By Dr. James M. Dahle, WCI Founder
You have often heard the phrase around here, “If you've won the game, stop playing,” perhaps most famously from WCICON22 keynote speaker Dr. William Bernstein. It obviously makes sense on an intuitive level, but when you try to break it down to the nuts and bolts level, nobody has ever really defined it. Today, we're going to talk about what “stop playing the game” really means.
Dial Back the Asset Allocation
The main thing that people mean when they use the phrase “stop playing the game” is to stop taking the same amount of investing risk that you did when you accumulated that nest egg. Maybe you won the game as a result of a long-term savings and investing plan. Maybe you had a windfall from the sale of a business or an inheritance. No matter how you won it, the idea is that if you needed a 75/25 portfolio before to meet your goals and now only need a 40/60 portfolio to do so, you should have a 40/60 portfolio (even if you can tolerate the volatility and risk of a 75/25 portfolio). It can be a funny thing, though. When you design your portfolio you should consider your
- Need,
- Willingness, and
- Ability
to take on risk. However, after you hit your number, your need to take risk goes down, while, conversely, your ability to take risk often goes up! Consider Warren Buffett for instance. The man doesn't need bonds because even if his equities lost 99% of their value, he would still have 1,000X as much money as he would ever need to support his lifestyle. He has a massive ability to take risk.
But if you just barely hit 25X or 33X (or whatever feels like “enough” to you) of your annual spending and you want to stop working, your ability to take investment risk has significantly declined along with your need and probably your willingness to do so. It makes an awful lot of sense for you to have a less aggressive asset allocation.
How to Adjust Your Asset Allocation
Naturally, just like when you rebalance your asset allocation, you want to make a permanent adjustment without incurring a lot of costs. You want to avoid fees as much as possible, and you want to minimize the tax hit. Ideally, you can make this sort of a change inside your retirement accounts, where there are no tax costs and, usually, minimal transaction fees. But if you find yourself having to sell appreciated assets in a taxable account, be smart about how you do it.
- Be sure you're not reinvesting dividend or capital gain distributions.
- Look for losses you can tax-loss harvest to offset those gains.
- Use any old capital losses you may have stored up.
- Be sure you're only paying at Long Term Capital Gains rates by only selling investments you've held for at least one year.
- Sell the highest basis shares first—to minimize how much of the money raised to reinvest in safer investments is subject to taxes at all.
- Consider your life expectancy and the value of a step up in basis to your heirs.
Now, what will you invest the proceeds into? The first option is to just buy more of the safe assets you already have in your portfolio. The safe assets in my portfolio are nominal bonds via the TSP G Fund and the Vanguard Intermediate Tax-Free Bond Fund (VWITX) and Treasury Inflation Protected Securities (TIPS) via the Vanguard Inflation Protected Securities Fund or the Schwab TIPS ETF. If I were going to decrease the aggressiveness of my asset allocation, those are probably the first assets for which I would reach.
However, there are lots of other options out there. You could simply put money into cash, with zero risk of nominal principal loss. If your fixed income isn't particularly safe, maybe you cut back on how much is in junk bonds, corporate bonds, or long-term treasuries.
Another option is to put money into insurance products—not because you think the investment return is going to be awesome, but because you are willing to give up investment return in exchange for some guarantees. You figure, “I'll let the insurance company take the risk of a market downturn or of me living a long time.”
Perhaps the most straightforward of these products is a Single Premium Immediate Annuity (SPIA). When you buy a SPIA, you are essentially buying a pension from an insurance company. You give them a lump sum of money, and the company guarantees you a fixed sum every month for as long as you live. It is hard to find one of these that adjusts with inflation, but at least on a nominal basis, you have passed a lot of your risk on to the insurance company. There are some riders on other fixed annuities, variable annuities, and cash value life insurance that can perform similar functions, albeit usually with significantly higher commissions and complexities. Just delaying Social Security until age 70 is one form of moving money into insurance products, but a SPIA is probably the best deal like this available out there.
There is a bit of a market timing question here, too. While, emotionally, you may want to reduce risk in the midst of a nasty bear market, you are going to be better off most of the time if you do so well into a bull market. Good news! Unless winning the game was a result of the sale of a business, a winning lottery ticket, or an inheritance, it probably occurred well into a bull market, anyway. So, right when you win the game is likely a great time to pull the trigger and get into a less aggressive portfolio.
