If most of what you saved is in the stock market, you've probably run the numbers on whether it lasts. And even when the numbers say yes, the fear of running out of money in retirement doesn't really go away.
Allianz, the insurance company, asked Americans about it this year. 73% of Gen X, people from their mid-40s to about 60, said they worry more about running out of money than about dying. And 57% of everyone surveyed said they feel anxious about the future whenever a market drop hits their retirement accounts.
I don't think a bigger balance fixes that. A different number does, and you can work out yours on the back of an envelope tonight.
Why a balance can't settle it
A balance has to last until a date nobody can tell you, because you don't know how long you'll live, through a market nobody can predict. So every month you sell a piece of it to pay the bills, at whatever price the shares happen to be that week. The bills are fixed. The share price isn't.
RAND, the research group, looked at this using the Health and Retirement Study, comparing retirees with the same total wealth. The ones whose monthly spending came from pension checks were more satisfied with retirement, and stayed that way as the years went on. The ones without a pension were less satisfied, and got less satisfied over time.
That study was about pensions, and a lot of you won't get one. But it shows where the worry actually lives. It lives in where the bill money comes from.
The number
Take your monthly bills and ask: how much of that gets paid by money that shows up without you selling anything?
Your paycheck doesn't count, because it only arrives while you keep showing up. And if your money is mostly in index funds, the number is small even while you're working. A little comes from dividends. The rest would have to come from selling shares.
That's the source of the worry. You can only run out of money you're spending down. Money that pays you every month without being sold isn't being spent down.
Running it through 2000 to 2007
Here's what the number does in a truly bad stretch, using actual market history.
Picture a guy who's 57 with $1.5 million, nearly all of it in an S&P 500 index fund. His bills are $5,500 a month, or $66,000 a year, healthcare included. He stops working at the start of 2000. I ran two versions of him through the next eight years.
In version one, every bill gets paid by selling shares. $66,000 comes out at the start of each year, and the rest stays in the fund. Then the market falls three years in a row: down 9% in 2000, 12% in 2001, and 22% in 2002, dividends counted. By the end of 2002 his $1.5 million is closer to $800,000. He's sold $198,000 of shares along the way, most of it after prices had already dropped badly. Now his $66,000 a year is more than 8% of what's left.
That's the year he starts asking whether the money will last. The market came roaring back with five good years in a row, and by the end of 2007 he's back to about $1 million. The market recovered. His portfolio didn't.
Version two is the same guy, same $1.5 million, same bills, same eight years. This time $660,000 goes into private mortgage notes. A note is a loan on a house. Somebody borrows to buy the property, and the lender collects the monthly payment. Before banks made most home loans, private individuals put up that money. It still happens. It just isn't the normal way people buy.
The Entrust Group, a self-directed IRA custodian, says mortgage notes often return between 8% and 12%. I held him at 10% for all eight years and assumed every borrower paid. At that rate the $660,000 pays $5,500 a month in interest, which covers every bill. He keeps another $66,000 in cash, like a high-yield savings account, a full year of bills. The remaining $774,000 goes into the same index fund, and he never sells a share.
Same three bad years. His stocks fall to around $484,000. Painful to look at, but he didn't have to sell anything, and the note payments still paid every bill. By the end of 2007 the stocks are back to about $880,000, a bit more than he put in. Add the notes and the cash and he's at about $1.6 million.
Same starting money, same bills, same market. One ends near $1 million, the other near $1.6 million.
When stocks win
To be fair to selling shares, I ran a second test. Different guy, same $1.5 million, same bills, but he stops working at the start of 2010, which kicked off a great run for stocks. Eleven years later, the guy paying bills by selling shares is about $530,000 ahead of the covered version.
When the market cooperates, being all in on stocks comes out on top. The problem is you don't get to pick your decade. The covered plan did fine in both, and in the bad one it never sold a share at a low price.
That's what the number does to the worry. With his bills covered, a falling market still dents the stock balance. It just never decides whether the electric bill gets paid.
Why I like notes for this job
The biggest reason is that you can see the income before you commit. The payment is written into the loan: the amount, and the day it lands, every month until the loan ends. You can read the whole schedule, first payment to last, before the money leaves your account. Nobody can hand you a sheet showing what your index fund will pay you in March of 2031. A note comes with that sheet.
Nothing has to go right in the stock market that month for the payment to show up. Behind it is a real physical house, with the loan recorded at the county recorder's office.
For covering bills, rentals and notes are the two things I like most. I went about four years without a paycheck, and my rentals paid the bills the whole time. But with a rental the work never ends. You're a landlord. With a note, the work is up front: you check the borrower and the house before you lend, and after that the payments come in. A note also has an end date.
Notes carry risk, the same as any investment. They're illiquid, so the money is committed for the whole term. If a borrower stops paying, an attorney handles it, but you wait through the foreclosure before the house pays you back, and there's no income in the meantime. That's why I never put all my money in notes. I keep a cash buffer for slow months, and whatever's left after the bills are covered stays invested for growth.
A note payment also never gets a raise. It's a fixed payment at a fixed rate. The growth money is what keeps up with prices over the next 20 or 30 years.
Finding your own number
Write down what a month of your life costs. Price health coverage as if you're paying all of it yourself, and leave out what you're saving. Then write down what shows up every month whether you work or not, without selling anything. Dividends count. So does rental income. A paycheck doesn't.
The gap between those two, for the years after you stop working, is what needs filling with income that arrives on a schedule. In the example, $660,000 of $1.5 million was enough to cover every bill. At half covered, a bad market can only reach half your bills. With all of them covered, no bill depends on what the market did that month.