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The Best Interest » Winning the Game: Retiring at 57 with $4.2M

Winning the Game: Retiring at 57 with $4.2M

I want to share a fantastic Q&A from this past week. A reader, “Vince,” wrote in and said:


Hi Jesse. I just reread your best of 2023 post about Compounding. Well, I’m late 50s. No debt. Have stayed the course, and am retiring with 4.2m dollars and 5.5m net worth. I’m the poster child for DCA, yearly rebalancing and living below your means but enjoying life. My wife and I know we’re very fortunate. 

Here’s the irony. Bernstein said ‘when you win the game, stop playing ‘ To me, that means going to a 55/45 (or even a 50/50) portfolio in perpetuity because a 3% withdrawal rate is likely all we need to keep us happy.  Yet, I’m giving up some return that comes with 60/40. 

Thoughts? I can afford to be more aggressive, maybe much more so, but is it worth it? Or should I just chill, rebalance annually or every 18 months, and watch the portfolio grow but a bit more slowly.

Thanks! 


silhouette of person raising hands

Vince is in an awesome situation. To add some context to his message:

PS: Here’s a straightforward financial independence and 4% rule calculator where you can input your own data.

I wrote back to Vince and said:


Hey Vince. Thanks for reading and for writing in. It’s fun to chat with folks like you. 

First off…wow. You find yourself in a terrific position! I love those details…dca, rebalance, live below your means. Do you mind if I ask…looking back, what was your rough average career household salary? And where did that salary max out? I’m just curious. 

[And now I’m coming back up here after having written the entire email…this would be a wonderful blog post Q&A, with your permission. Happy to anonymize you entirely. Let me know your thoughts?]

Yes – great Bernstein quote. I have a thought experiment that might put you at ease…

Take your current household spending needs…let’s say, $150,000 per year. 

Social Security will cover some…let’s say $50,000 per year (assuming you’re US? your country might have a different social safety net)

Therefore, your portfolio needs to cover $100,000 every year. 

And I’m going to assume (?) the $4.2M you mention is fully investable. 

If you went 50/50 in your portfolio – roughly $2.1M in stocks, $2.1M in bonds – you’d have 21 years of annual spending in bonds. Ideally, high-grade Treasury bonds. In theory, you have 21 years of buffer before you “need” to tap into your stocks. 

Do we have faith that your stocks will outpace bonds over a 21-year period? That’s now the critical question. Based on the stuff I talk about on The Best Interest, my answer is: yes, 21 years is a sufficient period for stocks to do their thing

Next question: can/should we pull that period closer to the present? 15 years? 10 years?

60/40 –>  $2.5M stocks, $1.7M bonds –> 17 years

70/30 –> $2.95M stocks, $1.25M bonds –> 12.5 years

I think you can feel good about 60/40. 17 years of bonds is a great buffer. 

But should you? You’re right that, technically speaking, you’re adding more risk to your portfolio. And for what reason? To die with a larger pile of money? 

It all comes back to Bernstein’s quote: what game are you playing, Vince? Have you “won?” If not, that’s fine. But ask yourself: when will that answer change? What is “winning” to you?

For example, if you have big goals for your “Excess Money,” that’s a different story. Do you want to donate $1M to the dog shelter when you die? In that case, we should separate that portion of your money from the rest of your money, and invest it differently. 

But if you’re main/most important goal is, “Live comfortably forever,” and the 55/45 gets you there…great! You’ve done it. 

…now I’m curious, how much return are you actually giving up in the long run by shifting down from 60/40 to 55/45? 

Assume 7% annualized inflation-adjusted returns for stocks and 2% inflation-adjusted for bonds

60/40 –> 5.00% per year, or 165% inflation-adjusted growth over 20 years. 

55/45 –> 4.75% per year, or 153% inflation-adjusted growth over 20 years. 

Definitely a difference. But not a huge one, IMO, especially when you (specifically you) won’t define success or failure based on that ~0.25% per year annualized difference. 

Alright – that’s a lot. But I hope it helps. 


person mountain climbing

If Vince’s portfolio is $4.2M and his annual needs are $100,000, he’ll be entering retirement following (essentially) a “2.38% Rule.” That’s way more conservative than the classic 4% Rule.

He doesn’t need to expose himself to undue risk. 60% stocks, 55% stocks, 50% stocks…Vince will be successful in any of these portfolios. Since he has “won the game” of career financial success, he can “stop playing the game” by taking some of his chips off the table a.k.a. reducing his exposure to risk assets (stocks).

Stocks outperform bonds over long periods of time, and Vince will be able to leave his stocks untouched for decades (if he wants to).


pair of red and white low top sneakers

Now, Vince did get back to me and shared some of his personal story. I want to share some of those details with you.

  • On his salary and investing: “I started at 35k in 1994 and ended at about 560k this year. One outlier year was about 600k. I’d bet my average was around 200k but there were so many big jumps it’s really hard to say. (I never moved jobs for a bigger salary. In fact sometimes I took less to be happier. Eventually , the money came). Also, I got married and we both worked so I’d guess 275k average over 30 years, but this may be off.  As I mentioned, dca, rebalance, live below our means. Also, 95% indexing with 4 funds and occasionally buying a stock or two and holding it.

Vince’s top-end salary ($500 – $600K) is top 1% territory. His average salary ($275K) is top ~4%. Vince earned great money. But his starting salary is relatively low. Salary growth was essential for Vince’s success. The lesson: you can – and should – look for ways to increase your income over your career. It might take decades. But it makes a huge difference.

And Vince’s investing technique is…boring! Index funds, dollar-cost averaging, buy-and-hold, annual rebalance. Sound familiar?! The boring stuff, while BORING, really does work.

photo of woman sitting with her hand on her cheek
Bored?

I’m not pulling your leg here with my articles and podcasts about boring, long-term investing. I’m serious. It works. Just look at Vince. Moving on…

  • On his lifestyle: “We drive old cars and jeans and t shirts are our preferred outfits. We researched our area before buying and our house that cost 350k is now worth about 1.2m. Actually, not the best 25-year return, but we’re very happy here. We want to keep living simply but comfortably. We’ve put 2 kids through college and have no debt. We love traveling but can do it rather inexpensively. In fact, we just spent a month in Portugal for a small amount. So 55/45 it is. THANK YOU!!!!! 

(FYI, the housing return Vince mentioned is about 5.5% nominal / 2.7% real annual return. )

The important takeaway is Vince’s choice to drive cheaper cars and wear cheaper clothes than he otherwise could. By my math, you could buy a Corvette on a $500,000 salary. You could fly first class. You could eat caviar. But Vince is an example that wealth is what you don’t see.

iceberg

“Wealth is created by a slow, steady drip of investment deposits, just like decades of waves carving a shoreline rock. Wealth is compound interest that grows slowly at first, then rapidly in the end. Wealth is what you choose not to spend money on. Wealth is quiet.”

It sounds like Vince still doing what he loves. He’s cutting costs where he can (or where he simply doesn’t care), but then spending where he wants to. That’s bimodal spending. Vince is enjoying the journey.

Vince is a success story. He’s won the game. And now, like a smart investor, he’s opting to “stop playing” by taking some of his investment risk off the table.

Thanks, Vince, for sharing your example with us.

Thank you for reading! If you enjoyed this article, join 8000+ subscribers who read my 2-minute weekly email, where I send you links to the smartest financial content I find online every week.

-Jesse

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