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Avoid running out of money
Old 02-07-2013, 04:18 AM   #1
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Avoid running out of money

In a different thread on Bogleheads Bogleheads • View topic - Running out of money
someone mentioned this video: How Much Money Do I Really Need? - YouTube

Thank you, Larry Swedroe. Some forum participants here might find the video interesting, as I did.
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Old 02-07-2013, 04:35 AM   #2
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I can quantify exactly what I'd conclude from the video, but what's the specific-quantifiable-practical lesson using numbers you take from the video? You posted the link, so please go first...
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Old 02-07-2013, 04:49 AM   #3
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The lesson for me was not so much about specific numbers. I enjoyed watching the video, as it reinforced the message about not being too greedy or taking too much risk.

His Chinese proverb makes a lot of sense to me. Once you have "won the game", as many forum participants here have, there is no need to take additional risks, as the consequences of being wrong later in life can be disastrous.

Taking risks during the accumulation phase is ok (for some). And it is also ok to be much more conservative during the spending phase of our lives and to focus on enjoying time with what we have.
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Old 02-07-2013, 05:15 AM   #4
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How about this for specific numbers:

Play around with FireCalc until you find the lowest portfolio amount that yields 100% success. Then take whatever is left over off the table and put someplace safe (CDs, short term bonds, interest checking,). Or, since you don't need the left over amount, invest it in equities and shoot for the moon!
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Old 02-07-2013, 05:22 AM   #5
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This should be a good thread.

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Old 02-07-2013, 07:36 AM   #6
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Thanks for sharing the video. I can relate very well. When some of my co-workers asked me why I was retiring, I often said because I have enough. (money) And I was working more and enjoying it less. During the bulk of my working years I invested 70 to 80% of my investable income in stocks. In the 5 to 8 years before I retired, I changed that to >90% CD's/bonds and cash. I'm happy with my AA (and so are my spreadsheets and FireCal)
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Old 02-07-2013, 07:50 AM   #7
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Quote:
Originally Posted by racy View Post
How about this for specific numbers:

Play around with FireCalc until you find the lowest portfolio amount that yields 100% success. Then take whatever is left over off the table and put someplace safe (CDs, short term bonds, interest checking,). Or, since you don't need the left over amount, invest it in equities and shoot for the moon!
That's what I've concluded also, from this video and many earlier books/articles and it's been discussed here before. "Play around with FIRECALC" using the default 75:25 (or whatever you like) and "find the lowest portfolio amount that yields" whatever % you're comfortable with (ie, 95% works for me). If your portfolio is larger than that (hopefully), you have several options but what Larry Swedroe was saying in the video was put the balance of your portfolio "someplace safe." 'You've won the game, why keep playing (with all your money)?' And that's basically how I arrived at my AA. YMMV
You could also invest the excess "in equities and shoot for the moon" or something a little more conservative, but that's not what the video was advocating.
It's unfortunate that Mr. Swedroe chose a 70 year old couple with (at some point) a $13M portfolio. Moving everything to munis is a viable option at that level, but 99%+ of us are not on that playground. However, at about 4:40 he mentions 30-40% equities, which probably makes more sense for those who've won the game for most of us IMO.

Not everyone can avoid equities and still have a reasonable chance of portfolio survival without a significantly larger portfolio and/or significantly lower spending - maybe 40-60% with all else equal...
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Old 02-07-2013, 08:13 AM   #8
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The lesson for me was not so much about specific numbers. I enjoyed watching the video, as it reinforced the message about not being too greedy or taking too much risk.
Fine and dandy, though the example he chose was extremely far fetched. And ultimately you have to quantify whatever approach you plan to use. One day I'll walk by this rabbit hole without looking in But I'll try to avoid asking again...
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Old 02-07-2013, 08:44 AM   #9
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The main problem with the 70 year old couple he used as an example is NOT that they were in equities, but that they were concentrated in tech stocks. Had they had a balanced portfolio, their wealth might have dipped ~30% and then recovered but 70% would not have evaporated.