More information here:
The Benefits of a Fixed Asset Allocation Portfolio
Liability Matching Portfolio
The concept of a “Liability Matching Portfolio” (LMP) has also been proposed by Bernstein, and similar concepts have been discussed by academics Zvi Bodie and Moshe Milevsky. The idea here is that you match your portfolio to your liabilities, i.e. you match what you invest in to your future expenses. It makes sense, since the purpose of your investment portfolio is to meet your needs and goals—not to beat the market, maximize returns, or impress your friends. If your “liability” (i.e. need) is to guarantee $100,000 in inflation-adjusted income to spend each year for the next 30 years, one easy way to do that is with a 30-year TIPS ladder. You buy a $100,000, one-year TIPS to cover your spending next year. You buy a $100,000 two-year TIPS to cover your spending the year after that. You buy a three-year TIPS for the following year and so on until you buy a 30-year TIPS. And then each year, you buy a new 30-year TIPS if you want to extend this time period. The return on this TIPS ladder isn't going to impress anyone at a cocktail party, but it is HIGHLY likely to meet your goals. Other safe investments (SPIAs, bonds, cash, etc.) can be used in a similar manner.
Perhaps you simply want to use a LMP for your needs and keep the rest of the portfolio (that will provide for your wants, extras, giving, and legacy) invested more aggressively. Perfectly fine. But you've stopped playing the game with money that you need during your life.
Cut Back on the Leverage
Here's another interesting way to stop playing the game. You will meet countless financial gurus, bloggers, podcasters, and other yahoos on the internet and social media who advocate that you keep your debt—especially low-interest rate debt—because you can earn more on your investments than the interest rate on your debt. Well, guess what? You've won the game. You don't NEED to earn any more on your investments, much less arbitrage the value of your microwave loan, car loan, student loan, or mortgage to meet your goals. So, why do it? Why not just pay off those debts and eliminate leverage risk from your life? You see real estate investors do this all the time, and if they use a regular old mortgage, the investment tends to do it automatically. As they pay off the mortgage with the operating income from the property, it becomes less and less leveraged (and usually their cash flow gets better and better) as time goes on and the loan is eventually paid off.
One of the first things Katie and I did as we approached “enough” was to pay off the mortgage on our home, which was our last debt. Mathematically speaking, dragging that 2.75% mortgage around for a few more years and investing the lump sums we used to pay off the mortgage would have resulted in us having more money. But guess what? We don't need more money. Why would we risk the roof over the heads of our children just to get a little more? Didn't make any sense to us, so we paid it off.
In my opinion, one of the funniest things about the “pay off debt or invest” debates you see is that there are very few people who only do one of those things. Most people either really do both or they really do neither in any significant way.
More information here:
De-Risk Businesses
Another big risk people have in their lives is a decrease in the value of their business. If you have won the game, perhaps you should do what you can to reduce that risk, too. You can sell the business and eliminate that risk completely. But there are less extreme options. You can have the business buy more insurance or increase its cash reserves. You can pay off any loans the business may have, or at least get rid of any personal guarantees you may have on the loans of your business (including real estate businesses you own). You can also sell part of the business, whether a minority share where you maintain control or a majority share where you lose control (you get the money or the control, your choice.) The proceeds from that sale are no longer subject to business risk.
In the medical world, this might mean bringing on a partner and selling that partner part of the business as a cash buy-in or a sweat equity buy-in. Either way, you're moving money and risk out of the business and into your personal portfolio.
Work Less
One of the best parts about winning the game and becoming financially independent is that you no longer have to do things you don't want to do. Don't want to do clinics on Wednesdays? Tell your administrator you're out. Don't want to work nights or take call? You can tell the administrator “no” or offer to pay your partners to do your share. You can skip useless meetings and quit playing silly games at work. Most importantly, you can work less. Chances are, you would love to work less even if you love your work and want to keep doing it. When I survey doctors anonymously, about 35% tell me they would quit working completely, and 55% say they would cut back on how much they work if they had the money. Well, you have the money. So, cut back a bit if you want.
If you own a business, you can now hire out the duties and tasks you don't enjoy doing. Yes, we know you CAN do them and you might even be the best person to do them, but you've already won the game, so you should quit playing. You can drop product lines you don't like, you can drop less profitable customers, you can get rid of the people who create hassle in your life, and you can get out of partnerships that you were in just for the money. For a doc, maybe you can fire patients that you hate seeing on your schedule, or you can quit doing procedures you don't like or that increase the risk of a malpractice suit. You can limit your practice just to the patients and medical conditions you most enjoy caring for.
