Warren Buffett has said that 90 percent of the money he leaves to his wife should be invested in stocks, with just 10 percent in cash. Does that work for non-billionaires?
As far as asset allocation advice goes, 90 percent in stocks sounds pretty aggressive. But IESE professor Javier Estrada thinks that the strategy has something going for it — even for retirees.
In his article for the Journal of Retirement, titled "Global Asset Allocation in Retirement: Buffett's Advice and a Simple Twist," Estrada argues that a 90/10 (stock/bond) allocation has a low failure rate, good downside protection, and high upside potential — a winning combination.
And the twist? Estrada suggests retirees keep an eye on stock market performance over the previous year when they choose whether to take their annual withdrawal from the stocks or from the bonds in their portfolio. The twist aims to avoid selling stocks when they are down, while trying to roughly stick to the 90/10 balance over time.
Asset allocation for the long haul
Asset allocation is one of the most important investment decisions for retirement. Some financial advisers suggest that retirees progressively move out of stocks and into bonds, for safety's sake, as they get older.
But Estrada and others argue that such a policy is not necessarily the best. In past articles, Estrada has made a case for investing more heavily in stocks. If a large nest egg is the goal, stocks are not necessarily riskier than bonds, just more volatile, he emphasizes. In fact, when Estrada crunches the numbers, he finds that long-term investments in stocks tend to fund wealthier retirements than bonds do.
See: "Retire at Your Own Risk," "Stocks vs Bonds: Where the Risk Lies" and "A Comforting Read in Times of Stock Market Volatility."
Estrada's idea for this article comes from Warren Buffett's 2013 letter to Berkshire Hathaway shareholders in which the Oracle of Omaha explained that, in his own will, he was instructing the trustee in charge of his wife's inheritance to put 10 percent in cash and 90 percent in the U.S. stock market.
Estrada notes that 100 percent in stocks has a historical tendency to outperform the 90-10 allocation recommended by Buffett over the course of a 30-year retirement, at least when it comes to some important variables largely related to upside potential. And yet, he also notes that 90-10 offers better downside protection than the 100-0 strategy. In sum, "Buffett's suggested allocation seems to provide a middle ground between the best performing strategy (100/0) in terms of upside potential and the best performing strategies (60/40 and 70/30) in terms of downside protection," Estrada writes.
And that leads to his twist. By looking at the stock market performance over the previous year, Estrada suggests that retirees take their annual withdrawal from bonds when stocks have performed badly in either absolute or relative terms. The simple idea is to give stocks time to recover. With the dynamic twist, Estrada reports a strategy with both higher upside potential and a slightly better downside protection than those for the 90/10 stock/bond portfolio.
Backing up Estrada's advice is an analysis of stock market data from 1900 to 2014 for 21 countries. He breaks this down into 86 rolling 30-year retirement periods, each starting with a portfolio worth $1,000. He assumes a 30-year retirement period, a 4 percent initial withdrawal ($40), subsequently annually adjusted by inflation, and annual rebalancing.
On average, investors following the simpler twist proposed end up with a higher inheritance, more upside potential, and better downside protection than they would if they followed either a 90/10 or a 60/40 split. Thus, any investor aggressive enough to find a 90/10 allocation acceptable would be better off by implementing this strategy, with a little twist.
FAQs
The 4% rule limits annual withdrawals from your retirement accounts to 4% of the total balance in your first year of retirement. That means if you retire with $1 million saved, you'd take out $40,000. According to the rule, this amount is safe enough that you won't risk running out of money during a 30-year retirement.
What is the 90 10 rule for retirement? ›
The rule stipulates investing 90% of one's investment capital toward low-cost stock-based index funds and the remainder 10% to short-term government bonds. The strategy comes from Buffett stating that upon his death, his wife's trust would be allocated in this method.
What does Warren Buffett recommend for retirement? ›
According to Buffett, you should invest 90% of your retirement funds in stock-based index funds. According to Buffett, the remaining 10% should be invested in short-term government bonds. The government uses these to finance its projects.
What are the Warren Buffett's first 3 rules of investing money? ›
What are Warren Buffett's biggest investing rules?
- Rule 1: Never lose money. This is considered by many to be Buffett's most important rule and is the foundation of his investment philosophy. ...
- Rule 2: Focus on the long term. ...
- Rule 3: Know what you're investing in.
One example is the $1,000/month rule. Created by Wes Moss, a Certified Financial Planner, this strategy helps individuals visualize how much savings they should have in retirement. According to Moss, you should plan to have $240,000 saved for every $1,000 of disposable income in retirement.
How long will $1 million last in retirement? ›
Around the U.S., a $1 million nest egg can cover an average of 18.9 years worth of living expenses, GoBankingRates found. But where you retire can have a profound impact on how far your money goes, ranging from as a little as 10 years in Hawaii to more than than 20 years in more than a dozen states.
What is the 70% rule for retirement? ›
The 70% rule for retirement savings suggests that your estimated retirement spending should be about 70% of your pre-retirement, after-tax income. For example, if you take home $100,000 a year, your annual spending in retirement would be about $70,000, or just over $5,800 a month.
What is the 80 20 retirement rule? ›
What is an 80/20 Retirement Plan? An 80/20 retirement plan is a type of retirement plan where you split your retirement savings/ investment in a ratio of 80 to 20 percent, with 80% accounting for low-risk investments and 20% accounting for high-growth stocks.
What is Warren Buffett's golden rule? ›
Warren Buffett once said, “The first rule of an investment is don't lose [money]. And the second rule of an investment is don't forget the first rule. And that's all the rules there are.”
What are Warren Buffett's 5 rules? ›
Here's Buffett's take on the five basic rules of investing.
- Never lose money. ...
- Never invest in businesses you cannot understand. ...
- Our favorite holding period is forever. ...
- Never invest with borrowed money. ...
- Be fearful when others are greedy.
The super-rich invest in stocks and real estate, as many people do.
What is the Buffett's two list rule? ›
The first step was to write down his top 25 career goals. In the second step, Buffett told Flint to identify his top five goals from the list. In the final step, Flint had two lists: the top five goals (List A) and the remaining 20 (List B).
How many hours a day does Warren Buffett read? ›
Indeed, the Oracle of Omaha has said that he spends “five or six hours a day” reading books and newspapers. And while it may be difficult to set aside nearly a full work day's worth of hours to read, it recently got a little bit easier to consume information like Warren Buffett.
What did Warren Buffett tell his wife to invest in? ›
In the interview, he said the Berkshire shares would go to philanthropy. Part of the cash would go directly to his wife and part to a trustee. He told the trustee to put 10% of the cash in short-term government bonds and 90% in a low-cost S&P 500 index fund.
Why the 4% rule no longer works for retirees? ›
It's a rigid rule.
It also assumes you never have years where you spend more, or less, than the inflation increase. This isn't how most people spend in retirement. Expenses may change from one year to the next, and the amount you spend may change throughout retirement.
What are the 4 D's of retirement? ›
My advice to you is “Be smart!” Maintain work-life balance by following the “4 Ds”- DO IT! DELAY IT! DITCH IT! DELEGATE IT!
At what age is 401k withdrawal tax free? ›
Once you reach 59½, you can take distributions from your 401(k) plan without being subject to the 10% penalty. However, that doesn't mean there are no consequences. All withdrawals from your 401(k), even those taken after age 59½, are subject to ordinary income taxes.
What is the golden rule for retirement? ›
Retirement may seem like a distant dream, but it's never too early or too late to start planning. The “golden rule” suggests saving at least 15% of your pre-tax income, but with each individual's financial situation being unique, how can you be sure you're on the right track?