I'm more of a risk taker and I have invested in equities for over 30 years and equities have done well for me so I don't ever see me having less than 50% in equities, but I can take the risk because once SS and pension come on line they will provide a large percentage of my living expenses. If I'm right, I'll have more available to enjoy life, donate to charity and leave more to the kids. If I'm wrong, I'll still be able to support myself financially and not be a burden to the kids.
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Old 02-07-2013, 10:49 AM   #10
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Fine and dandy, though the example he chose was extremely far fetched. And ultimately you have to quantify whatever approach you plan to use. But I'll try to avoid asking again...
Yes, the overall message is good, but it is so far fetched that I think it goes beyond being 'illustrative' to the point of being downright silly, and may just end up feeding the fear-mongering over those 'risky' equities. In the end, I think it actually ends up being a disservice to many listeners.

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The main problem with the 70 year old couple he used as an example is NOT that they were in equities, but that they were concentrated in tech stocks. Had they had a balanced portfolio, their wealth might have dipped ~30% and then recovered but 70% would not have evaporated.
Exactly. I had to replay that to make sure I heard it right. Nobody following any kind of reasonable diversification/AA for a 70 YO would have gone from $13M to $3M. That's ludicrous. I might as well post a video about the danger of fixed income, by finding some outlier case where someone had all their money in a bond that defaulted. So don't buy bonds? That's not reasonable either.

Even an aggressive 75/25 AA would have seen something like the more modest 30% dip you mention, not the 77% dip used in this example. And then recovered. Not the end of the world at all.

Less important, but it still bugs me, is that they probably would not have had that $13M w/o the concentration in high tech. So if they were in something 'safer', they would not have had the dip, but they would not have been at that high level to fall from. Maybe if we could see their actual portfolio, we might find that they were still ahead at $3M. But those important details were not shared (I think he alluded to it, but not emphasized enough for me). That's often the case when people point to a dip in equities to highlight the 'risk' - they ignore there was a run-up that the 'safe' investments did not share. It's not apples-apples, and it's not helpful.

I've enjoyed reading some of Larry's posts over at Bogleheads, and I'm sorry, but that lack of detail and emphasis on the negative w/o acknowledging the positive makes this video less than useless, IMO.

-ERD50
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Old 02-07-2013, 11:01 AM   #11
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The problem I see today is where/what is the safe haven you bail out stocks and move into? There are countless articles about a bond bubble and a few of my bond mutual funds have negative returns so far YTD. Money Markets and CD's are paying negative returns when consider inflation.

I would love to see interest rates begin to rise so we can get back to have nice, guaranteed 4% money market and cd's available. I do not think we are likely to see this though as the government is going to do everything they can to keep them down due to our national debt.
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Old 02-07-2013, 11:11 AM   #12
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I agree with the other posters who think that using as an illustrative example a 70 year old couple who lost close to 80% of their portfolio is far fetched, down right silly, and sends the wrong message to people who are understandably nervous about the stock market. Stocks are riskier than bonds, but this couple's portfolio must have been two or three times riskier than a properly diversified 100% stock portfolio. So the couple not only picked a totally inappropriate asset mix for their age, but also compounded the error by making hideously inappropriate stock selections.

For me the most valuable take-away from this video is the wife's "I told you so" comment to her husband. He probably richly deserved it, but a couple should never get themselves into a situation where either one thinks that finger pointing is right. Big picture financial decisions need to be discussed and jointly agreed upon. That apparently never happened with this couple until it was too late.
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Old 02-07-2013, 11:36 AM   #13
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If I was in the business of selling really terrible annuities I would use that video in my sales pitch.
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Old 02-07-2013, 11:41 AM   #14
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Regardless of whether the example is far fetched, his point is well taken.
At some point WHEN you think you have enough money it makes sense to take some percentage of risk off the table. He doesn't talk about getting out of equities totally quoting 30% to 40% .

