You Maniacs, You Blew It Up

by: Roger Nusbaum

David Van Knapp had a post at Seeking Alpha citing research that blows up the 4% rule, suggesting 2.8% might be the new 4%. The shift, if accurate, has to do with the current state of bond market yields and the possibility that yields may remain low for an extended period.

There is a massive psychological roadblock here IMO. The person who is able to accumulate $1 million very likely did so living a lifestyle far beyond the $28,000 that 2.8% would produce. You can plug in your own numbers into the equation to try to determine how much you need to save or how much of a reduction in lifestyle (financially) you might need to endure but to repeat something we've said many times before, if the 2.8% conclusion is right, which is that something's gotta give.

Although I don't think expressly stated by Van Knapp in this article, I believe his orientation would be to maintain a portfolio of dividend growth stocks and only withdraw the dividends, thus never touching the principal. For the right person this could work. A portfolio could be constructed that it does not take undue single stock risk, comprised of dividend growers that altogether yields three point something percent without having to load up on mortgage REITs and riskier MLPs.

There is at least one obstacle here as well. Often I talk about the idea that for most market participants the type of portfolio they have boils down to their interest in the task and their time available to spend on the task. It is not unusual to hear from retired people that they are busier in retirement than when they were working. If that is true then maintaining a portfolio of 20, 30, 40 or some other number of stocks (dividend or otherwise) would appear to be difficult from a time available standpoint. Obviously there is more than just the one obstacle.

One comment on the Van Knapp article listed several things that we have been talking about here for many years that I think are quite obvious. People need to save more money, they need to live below their means and they need to plan on having some sort of job past the age of traditional retirement age. I say some sort of job because many people don't want to stay at their same job or to maintain the same work-week grind.

If a couple makes it to their mid or late 60s having paid off their mortgage, with no credit card debt and no more than one car payment then maintaining that same work-week grind may not be necessary. If you love your job and it pays you $10k or $20k a month then sticking with it is a no brainer. Some sort of part-time work that might be more enjoyable (like monetizing a hobby) can be economically effective though.

It is not implausible that all of the various monthly expenses for a couple with no debt or just one car payment could be $3000. If Social Security is there for them (for now it is) and they can make a combined $1000-$1500 per month doing something part time then the burden on the portfolio could be very light if anything at all. In this context the portfolio could be used for big one-off expenses and/or maybe one big trip per year.

At some point the part-time income stream will probably end but a five-seven year run of little to no withdrawals would obviously be huge for increasing the odds of not running out of money. This sort of strategy relies heavily on behavior modification and I'm not sure how realistic this is across the board. For most it is probably unrealistic but there is some portion of market participants who can successfully modify their behavior if they need to.

Where a financial plan must have a certain rate of return to work, like a pension plan, it will be more difficult to succeed. If that is where you are now then hopefully you can recognize the need to make a couple of changes and then actually implement changes.