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Capital Preservation
Old 11-23-2009, 10:50 AM   #1
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Capital Preservation

I attempted to address this question in an earlier thread but I don't think that I presented the question clearly.

If I look at my current retirement savings, which is currently split about 50/50 (stocks & bonds), then project out to my estimated retirement in 8 years; I see that I can make my retirement savings goal with only modest (4%) growth going forward.

Does it make sense to reduce the risk of not making it to my goal (by having exposure to stocks) by putting all of my current savings into CDs and bonds hopefully yielding an average of 4%? Am I missing something? Is there a point when saving for retirement where one should shift to capital preservation mode to reduce the risk of missing a target date for retirement?

Thanks in advance.
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Old 11-23-2009, 11:03 AM   #2
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Unless you will be retiring at an old age, you still need your money to last several decades, regardless of inflation. A portion in stocks has traditionally been a good way to help make it happen.

There used to be an easy formula that your percentage in fixed income or equivilants should be equal to your age. ie, if you are 60, then 60% fixed income. Adjust annually.

Before the recent market crash, many people said that was too conservative. Now, some say it's just right.

Early in the year when the markets were way down, I would have said the formula was too conservative because the upside possibilities were so good. After the most recent gains, maybe it's about right again.
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Old 11-23-2009, 01:54 PM   #3
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There is risk in bonds too. To get a 4% yield, you'd have to have long bonds, and interest rates are relatively low today. If rates rise, you'll lose money.

That said, you raise an interesting question.

It may be appropriate to get ultra-conservative to reach your retirement goal in 8 years, but what happens after that? Most studies say that you need a good portion of equities in your portfolio to make it last a lifetime.

Good post.
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Old 11-23-2009, 02:00 PM   #4
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I guess I was figuring at that point a continued 4% growth rate would cover my withdrawals. Isnt 4% considered to be a safe withdrawal rate to keep your portfolio from being exhausted?
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Old 11-23-2009, 02:05 PM   #5
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Yes, but that is 4% real growth. In other words, inflation plus 4%. Over time, especially an extended period of time you'll likely lose to inflation with a totally fixed income portfolio. Although there are others here who will disagree, I suspect. But the entire concept of 4% SWR is to exceed inflation by at least 4%.
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Old 11-23-2009, 02:19 PM   #6
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Aha, I was missing something!
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Old 11-23-2009, 04:57 PM   #7
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cataman,
Please search through the forum for a list of reading material. There are a lot of subtleties in retirement planning that can come back to bite you if you're not aware of them.

This is one of the first articles I read (IIRC, there are 3 parts to it)
The Retirement Calculator from Hell
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Old 11-23-2009, 05:11 PM   #8
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To me, the increasingly conservative asset allocation that I planned when approaching retirement really helped me to feel certain that I could retire as planned.

I agree with walkinwood about the value of some reading material and personally I like the books on the Bogleheads' book list.
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Old 11-23-2009, 06:13 PM   #9
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Educate yourself as suggested above and then start gradually moving your AA to what you would like for it to be in 8 years when you retire. You will need some equity for growth to offset inflation.

Cheers,

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Old 11-23-2009, 07:31 PM   #10
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Although inflation is generally acknowledged as the big bugaboo of investment schemes that are tilted towards cash/bonds/CD's, this thread made me look back at my Quicken data to try to get an idea of what my personal inflation rate has been.

I ER'd December 2002 but I've been tracking all my finances in Quicken for many years. When I "normalized" my expenses by taking out house mortgage payments (I have no mortgage now), deducting taxes ( I'm at a very very low tax rate now) and kid payments (college, allowance etc my children were on their own by the time I ER'd). I found that that our annual expenses have remained remarkably and surprisingly level:

1997 $44k
2000 $45k
2005 $44k
2008 $45k

So, from a personal standpoint, my standard of living "feels" about the same and remarkably, there has been no change in my annual expenditures although the price level calculator here Inflation Calculator | Find US Dollar's Value from 1913-2009 shows a 34% increase. annual expenditures of $45 k in 1997 should be $60 K now. Of course, this is a very back of the envelope guesstimate and I'm sure other folks will vastly differ. My point is that when one is ER'd personal inflation rates can apparently be controlled to a surprising level.

