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Old 03-06-2015, 10:54 PM   #61
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If you assume 2% annual income inflation it will only last for 35 years.
SWRs from 100% US TIPs portfolio update | Investing For A Living

Is the math here on 0% TIPS wrong? I thought it made sense. He uses "the 0% real return SWRs are simply 1/retirement period."
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Old 03-06-2015, 10:57 PM   #62
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What was the time period?
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Old 03-06-2015, 11:27 PM   #63
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What is not to understand? Your way of looking at it is perfectly legitimate of course, but so is the "whole %" approach, which works well for those investors who would find it hard to stomach a steep drop in the value of their entire portfolio, regardless of how many years of guaranteed living expenses they had on hand.

Your approach - one that provides for 5 years of living expenses, is the one that gives you the feeling of safety you need. I'm not quite sure what you don't understand about the idea of allocating a certain percentage of the whole portfolio to a bond component. It's just a different way of looking at things.
I think the % allocation strategy is just too general - just like the '80% income replacement during retirement' rule is typically too general for most people. The % allocation probably works well for a decent percentage of retirees, but the outliers on both the low and high end of net worth are problematic. On the low end are folks, despite having say, 30% of assets in bonds, may only be able to weather a 2 year downturn in the equities market, which may not be enough. On the high end are folks who, because they have the same 30% of assets in bonds, have enough to weather a 20 year downturn, which may be too much (unless they're planning on keeping a pool of funds for market timing equities as mentioned by audreyh1, which is an investment strategy discussion and not a portfolio survivability discussion)

For most people, the recommendation to maintain a certain bond allocation is there so they don't have to sell their hard earned assets (either bonds or stocks) during a market downturn and maximize the survivability of their plan. In my opinion, you don't meet that objective by recommending that everyone retired at a certain age keep at least xx% in bonds. You meet it by figuring out your spending needs and acceptable maximum duration of market downturns and calculating the necessary pool of bonds to support that. That might turn out to be 30%, but it might also end up being 5% or 50%.

Going back to my analogy with the '80% income replacement' guideline - when folks actually sit down and run the numbers, they are often surprised by the actual income needed at retirement. I know I was when I started this whole FIRE adventure years ago. I think the % bond allocation rule deserves the same type of bottoms-up investigation...
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Old 03-06-2015, 11:52 PM   #64
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I think the % allocation strategy is just too general - just like the '80% income replacement during retirement' rule is typically too general for most people. The % allocation probably works well for a decent percentage of retirees, but the outliers on both the low and high end of net worth are problematic.
I was merely taking issue with you saying that you didn't understand this approach. From your reply, it seems that you do understand it and even concede that it works for many retirees, though not for you (which of course, is fine). Perhaps I am too literal in the way I read things.

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On the low end are folks, despite having say, 30% of assets in bonds, may only be able to weather a 2 year downturn in the equities market, which may not be enough.
I'm not sure I understand this part. When you say that someone with 30% in bonds might not have enough to weather a 2 year downturn, do you mean they might not have enough in cash to get by without selling some equities? If that's the case, it is OK to sell equities in a downturn - as long as you don't sell all of them Could you explain a bit further?
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Old 03-06-2015, 11:59 PM   #65
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Originally Posted by daylatedollarshort View Post

Is the math here on 0% TIPS wrong? I thought it made sense. He uses "the 0% real return SWRs are simply 1/retirement period."
True if your SWR stays the same, but you have to account for inflation to maintain the same buying power. If you have $100k and take out an 2%, ie $2k every year it will obviously last for 50 years at 0% investment return. But with 2% inflation that $2k becomes $2k*(1+0.02) in the second year. the result is you are out of money in 35 years.

Of course 0% return is as silly as 0% inflation, but as a stress test 0% return and 2% or 3% inflation is getting pretty tough.
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Old 03-07-2015, 12:03 AM   #66
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True if your SWR stays the same, but you have to account for inflation to maintain the same buying power. If you have $100k and take out an 2%, ie $2k every year it will obviously last for 50 years at 0% investment return. But with 2% inflation that $2k becomes $2k*(1+0.02) in the second year. the result is you are out of money in 35 years.

