As someone with no kids, I’ve always loved the idea of giving away and spending down my assets in the final decades of life so that I die with very little. But a financial plan that involves “dying broke” is not very realistic for most of us, because we can’t predict how long we’ll live or how well our portfolios will perform in our final years. So, what if I told you that you can greatly increase your spending in those years as long as you’re willing to simplify your life and disappoint your heirs?
The Two-Bucket Die-Broke Strategy
The first step is to create a liquid portfolio in your 60s or 70s. This means converting all your illiquid assets (yes, the house too) into an investment portfolio. Once that’s done, you’re ready to set up your buckets.
Bucket 1
In the first bucket you would segregate just enough of your assets to cover your basic needs for the rest of your life, no matter how long you might live. You could either buy an immediate fixed annuity to secure a guaranteed lifetime income stream, or build a portfolio and make recurring withdrawals at a sustainable rate of about 4-5% of the balance. This money, along with social security, can be used to cover expenses such as housing, medical, groceries, taxes, insurance, some local traveling and more.
Bucket 2
From your second bucket you can spend as if you want to drain it completely within, say, 15 years. In my estimate, you could take more than 7% of the initial balance and have a reasonable chance that there’s still some money at the end of this period (if it’s properly diversified and in the right blend of stocks and bonds). From here, you could draw for the stuff and experiences that you’ll most enjoy while you’re still on the younger side. These are also the things you may not care as much about in your late 80s and 90s – expensive international trips, big charitable gifts, spoiling your nieces and nephews over holidays, helping a loved one, etc.
This strategy may add some tax consequences in the short-term, and requires that you have the proper amounts and types of insurance in place so that you’re prepared for large unexpected expenses (like long-term care). But if it’s done right, you should be able to give and spend more of what you’ve worked your whole life building up. So the next time you give that extra special birthday present to your niece, just tell her it’s no trouble – it came out of her inheritance.
Happy planning,
Barrett
