Practical analysis for investment professionals
04 March 2014

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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About the Author(s)
Lauren Foster

Lauren Foster was a content director on the professional learning team at CFA Institute and host of the Take 15 Podcast. She is the former managing editor of Enterprising Investor and co-lead of CFA Institute’s Women in Investment Management initiative. Lauren spent nearly a decade on staff at the Financial Times as a reporter and editor based in the New York bureau, followed by freelance writing for Barron’s and the FT. Lauren holds a BA in political science from the University of Cape Town, and an MS in journalism from Columbia University.

32 thoughts on “Warren Buffett’s 90-10 Rule of Thumb for Retirement Investing”

  1. Ashraf malik says:

    Well Said Buffet

  2. Matthew Silverhardt says:

    There are elements that I believe may make some sense (i.e. try and be simplistic to a certain extent and keep towards lower costs to facilitate). However, as Mr. Cao indicates, the size of the endowment Warren will leave to his wife can have a rather large impact to the conversation. I have no idea what that amount is, but even given a large equity decline, I would imagine his wife still will not have a large Standard of Living risk. I like the idea behind indexing for sure but to just assume the 90/10 split will work for anyone who is a non-expert investor is neither considering that person’s financial situation nor any of their behavior or emotional biases that could derail the “staying the course” mentality. I would guess that she could withstand seeing a 90% decline in the market value of her portfolio and still be more than ok.

  3. Ryan Renicker, CFA says:

    Recall that he is essentially an insurance salesman; recall late February 2009 when he frightened the markets by suggesting financial collapse only to buy U.S. stocks cheaply as they fell to historic lows, funded by long-dated European Puts sold at a substantial premium (large skew, high implied volatility and steep term structure of volatility)….

  4. Ashraf, Matthew, and Ryan: thank you for visiting the blog and for contributing to the conversation through your comments.

  5. Dougal Williams, CFA says:

    While the S&P 500 is more well known and has a catchier, simple ring to it, I’m a little surprised Buffett didn’t dictate a total stock market index fund, perhaps even a smattering of an international stock index fund, too (all available for very low cost via Buffett’s preferred provider, Vanguard). Diversification, after all, is THE free lunch in investing.

  6. prabhat says:

    Now that is a sure shot win win rule for long term.. But I would rather say build a min. reserve (like six months of your expense) in cash securities and then follow this rule.

    1. Charles Dwight says:

      I would suggest more like 3-5yrs of cash. If you are going to avoid selling stocks at the wrong time you need to be able to look past a bear market.

  7. Buffett’s 90/10 Rule simply demonstrates his ignorance outside his areas of expertise which are selling insurance, buying cheap stock and PR. Clearly he has no idea how to construct a portfolio with good returns and low volatility. It also shows that he has zero trust in his successors at Berkshire Hathaway. Otherwise, why would he not allocate the 90% to BRK stock?

    If everyone follows his advice it makes my job that much easier (and more rewarding.) Guess I should thank him…

    1. RYAN RENICKER, CFA says:

      Interesting comment re: incentive to invest 90% in BRK. First thing that comes to mind is that the “90% investments” are allocated according to their exposure to BRK – according to BRK’s allocation to these firms’ Board of Directors.

      If this is indeed the case, then the 90% invested – over time – becomes reliant upon and generate returns simply because they cater towards BRK’s performance (a quasi-front-running investment that recycles profits from the BRK-appointed Board members and management selected by the Board that are recycled into the BRK conglomerate over time and at the “right time”.)

      Also, I am aware of quantitative strategists on The Street that replicate Mr. Buffett’s portfolio of stocks – of course, after these investments by BRK are disclosed when the % of each investment reaches various points / fall under the category of SEC regulation relating to Rule10b5. In 2000, the SEC made an administrative ruling, known as 10b5-1, or 10b5-1 (c). Benefits from the 2000 ruling:


      10b5-1 is a pre-set systematic method of accumulating and/or disposing of shares, the possession of insider information becomes essentially irrelevant.

      By definition, this will help stem accusations of insider trading and/or front running after a trade is consummated.

      In short, for executives at high profile companies that are frequently the target of shareholder suits and almost always subject to scrutiny from the investment community, this system can be invaluable.

      2) When a systematic plan is in place (which this ruling provides a safe harbor against insider trading rules enacted – in particular, Form 4), investors will be able to see the insider’s intentions more clearly.

      Example: certain insiders liquidate shares at regular, consistent times during the year; thus, investors are more apt to be aware of and understand that an insider is simply diversifying his or her holdings, and that the remaining sizable position in the stock implies confidence in the company.

      Systematic investment plans are protected by 10b5-1 and 10b5-1 (c) and are much more beneficial for both insiders and individual investors than transactions effectuated on the open market. A 10b5-1 plan allows executives to diversify their holdings without creating a stir in the investment community, and allows investors to keep an eye on executives’ sales of shares.

      Mr. Buffett’s comments and investments appear to generate what I will call “regulatory alpha” that is almost always immune to downside moves in the captive stocks that recycle said profits and business deals, etc. back to and under the umbrella of BRK.

      Just a theory, but insurance salespeople understand human behavior and BRK / Buffett are investors in insuring various front-running schemes that are legal but often obscure and always aiming toward capturing alpha and packaging it into a single investment: BRK shares.

