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

Quick Read

• Buffett’s 2013 letter tells his wife’s trustee: 10% in short-term government bonds, 90% in a very low-cost S&P 500 index fund.

• For a couple with $2,000,000 drawing $66,000 a year, the $200,000 bond sleeve is 3.0 years of withdrawals: enough for 2020 and 2022, $158,050 short for 2007 to 2009.

• A reserve of about $358,050 (an 82/18 split) would have covered the 65.1-month wait after 2007; size your bonds in years of withdrawals.

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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.

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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%.