More information here:
7 Reasons I Practice Medicine Part-Time
The Emotional Aspect
Chances are that if you win the game much earlier in life than the traditional retirement age, you will have to deal with some unique emotions and existential dilemmas. Consider this recent post from a Boglehead:
“I have $7,000,000 in Vanguard Index, 80% in Total Stock Market and 20% of that in Vanguard Total International Stock Index. I have another $4,000,000 in paid off real estate, for a total of $11M. I am 54 years old, and my company is thriving. I am burned out beyond belief, but I am so young to walk away from such a lucrative business. I have read plenty on this forum about ‘winning the game.' I can walk away now, but will I lose my identity in the process? I'd love to hear comments from you on walking away and never looking back. I haven't commented in a long time, but I'd love to hear from the ‘winners.'”
There is clearly more to not playing the game than cold hard logic and finances. Not only do people enjoy their work for non-financial reasons, but many of us turn our investing focus away from our own needs and toward those of our heirs and favorite charities as we become wealthier. There are always more generations to “win the game for.” I don't have a lot of wisdom to share here, despite spending a lot of time thinking about it for years. Just know that you will probably spend some time and effort struggling against leaving the game right when perhaps one would think you should, whether that game is working/earning/saving or simply investing aggressively.
“Stop playing the game” means different things to different people. But once you've won the game, it is time to start considering what it means to you.
What do you think? Have you won “the game?” What did you do afterward? Did you stop playing? In what way? If you have not won the game, what do you plan to do once you have? Comment below!
The situation of that Boglehead is enviable. “Winning the game” may be one of those things that is easier to judge in others than to realize for our own situation. I would tell that individual to test-drive a retirement. Watch “The Big Year” in which Steve Martin repeatedly rebuffs his company’s needs and promises of higher compensation for time off to go birdwatching. The hustle, grind, side gig culture is pervasive to where we feel something is wrong if we slow down. Work for compensation can be replaced by volunteering, mentoring, learning a new craft or hobby, or so many other things. Go hard, but do it in a different lane. I’m looking forward to that opportunity in a dozen years according to my current plan and the whims of the markets.
I am finally seeing I am overinvested in stocks since I am panicky at having to sell now- not the bad situation of selling now since I have lost money (during the preretirement saving/new investments phase), but the eventually untenable (or at least bad for our fiscal utility) bad situation of not wanting to sell stocks when I should since the market is bearish during our retirement/ spending down phase of life. I have long told myself that the opposite of dollar cost average investing is % average retirement withdrawals. I had meant for this to mean if 3% (or whatever rate should mean we never run out) is less than last year, we have to spend less this year. Since we still aren’t expanding our expenses enough (pandemic really thwarts travel and eating out plans) to hit that spending limit anyway I am just not restocking our cash supply (a CD ladder in our case) as our plan has laid out. I have justified this to myself by getting 3% paying off a new mortgage and saying I am waiting for the next estimated tax quarter to have a few more months before the tax bill on selling shares is due. With 20/20 hindsight this was a mistake since now it’ll take a larger % of our holdings to do the same restocking. And what if this (bear market) situation worsens in the timeline where we run through our cash? So I will force myself to sell off a small % of our holdings no matter what, and try not to tell spouse to spend less since.. not that we can’t afford it, but waiting until the market rebounds would pay off… if it does in our lifetime!
Thank you for this timely (for us) article.
Are you still limiting how much you’re eating out and traveling due to the pandemic? If so, you’re in a very small (and ever shrinking) camp. The case count in Utah is down 75% since July and only 17 a day are being admitted to hospitals. At what point will you stop limiting yourself?
I write this from Slovenia while on our way to Croatia. I get that we’re more risk tolerant than most and everyone is free to do what they want, but COVID is never going away completely, so at some point you’ll have to decide when the numbers are low enough that you’re willing to come out.
Probably after the 6-month-old grandson gets his first series of covid shots 🙂
6 month olds can get covid shots now.
https://www.healthychildren.org/English/tips-tools/ask-the-pediatrician/Pages/when-can-children-get-the-COVID-19-vaccine.aspx#:~:text=The%20American%20Academy%20of%20Pediatrics,disease%20and%20hospitalization%20from%20COVID.
Wow, this is really disappointing. I like the blog post topic, though.
I think we’ll have to agree to disagree on this, and it seems most other topics as well.
No problem, but please check out the realities of V-safe, which prove what we have been saying for years now, and have literally been canceled even – for stating medical facts. It’s all I ask.
https://amidwesterndoctor.substack.com/p/we-now-have-clear-proof-the-vaccine?utm_source=profile&utm_medium=reader2
Sorry, “dangerous vaccine” doesn’t pass the sniff test. I worked in the ED all through the pandemic. Saw lots of people get sick and die with COVID. Didn’t see any get sick and die with vaccines. So its dangers, whatever they may be, are clearly lower than the disease they were designed to prevent. I saw only one case that I thought might have been from the vaccine, and the patient recovered fully.
