Back To Bodie And The 10/90 Portfolio?

I wanted to follow up on several different ideas including one from quite a few years ago but they all tie together.

First up is replacement rates in terms of figuring out how much to plan on for retirement. The Wall Street Journal had an article that says research calls into question the “venerable 80% rule” and there was also a companion piece at ThinkAdvisor. So first I always thought the rule of thumb was actually 70% but either way.

The article includes the standard takedown which is you start at 100% of gross pay but you pay taxes so you were never living on 100%. Depending on your situation your after-tax starting point could be anywhere from 65-80% of your pay. From there you are unlikely to save for retirement once you have retired. A savings rate ranging from 5-25% probably covers most people (good for anyone who can save more than that). So then now some could focus on a replacement rate of 40-75% right? To the extent people time paying off their mortgage to coincide with retirement could mean an even bigger drop in expenses. Some expenses might go up especially health related costs.

The article makes note of something I have been talking about for years which is that some people live below their means. Someone very happy on a $40,000 lifestyle with a $60,000 take home pay would logically focus on their expenses not a percentage of their income. This can boil down to simple spreadsheet work but obviously it would be a bad idea to wake up on day one of retirement and decide “ok, I’m going to start tracking my expenses. “

The key here is about finding the balance between living a reasonable lifestyle before and after retirement as well as avoiding the extremes being 80, Cenegenics commercial-healthy and out of money versus dying with $20 million in the bank unspent.

In a recent blog post about withdrawal rates I made the following comment;

For a little context of my own, a 4% withdrawal rate invested in cash at zero percent will last 25 years. That is not a recommendation obviously as 4% of $X in 2040 would be worth a lot less than today (could easily be a 50% inflation haircut) but that point has helped conversationally to make the point.