Calculate Number / Portfolio Buckets

[aim-high]

I'm working on calculating my "number" and doing so from the bottom up using buckets & time periods.

Here are the buckets.

• ELE - Essential Living Expenses - portfolio goal is a very low risk 0% real return (no risk, keep pace with inflation.)
  
• DLE - Desired Living Expenses - portfolio goal is conservative 2% real return (low to moderate risk beat inflation by 2%.)
  
• LL - Legacy & Luxury - portfolio goal is aggressive growth using various strategies to maximize total return.

Here are the time periods (we are 47/49).

• ER - Early Retirement (10.5 years) - Covers period from now until DW can access her IRAs (DW 49 to 59.5).
  
• RR - Regular Retirement (12 years) - Covers period after Early Retirement until Social Security can be accessed (DW 59.5 to 71.5).
  
• SR - Subsidized Retirement (16.5 years) - Covers period after Regular Retirement until old age (DW 71.5 to 88).
  
• OA - Old age (12 years) - Covers period of reduced income need until departure. (DW 88 to 100)

::: numbers adjusted for ease of explanation :::

For our ELE bucket we need 2.415M based on the following.

• ER - 80k * 10.5 years = 840k
• RR - 70k * 12.0 years = 840k
• SR - 30k * 16.5 years = 495k
• OA - 20k * 12.0 years = 240k

For our DLE bucket we need 1.125M based on the following.

• ER - 30k * 10.5 years = 315k
• RR - 30k * 12.0 years = 360k
• SR - 20k * 16.5 years = 330k
• OA - 10k * 12.0 years = 120k

From this our number 3.54M (plus social security) to cover a 51 year retirement with very conservative investments (matching inflation on essentials and return 2% real for non-essentials.) Money over and above the 3.54M can go into a LL portfolio and withdrawn as desired.

Regarding the account types, the first 10.5 years is being withdrawn from a taxable account. From there on out the money comes from 90% ROTH and 10% IRA.

Now for the portfolios.

ELE - Goal: Keep Pace with Inflation - Low Risk

• VTSMX - Total Stock Market - 13.70% - $330.75k
• VGTSX - Total International Stock - 5.87% - $141.75k
• VBMFX - Total Bond Market - 64.35% - $1,554.00k
• VTIBX - Total International Bond - 16.09% - $388.5k

DLE - Goal: 2% Real Return - Moderate Risk

• VTSMX - Total Stock Market - 40.88% - $459.90k
• VGTSX - Total International Stock - 17.52% - $197.10k
• VBMFX - Total Bond Market - 33.28% - $374.40k
• VTIBX - Total International Bond - 8.32% - $93.60.

Aggregating the two portfolios gives the following.

• VTSMX - Total Stock Market - 22.33% - $790.65k
• VGTSX - Total International Stock - 9.57% - $338.85k
• VBMFX - Total Bond Market - 54.47% - $1,928.40k
• VTIBX - Total International Bond - 13.62% - $482.10k

These portfolios came from Vanguard. I created a portfolio for each time period and aggregated them by goal and then again overall using this tool.

https://personal.vanguard.com/us/funds/tools/recommendation

I could really use some help / suggestions here since I have limited experience.

 

[aja8888]

Not sure what the questions are. Whos is working and why only figure DW requirements? Not nearly enough information.

 

[NW-Bound]

...why only figure DW requirements?

Are there other requirements?

 

[aim-high]

Are there other requirements?

Exactly. DW is 18 months older than I and has a family history of longer life. I calculated everything based on her age to 100 and us getting social security when I hit 70. She'll get spousal social security. The income numbers are for the household, we don't separate anything, it's all our pile.

I guess my questions are . . .

Does this approach make sense given Bernstein's idea of having won the game and taking minimal risk for the portion of your portfolio needed to cover essential expenses?

Do the portfolios that Vanguard recommended make sense to match inflation and to return a 2% real return?

Are there better ways of doing so?

 

[daylatedollarshort]

Does this approach make sense given Bernstein's idea of having won the game and taking minimal risk for the portion of your portfolio needed to cover essential expenses?

Do the portfolios that Vanguard recommended make sense to match inflation and to return a 2% real return?

Are there better ways of doing so?

This is Bernstein's recent thinking on safe assets for essential expenses -

"You want to end up with a portfolio that matches your liabilities, meaning the amount you'll need to spend in retirement. The rule of thumb I came up with, based on annuity payouts and spending patterns late in life, is that you should save 20 to 25 times your residual living expenses -- that is, the yearly shortfall you have to make up after Social Security and any pension.