Among all of the excellent articles you’ve written, this is one of the best! Very thought-provoking.
Thanks for your kind words.
A family member (near retirement but still working) recently inherited a large sum of money, enough that she never needs to worry for herself again. She knows VERY little about investing (only CDs and MYGAs) and reached out for advice. My gut reaction was to invest primarily in equities (90+%) due to projected long term out performance relative to bonds. Even if she might not have the greatest risk tolerance , is it not optimal to simply shield her from seeing daily/weekly returns, invest in equities and leave a greater amount to heirs?
What’s the right way to think about “… after you hit your number, your need to take risk goes down, while, conversely, your ability to take risk often goes up!”
I know there’s no right answer here, but hoping to get some insight into the risk taking dichotomy.
The worst thing she can do is exceed her risk tolerance and sell low. I would err on the more conservative side when setting up her asset allocation. Education goes a long way but I bet you’ll arrive at something far less than 90% stocks for her.
It is almost impossible to stop playing the game these days. There is no where to hide.
Stocks, way down.
Bonds, way down.
Cash, losing value by the minute due to high inflation.
Savings, interest rates are better than they were in recent years, but way less than inflation.
Thankfully, we have some real estate investments, but real estate values are likely to fall as well.
It feels risky to stop playing the game when every type of investment looks bleak, at least in the shorter term. If I had chosen to retire last year when every asset was flying high, I might be a bit worried at this juncture.
Sure, the value of your investments is down. But the expected future return on all of them is higher than it was a year ago. Don’t extrapolate the recent past into the future.
every investor nearing retirement needs to understand sequence of returns risk SORR
I am now one year retired at age 67. I have about 9 mil in retirement assets. 23% is in stocks, 21% in debt real estate, 4% in a short term bond fund, 28.5% in commercial real estate with no mortgage and 23.5% in cash with 70% of that cash earmarked for a Capital fund that will finance ESOPs (employee stock ownership plans) over the next 3-5 years. The latter is a debt investment with equity upside. I will take SS at age 70 and start taking from my 401K plan, which is now a little less than 2 mil, starting at age 72. I am living a wonderful lifestyle with lots of travel (mostly Backroads cycling trips all over the world). I am part of a choir that recently traveled to Ireland and Scotland. I participate in a quintet with voice and guitar and have just joined a rock band playing acoustic and electric guitar. As far as I’m concerned I am living my dream life with my wife of almost 40 years. I have no desire to go back to practicing medicine. Fortunately I have more than enough money to finance my lifestyle.
Thanks for your story with the details. You’re where I want to be in 20 years.
Great hearing stories like this.
In hindsight with the large amount of money you now have, would you have retired earlier and preferred the extra free years in exchange for some of your current assets?
Actually I did retire originally at age 62 when I wanted to go to 1/2 time call but the hospital would not let me. After 1.5 years I decided to go back when the doc the hospital hired to replace me was let go. This time I could dictate my terms. I worked 2 days a week and did not have to take any call. It was a great gig but after 3 years I was ready to let go.
Well done with everything, including being born at the right time.
I sure hope you didn’t take the experimental mRNA therapy. That would be sad given your great savings and investment status.
I did take all of the mRNA covid vaccines including the Omicron variant newest one (yesterday in fact). I’ve never had any problems. All the many folks I know who have also taken the vaccine have not had any significant issues. I highly recommend the vaccine. I know one anti vaccine person who lost her husband due to pneumonia from Covid. Despite the fact he had 2 positive Covid tests and had no other risk factors for life-ending pneumonia, she still denies he had Covid or died from it. Misinformation and denial my friend, misinformation and denial!
You can deny all the facts that you like, so I won’t bother listing all of the lies and claims of the injection, and how it doesn’t even work (which is why you needed multiple boosters, unheard of for something that’s called a “vaccine”) compared to any historical treatment. I hope you are fortunate enough moving forward, but it is quite dependent on many factors, and is dose response related. When young adults and athletes drop dead and have more adverse reactions than anything ever recorded (vaccine wise) combined, it’s interesting that I’m with one accused of misinformation. I do wish you the best, though.
https://www.statesman.com/story/news/politics/politifact/2022/02/01/fact-check-athletes-dying-covid-19-vaccine-playing-field/9287487002/
I dispute those claims, as you might suspect, mostly because they are inaccurate from sources that quite frankly lie. All you need to do is look at the EPL as a microcosm.
