William J. Bernstein had an interesting op-ed in the Wall Street Journal titled How To Tell If Your Retirement Nest Egg Is Big Enough. Anytime the termnest egg pops up in a post I feel compelled to make the Lost in America reference when Julie Hagerty loses the nest egg at the tables in Las Vegas almost immediately after they hit the road and Albert Brooks tells her to never use the words nest and egg in the same sentence ever again.
He suggests figuring out where you stand right now in relation to where you need to be with a measure called residual living expenses or RLE. RLE is simply the difference between your lifestyle needs minus whatever fixed sources of income you might have or will have like Social Security or pension income.
In Bernstein’s example he assumes a $70,000 annual lifestyle with $30,000 coming from fixed sources of income so a portfolio need of $40,000. The next step is to understand how much your nest egg can generate. He seems to suggest applying a more numbers oriented version of the simple 4% rule but of course there are several theories out there about how much you need your nest egg to be. The big thing is to go with what you believe to be right and measure where you stand right now.
If your RLE is $40,000 and you have $1.8 million accumulated then Bernstein would suggest you declare victory and manage your risk budget to have less exposure to risk assets. From the article;
When you’ve won the game, stop playing. So, retirement nest-egg-wise, what constitutes “winning� Simple: You’ve won when you’ve acquired enough assets to provide your basic living expenses for the rest of your life.
A sense of game over, which is of course what he is talking about, is a discussion of proper asset allocation which starts with understanding what you really need your RLE to be. If you can reduce the RLE a little then you place less of a burden on the portfolio which is something we have discussed before or you can get by with a smaller portfolio if somehow you don’t quite accumulate as much as you hope for.