      Another way to describe this relates to options.

      This rule is essentially a zero-cost put option against insider trading charges as well as a zero-cost call option that provides Buffett an option to time holdings Form 4 normally requires.

      Both options have underlying securities across the global markets, providing a high degree of dispersion of choices of which stocks can be purchased.

      This dispersion has value, similar to volatility, for both put and call options.

      Also, since both rules 10b5-1 and 10b5-1 (c) have not been subject to any altering by the SEC for more than a decade, the expiration of these rules’ consequences is unlikely to be altered anytime soon.

      This also adds value to the options discussed above.

      Score 1 for zero-cost option selection.
      Score 2 for high VALUE such options’ dispersion embeds itself in these options (again, cost $0).
      Score 3 for the time-value – or “Vega” – embedded in this game of “regulatory alpha”.
      Score 4 for both the put and call options’ biases that promote higher stock prices (“Delta”).
      Score 5 for political connections and the policies that created these options that are quite convenient and valuable to big-pocket campaign donations (that can be written off for tax purposes).



    2. Investinator says:

      Warren Buffett has no idea how to construct a portfolio with good returns and low volatility? LOL!!!

  8. Gordon Wiebe says:

    Another smart but easy to understand retirement income strategy from the Sage.

    Last year he shared the wisdom behind investing in a viable company and simply making systematic annual withdraws at a rate below the company’s growth rate.

    Either works but, the 10% cash/90% S&P ETF could be explained to a 12 year old.

  9. Manjiree S Jaitly, CFA says:

    Very sound and simple advice. Any index fund by its very nature ensures that the investor is continuously rebalancing her portfolio. So businesses that do not perform are excluded and businesses with superior results are included.

    Of course, the performance of an index fund would not be spectacular. However, it would deliver an average return higher than any fixed income security and as high as a diversified equity portfolio would.

  10. Hamid Sheikh says:

    Majority of Warren’s advice makes a lot of sense to me, however in this case a 4%-5% return might not be good enough to support someone who does not have a lot to invest in the first place. The 90-10 rule can only be applicable when the principal to be invested is enormous. As the principal decreases the amount of risk should increase to achieve better results. I would still say that any blue chip stocks would always out perform govt short term bonds on a year to year basis. Hence, although Buffet’s advice might hold true for the big guns, for us small time investors blue chips are our investment to rely on.

    1. Len says:

      I think you miss the point.
      If you do not have a big amount to invest then it doesn’t matter how you invest it, you still will not be able to support yourself on that alone, whether it is Blue Chips or not.

  11. Pablo Matsumoto, CFA says:

    Criticising an opinion by someone like Warren Buffet clearly has to be done with a lot of cautious. I wonder if those who strongly attacked him in these comments appear on Fortune’s rankings. Having say this (nothing personal), what Buffet clearly points out is the fact demonstrated by almost all serious academic research that except for some exceptional and very rare managers, active-managed mutual funds cannot obtain consistent extraordinary results on a risk-adjusted basis and that keeping transaction cost low in an index fund is one of the strategies to follow in the long term.

    To contribute to the discussion, it is important to consider for long term investing the expected equity risk premium for stocks in the next decades. As the excellent Research Foundation’s monograph by Hammond, Leibowitz and Siegel “Rethinking the Equity Risk Premium”, it is very probable that we will see much lower excess returns on equity than we used to and that return on fixed-income products will provide better performance than in the recent past. In this respect, investing a larger proportion in high-grade bonds should not be disregard so easily.

  12. kk says:

    A 90/10 allocation between stocks and cash is extremely unsuitable for 99,9% of investors Ms. Buffett’s age. She is now 68. I am dumbfounded that someone would call 90/10 a “rule of thumb” and neglect to mention how allocation depends on the plethora of factors (age, cash flow needs and value of assets being in the forefront) that we have been taught in the third part of the CFA curriculum.

  13. Mr. Buffett’s advice warrants critical scrutiny: it is an unconventionally risky allocation, requires tremendous discipline to avoid investment behavioral traps, and may not allow for sustainable withdrawals in the worst of markets over decades of retirement. One wonders whether he considered his wife’s willingness, capacity, and need to take risk. Likewise, has he worked out an Investment Policy Statement with the Trustee where “a terrible period in the market” is defined? Why not rebalance? After a few years, whether markets rise or fall significantly, the 90% S&P 500 index fund allocation will be even higher. Most retirees are interested in reducing volatility, not increasing it.

    1. Len says:

      If you have read anything about Warren Buffett, you would know that he does not define risk like we have been taught in school, i.e volatility. He also only invests for the long run so having said that, an index fund makes perfect sense with that allocation.
      I’m sorry to break this news to you, but not everyone believes or wants the academic version of portfolio allocation. Buffett has done well without it and most likely better than those bashing him here.

  14. Thanks For Sharing..
    Mr. Warren Buffett

  15. Oh, please.... says:

    It’s fine advice if you don’t mind 50% drawdowns in your portfolio.


  16. Jim Strong says:

    this is really good blog thanks for sharing this

  17. ken says:

    If Buffet’s rule is only for investment cash, and not real estate and other tangibles and intangibles he owns, his future widow will be better diversified than it seems with the 90/10, as she will have other assets.

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