How to Live Off Investments
Have you heard the fable The Goose and the Golden Egg? It tells the story of a man who has a goose that lays one golden egg each day. He takes the golden eggs to market to sell them to live off the money. Soon he gets frustrated that he is only getting one egg each day. He decides to kill the goose to be able to get all the golden eggs at once. But after killing the goose, he finds no golden eggs inside and now his goose is dead.
What a bummer of a tale. But it’s a great example of how not to live off of your investments–for retirement or otherwise. But wait a second, isn’t the point of investing and retirement to live off of that money?
Confused? You’re not alone.
The problem is no one teaches you how to live off your retirement investments.
Saving–really investing–for retirement feels confusing (something I simplify and teach in workshops and 1:1 coaching). And once you understand how to invest for retirement, there is even less information on how to live off those investments.
This is such important information that no one talks about!
According to the Centers for Disease Control and Prevention, the average life expectancy for Americans is 76 years old. And according to the Center for Retirement Research at Boston College, the average retirement age for men and women are 65 and 62 respectively. That means there is a gap of eleven to thirteen years you are no longer working, but are living off your retirement investments. One of the biggest fears people have is they will outlive their money.
So how can you make sure your money will last?
To live off your investments, you must only live off the returns they make.
Think about it like the goose and the golden egg. You want to live off the golden eggs, not the goose. If you live off the investment itself, what you are essentially doing is killing, roasting and carving up your goose. Don’t do that! Instead, live off the returns your money makes so you will continue to have money and not stress about which–you or your money–will reach the finish line first.
So how do you do that?
Here are two practical tips to wisely live off your investments:
Tip 1: Have an emergency fund of twelve month’s expenses.
What?! I thought you suggest only 3-6 months of savings. Why all of a sudden are you saying a full year?
Yes, for those working and bringing in an income, I suggest 3-6 months worth of expenses in your emergency fund. However, once you reach retirement age, you’ll want to increase your emergency fund to a full year. Here’s why: when you live off your investments, the percent return they make varies. Sometimes the returns are really high. Sometimes they’re average returns. And you only get “average” if you also have returns that are down. This is when all the news anchors act like the sky is falling and the stock market is crashing and doomsday is knocking at the door. Your returns are going to vary.
Do you remember the old adage, “Buy low, sell high”? When returns are down, the only way to live off your investments would be to sell some. But you don’t want to sell low. That would be like cutting off your goose’s wing–you’re not eating the whole goose, just a part of it. Don’t do that. Instead, when returns are down, rely on the big emergency fund you have saved. This allows the market to recover and start laying eggs for you again. When this happens–because the market does dip sometimes–and you live off some of your emergency fund, be sure to replace what you used when your returns are high.
Tip 2: Have a retirement withdrawal rate of 3-4%.
To have confidence you don’t run out of money, a rule of thumb is to withdraw 3-4% of your nest egg. Remember, your investments are still earning returns. For easy numbers sake, let’s say your investments average a 10% return. Why should you only withdraw 4%? Why not the full 10%?
Withdrawing 4% allows the remaining 6% to be reinvested (feeds the goose), which allows it to continue to grow. You want to continue to feed and fatten your goose. It also allows your investments to keep up with inflation. Because what you get with $20 today is a whole lot less than what you could get with $20 twenty years ago. By living off only some of your returns will allow your goose to continue to grow and continue to provide you with the amount of eggs (or money) you need to live off of.
It’s always wise to sit down with an investment professional and create an investment plan for retirement. It’s never too late or too early to start investing. As the old Chinese proverb says, “The best time to plant a tree was twenty years ago. The next best time is today.”
Want help?
Understanding retirement doesn’t have to be confusing. It’s one of the topics I cover in 1:1 coaching. Let’s see if coaching is your right next step.
