Long-Horizon Investing, Part 4: Real-Life Applications in Retirement

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This is part three of a five-part series that develops an analytical framework for long-term, retirement-oriented investing. You can read part 1 here, part 2 here and part 3 here. The author would like to thank Joe Tomlinson and Michael Finke for their helpful comments on this article series.

The twin paradox: Another financial fable

Consider the following scenario: At the start of 2022, Bob, a healthy 65-year-old man, decides he is ready to retire. To help him manage his finances in retirement, Bob hires Rule of Thumb Investment Advisors (a.k.a., “ROT IA”). He has $1 million to invest, so ROT builds him a portfolio that is 60% stocks and 40% bonds – the classic “60/40” portfolio. Per the famous “4% rule,” ROT informs Bob that he can safely withdraw $40,000/year (4% of $1 million), adjusted annually for inflation.

A year later, compliments of unusually high inflation contributing to double-digit declines in both stocks and bonds, the value of the portfolio has declined to $796,000.1 ROT rebalances back to 60/40 and, noting the 6.5% inflation rate over the prior year, instructs Bob to withdraw $42,600 ($40k + 6.5%) the following year. At the same time, Bob’s identical twin brother Fred decides he too is ready to ride off into the sunset. By uncanny coincidence, Fred also has $796,000 available to invest. His brother convinces him to hire ROT IA as well. Following their formula, ROT builds a 60/40 portfolio and instructs Fred to withdraw $31,840 (4% of $796,000) plus inflation throughout retirement.