Aiming to ‘Die with Zero’? Here Are the Implications for Portfolio Construction and Retirement Spending

On this episode of The Long View, Dr. Jay Zigmont, author and founder and CEO of Childfree Wealth, breaks down how childfree people can plan their finances and key takeaways from his new book, The Childfree Guide to Life and Money.

Here are a few excerpts from Zigmont’s conversation with Morningstar’s Christine Benz and Amy Arnott.

How Aiming to ‘Die With Zero’ Versus Wanting to Leave a Legacy Changes Your Portfolio Allocation

Amy Arnott: So I’m curious about the investment side of things. Do you think the asset allocation of a portfolio for someone who is following the “Die With Zero” approach should look different than it would for someone who wants to leave a legacy?

Dr. Jay Zigmont: Well, it’s interesting. So when we look at a Die With Zero plan or winding down your wealth, as we call it, we set a safety net. So the safety net is you have a plan for long-term care. You put off Social Security till 70 and you have a little cash cushion. The cash cushion is usually like one or two years of expenses. And then we optimize for how much money can you spend each year. And it’s actually a minimum amount of spend rather than a maximum. And you can do two different things with your investments. If you’ve truly got a Die With Zero plan, you could go 100% into fixed income and be OK because it’s a predictable amount. You could just run a ladder and do it. On the flip side, you could also go nearly 100% into stock and just take a chance. You swing for the fences because the goal, you’ve got that safety net there. The goal isn’t to pass on a certain amount of money. You can go either way. And both of those seem weird. We’re talking to somebody in their 60s and 70s like, hey, you could be 100% stock, or you could be 100% fixed income, whichever works for their structure. And when you walk them through, like, well, but the general rule says I need to have and blah, blah, blah.

And that’s where those general rules don’t fit. And it’s more a question of what type of life do you want to live and how do we make sure you’re spending enough to bring down your net worth, which is a challenge. I mean, we spend more time with our clients talking about spending money than saving money. And sometimes, it actually helps them to spend more money if they’re on a fixed-income investment. They just run it. Others, hey, they will have big dreams, and they want to take a chance. Both work.

How to Transition from Saving to Spending in Retirement

Christine Benz: I wanted to follow up on that spending point because it seems like that’s a recurrent theme with a lot of financial advisors we talk to, where they say that getting their clients to switch on the spending after a lifetime of saving is a really tricky, tricky thing. I’m wondering if you can share any techniques that you have. And it seems like they would probably be relevant to people with kids, without kids, to get them to spend an appropriate amount given whatever their goals are.

Zigmont: So my ,.D. is in adult learning, and I come out of that kind of the behavioral side. And I probably spend more time with my clients, working on that behavioral side, the money mindsets, than I do on the finances. Because our goal, the way we look at it, is we’re always trying to make your finances simple so your life can be amazing. So we’re not doing anything fancy on the investments, but we’re trying to get them to actually enjoy their money. And I think the hard part is the people that have been great savers, like we have to unprogram 40 or 50 years, or whatever it is, of experience. We run into it so often we call it the blueberry problem, which is the people that have the money they need to do whatever they want. But they’re buying the frozen blueberries because they’re a dollar cheaper than the fresh blueberries. I’m like, just buy the good blueberries. You’re fine. I have a client with tens of millions of dollars still cutting coupons. I’m like, you don’t have to do that anymore. But the hard part is that’s not where their brain is.

So great example of this. What we’ll do is we will combine whatever their priorities are, their goals are for spending with a giving option. So, for example, when you spend money, often there’s guilt around it. So I have a client; we set up a goal and said, all right, I want you to spend X amount of money per year. In their case, like $100,000 on travel. But we’re also going to give away $100,000 each year. And what ends up happening is because they’re giving—and it’s not always to charity, some of it’s to family or whatever else it is—they’re giving, they feel OK about. And that makes it OK also for them to spend on themselves. Now, I will tell you at the end of the year, I do ask them, which did you get more out of, the travel or the giving? And it’s usually actually the giving they got more out of. But it changes the habits. I had a client the other day, like “You’d be proud of us. Last year we spent double what we did the year before!” And I’m like, yes, and we’re celebrating it.

Why the 4% Guideline Doesn’t Hold Up for People Without Kids

Arnott: You also have a section in the book on the 4% guideline for retirement spending that is this well-known rule of thumb that so many people have latched onto. But you argue that that really doesn’t hold up for people without kids. Can you talk a little bit more about that?

Zigmont: So the 4% rule was based around the concept of, once again, I don’t want to run out of money. And you go into the data, and I don’t know, depending on the week, you’ve got the different numbers was 3.7%, or 4%, or 5%, or whatever else they are. They are all very rough back-of-the-napkin math that do not reflect the lifestyle you want to live. And they have assumptions in there that don’t match. So that’s really all based on essentially Monte Carlo simulations. If I do a Monte Carlo simulation for my clients, I’m trying to get to like 50% success. Half the time they run our money, half the time they don’t. And it gives you a better idea of what they can actually spend. The 4% rule is great for like just directional: Hey, I need about this amount of money. But what we find with our clients, because they’re not retiring in the classic sense, they’re going to work a little bit. They’re going to do some things.

They actually save too much by the 4% rule. And if they’ve been kind of deep in the FIRE literature, deep in kind of like, “I’ve got to hit this number,” what ends up happening is they focus so much on the number, they miss their life on the way by. And it’s one of those things you have to reprogram. And if you’re going to die with zero, if you’re going to go down that path, you really need to be doing ongoing financial planning, not one-off, let me grab a number and play with it. And I think that’s a different mindset than just saying, here’s a general back-of-the-napkin math, and it should make me through.

Why You Need to Continuously Recheck Your Probability of Success

Benz: To follow up on that. So you mentioned that 50% probability is a starting point. And then is the idea when you work with clients, you’re revisiting that on an ongoing basis based on what their spending has been like, how their portfolio has behaved, and so forth. And you kind of recheck that probability of success?

Zigmont: Yeah, we’re more on the retirement guardrails-type approach, but it’s really around, we have to bend that net-worth curve. So there’s just those assumptions that have to change to the point where we can look at it and say, over the last two years, this has been your spending, this has been your growth, your net worth is still going up. We need to optimize for spending more. And since you’re doing it regularly—we have an ongoing financial planning process, that’s how we do this—what happens is you can make tweaks each year based on their goals, based on the market, and based on where they’re trying to go. I think the challenge is if you try to guess it upfront, you’re just wrong. I mean, we all know that any prediction, we know is wrong. But if we’re doing an ongoing financial planning and life planning process, these adjustments each year, you can get to the impact you want to make and get to enjoy your money.