Garbage In, Garbage Out

So many of us are confused when trying to figure out how to invest our money for a positive return over our lives.  We aren’t asking for much: We want to know how much we need to save today so that we will have enough money to pay for the necessities (not wants) of life—for as long as we shall live.

Seems simple enough to me.  But is it?

I recently read an article from our benevolent Vanguard Group, titled “Revisiting the 4% Spending Rule,” which addresses the question at retirement: Is there a safe amount of money that I can withdraw each year from my accounts so I never run out of money?  Interestingly, Vanguard uses the 4% rule when, after all this time, I thought it was 5%.  The short answer to this question: After a lot of fine print, 10 pages of explanation, and CYAs —Yes!

Keep in mind that the article referenced was written by Vanguard, who is known as a passive, index style investment company, versus an actively managed non-index style investment company.  Now, I am not debating passive index style investing over active non-index style investing at this time.  It would be like debating Democrat or Republican and arguing that there is a one-size-fits-all approach.  There isn’t, and as far as I can see, never the twain shall meet...or agree.

So, without making you hang on forever in today’s short-attention-span world…

With proper planning, a strategy that takes into account your comfort level over your lifetime, and the knowledge that—unfortunately—inflation is a fact of life, you can create a portfolio (index based and/or actively managed) that will allow you a reasonable amount of money to live on throughout your lifetime.  And yes, a good rule of thumb for spending is 4%. 

What Vanguard and others don’t stress enough is that 4% of a portfolio that just dropped 25% or more may not be okay with you.  You just got a 25% cut in your spending.  Good luck calling your bank and telling them you are dropping your mortgage payments by 25%.  But not to worry—the investments are expected to grow again and you should soon be on track!

The key decisions to make with your advisor, or with yourself if you subscribe to the do-it-yourself surgery kit, are:

• Am I willing and able to decrease my spending if my portfolio drops by 25% in any given year?
•  Is there a way I can avoid dropping my spending amount and even possibly grow it over time?
• What is the time period of investment returns you are looking for (as 1926 was a long time ago)? How have the investment returns faired over the past 10–20 years (as that is more in line with where we are today)?

Happy to help with questions like these.  We invite you to reach us @ info@bersonmoney.com 

 We offer a complimentary 30-minute phone consultation
...and promise to use common sense when talking to you if at all possible.

Investment advisory services are offered through Berson Money Management, a registered investment adviser offering advisory services in the State of California and in other jurisdictions where exempted.  The contents of the blog are not to be copied, quoted, excerpted or distributed without express written permission of the firm.  Any other use beyond its author's intent, distribution or copying of the contents of this e‐mail is strictly prohibited.  Nothing in this document is intended as legal, accounting, or tax advice, and is for informational purposes only.