This portfolio should be in safe assets: Treasury Inflation-Protected Securities, annuities, or even short-term bonds.

Anything above that, you can invest in risky assets."

The worst retirement investing mistake - Sep. 4, 2012

Here is another article on the sequence of return risk potential flaw in the balanced stock / bond portfolios for essential retirement expenses -

http://money.msn.com/mutual-fund/the-hidden-threat-to-your-portfolio

 

[sengsational]

I like your way of thinking about your retirement. More than like, think it's pretty awesome, actually.

If I had something to add, I'd add it, but I'm afraid I'm not smart enough. Posting simply because I want to see a checkmark in the list and can see what smarter people say.

 

[timo2]

I'm having trouble with the concept of your plan. The way I read your plan conceptually is that it is layered over time, where the bottom layer is ELE, next above that is DLE, and the top layer is LL. Sort of like Maslow's hierarchy of needs. Is that correct? or did you mean the concept of 'chunks' of time rather than layers. The chunks would align with the periods of time you have layed out (ER, RR, SR, OA). Or do you use both chunks and layers?

edit: I have my RE plan laid out in the chunks, but with your two lower layers in each chunk. each bucket is one chunk instead of a bucket per layer.

 

[aim-high]

This is Bernstein's recent thinking on safe assets for essential expenses -

"You want to end up with a portfolio that matches your liabilities, meaning the amount you'll need to spend in retirement. The rule of thumb I came up with, based on annuity payouts and spending patterns late in life, is that you should save 20 to 25 times your residual living expenses -- that is, the yearly shortfall you have to make up after Social Security and any pension.

This portfolio should be in safe assets: Treasury Inflation-Protected Securities, annuities, or even short-term bonds.

Anything above that, you can invest in risky assets."

The worst retirement investing mistake - Sep. 4, 2012

Thanks, for the quote / link. He pegs retirement age at 65ish. Going 18 years earlier than that means I'll need 35 to 40 times residual living expenses. Also, it looks like even my conservative portfolio is too risky based on the assets he's talking about.

It doesn't make sense to annuitize my portfolio at my age. (Of course, Bernstein would say anyone retiring at my age is crazy.) I don't see it as retiring, I see it as doing work I like to do without worrying about remuneration.

Interest rates usually more than keep up with inflation. It's true that real yields right now are historically low, but as a student of financial history I have to believe that's not going to last forever.

Who thought they'd be this low for as long as they have been? How long can the Fed keep "risk free" at a negative real return.

 

[aim-high]

I'm having trouble with the concept of your plan. The way I read your plan conceptually is that it is layered over time, where the bottom layer is ELE, next above that is DLE, and the top layer is LL. Sort of like Maslow's hierarchy of needs. Is that correct? or did you mean the concept of 'chunks' of time rather than layers. The chunks would align with the periods of time you have layed out (ER, RR, SR, OA). Or do you use both chunks and layers?

edit: I have my RE plan laid out in the chunks, but with your two lower layers in each chunk. each bucket is one chunk instead of a bucket per layer.

Both chunks and layers.

Using Maslow as you described, the base is ELE, then DLE, then LL at the top. But I divide the ELE up by time periods because the annual ELE changes over a 51 year retirement.

The first period I'm at higher expenses, kids still in the home, and no access to withdraw money form my IRA.

The second period the kids are gone and I can tap the IRA.

The third period I we are older, reduced expenses some, and we're getting Social Security.

The fourth period we're really old and aren't taking trips to Europe.

Add all those periods up and I get my overall ELE. I do the same for my DLE. That is my number. Anything over that number goes into the LL investment pool.

I just realized, with the goal of a 2% real on my DLE, I'll have to adjust those numbers down some to account for the compounded return.

 

[daylatedollarshort]

If you want 2% real, 30 year TIPS are close at ~1.50%. Do you have access to stable value funds? Our SV returns have actually been not too bad in real terms since inflation is so low.

 

[zakenjanei]

If all you're trying to do is to keep up with inflation with the ELE portfolio, I'd stay
entirely with TIPS/IBonds. You could buy TIPS maturing each year with the
specific required income.

I'd think that is the lowest risk for someone who has the funds. You might be
interested in listening to Zvi Bodie.

