Do you live off your portfolio? How?

[vinod1]

Agreed on specifics. So I am more interested in a framework to think about this.

E.g. why does a simple 50/50 equity/bond portfolio at 4% withdrawal rate work in backtests? One *possible* answer is this: on average bonds paid 4%, and equities earned 8%. So the backtested portfolio earned 6% on average. You withdraw 4%, but reinvest 2% to cover inflation. So the math has worked out on average. *If* thats correct, then you can adjust for today and say bonds at 2% doesn't make sense.

 

I think you thought through the plan very well. Just wanted to add a quick note about something that surprised me when I first learned about it.

 

There is something called "Volatility Drag". Basically it means if the expected return of the portfolio is say 6%, you cannot withdraw 6% because the volatility of the portfolio would make you sell larger quantities when the asset values are depressed and portfolio would diminish rapidly. The more volatile the portfolio the higher this volatility drag is. Generally plan on 1-2% for this.

 

Bill Bernstein, author who wrote many books on investing and has articles at http://www.efficientfrontier.com/ wrote about this way back in the early 2000's.

 

Vinod

 

 

 

 

[Hielko]

Yes, and that's why you really want to do things like monte carlo simulations to determine safe withdrawal rates.

 

But I think simply having a portfolio that is significantly bigger than needed is the best strategy, and try to have a plan B and C in the first couple of years of living on your portfolio. In the first few years the risks of negative volatility is the biggest, and if it doesn't occur in the first few years your portfolio presumably grew a decent amount to increase to margin of safety.

[scorpioncapital]

If you are confident in your timeframes and business selection you could borrow temporarily from your broker for living expenses. With interest rates currently very low, there is some window to do this. In some countries interest expense is tax deductible and could reduce annual taxable income by 20 to 25%. I remember Shelby Davis, the guy from The Davis Dynasty who was a believer in buying beaten down insurance stocks paying a dividend on margin and the dividends would pay for the interest cost while the portfolio accrued capital gains. needless to say all these situations are very different than a steady salary in that the result is volatile and you will have years where your temperament will be tested.

 

[Cigarbutt]

 

If living in the US, you may want to decompose the healthcare risk into basic healthcare costs and long-term care (nursing home). It is a morbid topic but people vastly underestimate the odds and duration of long-term costs and tend to vastly underestimate their 'share' of the cost. And the cost environment (safety net aspect, productivity issues in nursing homes) is unlikely to change for the better. Also, if you are part of the group 'planning' to live off your portfolio, you are likely to be part of the group who will be deemed to be self-sufficient. It may be worthwhile to see how much it would cost per year and use the 3-4% rule to have an idea for the put-aside funds necessary only for that purpose.

So make sure you can enjoy life today and tomorrow. :)

 

Thank you. Yes I have never thought about nursing homes and have no clue how this operates in Canada. Has anyone actually looked at this perhaps for their parents or grandparents?

 

What do you mean by this: "you are likely to be part of the group who will be deemed to be self-sufficient"

 

Are you suggesting something like this: I need $X per yer 40 years from now for nursing home fees and adult diapers. So I will need 25X in assets to pay for it in 40 years. So I need 25X discounted to now in addition to my current expenses. Did I understand you correctly?

Jurgis may be the specialist for these questions but here are some additional comments.

I live in Canada too and am familiar with the process in my province (rules, public and private options etc).

