Why rich people should ignore conventional retirement advice

If you have a lot of capital, you should mostly ignore conventional retirement advice.

Your standard retirement planner assumes that you are going to build up a portfolio of assets over your working life, then liquidate that portfolio to fund your retirement.

Because you will need to begin to liquidate at a certain date (say, when you turn 65), you are vulnerable to big swings in the value of your portfolio as you near that target date. To avoid being poor in retirement, the thinking goes, you need to be very concerned with maximizing the value of your portfolio at your target retirement date. Since equity (stock) returns are supposedly more volatile than bonds, advisors tell you to start selling stock and buying bonds as you get closer to retirement age.

So far, so good. But this advice is really targeted at people who aren’t going to end up with a large enough pile of assets to live off the income produced by the assets, and therefore need to liquidate.

What if you have significant assets?

In that scenario, the goal is not to maximize liquidation price at a given time… in fact, that’s exactly the opposite of what you’re trying to do.  You want to pass along as much wealth as possible to the next generation (and for that generation, in turn, to pass the wealth onto the next).

If you’re not going to think in terms of liquidating the portfolio, your whole outlook on investing changes. You don’t care very much about the volatility of the prices of assets you hold… after all, you’re not a seller (unless the market offers truly insane prices!).

Instead of thinking about maximizing price at any particular time, you should focus on:

  1. Maximizing the amount of earning power over which your portfolio gives you (and your heirs) a claim; while
  2. Assuring that an acceptable portion of that earning power is delivered to you in the form of cash distributions (because you need money upon which to live)