Of course 0% return is as silly as 0% inflation, but as a stress test 0% return and 2% or 3% inflation is getting pretty tough.
I posted "Even at a 0% real return, a 2% WR will last for 50 years. With a positive yield TIPS ladder that WR can be pushed higher with no NW ups and downs along the way as long as all the bonds are held to maturity."

2% inflation with a 2% nominal return = 0% real return.
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Old 03-07-2015, 12:08 AM   #67
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I didn't post 0% return. I posted 0% real return, which is why I linked to the TIPS article and table with SWR at 0% real returns.
Ahh ok I see what you did, you did a Zvi Bodie.
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Old 03-07-2015, 02:08 AM   #68
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I'm not sure I understand this part. When you say that someone with 30% in bonds might not have enough to weather a 2 year downturn, do you mean they might not have enough in cash to get by without selling some equities? If that's the case, it is OK to sell equities in a downturn - as long as you don't sell all of them Could you explain a bit further?
Yes, that's exactly what I mean - you can of course sell stocks in a downturn, and in fact, the retirement calculators assume that you do that (most assume you sell evenly across your portfolio), but every time you do that, you reduce the survivability of your portfolio since you're drawing down principal faster than planned.

My primary purpose for holding bonds is to minimize that possibility of having to sell stocks during a downturn, and to meet that goal, I need to have a certain amount (my 'belt-tightened' spending requirement per year times my guess at a reasonable maximum number of years for most market downturns). For me, there's no reason to hold any more than that amount.

Obviously my goals for holding bonds is not going to be the same as everyone else's, but that was sort of my original point - don't just go with some rule of thumb, figure out why you're holding bonds and calculate how much you need to satisfy your goals.

BTW, my apologies to the OP for going fairly off-topic. My on-topic feedback to the linked article would be that, although I agree with 100% equities, my risk tolerance is such that I prefer to have a small amount (which, for me, calculates to about 10%) in bonds. I, like the author of the post you linked, live off dividends and don't really need to sell other than to harvest capital gains, but you never know what life will throw at you and not having to sell stocks in a downturn is a big plus in my book.
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Old 03-07-2015, 08:18 AM   #69
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Think of a motorhome as a tiny house on wheels, and it is even self-propelled. Party on!
Actually a motorhome is my aspirational goal if our portfolio does really well I figure I have 5 years at least to warm DW up to the idea.

On the other hand I saw a mobile home for sale for 17k the other day (It might have been just the lot)
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Old 03-07-2015, 08:40 AM   #70
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I think whether to hold 100% equites after 70.5 when you have annual RMDs is an important question.....particularly in a down market. It doesn't sound like the best AA to me in those circumstances.
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Old 03-07-2015, 08:49 AM   #71
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I think whether to hold 100% equites after 70.5 when you have annual RMDs is an important question.....particularly in a down market. It doesn't sound like the best AA to me in those circumstances.
It would at least be a good argument for severely reducing the equities allocation - which is what a lot of folk gradually do as they age, anyway,
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Old 03-07-2015, 10:18 AM   #72
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I think whether to hold 100% equites after 70.5 when you have annual RMDs is an important question.....particularly in a down market. It doesn't sound like the best AA to me in those circumstances.
Of course you can always transfer assets out in kind. You just have to pay the taxes from some other pile. If someone really, really wants to stay 100% equities in their 70s, nothing, not even RMDs stands in their way!!!!
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Old 03-07-2015, 02:25 PM   #73
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I think whether to hold 100% equites after 70.5 when you have annual RMDs is an important question.....particularly in a down market. It doesn't sound like the best AA to me in those circumstances.
Why is a 100% equities allocation particularly bad if you have RMDs?

Is it because you might have to take say a $100,000 RMD even though that $100,000 dropped in value to $70k due to a 30% crash in the market (if you wait till Dec 31 of the tax year to take the RMD)?