 

The comments had to do with the safety net aspect. In the US, the safety net for long-term care is very sketchy with Social security and Medicaid offering incomplete or nil coverage. Long-term care insurance also has not really caught on. In Canada, the safety net in retirement is different but more complete for long-term care. The public option works OK but there are significant drawbacks. So, if you want a premium and private option, the costs can be very real. For a reasonably nice place, the monthly rent comes to about 2500-3000$ per month (for a couple) and if you need more active care, the monthly rent can easily rise to 4000$ or more. Also, if you like to think like a financial planner, your expectations for pensions (OAP, CPP) should be dampened IMO (lower amounts and starting later). In my own planning, I put zero for these. Why? I think the demographics are not favorable, the long-term planning of our central planners is deficient and the public safety net is not free; somebody will need to pay for it and it may be you, the one who set aside funds for that purpose. :) So, you may want to adjust the absolute amount necessary to fund long-term care and make abstraction of expected public funding for your own benefit. If you have questions, don't hesitate as I went through the process with my parents recently and am going through the process now with my in-laws. An interesting feature in my area is that American private equity funds have been acquiring private nursing homes and homes dedicated for retired people with a premium and, unsurprisingly, these homes are no longer managed the same way and this is starting to show up in rents.

 

Additional comment:

The use of FireCALC or similar is interesting and it just takes a few seconds to get a picture. It can show the odds of your portfolio surviving in any market conditions that have occurred over time. Even if you instill a value flavor to your portfolio and plan to outperform, even in downturns, it may help to feel better if you find out that, with reasonable assumptions, your portfolio would survive any market conditions (at least from a retrospective perspective). Also (sorry this is a sad part but you asked for it), I suggest you put in place some kind of an automatic system where your autonomy about financial decisions (including investments) will be curtailed and eventually transferred. :(

 

These planning steps are a pain but thinking about it beforehand (such as the way you're doing it, I assume you are quite young) makes it easy to then forget about it and enjoy life to the fullest. Yesterday, I took some money out from funds set aside for higher education purposes (for three children) and now realize even more that the move made 20 years ago was a wise one. Good luck!

 

 

[SharperDingaan]

Treat your portfolio as something that exists, but which can not be relied upon.

Once/yr as/when you have gains or dividends, simply withdraw the cash & use it for school, a house down payment, or a mortgage repayment. Whatever comes out is a bonus, and it will make your life 'better' - every month - for an extended period.

 

SD

 

Thanks SD. I am currently in this happy state of not relying on my portfolio. So its all a (taxable) bonus. My question is about what happens when its not a bonus but base pay.

 

Think of base pay as EITHER a monthly payment from your portfolio, or a monthly expense that you no longer have to pay. 

If you don't have the expense anymore, you don't need the same level of base pay.

 

You are asking for 'certainty' where there isn't any.

Modeling out a portfolio's growth and withdrawal is NOT a substitute for reality - no matter how much we might like it to be.

The reality is that you have no idea today how your investments will be performing a year from now, or if you'll even still be alive; and the further out you go, the LESS AND LESS certain you can be. NOT what most people want to hear.

 

Pay your mortgage down, and the results are certain, both now AND in the future.

All else equal, the monthly saving is completely known, and permanent. You also have optionality - keep the monthly saving, or keep payments as they are; and repay the remaining mortgage years earlier than would otherwise be the case.

 

Different approaches, BOTH equally as uncertain, but very different systemic pay-offs.

Modelling results in higher AUM balances for longer, maximizing the fund managers fees. Deferring debt repayment maximizes the loans lifetime spread. Products are marketed a specific way, for a reason.

 

SD

 

[samwise]

Thanks CB. Very informative and lots to think about. Let’s me consider and I might come back with thoughts and questions.

 

Btw I am mid 40s in Ontario. Does that change any of your advice?

[samwise]

 

I think you thought through the plan very well. Just wanted to add a quick note about something that surprised me when I first learned about it.

 

There is something called "Volatility Drag". Basically it means if the expected return of the portfolio is say 6%, you cannot withdraw 6% because the volatility of the portfolio would make you sell larger quantities when the asset values are depressed and portfolio would diminish rapidly. The more volatile the portfolio the higher this volatility drag is. Generally plan on 1-2% for this.

 

Bill Bernstein, author who wrote many books on investing and has articles at http://www.efficientfrontier.com/ wrote about this way back in the early 2000's.

