Last weekend, I read Larry Swedroe’s latest book The Only Guide You’ll Ever Need for the Right Financial Plan. (Excellent book, by the way, for the intermediate/advanced investor.)

One point Swedroe makes repeatedly throughout the book is that you need a “Plan B” if you’re going to be investing in risky securities like stocks. Specifically, you need to be prepared for a scenario in which:

Stock returns over your retirement are far less than their historical averages (and lower than the returns you were planning on), or You face an unlucky sequence of returns — namely, a bear market at the beginning of retirement — that leaves your portfolio at just a fraction of its original size while you still (might) have 20+ years of retirement to go.

In other words, you need to have a specific plan for what you will do if it looks like your portfolio is no longer going to be able to sustain the rate of spending that you originally planned on. For example, “If our withdrawal rate gets above X% before age 70, we’ll _____.”

“Plan B” Options

The most likely forms of backup plans are simply ways you can cut your spending or increase your income. For example:

Take vacations half as often,

Sell your home and move into something less expensive, or

Get a part-time job or start a business.

Investment “Plan B”

But what if you don’t want to go back to work or significantly reduce your spending? Is there any way to adjust your portfolio so that it can fund a higher withdrawal rate?

Moving more money into stocks may work — if you get lucky and the market comes roaring back just when you need it to. Or, it could backfire completely if the market continues to perform poorly.

Moving a large portion of your portfolio into TIPS would reduce your risk. But their payout is rather low. An all-TIPS portfolio is unlikely to sustain a withdrawal rate that’s already unsafely high.

In short, if you’re looking at a dangerously high withdrawal rate and you’re absolutely unwilling to cut spending or go back to work, annuitizing your portfolio may be the only way to ensure you don’t outlast your money.

Of course, as we’ve discussed several times here, annuities have their own drawbacks:

The money won’t go to your heirs,

You lose control of the money (which can be a problem if you’re faced with a sudden, unexpected expense), and

Annuities are still not 100% risk-free.

Plan B Stinks. What’s My Other Choice?

What if you’re unwilling to cut your spending, unwilling to get a job in retirement, and unwilling to annuitize your portfolio?

If that’s the case, then you probably shouldn’t be taking investment risk at all. I’d say that your best bet is to use a portfolio comprised largely of TIPS and to plan from Day 1 to use a very low withdrawal rate.