfolio would be considered “safe” for enough for 30-years of retirement. You could start withdrawing $40,000 per year in year one and at least that much every year going forward – and not worry about running out of money. See below.
We’re generally conservative when it comes to investing our money but we do have an ambitious investing goal: a nest egg of $1 million (in addition to some small workplace pensions) to live from.
For simplicity sake, assuming this magical $1 million was invested inside our RRSPs – by only spending $40,000 per year from our personal portfolio; including 2.5% inflation factored in; we’d still have over $600,000 in the bank at age 94.
(Note: We have a die-broke plan to about age 95.)
Could we spend less from our portfolio if we absolutely have to? Yes.
2. Working as long as we’re able
If you didn’t like the “spend less” option above, you’re probably not very happy with this one either. However working as long as you’re able can have a number of tangible benefits beyond more cash in your pocket to cover expenses. Your mind may remain more engaged and your body may get more exercise if you continue to work longer. There are, therefore, mental, physical and social benefits of working longer. Don’t discount that value. I personally intend to work as long as I’m able – at something.
3. Owning more equities (than bonds)
Conventional financial advice goes something like this:
- Own a % in bonds that matches your age or 110 – age = your asset allocation as a % in bonds. You need bonds in your portfolio because they lower the volatility of your portfolio; they help you so you don’t panic and sell when equities crash.
- Own more bonds and fixed income as you get older. This is because you don’t have time for your portfolio to recover from bad equity markets.
- Own an annuity as you get older. Guaranteed income.
I’m not planning on following conventional wisdom. You can see that from my investing approach – I follow dividend investing here (that makes passionate index investors cringe) and we own some low-cost ETFs. We don’t own any bonds in our personal portfolio.
Given the current crappy bond yields I mentioned above – you may need more growth as you age – and that won’t necessarily come from bonds. In fact, there are studies and articles to suggest you should actually increase your equity allocation as you get older.
If you fear the stock market volatility (and many investors do) you might need to train your investing brain and learn to live with stocks.
There are other strategies to consider but these ones are top of mind for me. The best way to make your money last is to probably have “enough money” in the first place. That exact figure will likely need to be recalculated over time though.
At the end of the day saving early, saving often and keeping your investment costs as low as possible for as long as possible will put you on a great path. This is regardless of what the retirement headwinds might throw at you.
What are your strategies to fight retirement or semi-retirement headwinds? Are you considering other options to make your nest egg last?