 

Vinod

 

Yes agree about volatility drag. It’s a concept used in modern portfolio theory. Buffet never talks about it. He likes volatility because it generates opportunity. See his example about selling BRK to generate dividends. There is no concept of volatility there. See his article about inflation. He uses 12% ROEs but no volatility. That’s the gap between the valuation approach and modern portfolio theory.

 

Does the valuation approach have a concept of expected returns and cash flow from a 50/50 portfolio of ETFs or individual stocks ? That’s what I am trying to figure out. It’s not about outperforming the market through a valuation approach.

 

Look at an example from history. A Japanese investor in 1990 had wonderful backtests. But the retiree could expect the same results going forward with a p/e of 50? With companies earning a 2% yield, could they safely withdraw 4%. If you were in 1990, without knowing the future, how would you answer that?

 

Edit: p/e of 50 equals a 2% earnings yield.

[Cigarbutt]

Thanks CB. Very informative and lots to think about. Let’s me consider and I might come back with thoughts and questions.

 

Btw I am mid 40s in Ontario. Does that change any of your advice?

That's what you sounded like. :)

The only thing I would add is your potential direct and indirect exposure to real estate (depending on where you live exactly and if you have real estate or related exposure in your investment portfolio) but I understand that we don't share the same view on valuation and the potential effects of volatility on perceived valuation going forward. It has been said that, in the late 1980s, the land underneath the Tokyo Imperial Palace was worth as much as the entire state of California. The two real estate scenarios have different flavors and history doesn't always rhyme but I continue to be morbidly fascinated by the factors that led to their own bubble and how, when you read stuff written then, many felt that this was a new normal.

An example:

https://hbr.org/1990/05/power-from-the-ground-up-japans-land-bubble

Take the above with a grain of salt as I would have moved out of Toronto for that exact reason a long time ago, missing a potentially huge leveraged gain but the idea for you, if you think of living off your portfolio, is to ask a few "what if?" questions.

[vinod1]

 

I think you thought through the plan very well. Just wanted to add a quick note about something that surprised me when I first learned about it.

 

There is something called "Volatility Drag". Basically it means if the expected return of the portfolio is say 6%, you cannot withdraw 6% because the volatility of the portfolio would make you sell larger quantities when the asset values are depressed and portfolio would diminish rapidly. The more volatile the portfolio the higher this volatility drag is. Generally plan on 1-2% for this.

 

Bill Bernstein, author who wrote many books on investing and has articles at http://www.efficientfrontier.com/ wrote about this way back in the early 2000's.

 

Vinod

 

Yes agree about volatility drag. It’s a concept used in modern portfolio theory. Buffet never talks about it. He likes volatility because it generates opportunity. See his example about selling BRK to generate dividends. There is no concept of volatility there. See his article about inflation. He uses 12% ROEs but no volatility. That’s the gap between the valuation approach and modern portfolio theory.

 

Does the valuation approach have a concept of expected returns and cash flow from a 50/50 portfolio of ETFs or individual stocks ? That’s what I am trying to figure out. It’s not about outperforming the market through a valuation approach.

 

Look at an example from history. A Japanese investor in 1990 had wonderful backtests. But the retiree could expect the same results going forward with a p/e of 50? With companies earning a 4% yield, could they safely withdraw 4%. If you were in 1990, without knowing the future, how would you answer that?

 

Volatility drag relates to any portfolio that is being liquidated or being used to fund expenses. Does not matter what approach we are using, as long as there is volatility in the portfolio a safe withdrawal rate in the portfolio is going to be lower than the expected return rate.  Whether we take advantage of volatility is a separate topic. I understand where you are coming from, why that is important but purely from a withdrawal perspective it is easier to think this way.

 

I agree with you violently regarding relation between expected returns and safe withdrawal rates. Returns have been much higher in the past than it seems probable in the future. So I would not use past safe withdrawal rates as a guide to the future. They need to be adjusted down very significantly. In fact, this is one of the motivations for me way back in 2005 to switch to active as I had been indexing up to that point.

