The World’s Simplest Retiree Portfolio to Never Run Out of Money
Welcome to the Schmoozeletter Blog. Your source for weekly water cooler wisecracks from the world of finance. If you have an opinion different than mine or a topic you want to hear about, let me know!
This week, Mr. Market craters as Trump once again goes on a tariff tirade and decrees Apple needs to start making iPhones in the U.S. Nothing says “pro-business” like irrational demands that major corporations uproot their entire supply chain. Hey Tim Apple… THREATENING ALL CAPS MESSAGE!
GOOG is hot after an impressive “I/O Conference” where the company showed investors it doesn’t plan to roll over and die at the hands of ChatGPT. Who would have thought Google would be on the forefront of new technology?
Bitcoin breaks to a new all-time high, and Dogecoin breaks to… about one-third of its all-time high price from 2021. Hope you picked the right magic bean to invest in!
But enough mumbo jumbo. This week is all about the current or soon-to-be retirees. Shout out to the old heads. I’ll be sure to throw in tons of old-timey language to make you feel more comfortable. Let’s get this hootenanny kicking! This is…
Before you proceed with the world’s simplest retiree portfolio to never run out of money—and think this may apply to you—you need to pass this one-question quiz:
Can you live off an annual salary of 7% of your nest egg?
So let’s say you’ve scrimped and saved. You’ve toiled and pinched pennies. You’ve put in the work to squirrel away a nest egg that is $1M.
$1M * 7% = $70k
Can you live off an annual salary of $70k?
So let’s say you’ve scrimped and saved. You’ve toiled and pinched pennies. You’ve put in the work to squirrel away a nest egg that is $2M.
$2M * 7% = $140k
Can you live off an annual salary of $140k?
You get it. Math.
If you’ve answered yes to your one-question quiz, you may enter.
There are plenty of ways to structure a portfolio to make it quite simple.
There are plenty of ways to structure a portfolio so that you’ll never run out of money.
But combining the two?!
That is tougher than a two-dollar steak.
To have simplicity in a portfolio, we are looking for two things:
1. As few funds as possible.
You don’t want to be fetching the courier’s dispatch for your brokerage statement and see a million tickers. That is complicated and confusing. You want ease and comfort in your life. You want a nice, cushy La-Z-Boy recliner of a portfolio with only two funds, TOPS.
2. Buy something once, never do anything again.
You don’t want to be fiddle-faddling constantly when you roll the bones on a venture. You don’t want to be worried every time the market goes down a percentage point. One move. Buy something. Then just transfer cash to your bank account for the rest of your life. It really is that simple.
To guarantee you never run out of money, we are looking for two things:
1. Never sell the principal. Only live off the interest.
You don’t want to be selling down your nest egg to the point where you are frettin’ somethin’ fierce about how long you’re going to live. With modern medicine and that whippersnapper Zuckerberg and his kooky ideas, people could be living to 150. You want to set yourself up to be constantly getting cash payments for as long as the sun doth rise.
2. Cash payments increasing faster than the inflation rate.
You don’t want your cash to be flat each year. Candy was a penny and you could get into some shackbaggerly with a gigglemug and have a copper-clawing good night for a quarter. Times were simpler back when you were walking to school (uphill both ways). But today’s prices are much higher due to inflation. You need your cash to be going up each year faster than inflation goes up, or you will be stuck in some real humbuggery.
Alright, so we got the parameters out of the way. What is the portfolio?
Half your nest egg in SPYI.
Half your nest egg in SCHD.
SPYI is an actively managed covered call ETF that generates income primarily by selling options against the S&P 500 index.
SCHD is a passively managed index fund that seeks to track the performance of the Dow Jones U.S. Dividend 100 Index.
If those explanations didn’t make any sense to you, then it will probably take longer than this quick Schmoozeletter to explain the funds. The relevant information for now is SPYI pays 10–12% annual cash payments and SCHD pays 4% annual cash payments.
SPYI will likely not grow the cash payments to you, while SCHD will likely grow the cash payment to you in the double digits.
So what does this look like?
Well, what is your nest egg?
$2M you say?
Let’s say you have $2M and you are able to live off $140k per year in today’s dollars.
Here is a shot of the full breakdown:
Here is what your annual salary would look like over the next decade:
What if you need more cash than that?
Too bad, gramps! This is the never-run-out-of-money portfolio. Don’t you go pulling some poppycock by selling the principal and be yelling at me when you’re 150. Stick to your annual salary and be pleased as punch for life!
Let’s say you have $10M and you are able to live off $700k per year in today’s dollars.
Here is a shot of the full breakdown:
Here is what your annual salary would look like over the next decade:
And there you have it. The world’s simplest retiree portfolio to never run out of money.
Is this the best portfolio?
No, growth stocks will likely get a higher
return.
Is this the highest-yielding portfolio?
No, there are other assets that can
generate a higher yield.
Is this the least risky portfolio?
No, more diversification would spread
out the risk.
But is this the simplest, buy-one-time-and-generate-cash-for-the-rest-of-your-days-without-having-to-lift-a-finger-again portfolio?
You bet your Thursday early afternoon
bingo card it is.
Final Thought
“Our favorite holding period is forever.” – Warren Buffett