Also, this bogleheads thread talks about how to build a TIPS ladder that
generates an inflation adjusted income for each of the retirement years:

Bogleheads • View topic - TIPS Ladder Spreadsheets in General & Two in Particular

 

[aim-high]

If all you're trying to do is to keep up with inflation with the ELE portfolio, I'd stay
entirely with TIPS/IBonds. You could buy TIPS maturing each year with the
specific required income.

I'd think that is the lowest risk for someone who has the funds. You might be
interested in listening to Zvi Bodie.

Also, this bogleheads thread talks about how to build a TIPS ladder that
generates an inflation adjusted income for each of the retirement years:

Bogleheads • View topic - TIPS Ladder Spreadsheets in General & Two in Particular

Thanks! This is from one of the posts on the bogleheads thread.

Although it seems like a TIPS ladder is just a different way to get access to the TIPS asset class, that's not the only way to use a TIPS ladder. In fact, to me a TIP ladder is really a completely different animal that lets you exactly pre-fund essential future expenses as they hit, year-by-year. With a TIPS fund, you're subject to interest rate risk and as the years go by, it may not deliver the exact income you hope it does. With a TIPS ladder, you can be 100% (well 99.9999%) sure that you'll get exactly the income you expect during the period covered by the ladder.

So a TIPS ladder produces guaranteed income to fund expected expenses. It's really like no other investment, except possibly a life annuity that's indexed to inflation. But with the life annuity, you're paying some extra expenses to the insurance company and you're getting longevity insurance. For an ultrasafe retirement income floor, I like the idea of a TIPS ladder for the first 20-30 years, then some type of longevity insurance after that. If there's a bequest motive involved, you might not need any annuity income at all, since you could just fund the TIPS ladder out to age 100-105 and bequest anything that's left over.

Personally, I'd consider a TIPS ladder as being completely separate from the risky investment portfolio and put it in its own bucket, maybe next to SS, pensions, and life annuities. Then, once I've built a floor of income to meet minimum expenses using these guaranteed income generators, I'd layer in a risky portfolio on top of that.

That sounds about what I'd like to do with my essential living expenses.

 

[RetiringAt55]

Exactly. DW is 18 months older than I and has a family history of longer life. I calculated everything based on her age to 100 and us getting social security when I hit 70. She'll get spousal social security. The income numbers are for the household, we don't separate anything, it's all our pile.

If she has a longer life expectancy than you, make sure you run the numbers assuming there is only one SS and much higher taxes when you die. This can have a big impact on plans.

 

[Independent]

I'm pretty analytical, so I like your double-layered analysis. I'm a big fan of splitting expenses into "needs" and "wants" like you have done. Nice work.

When you add all this up, you're stock/bond AA is 32/68, and your first year withdrawal rate is 3.1%. That's plenty conservative, which seems to be your intent.

It sounds like you've got some money left over for the LL category. Unless you plan to spend all of it in the first couple years, that's another safety net.

The step down from RR to SR is pretty large, $50k. Presumably some SS and some belief that your expenses will go down. Some people here would be pretty cautious about SS. Some will try to plan for the possibility that the last phase of your life will be "dependent" and you may be paying other people to do things for you that you're accustomed to doing yourself.

 

[pb4uski]

I'm actually not that keen on the approach and prefer a single integrated approach rather than chunking it up the way you have. I do have changes to spending as we age in my base plan which it appears that you have.

The resultant AA is too conservative given your young ages IMO. Even the Vanguard Target Retirement 2010 fund is 40/60 and the Target Retirement 2020 fund is ~60/40 so your 30/70 seems too conservative to me. I'm older than you and target 60/40 but I concede that we each have different levels of comfort with absorbing investment risk.

 

[aim-high]

RetiringAt55 - Thanks. Good thinking. I was using both my SS and my DW's spousal SS. I'll remove the spousal from the plan. I don't think there will be a tax impact though because the income will be 90% from a Roth IRA.

Independent - correct assumption on the decrease from RR to SR. I was thinking we'd get 36k in SS benefits plus reduced expenses. That will be adjusted (see above) and I'll need to revisit the idea of paying for things we do ourselves, especially in the OA phase.

pb4uski - it feels too conservative to me also, especially given the potential of 50 years without producing income. We will have another 10x or so in the LL portfolio. I'm not opposed to risk. We took a lot of it to get here - much more than I realized until I read this forum. Perhaps I've been scared too far the other way. However, I've made it, lost it, and made it again. I don't want to risk losing it again. I'm in the process now of divesting from highly concentrated positions in some rather illiquid investments.