 

This has been a topic of interest to me for the last 15 odd years and I am just highlighting some things that are not discussed above.

 

If you are thinking about early retirement say in your 30s or 40s, then adjusting for inflation is not going to be enough. Two reasons

 

1. Since the standard of living is going up, you would be pretty much forced to upgrade your living standards as well with the rest of your peers. If you are retiring in your late 60s or 70s there is not enough length of time to make this a big issue but if you are in your 30's it is going to add up.

 

2. Hedonic adjustments means you cannot just buy inflation adjusted goods. You are forced to buy the improvements. Even if you want to you cannot say ask you eye doctor to use 1950s technology and costs for your current eye exam. You would be forced to use current tech and rates. And they have been hedonically adjusted so CPI is not going to cover that.

 

For a longish retirement your expenses are going to be grow with CPI + Real Per Capita Income growth of your peers. So plan for that.

 

I wrote about this way back in 2005.

 

http://vinodp.com/documents/nri/standard_of_living.html

 

Vinod

[SharperDingaan]

You might want to consider …

 

Volatility drag. In the practical world - is that even a real thing?

You are being led to believe that if the value of your portfolio is volatile, you need to adjust for that by reducing your withdrawal rate by 1-2%. If your withdrawal rate is the typical 4% - you need to withdraw 25 - 50% less. REALLY? 'Cause apparently your portfolio must have close to zero diversification (reducing volatility), and none of it must be marginable - enabling you to borrow to pay yourself vs having to sell at todays adverse low prices?

 

Standard of living. EXACTLY what is that? and is it relevant?

20 years out, you have no idea what your standards should be. Will you still be single/married? will you still be as healthy? will you still be as mentally flexible to change? A minor change in any of these produces a very different result. And if life is changing quickly (20-35 yr/old), all that you can be certain of, is that tomorrow is going to look very different from today! You are assuming on-going continuing stability, in a constantly changing world. Dangerous.

 

Actually talking to 'young' (early 50's) retiree's

In 2020, almost every one of them will tell you that you have to have a 'real' something to 'do' every day. It can be whatever you want (paid, volunteer, etc.), but if you're not planning on becoming a vegetable - you're going back to work. Maybe not right away - but you are going back. And it WILL affect what you require from your portfolio.

 

Bit of a buzz-kill - but if you want to be practical ….

 

Good luck!

 

SD

[Munger_Disciple]

In my opinion, CPI vastly understates an average person's living expenses. I live in southern California and everything related to housing has gone up significantly during the last decade: rent/ purchase+maintenance cots (if owner), most of the utilities (especially water, power). It is very hard to even find good workers. Education costs have gone thru' the roof and medical cost inflation is ridiculous.

 

I think CPI is basically bulls**t.

[Munger_Disciple]

As other have said, I also think the concept of "early retirement" is oversold in the US (perhaps in Canada too). It is useful for a person to have a goal and an occupation in life. Several studies show mental & health benefits accruing to a person who has a "job" as broadly defined: it could be volunteering or some kind of part-time work a person enjoys doing. It is especially necessary for a man I believe.

[Hielko]

You might want to consider …

 

Volatility drag. In the practical world - is that even a real thing?

You are being led to believe that if the value of your portfolio is volatile, you need to adjust for that by reducing your withdrawal rate by 1-2%. If your withdrawal rate is the typical 4% - you need to withdraw 25 - 50% less. REALLY? 'Cause apparently your portfolio must have close to zero diversification (reducing volatility), and none of it must be marginable - enabling you to borrow to pay yourself vs having to sell at todays adverse low prices?

It's a very real thing! That's why people historically have used a 4% withdrawal rate while historical (equity) returns have been close to 10%! The only reason you don't have a 10% safe withdrawal rate with 10% equity returns is because of the volatility drag. With lower interest rates and probably lower equity returns going forward a safe withdrawal rate would also be lower.