The calculation for whether one has enough money or not should factor in some part of inflation. If a person can cover that almost regardless....then why take risks at all? The concept of converting a percentage of one's cash assets into income generation vehicles for life makes sense at this point.(revolving SPIA's or CD ladders...etc).
The major point is the person will be fine without the risk.

The finer point of "the value of the upside" making little material difference to their lives versus the "pain of the downside" being extremely painful is perhaps getting lost in the shuffle. That is an interesting and valid point.
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Old 02-07-2013, 11:50 AM   #15
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....

His Chinese proverb makes a lot of sense to me. Once you have "won the game", as many forum participants here have, there is no need to take additional risks, as the consequences of being wrong later in life can be disastrous.
The trouble is, as we have seen from FIRECALC runs, a much larger portfolio ( ~ 2x) is required to achieve the same success rate with an all-fixed portfolio over something closer to 75/25. So (keeping with the sports analogy), the goal posts have been moved w-a-a-a-a-y out to "win the game".

It's not just a simple investment decision. It is also a decision to accumulate a portfolio ~2x what we would need otherwise.

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Taking risks during the accumulation phase is ok (for some). And it is also ok to be much more conservative during the spending phase of our lives and to focus on enjoying time with what we have.
bold mine. And for many/most of us, working long enough to double our portfolio (if even possible, with the current job market, age discrimination, and hungry, eager younger people willing to work for much less) would have really cut into the time we have left. And for many/most of us, those early years of ER are the ones we can enjoy the most. I've already cut back some activities due to back/knee problems, and they will likely get worse with age.

So sure, if someone is in a position to ER with a portfolio large enough to handle the lower historic returns of an all-fixed portfolio, they have that option. But for most of us, that option would come at a very high price. And the few of us that might pass before we can accumulate that kind of portfolio would never experience a single day of ER. I've enjoyed ER so much, I wouldn't wish that on anybody.

-ERD50
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Old 02-07-2013, 02:03 PM   #16
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Originally Posted by racy View Post
How about this for specific numbers:

Play around with FireCalc until you find the lowest portfolio amount that yields 100% success. Then take whatever is left over off the table and put someplace safe (CDs, short term bonds, interest checking,). Or, since you don't need the left over amount, invest it in equities and shoot for the moon!
You do not have to "play" very much. On the investigate tab, use the button that says to solve for starting portfolio value for a given spending level and success rate.
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Old 02-07-2013, 03:17 PM   #17
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Excellent video

Thanks for sharing obgyn65
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Old 02-07-2013, 03:22 PM   #18
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And for many/most of us, working long enough to double our portfolio (if even possible, with the current job market, age discrimination, and hungry, eager younger people willing to work for much less) would have really cut into the time we have left. And for many/most of us, those early years of ER are the ones we can enjoy the most.
And the few of us that might pass before we can accumulate that kind of portfolio would never experience a single day of ER. I've enjoyed ER so much, I wouldn't wish that on anybody.

-ERD50
Wonderfully put. We all have insecurities about how much will be enough... and then there is that little devil on your left shoulder that keeps saying "go on ..one more year of w*rk will set you up nicely..."
Knowing when to knock that devil (greed) off your shoulder is hard
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Old 02-07-2013, 03:56 PM   #19
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Thanks Obgyn for posting this !
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Old 02-07-2013, 04:41 PM   #20
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The lesson from this video which stands out to me more than the intended one is as follows:

Diversification is important. A tech-concentrated 100% stock portfolio (and presumably 100% American) is NOT diversified.

But I also find his anecdote misleading. He is using data from one couple and carefully selecting the numbers from the very top of the dot-com bubble as well as immediately after the crash. Also, he doesn't tell us how large the couple's portfolio was at the beginning of the dot-com rise in 1997.

Furthermore, if that 70 year old couple still had a portfolio of $3 million in 2002, they weren't exactly in the poorhouse.
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