No. of Recommendations: 10
Jim, I agree with your idea, but there is one idea it ignores.
What if you need the liquidity of your money for someday needing it to purchase a senior assisted care place or a nursing care place, or for just cost of nursing care as you get older and ill, or some other need..
Most people fall into one of three categories. You're so rich that strategy doesn't matter, you can buy an index fund and live forever from the dividends, as Mr Buffett recommended for his widow. Two, you're so poor that no amount of fancy footwork is going to keep you fed till you die. Or in the middle, where a bit of good strategy can materially improve your standard of living during retirement while guaranteeing that you don't outlast your funding. My comments (like so many others) are useful only for people in the last category.
The worry you mention is real, but could be seen to fall under the category of "sorry, you don't have enough money, and a fancy strategy isn't going to fix that". If you are living on a SWR and this situation occurs, and you use a meaningful chunk of your capital to deal with a sudden large expense like a heart transplant, you are not going to have that capital to live from thereafter. So it's a problem with a SWR approach, and it's a problem with my "barbell" approach. To me, the main difference is that the approach I advocate won't let you run out of income, and all SWR approaches (for people in that latter category) can. They just don't work that well: any withdrawal rate which is really really certain not to run out of money leaves you with an almost certain never to benefit from the wealth.
Of course, there is also no reason one has to put ALL of the money into an income producing strategy. If you have a sufficient bankroll, a certain amount could be just left as a portfolio like a category 1 person: let it sit and spend the dividends, serving the bonus purpose of being a pot for emergencies. If you're lucky enough to have sufficient funds for both that and an income-producing strategy. Similarly, a person concerned about how much ends up in their estate need not allocate all their funds to income production--if they have enough funds for both goals.
As an aside, my forever pet peeve:
I have a real problem with so many sites that recommend various SWR approaches claiming (say) only 1% chance of failure. That's one person out of a hundred among the people who follow their advice ending up living in a cardboard box under a bridge. And most such sites make the assumption that forward returns in future are going to be like those in the past, implicitly concluding that portfolio returns are uncorrelated with starting valuation levels. It was not just luck that made SWR approaches starting in 1982 work so much better than the ones starting in 2000. The smoothed earnings yield of the S&P 500 was about 18% in August 1982, and about 2.4% in March 2000. It's about 2.7% now. Starting at the top in 2000, the real total return was negative for a long time: the total return series didn't get up to its starting point for over 13 years. I don't know what the next 13 years will be like, but there is no reason to make any optimistic assumptions. Assuming forward returns will statistically resemble past returns definitely falls into the category of making an optimistic assumption.
Jim