[no_free_lunch]

I am not there but I would want my expenses mostly covered by dividends. I would also want a couple years expenses in something very safe, just in case.  Ideally you have some additional investments beyond that in case your dividend portfolio can't keep up with inflation.

 

The dividends will help against volatility but in a depression they will go down for awhile, so better but not perfect. I think it's important to diversify that income stream across industries.  Try to be conservative with these investments and you will hopefully be okay.

[John Hjorth]

no_free_lunch,

 

Have you ever considered looking at your portfolio on a look-through-basis with regard to earnings?

[no_free_lunch]

Of course John.  I usually try to estimate free cash flow for all individual securities. Maybe a couple exceptions but yes.

[KCLarkin]

It's a very real thing! That's why people historically have used a 4% withdrawal rate while historical (equity) returns have been close to 10%! The only reason you don't have a 10% safe withdrawal rate with 10% equity returns is because of the volatility drag. With lower interest rates and probably lower equity returns going forward a safe withdrawal rate would also be lower.

 

And it is not just the volatility. The sequence of returns is critical. If you have a few bad years at the start of your retirement, you get into a death spiral where your portfolio goes to zero. Think of it as the evil twin of dollar cost averaging.

 

From the 1929 peak, stocks returned 8% per year over 35 years.

 

Except there was a 86% drawdown over the next 3 years. If you took 5% per year on top of the 86%, it was game over. That is where the 4% number comes from.

 

But if you compounded at 8% over 35 years until 1933 (losing 86% in the final years of your retirement), the 4% rule would leave a very large estate.

[Jurgis]

But I think simply having a portfolio that is significantly bigger than needed is the best strategy, and try to have a plan B and C in the first couple of years of living on your portfolio. In the first few years the risks of negative volatility is the biggest, and if it doesn't occur in the first few years your portfolio presumably grew a decent amount to increase to margin of safety.

 

That's pretty much how I plan.  8)

[Jurgis]

 

If living in the US, you may want to decompose the healthcare risk into basic healthcare costs and long-term care (nursing home). It is a morbid topic but people vastly underestimate the odds and duration of long-term costs and tend to vastly underestimate their 'share' of the cost. And the cost environment (safety net aspect, productivity issues in nursing homes) is unlikely to change for the better. Also, if you are part of the group 'planning' to live off your portfolio, you are likely to be part of the group who will be deemed to be self-sufficient. It may be worthwhile to see how much it would cost per year and use the 3-4% rule to have an idea for the put-aside funds necessary only for that purpose.

So make sure you can enjoy life today and tomorrow. :)

 

Thank you. Yes I have never thought about nursing homes and have no clue how this operates in Canada. Has anyone actually looked at this perhaps for their parents or grandparents?

 

What do you mean by this: "you are likely to be part of the group who will be deemed to be self-sufficient"

 

Are you suggesting something like this: I need $X per yer 40 years from now for nursing home fees and adult diapers. So I will need 25X in assets to pay for it in 40 years. So I need 25X discounted to now in addition to my current expenses. Did I understand you correctly?

Jurgis may be the specialist for these questions but here are some additional comments.

I live in Canada too and am familiar with the process in my province (rules, public and private options etc).

 

The comments had to do with the safety net aspect. In the US, the safety net for long-term care is very sketchy with Social security and Medicaid offering incomplete or nil coverage. Long-term care insurance also has not really caught on. In Canada, the safety net in retirement is different but more complete for long-term care. The public option works OK but there are significant drawbacks. So, if you want a premium and private option, the costs can be very real. For a reasonably nice place, the monthly rent comes to about 2500-3000$ per month (for a couple) and if you need more active care, the monthly rent can easily rise to 4000$ or more. Also, if you like to think like a financial planner, your expectations for pensions (OAP, CPP) should be dampened IMO (lower amounts and starting later). In my own planning, I put zero for these. Why? I think the demographics are not favorable, the long-term planning of our central planners is deficient and the public safety net is not free; somebody will need to pay for it and it may be you, the one who set aside funds for that purpose. :) So, you may want to adjust the absolute amount necessary to fund long-term care and make abstraction of expected public funding for your own benefit. If you have questions, don't hesitate as I went through the process with my parents recently and am going through the process now with my in-laws. An interesting feature in my area is that American private equity funds have been acquiring private nursing homes and homes dedicated for retired people with a premium and, unsurprisingly, these homes are no longer managed the same way and this is starting to show up in rents.

