Now don’t get me wrong, there’s nothing terrible about following this advice.  A retiree who adheres to this plan has a great chance their portfolio will last the remainder of their life.  But isn’t there a better option?  One where the retiree needn’t worry about outliving their nest egg?  Luckily, there is a better plan.  Instead of drawing down one’s portfolio, a retiree can simply live off the dividends and interest their nest egg produces.  Following this method guarantees that one never runs out of money.  It is also easy to stick to, and will eventually leave one’s heirs with a tidy inheritance.  The one caveat of living off dividends and interest alone is that it usually requires significantly larger retirement savings.

This issue is discussed in further detail here:  Retiring on Investment Interest: Can It Be Done?

“A true interest-only strategy can work only for those with excess capital. If you retire with $1 million but only need $55,000 per year of supplemental income, keeping with our 6% assumption, you will need $917,000 to produce your income. That will leave   you with $83,000 that could be used for emergencies or irregular expenditures.”

“Be thorough and careful when working out the numbers.  Interest-only portfolios can work, but if you assume that one will work for you without working out the details, you may find yourself without adequate retirement funds.”

Due to the larger capital requirements needed for a dividends and interest only plan it may not be feasible for individuals who are
currently nearing retirement.  However, I believe this plan is perfectly achievable and a worthy goal for young investors.  There is no reason why someone with a long time horizon and a decent career can’t accumulate enough capital to implement this great plan come retirement.

As a case study, I bring you the story of The Simkin family: Getting back on the retirement horse

“Jason and Patty Simkins, both 40, have saved next to nothing for retirement in the past year.  They were rattled by the rocky market, which caused the value of their portfolio to tumble 40% at its low point.”

“So when Jason switched jobs last fall… he neglected his new 401(k).  Saying, “I didn’t want to throw money into it if it was just going to be lost.”

“But now they’re disappointed to have missed out on additional gains from the market’s rebound.”

“Realizing they need to catch up on retirement (and, with two kids, save for college), they’re ready to put a toe back in the water.”

I think all of us can relate to The Simkin’s story.  Last year as the markets were being pummeled day after day, even the most iron-willed of us surely contemplated exiting the markets, or at the very least stopping our ongoing contributions.  The problem with this, as the Simkins indicated, is that they’ve consequently missed out on the juicy 60% returns the market has put in since bottoming.  Now, only after this enormous rally, are they looking to restart their retirement plan contributions.  This my friends is not the modus operandi of successful investors.

Instead, I offer the following plan to passive retirement investors…

First, familiarize yourself with the concept of asset allocation.  Once familiarized, develop a diversified asset allocation that coincides with your risk tolerance and time horizon.  (note: you’re probably less risk tolerant than you think)

Second, contribute to your retirement accounts using a dollar-cost averaging plan.  This entails investing a fixed amount of money on a monthly or per paycheck basis.  These contributions should match the asset allocation you created in step one.

Third, every quarter check up on your portfolio and revisit your asset allocation.  Are your current holdings in-line with your plan? If not, rebalance your portfolio so it isn’t too aggressive or conservative.

Finally, once every year you need to reexamine your risk tolerance and time horizon.  If they’ve changed, chances are you need to modify your asset allocation.

There you have it.  Following these simple steps will give you a disciplined financial plan that you can implement in an emotionless manner. Give it a try and your odds of being a successful long-term investor are high.