 

[daylatedollarshort]

I'm actually not that keen on the approach and prefer a single integrated approach rather than chunking it up the way you have. I do have changes to spending as we age in my base plan which it appears that you have.

The resultant AA is too conservative given your young ages IMO. Even the Vanguard Target Retirement 2010 fund is 40/60 and the Target Retirement 2020 fund is ~60/40 so your 30/70 seems too conservative to me. I'm older than you and target 60/40 but I concede that we each have different levels of comfort with absorbing investment risk.

It depends on your risk level and retirement expenses. If you have 40 years of retirement expenses in savings + LTC covered, all you really need is to keep up with inflation. Or if you can live off other income streams, like part time work, pensions and/or SS, then you don't really need to take any portfolio risks other than maybe keep up with inflation.

 

[Svensk Anga]

Counting dividends toward your safe floor may help you accommodate a higher equity allocation. William Bernstein suggests that half of one's dividend income can be considered "safe". Over the last century or so, dividends never fell by more than 50% in real terms in any crisis. (Deflation during the Great Depression helped keep up the real value of reduced nominal dividends.)

I like a TIPS ladder (and I bonds) for the essential expenses beyond pensions/SS. I have been buying the 10-years. In your case, you might want to buy the 30-years as well. (I cannot stand to buy the 5's with negative real rate.) I considered buying some of the previously issued 20 and 30 year TIPS on the secondary market but decided against it. These can sell for substantially more than par, depending on accumulated inflation adjustments since issue. The government is obligated to pay back par plus inflation at maturity. If we get a bout of deflation (as in Japan recently), one could lose the current premium over par. Better I think to park the money in something shorter term and then buy the TIPS at auction every year to fill out the rungs where a cheap secondary market TIPS is not available. See:

Treasury Inflation-Protected Securities (TIPS) - Markets Data Center - WSJ.com

Anything over 1000 in the last column is at some risk. The TIPS maturing in the 2040's and 2029 look fairly reasonable.

TIPS may not earn enough interest to provide a real return after taxes. In your case, with so much Roth space, you could count on a real return.

 

[daylatedollarshort]

I considered buying some of the previously issued 20 and 30 year TIPS on the secondary market but decided against it. These can sell for substantially more than par, depending on accumulated inflation adjustments since issue. The government is obligated to pay back par plus inflation at maturity. If we get a bout of deflation (as in Japan recently), one could lose the current premium over par. Better I think to park the money in something shorter term and then buy the TIPS at auction every year to fill out the rungs where a cheap secondary market TIPS is not available. See:

Treasury Inflation-Protected Securities (TIPS) - Markets Data Center - WSJ.com

Anything over 1000 in the last column is at some risk. The TIPS maturing in the 2040's and 2029 look fairly reasonable.

TIPS may not earn enough interest to provide a real return after taxes. In your case, with so much Roth space, you could count on a real return.

We have been doing the same. We sold our initial round of TIPS when it looked like yields had bottomed out. I couldn't bear to see all those 20 - 40% total returns disappear.

Now that yields are rising we are now re-buying the positive yield, longer maturities again in chunks at auction.

I have bought TIPS on the secondary market at times in the past. I would do that again if yields went over 2%. I think the prospect of 20+ years of deflation is not impossible, but slim odds compared to a fairly risk free 2+% real return. I bought some on the secondary market when yields jumped on deflation fears in the past and in hindsight I wish I had bought much more than I did at the time.

 

[Lsbcal]

Just a comment on the recent emphasis on matching liabilities and bond maturities. This has come about after the 2008-2009 disaster. Before it wasn't nearly as popular. One should pay attention to historical real rates.

I'd not want to purchase TIPS myself until they approach historical real returns (2.3% for 10 years, maybe 2.4% for 20 years). Also one does not want to fund a ladder all at once as then one is initially locking in only today's rates.

 

[aim-high]

I've been reading this thread . . .

Bogleheads • View topic - Liability Matching Portfolio? Really?

There are some interesting posts by Bill Bernstein on there. Is it really him?

 

[Lsbcal]

Yes, he posts under "wbern" there. You can check for more recent posts by using their search.

 

[Turn_the_Page]

Bully for you if you can manage this. While I'm as analytical as they come, this is WAY to complicated for me!