Seems like over the long term with an upward trending market you would do well with a high equities allocation (ie the $100k RMD might have grown to $120k by year end yet you must only take $100k).
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Old 03-07-2015, 03:05 PM   #74
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Why is a 100% equities allocation particularly bad if you have RMDs? Is it because you might have to take say a $100,000 RMD even though that $100,000 dropped in value to $70k due to a 30% crash in the market (if you wait till Dec 31 of the tax year to take the RMD)? Seems like over the long term with an upward trending market you would do well with a high equities allocation (ie the $100k RMD might have grown to $120k by year end yet you must only take $100k).
My thought is whether 100% stocks is best in a long term bear market when you are forced to sell because of RMDs. Even if your need for income is small you are forced to sell more and maybe sequence of returns becomes important.
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Old 03-07-2015, 03:55 PM   #75
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One issue I have with mutual fund investing is that when you invest that way you are indirectly claiming that a stock is just a stock. They are all the same... they all behave the same.

So then when you look at for example just living off of the dividends from the S&P 500, there is fear, because the dividends from a fund are pretty random, and do have large declines occasionally.

However, if you instead build your dividend income off of national (so their are no currency issues) essential services, and multinationals that have been around for 100+ years, the fear of living off of dividend income goes away. At least for me it does.

As a bonus your yield is almost always at least 1% higher than what you will find on the S&P 500 and you can take advantage of random events. For example, do you really think the decline in oil prices will last indefinitely? If you don't then you might consider that there are some bargains out there right now.

I started out as a Bogglehead (way back when it was on morningstar forums, although I have always been essentially just a lurker) and switched to individual stocks because I could sleep better at night when I started investing in companies as opposed to financial instruments.
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Old 03-07-2015, 04:01 PM   #76
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During RMDs you are forced to sell from an IRA because the government doesn't allow you to defer taxes forever. Normally you don't want to sell equities during a big downturn but there's nothing that says you cant immediately re-buy the same stocks or funds in a regular after tax account. If you do it that way, you are losing the tax deferral on the amount that you were forced to sell due to RMDs but the fact that stocks are way down at the moment has no effect.
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Old 03-07-2015, 04:22 PM   #77
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I started out as a Bogglehead (way back when it was on morningstar forums, although I have always been essentially just a lurker) and switched to individual stocks because I could sleep better at night when I started investing in companies as opposed to financial instruments.


I think the challenge with this approach is that one has to select the right stocks individually - stocks that each pay a dividend yield above the market average, that each are financially sound and each not going to suspend the dividend, etc. That's not easy for all to do .. If it is for you, then great !

Unless holding a portfolio of 50-75 individual dividend paying stocks, I would be too nervous that a single failure would be too disruptive to portfolio dividend returns. But that's just me personally. Others have much fewer stocks and higher risk tolerance.

Eastman Kodak used to pay a good dividend. Diamond Offshore too. For a while Ford cancelled their dividend etc.

Back to funds. Are the actively managed "dividend oriented" income funds an option ? Possibly. But while they may yield 3 or 4 percent it seems the cap appreciation / principle growth is very low. Much less than the more balanced SP500 (growth and income ).

Would be curious how your own stock by stock portfolio performed in 2014 on aggregate - gains and dividends reinvested ... compared to SP500 (on a total return basis).

it's the classic active versus passive argument, I think ..
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Old 03-07-2015, 05:50 PM   #78
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During RMDs you are forced to sell from an IRA because the government doesn't allow you to defer taxes forever. Normally you don't want to sell equities during a big downturn but there's nothing that says you cant immediately re-buy the same stocks or funds in a regular after tax account. If you do it that way, you are losing the tax deferral on the amount that you were forced to sell due to RMDs but the fact that stocks are way down at the moment has no effect.
Ahh obviously, problem solved
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Old 03-07-2015, 05:56 PM   #79
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During RMDs you are forced to sell from an IRA because the government doesn't allow you to defer taxes forever. Normally you don't want to sell equities during a big downturn but there's nothing that says you cant immediately re-buy the same stocks or funds in a regular after tax account. If you do it that way, you are losing the tax deferral on the amount that you were forced to sell due to RMDs but the fact that stocks are way down at the moment has no effect.
You often will not even have to sell and rebuy. I take RMDs in kind. I still get a 1099 that causes me to pay taxes, but there are no extra expenses or frictional losses.

Ha
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Old 03-07-2015, 06:10 PM   #80
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RMDs don't force you to sell equities! You can transfer in kind whether it's individual stocks or mutual funds.

I see Ha already explained that. But I had also mentioned that above.
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