Redefining Risk So My Money Lasts As Long As My Life

One of my greatest fears about retirement was the very real risk that my life would last longer than my money.

So how did I get comfortable that I could retire?

I spent hours reading about retirement and tax strategies for early retirees.

I learned I could convert my pre-tax 401k’s to Roth IRA’s and pay little or no tax on the conversions.  This results in a lower taxable income after age 65 with less of my Social Security benefits being taxable and lower Medicare premiums.

I learned about the ultimate retirement account–the HSA which allows me to deduct my contributions and not pay tax on withdrawals for medical expenses.  If you delay reimbursement of medical expenses, the HSA can grow just like any other retirement account until you submit those old medical expenses and get your money out tax free.

I studied what actually happens to our spending as we age.  It goes down significantly.  This makes sense to me–I already need fewer things than I did when I was young and at some age, I don’t expect we’ll want two houses or two cars.

I educated myself on social security claiming options particularly when one spouse is older and a higher earner.  It pays to delay my husband’s payments so he receives a higher payment and, upon his death, I would switch from my lower payment to his.

I found out that if I could keep my taxable income low, subsidies would pay for most of our health insurance premiums under Obamacare. Though it feels icky and will likely go away with the Republicans in control.

I learned about the Trinity Study and the 4% safe withdrawal rate.  It tells me I can withdraw 4% of my invested assets each year, increased annually for inflation with a 95+% certainty my money will last forever.

I created a detailed spreadsheet estimating my income and expenses for the rest of my life.  I estimated my inflows like investment returns, Social Security, property sales and inheritances low and my expenses high.  I included a large contingency each year which should remain unspent in most years.  And I still didn’t run out of money.

But the most important thing I did was redefine stock market risk. 

Risk is defined as exposure to the chance of loss.  People typically think investing in the stock market is risky.  We are exposing our money to the chance of loss because if we look at market values day to day or even year to year, some days and some years they lose value.

But volatility does not equal risk for me. Just because the market values go up and down, we have not lost any money unless we sell.  If we look at the market values decade to decade or 20 year period to 20 year period, we find there is very little risk in the stock market.  It’s like my neighbor Hoover in the picture above–values go up and down–they are volatile.  But, over long periods of time they always end up.  And, yes, a camel is my walking distance neighbor in metro Phoenix–strange huh?!

Here’s what is truly risky:  Not keeping up with inflation.  If I want to invest my money “risk free”, and keep it in an FDIC insured bank, I am virtually guaranteed to lose money against inflation.  The best interest rate I can get on a 5 year CD today is 1.85%.  The average historical inflation rate is 3.22%.  Over the rest of my life, my money will lose half of its value.

As a retiree, many experts would recommend that I keep 40 or 50% of my invested assets in no or low risk investments.  Common rules of thumb are 100 minus current age or 110 minus current age.  If I followed one of those rules, it’s pretty likely my life will last longer than my money.  With only around 10% of my net worth “risk free”, I should be fine.

My frequent readers know I’m very risk averse except when it comes to investing and may be surprised I’m comfortable with “should be fine”?  If my estimates of stock market performance are way off, I can decrease my spending substantially or figure out a way to make a bit of money in retirement–I’ll still have a nice life!

Let me know if you think I’m crazy in the comments 🙂


Investing is risky, this reflects my opinion and is for informational purposes only.  Proceed with caution, do your research and seek professional advice if necessary.

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Author: Ms. Liz

A CPA, I retired at 51 and I am helping people create their fantastic futures!

4 thoughts on “Redefining Risk So My Money Lasts As Long As My Life”

  1. You list two strategies that are ingrained in prevailing investment thought: 1) volatility = risk, and 2) 40-50% of older folks’ holdings should be in fixed income or low risk investments. I think that you are absolutely right to challenge these two ideas!

    Correlating volatility with risk is deeply embedded in the math of equity analysis. Computer simulations, equity beta ratings, risk adjusted returns, etc. all assume that volatility represents risk. But really, volatility is not a good indicator of the potential for losses, except in a fixed time defined model. I think the industry needs to move to a mathematical representation of long term trends to model risk.

    The second point is an illustration of how the first point is misused. If you correlate volatility with risk, you miss the big picture that we are at a 30-40 year cycle low for interest rates and “low risk” fixed income in 40% of your portfolio will destroy value faster than a toilet flushing $100 bills. Risk should be expressed in terms of trend, not the standard deviation of price fluctuations!

    Maybe we need a Ms. Liz Ratio to replace the Sharpe Ratio?

    1. Thanks for your thoughtful comment Mitch! I’m glad you’re in agreement on both counts and thank heavens I don’t own one of those $100 bill flushing toilets. I’ve also been thinking about how social security is really a big bond for those of us baby boomers and older. If we think of it that way, our portfolio risk is further reduced–what do you think?

      1. Absolutely. Social security is the boomers’ fixed income backstop. So you can back into your asset allocation using the 3% withdrawal rule as an approximation. Viewed as such, every $2,000/month in SS is about equal to an asset allocation of $800,000 in fixed income.

        1. I love comparing thoughts with you on investing–especially when we agree 🙂 Let me know if you want to write a guest post so my readers can learn from you.

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