Simple Investment Rules Repay Handsomely


I have been retired now for 22 years.  The markets treated me well during the first half of these retired years and, unlike the majority of retirees, did not hurt me during the last half.  Understand that I am a conservative investor that uses simple rules for investments, allocations and withdrawals.  I am sure that there are a few retirees who have done much better, but I also know that there are lots who have fared much worse.


I have planned on a very long retired lifespan.  If I live as long as my father, my remaining money will have to last another 19 years.  My plan is based on exhausting our investments sometime after my wife dies.  All in all, I started with a plan to retire for 48 years.   Roughly, that meant that my first year’s withdrawal had to be less than 3% of my investments.  More recently, that has increased to about 4.5%.  Theoretically, if we both were still alive, I would draw 100% in the 48th year, but of course I wouldn’t do that because even a 100 year old wife still has a life expectancy of several years.


The investment selection, allocation and withdrawal rules I use are detailed in Getting Started in a Financially Secure Retirement (Wiley 2007).  Here are the major ones:


I make a new calculation each year using one of the retirement planning programs on  I do not arbitrarily increase last year’s withdrawals by the amount of inflation as some planners recommend.  For every dollar I started with at the beginning of retirement, I now have $2.50.  So far, I have withdrawn $1 for every dollar I started with at the beginning of retirement.  My after-tax return on investments has been far above the average retiree who is lucky to beat inflation.  On the other hand, I retired in a very good year.  Optimists who retired near 2000 and spent freely will have great difficulty because the investment climate was so poor in the years that followed.


I adhere rigorously to the spending limit determined by a planning calculation with conservative inputs for returns, inflation and tax rates.  (Being conservative was rewarding in the six years I was Boeing’s chief planner.)  My wife and I live less expensively than we supposedly could “afford” and give much of the remainder to children and charity.  In banner years, I reinvest anything that is left over.  I have the dividends and interest deposited to money markets.  That makes it easy to transfer savings to our checking account, and it makes it easy to determine capital gains for tax purposes.


I use my age to determine investment allocation.  Fixed income investments are always between my age as a percent and 10% less.  At age 77, my fixed income investments have to be between 67% and 77% (my age as a percent).  The remainder is in equity, that is, in stocks and investment real estate.  I only count half of my home as an “investment” because I know we could still live comfortably in a smaller place or get a reverse mortgage if necessary.  Typically, I only have had to rebalance about every other year.  Rebalancing only when allocations were outside my limits meant that I sold when securities were relatively high and bought when they were relatively low.


I do not count my pension, social security or income from immediate annuities when determining allocations.  My pension is truly fixed, but my Social Security and immediate annuity payments are adjusted for inflation.  I do not believe in trying to determine the present value of those payments in order to fit into an allocation analysis.


I am in a high tax bracket, so I pay a lot of attention to income taxes in my selection of investments and withdrawals.  I hold most stock funds in taxable accounts and most fixed income investments in tax-exempt or tax-deferred accounts.  That gives me the lowest overall tax rate because capital gains and dividends have lower tax rates than interest.  My stock investments are in very low-cost broad index funds, many of which are also “tax-managed” accounts.  I preferentially draw money first from taxable accounts, then deferred-tax accounts, and tax-exempt accounts last.  When possible, I make charitable gifts directly from deferred-tax accounts.  Otherwise I make them form donor-advised accounts.


The majority of my fixed-income investments are in actual bonds, not bond funds.  The major exception to this rule is a stable value fund in my 401(k) that pays a good interest rate.  Because of my tax bracket, most of my bonds are in laddered municipal bonds.  They are laddered with respect to maturity dates and also diversified with respect to states.  Ever since I felt that we were ultimately destined to high inflation rates I have been investing in Savings I Bonds and laddered TIPS, the latter in Roth IRAs because of their unfavorable tax rules.  I hold bonds till they reach maturity.


I do not try to time the market, but I confess to biasing my fixed-income selections with my perception of future returns, inflation and tax rates—none of which I really know, of course.   This is about the only place that I let my emotions creep into my investment selection, allocation and withdrawal rules.


Henry K. Hebeler