Warren Buffett Told His Wife’s Trustee Exactly Where to Put Her Money. Stocks Just Fell 4.4%.

Warren Buffett's instruction for his wife's money is 90% in a low-cost S&P 500 index fund and 10% in short-term government bonds. After Thursday's 4.4% drop, here is how that rule holds up for a retired couple with $2 million…

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Warren Buffett told the trustee for his wife’s money exactly where to put it, in one sentence: “Put 10% of the cash in short-term government bonds and 90% in a very low-cost S&P 500 index fund.” It comes from his 2013 shareholder letter, and it covers the cash his will leaves to a trust for her benefit. He added that he expected the trust to do better than most investors who pay high-fee managers, and told readers to keep costs minimal.

That sentence is worth a hard look this week. The S&P 500 fund fell 4.4% on Thursday, closing at $733.00 after $766.81 on Wednesday. Friday’s close of $735.29 sits 5.6% below the Oct 6 record of $779.09. Gary, 66, and Linda, 63, are retired with $2,000,000 invested: $1,400,000 in an IRA, $450,000 in a taxable account and $150,000 in a Roth. They spend $120,000 a year, collect $4,500 a month in Social Security ($3,400 for Gary and $1,100 for Linda, $54,000 a year), and draw $66,000 a year from savings. Gary wants to know if 90/10 is safe for them, and if you are near retirement you may be asking the same thing.

The direct answer: the stock share matters less than the size of the bond sleeve, and for them 10% is a little thin. Under 90/10 they would hold $200,000 in short-term government bonds, 3.0 years of withdrawals. That covered the two most recent crashes but would have run out about 29 months before the 2007 to 2009 crash was repaired. A reserve of about $358,050, roughly 18% of savings, covers all three. An 82/18 split fits them; the one condition that flips it toward 70/30 is a withdrawal rate near 5% instead of their 3.3%.

Ninety percent of $2,000,000 is $1,800,000 in the stock fund, and 10% is $200,000 in short-term government bonds. Their withdrawal of $66,000 a year is 3.3% of the $2,000,000 portfolio, a modest rate because Social Security pays 45% of their $120,000 spending.

Gary and Linda under 90/10: $1,800,000 in the stock fund, $200,000 in short-term government bonds. Closing prices, price only, dividends excluded; bonds assumed to hold their value.

Thursday’s drop would have taken about $79,365 off the $1,800,000 stock side, about 4.0% of the whole $2,000,000, leaving $1,720,635 in stock. From the Oct 6 record to Friday’s close, the slide is about $101,195. Nothing in that math forces a sale. Their next year of spending sits in the bond sleeve, so you can let the stock fund ride while it is down.

Buffett’s bond sleeve has one job for a retiree: it is the money you spend while stocks are below their old high, so you never sell the index fund at the bottom. The right size is the number of years you might have to wait, times your yearly withdrawal. For Gary and Linda, $200,000 divided by $66,000 is 3.0 years. The question for them, and for you, is whether 3.0 years has been enough.

Closing prices for the S&P 500 fund (price only, dividends excluded) give three recent tests, all applied to the $1,800,000 stock side.

2020: Peak $338.34 on Feb 19, low $222.95 on Mar 23 (down 34.1%, a paper loss of $613,800), back above the old peak on Aug 18, 2020, a wait of 5.9 months. Withdrawals during the wait: $32,450. Covered easily.

2022: Peak $477.71 on Jan 3, 2022, low $356.56 on Oct 12, 2022 (down 25.4%, a loss of $457,200), back on Jan 19, 2024, a wait of 24.5 months, about 2.0 years. Withdrawals during the wait: $134,750. Covered, with $65,250 of the reserve left.