Is Taking All Your Money Out of the Stock Market Ever A Good Idea?

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timemoneylogoIf you enjoy financial success stories from people with modest incomes, check out the Time Money article I Took All My Money Out of the Stock Market and It Feels Amazing. Yes, the title is a bit clickbaity, but it’s still worth a read.

Rosalind Warren combined her personal savings with a modest inheritance, invested it in low-cost index funds, and left it alone for a long time. These are exactly the three things that the prudent DIY investor is supposed to do. (She even used Vanguard index funds. Future spokesperson?)

Here’s how $10,000 invested in the mentioned Vanguard Balanced Index Fund would have done since its 1992 inception (via Morningstar):

vbinx

The frugal librarian is now age 62 with a paid-off house, no debt, and a “high six-figure” nest egg. However, she differs from the prototypical retiree in that she recently sold off all her stocks:

I once figured out exactly how much money I would need to live on — not lavishly, but comfortably — for the rest of my life. I promised myself that once I had that amount, I would actually do just that — take my money out of the market and live on it for the rest of my life.

Last week, I reached that goal.

I’m 62. I’ve spent decades caring about the market. I counted on it to make me enough money so that I’d be able to cash in my chips and walk away when I hit retirement age.

And so it did.

And now? It’s time for this librarian to declare victory and get the hell out.

Having zero stock holdings is not something that would usually be recommended by professional financial planners. Most would recommend at least some small allocation to stocks. But you know what? If you read the entire article, Warren shows that she has done her research and appears to understand the angles. She’s not stuffing the money in a mattress. She’s not panicking or predicting a crash. She’s shown that she can control her spending.

Her portfolio now consists of U.S. Treasuries, Treasury Inflation-Protected Securities (or TIPS bonds), and laddered CDs. First, this shows she knows that the biggest danger of not having any stocks is inflation. Second, it also shows she has the financial knowledge to counter that risk. If she’s holding TIPS and laddering CDs with the top rates, her money should at least keep up with inflation (although she admits it won’t grow much past that).

Even if her portfolio only manages to barely keep up with inflation and she lives another 33 years to age 95, simple math shows that she can still theoretically take out 3% a year (100% divided by 33). I don’t know exactly what “high six-figures” means, but $800,000 times 3% = $24,000 per year. There is the possibility that she might need more money than that, but there’s also the possibility that stocks perform even worse than her bonds/CD portfolio. She’s also still working and not taking withdrawals yet.

I don’t see any problem with not holding any stocks in this specific situation. Rosalind Warren has a steady job she intends to keep working at, the ability to defer Social Security until age 70 (maxing out her lifetime inflation-linked benefit), no debt, a paid-off house, and another $20,000 to $30,000 a year she can withdraw in the future. Equally important, not having to pay attention to market fluctuations gives her peace of mind. What do you think?

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Comments

  1. With one more Fed rate hike this year and 2-3 more projected for next year, I calculated that I can sell all my dividend paying stocks, preferred shares, ETFs and Mutual Funds (most of which are from Vanguard) and replace that entire cash stream with a 3.7% FDIC Insured, non-Wall Street Manipulated, no one can steal it from me, CD. I would hold on to my corporate bonds and TIPS until they mature.
    For what possible reason would I want to stay higher on the risk curve longer then I have to for equivalent yield if it becomes available, as I hope, in the late 2018 or early 2019 time frame.

  2. It would be interesting to compare the results of self managing in this fashion vs buying a single life inflation adjusted SPIA. A SPIA is a lot more like the balanced fund she’s accustomed to and would become more and more appropriate as she ages. Perhaps she’ll switch to a SPIA if rates end up rising (which is the biggest benefit of her current approach – flexibility and liquidity).

  3. I didn’t click through but IMO, it depends on her goals. If leaving a nest egg for someone else is a goal, there are few of us who can do that w/out being in the stock market. However, if your goal is to die right as you spend your last dollar–and to make sure the money lasts that long, if you have enough, you have enough. As she said, she no longer has to worry about it. My dad had more than enough, and when he got to a certain age, he realized he no longer cared to follow the market , that he had enough money to leave his kids and that the easiest thing to do was to put it all in the bank, so he did. Could I have inhertied more if he had been in the market? Maybe, but if he would have died in 2008 I would have gotten less.