 

Additional comment:

The use of FireCALC or similar is interesting and it just takes a few seconds to get a picture. It can show the odds of your portfolio surviving in any market conditions that have occurred over time. Even if you instill a value flavor to your portfolio and plan to outperform, even in downturns, it may help to feel better if you find out that, with reasonable assumptions, your portfolio would survive any market conditions (at least from a retrospective perspective). Also (sorry this is a sad part but you asked for it), I suggest you put in place some kind of an automatic system where your autonomy about financial decisions (including investments) will be curtailed and eventually transferred. :(

 

These planning steps are a pain but thinking about it beforehand (such as the way you're doing it, I assume you are quite young) makes it easy to then forget about it and enjoy life to the fullest. Yesterday, I took some money out from funds set aside for higher education purposes (for three children) and now realize even more that the move made 20 years ago was a wise one. Good luck!

 

I'm definitely not a specialist, especially not on Canadian side of things. Cigarbutt is clearly much more of an expert there.

 

The numbers in US are possibly similar (just in US$ vs CAD$). It would depend a lot on location and needs.

 

Like I said in another post, being over-conservative and building an outsized nest egg is the way I plan it. We still work and earn positive CF, so likely we'll have what we need when we stop working.  8)

[samwise]

no_free_lunch,

 

Have you ever considered looking at your portfolio on a look-through-basis with regard to earnings?

 

Not no_free_lunch, but that’s what I have mentioned in the first post and some later ones as a sensible approach to comparing withdrawal rates. But it is incomplete because we don’t know how earnings will grow. It doesn’t make much sense for certain large parts of my current portfolio. E.g. asset driven investments or net-nets have no or negative earnings. Growth stocks like MA produce very little earnings yield (~3%), but I intend to keep “forever” to defer taxes. I bought a preferred at a 18% yield after  dividends were stopped. All these situations don’t work well for look-through earnings. But we could use it for a part of the portfolio set aside for funding expenses.

 

What if I used look through earnings for “expenses funding portfolio”?   

First,  only part of earnings are available for expenses even if I benefit economically from the rest. E.g. WFC a couple of months ago gave you a 4% withdrawal rate (as dividends), with the other 6% earnings reinvested in increasing the business or increasing your share of it by buybacks . The reinvestment should grow dividends in the future. I would expect WFC to grow with consumers spending (better than CPI as Vinod pointed out). So WFC @45 could be part of the “expenses funding portfolio”. 

Second, size of portfolio required: you need 25xexpenses invested in a few stocks like that to hedge expenses with a 4% dividend. With a high yield vehicle you could get by with much less invested in  “expenses funding portfolio” , which is why I was interested in the yields they got on real estate, or loans. Most public high yield vehicles are pretty risky. Not sure what private rental properties yield (terrible yields in Toronto).

 

Thinking in these terms, it is not at all obvious that the standard 4% withdrawal rate applies. I knew someone who brought US properties in 2012 at 10% yield. Does he still need a 25x expenses portfolio and a 4% withdrawal rate?

[samwise]

You might want to consider …

 

Volatility drag. In the practical world - is that even a real thing?

 

Bit of a buzz-kill - but if you want to be practical ….

 

$100 +10%=$110

$110 -10%=$99

 

Average (+10%, -10%)=0%

Portfolio return =-1%

The 1% loss is volatility drag

 

About the rest,

1) I  agree that the future is uncertain and planning may be futile. But then you should support being extra conservative at keeping a margin of safety in aiming for a bigger  portfolio than you guess you need (or equivalently a smaller withdrawal rate)

2) Agreed that  man cannot live on bread alone but must keep himself busy. Buffet found a hobby after claiming to “retire” at 26. I am sure everyone can, if they have some interests like gardening or reading 10Ks.

