Warren Buffett’s 90-10 Rule of Thumb for Retirement Investing
Legendary investor Warren Buffett endured a marathon appearance on CNBC’s Squawk Box on Monday. The good news for those of us who missed it, or didn’t have the time to sit through the entire “Ask Warren” show, is that there is an unofficial transcript of all three hours. Over the course of the show, Buffett touched on everything from the price of stocks to what he’s set aside for his wife, the Keystone pipeline, bitcoin, the earned income tax credit, and more.
Buffett’s appearance came on the heels of the latest Berkshire Hathaway (BRK/A:US) annual shareholder letter, which included some investing advice for his wife and her trustee: “What I advise here is essentially identical to certain instructions I’ve laid out in my will. One bequest provides that cash will be delivered to a trustee for my wife’s benefit. . . . My advice to the trustee could not be more simple: Put 10% of the cash in short-term government bonds and 90% in a very low-cost S&P 500 index fund. (I suggest Vanguard’s.) I believe the trust’s long-term results from this policy will be superior to those attained by most investors . . .”
CNBC’s Becky Quick noted this was the first time she had heard Buffett talk about this.
“You also revealed something in the annual letter this year, where you said, you laid out the terms of your will, what you’ve set aside for your wife. Which, I didn’t know any of this,” Quick said.
To which Buffett responded: “Well, I didn’t lay out my whole will. . . . I did explain, because I laid out what I thought the average person who is not an expert on stocks should do. And my widow will not be an expert on stocks. And I wanna be sure she gets a decent result. She isn’t gonna get a sensational result, you know? And since all my Berkshire shares are going to philanthropy, the question becomes what does she do with the cash that’s left to her? Part of it goes outright, part of it goes to a trustee. But I’ve told the trustee to put 90% of it in an S&P 500 index fund and 10% in short-term governments. And the reason for the 10% in short-term governments is that if there’s a terrible period in the market and she’s withdrawing 3% or 4% a year you take it out of that instead of selling stocks at the wrong time. She’ll do fine with that. And anybody will do fine with that. It’s low-cost, it’s in a bunch of wonderful businesses, and it takes care of itself.”
While Buffett says the advice is intended for “the average person who is not an expert on stocks,” my colleague Larry Cao, CFA, cautions that the 3% or 4% withdrawal rule mentioned here may be a “customized” recommendation taking into account both the size of the bequest and Mrs. Buffett’s lifestyle. The 90-10 split is more of the universal rule of thumb. Whether you should withdraw 3%, 4%, or 5% a year may depend on your personal situation.
Retirement security is a topic we think about a lot at CFA Institute, and it’s a keystone of our Future of Finance project. What do you think about Buffett’s advice? Tell us by leaving a comment in the comment section below.
Related content: “Chasing Warren Buffett’s Alpha”
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All posts are the opinion of the author. As such, they should not be construed as investment advice, nor do the opinions expressed necessarily reflect the views of CFA Institute or the author’s employer.
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