More importantly for now is the finally released v safe data. This link is important, as the evidence is incontrovertible. The lies about this treatment have always been there. The toughest part is being humble enough to admit it if you once took part in it. But that’s the point of science and truth seeking. Or, used to be. Anyway, just please check this out, as it is the most important smoking gun to date. Again.
https://amidwesterndoctor.substack.com/p/we-now-have-clear-proof-the-vaccine?utm_source=profile&utm_medium=reader2
We can debate this forever.
Here is commentary on one of the quoted authors, Steven Kirsch, mentioned in the article you provided. I think we should leave this now since this is really not the appropriate forum for this type of discussion.
https://www.covid-datascience.com/post/are-the-mrna-vaccines-really-safe-evaluating-claims-by-steven-kirsch-on-danger-of-spike-proteins
https://healthfeedback.org/claimreview/alleged-spikes-in-medical-conditions-military-after-covid-19-vaccine-based-on-faulty-data-thomas-renz/
This article deals with the alleged discrepancies in disease reporting in the military from 2016-2019 vs 2020-2021.
Thanks for the article, Jim. It was a great read, as usual.
I am using leverage in my real estate portfolio of 10 rental properties (22 doors) and have wondered if I should stop buying properties or continue? My rental properties are with conventional financing , have good terms are were bought with 25% down payment. They cash flow about 7K /month on average. I am still employed, making about 250K/ year and I just turned 50. I enjoy my job and don’t plan on retiring soon. My question is how do I decide if I need to pay off these houses or acquire a few more? How would you go about making that decision? I currently contribute the max to 401K , 457 and IRA. My primary residence is paid off.
Thank you
What are your goals? How much cash flow do you need to live, for instance. If you need $15K a month, you don’t yet have that just from the rentals. You can get it either by buying more properties or by paying off the ones you have.
Thank you.
Dr. Dahle,
I’m wondering what you think about the time vs. salary swap, or the opportunity costs, especially when you are a single person with tax bracket disincentives, as we’ve talked about. Would you IC it and be subject to greater taxes and potentially IRS scrutiny, doubling your effective rate, trying to make 300k with much more stress and inability to do things like travel (or other hobbies that you value), or just save some, live and travel with much more time and less stress making 150k?
I’m always curious how people value this, especially in light of modern government taxation and the rat race. Finally, what about working shifts/weekends for a quarter of the year, and making 180-200k, or working almost half the year in shifts with a good number of weekends, for double that?
Thanks for the thoughts, as I like to hear what value other people put on their younger years, vs retiring with more later, but at an older age.
I’m FI now so working more for more money has little incentive for me. But earlier in life, it may have been worth it to me.
If you were late 30s to late 40s, and you had good savings, but were single, what level of income would you try to make? Given stress, taxes, etc … and the desire to get away and travel/be in different cultures and arbitrage living with the USD?
I don’t think I’ve ever decided how much to work primarily based on the income it would bring me. Kind of foreign to how I think actually. Right now I get into different cultures at least as much as I want to yet I’m earning more than I ever have. Greetings from Bosnia by the way.
Great stuff! Enjoy the tour over there!
great article Jim! I’m not sure you ever truly have “won” the game as I look at it. I think the game we are all playing is to maximize happiness until the day we die and money is a tool to help us mold that happiness with every second of our life. Heck, the game can keep going after we die if we have legacy goals. I like to think more of playing more defense rather than stop playing. even when Bill Bernstein says stop playing and liability match your portfolio with TIPS ladders, still seems like playing the game to me but kind of like running out the clock when your up 4 touchdowns with a couple minutes left.
Maybe I’m just more of a football fan than Bill!
Good analogy. Sometimes I wonder if the goal is really to maximize happiness. Maybe the goal should be to maximize usefulness.
Wise words Jim. Maybe because I think the same thing. My brain isn’t wired to maximize happiness, but I feel most content during and just after being most useful. But burnout has made me realize there is a point of no return for me on the maximizing usefulness scale. Recalibrating has been far harder than I ever thought it would be while still trying to maintain a career in medicine. But I also recognize how many other ways I can make myself useful outside of medicine. Ready to transition to this next phase. (In one more year…)
Under Liability Matching Portfolio you say to buy 1 year TIP in year one and a 2 year TIP in year two and so on. Can you buy a 1 or 2 year TIP? I thought they came in 5, 10 and 30 year structures. Thanks
You’re buying a 3 year old 5 year TIPS on the secondary market. That’s now a 2 year TIPS.