Well, if your port doesnt throw off enough to live comfortably on, with most future capital and expense items considered, then you have no choice.
However, at 43 (birthday last week, wedding tomorrow, yay) and a gene pool that includes plenty of 90-somethings, I cant afford to eat my principal.
My thinking is most people can live well on 30-40k a year. Most people are probably not going to retire on less than a mil a year (yes, we know John). If you cant figure out how to get a portfolio that throws off 3-4% dividends and also has a couple of percentage points of capital appreciation per year to hedge against inflation...maybe ya oughta keep working!
Wellesley fund throws 3-4% or more (historically) and has had an annual capital appreciation averaging 6% on top of that for a total return of over 10%. No expensive growth stocks, no long term bonds, no consecutive losing years, no double digit losing years. Over a 30 year span. .20 expense ratio for admiral shares. Boom, you're done.
I'm sure a target retirement sort of thing or a consolidation of 50% large cap value and 50% intermediate muni bond funds would produce roughly the same numbers, but the target retirement funds dont have a long track record, and putting together all those asset class returns over a 10-20 year period is too much like work.
You can certainly take on more risk, and potentially improve your returns or terminal portfolio sizes, but unless you're unhappy with the quality of life the dividend throw off provides, why?
As far as the original question, the only bugaboos are inflation and long term low returns (like 1965-1980). You can somewhat conquer inflation with commodities a la PCRIX, timber which a number of large portfolios are adding in 3-10% amounts (smartmoney this month highlights two purish timber plays, I cant remember their names), and tips. Raddr over on his web site did a long term firecalc sort of analysis using tips, cash and commodities and showed that commodities provided the best hedge against inflation, especially in large doses. The fact that some of the commodity funds like PCRIX leverage TIPS as the financial instrument as assurance against the commodity futures means you get tips returns + tips inflation protection + commodity returns. Not very tax efficient though. Oh yeah, and you could lose enormous chunks of principal although the fund is well hedged and quite diverse.
As far as long term weak returns, load up on your dividend paying stocks (but dont overdo it and lose your capital on flakey companies) and a variety of bonds, and dont go crazy on high PE stocks or indexes that are loaded with them until valuations soften up.
My kids college plan hasnt been fully fleshed out. My first inclination was to not fund one at all and let her figure it out on her own, but leave her my retirement principal nestegg as a 'surprise', somewhere in her 40's is when I'll probably expire...letting her ER without planning her life around a windfall. But I've lately thought about just buying a chunk of ibonds (if the interest rate gets up to 1.5%) and then using their inflation protection + 1.5% (tax deferred and tax free if you use it for educational expenses) to fund at least part of a basic college education and letting her fill in the rest. But I havent really thought it through.
T-minus 16 hours until I'm not single...THATS something I'm thinking about!