[samwise]

But I think simply having a portfolio that is significantly bigger than needed is the best strategy, and try to have a plan B and C in the first couple of years of living on your portfolio. In the first few years the risks of negative volatility is the biggest, and if it doesn't occur in the first few years your portfolio presumably grew a decent amount to increase to margin of safety.

 

That's pretty much how I plan.  8)

 

More than you need is a good, safe and commendable strategy.

But, how much do you need?

Option 1) 25x expenses or 4% withdrawal rate

Option 2) expenses covered by dividends or rental income (after costs, taxes adjusted for vacancy rates), even if portfolio size = 15x expenses, I.e 6.7% withdrawal rate from 6.7% cap rate properties.

Option 3) expenses covered by earnings yield (with a 2% margin for volatility drag if you prefer). If I get enough WFC like stocks at 10% earnings, the portfolio would need to be 12.5xexpenses only, or a 8% withdrawal rate (leaving 2% for volatility drag adjustments). In this option you need to sell shares to generate your cash, since the grocer doesn’t accept look-through earnings.

 

It seems the standard advice is option 1. But gfp pointed out psychological risks there.

 

Packer and gfp seemed to use option 2, with extra money in the more aggressive portfolio. But not sure what yields they get.

 

Option 3 seems risky to me.

 

Of course if we have a Great Depression or perhaps high inflation, all options might fail.

[samwise]

 

So I would not use past safe withdrawal rates as a guide to the future. They need to be adjusted down very significantly. In fact, this is one of the motivations for me way back in 2005 to switch to active as I had been indexing up to that point.

 

How did you manage your portfolio after becoming active? Did you aim for higher earnings yields or a different approach?

 

 

adjusting for inflation is not going to be enough. Two reasons

 

1. Since the standard of living is going up,

 

2. Hedonic adjustments means you cannot just buy inflation adjusted goods. You are forced to buy the improvements.

 

For a longish retirement your expenses are going to be grow with CPI + Real Per Capita Income growth of your peers. So plan for that.

 

I wrote about this way back in 2005.

 

http://vinodp.com/documents/nri/standard_of_living.html

 

 

Thanks Vinod! Very interesting paper. So the expenses need to keep pace with the “Joneses”, not with inflation. I get the idea that if you have maintained a 1950 middle class lifestyle in 2019 you might consider yourself poor: you are living without cell phones (even Dumb ones), and probably lots of other things.

 

You mentioned keeping pace with wages. No company earnings track that, but they might track consumers spending. Is that an alternative to tracking wages.

 

Do you look at the growth rate of look-through earnings ? E.g. percentage of wages spent on food decreases as living standards rise in countries. So buying food company earnings might not protect your living standard. What would protect your living standard? Do you look for natural hedges to inflation or wages etc?

[samwise]

 

An example:

https://hbr.org/1990/05/power-from-the-ground-up-japans-land-bubble

Take the above with a grain of salt as I would have moved out of Toronto for that exact reason a long time ago, missing a potentially huge leveraged gain but the idea for you, if you think of living off your portfolio, is to ask a few "what if?" questions.

 

Interesting article! I guess one can hedge a real estate bubble by having no mortgage. And owning the place outright.  The certainty that SD advised. It’s expensive in a bubble of course, by definition.

 

Or one can live in a rent controlled building.

 

The rents currently are 2,500-3,000, so they could roll into the similar payments you mentioned for old age homes or nursing care. Or one sells the house at 80 and uses the money for the nursing home.

[samwise]

If you are confident in your timeframes and business selection you could borrow temporarily from your broker for living expenses.

 

Which brokers do this? Isn’t a margin loan only for buying securities, or can you cash it and take it to the nursing home?