  4. Thanks for linking this article. Not only is it interesting, but it’s well-written – her personality comes through.

    And good for her! She knows that she has a low tolerance for risk. So much so that it’s worth it to her to give up higher returns for peace of mind. It may not be the ‘right’ decision on paper but it’s an informed choice that works for her.

  5. I can understand why she did what she did, and I’m sure she’ll be fine. However, it seems to me that there must be a better way to get a guaranteed return, perhaps an annuity or something.

    • I agree annuities would be an option to consider in such a situation. An immediate annuity would get her a higher guaranteed income, but she would have to give up the principal. Also, most SPIAs are not inflation-adjusted, which brings you back to inflation risk. Many inflation-adjusted SPIA quotes that I’ve seen have rather low payouts. It would depend on your desire for higher lifetime income vs. flexibility of keeping a big stash of money.

  6. Also lucky that $50k landed in her lap when she was in her late 20’s/early 30’s

    • Not really so lucky. That $50K landed in my lap because my mom died when I was 24. I miss her every day.

    • Managing a financial windfall is actually a common personal finance question that people search for online. Many people will be faced with such a situation, and I wouldn’t take it for granted that any given 20-something would save it and invest it wisely for the future. You have to play the cards you’re dealt.

  7. Hi Jonathan! I ‘m Roz Warren, the person who wrote that essay, and I enjoyed reading your post.

  8. Investing in stocks is one of many options for investing your money, It comes with substantial risk, especially in the short term. Investing all of your money in the stock of a single corporation is very risky, you can quickly lose most (or all) of your money. A good strategy for reducing risk is to spread out your investments across the stocks of lots of companies, but that has complications, too.

  9. Great for Roz! Interesting, we need to diversify (stocks/bonds) and build-up wealth but when we reach a certain point – could take it all off the table.

    My 2 Cents:
    I think folks near or in retirement need a percentage of assets in stocks. This does up your risk level but history shows as decades march on the returns are greater. What would 82 year old Roz say to 62 year old Roz? I suggest you put 25% of your assets into the S&P 500 and let it ride! This won’t drastically alter your plans/comfort zone but has the potential to build more wealth for down the road.

    • What would 82-year-old Roz say to 62-year-old Roz? Probably “Hurrah! I made it to 82!” (Not a given, by any means, with my family history.) All joking aside, your advice is sound.

  10. William Bernstein said, “when you’ve won the game, stop playing.” Seems right on point.

  11. I read the article the other day, and it reminded me of a similar sentiment held by one of my co-workers who’s ready to retire soon. She’s an accountant, who confided in me that she did incredible well this year in the stock market, but then moved everything into bonds mid-year so as not to lose what she’s made to date. I can partially understand her concern, but like you, I think moving out of stocks entirely is not ideal. You should lesson your reliance on stocks as you age, but I think you should hold some stock assets, as you mentioned for inflation. And by stocks, I’m really thinking index funds.

    Anyway, I always enjoy the articles and analysis.

  12. nearly a year has gone by.

    NO ONE talks about the taxes she had to pay???

    I see Roz has answered a couple coments here, would love to hear about your 1040 Ms. Roz.

    Look I’m not criticizing you in the least. Not at all. Your money, do what you’ve gotta do.

    But let’s say you inherited 50k in 1982 and returned 8% year until 2017 when you cashed it in.
    Not crazy talk about the bull started in 1982.

    It’s worth 739k. Now, I get there’s been a ton of dividends and cap gains distributions over that 35 years too.

    So, let’s add $150k to your basis. So, your basis is $200k total . Meaning you had a taxable gain of 539k.

    That puts you well above the threshold for the Net Investment Income Tax of 3.8% plus the higher capital gains tax rate too.

    So, now you were in the 39.6% tax bracket, meaning your long term capital gains were taxed at 20% plus the 3.8% NIIT tax.

    Essentially you lost roughly 25% of that 539k.

    Would love to hear differently, of course. as only you know what you paid. But is this how things shook out for you?

    Thanks!

    Josh

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