Disclaimer, my own asset allocation is 55-65% equities, primarily because I bought into the equities for inflation argument. Now I have to think some more about this....
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Old 11-24-2009, 07:57 AM   #11
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My point is that when one is ER'd personal inflation rates can apparently be controlled to a surprising level.
This is exactly what Dominguez said in YMOYL - you can control your own personal inflation rate - his example (from 1970-80s) was not investing in the latest technology right away. He also advocated minimization of spending on those things one doesn't value as much. However, he had done a similar exercise and found his personal inflation rate to be much lower than the CPI - and that was a big deal back then when inflation was in the double digits.
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Old 11-24-2009, 09:29 AM   #12
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Old 11-24-2009, 02:13 PM   #13
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Funny how the "conventional wisdom" has shifted in stock/ bond/ cash allocations for retirees and near retirees. When I retired at 55 in March 2000, an advisor recommended 65/35. Most folks had added 10 to the Bogle advice of 100-age in stock rule of thumb. After the past "lost decade" more conservative, wealth preservation views have emerged. Just recently re-looked at a Vanguard book on retirement that I got in 1997. The advice there seems pretty reasonable:

60/40 if under 60

40/40/20 60-75

20/60/20 if over 75

Fyi, our allocation at 65 is 40/55/5 with 10% of the total portfolio in international. Just a couple of years ago we were at 50/50, so admit that lowering risk with an eye on preservation has really risen in our priorities.
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Old 11-24-2009, 02:34 PM   #14
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Quote:
Originally Posted by WilliamG View Post
Funny how the "conventional wisdom" has shifted in stock/ bond/ cash allocations for retirees and near retirees. When I retired at 55 in March 2000, an advisor recommended 65/35. Most folks had added 10 to the Bogle advice of 100-age in stock rule of thumb. After the past "lost decade" more conservative, wealth preservation views have emerged. Just recently re-looked at a Vanguard book on retirement that I got in 1997. The advice there seems pretty reasonable:

60/40 if under 60

40/40/20 60-75

20/60/20 if over 75

Fyi, our allocation at 65 is 40/55/5 with 10% of the total portfolio in international. Just a couple of years ago we were at 50/50, so admit that lowering risk with an eye on preservation has really risen in our priorities.
At 62, we're about 50/47/3. I'm comfortable with that. I also understand that it may very well turn out that a higher or lower allocation to equities would have been better. But not knowing the future, it's all a guess. You read, you study, you listen, you pick some "reasonable" number and learn to live with it while you enjoy life despite the financial risks you inevitably assume.
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Old 11-24-2009, 09:12 PM   #15
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Quote:
Originally Posted by ejman View Post
So, from a personal standpoint, my standard of living "feels" about the same and remarkably, there has been no change in my annual expenditures although the price level calculator here Inflation Calculator | Find US Dollar's Value from 1913-2009 shows a 34% increase. annual expenditures of $45 k in 1997 should be $60 K now. Of course, this is a very back of the envelope guesstimate and I'm sure other folks will vastly differ. My point is that when one is ER'd personal inflation rates can apparently be controlled to a surprising level.
We have a similar experience to ejman, in that our living expenses stayed the same (actually decreased somewhat) over the first 10 years of retirement, even though there has been inflation over the same period. I think a big part of it is that we kept getting smarter about spending our money. We also bought some toys at first as this kind of spending declined.

Now, however, we're about the "catch up" for all that under-projection spending since we are electing to modify our lifestyle in a way that is guaranteed to increase expenses!

So you never really know what will happen IMO, and it is better to assume that expenses will track inflation in your planning.

Audrey
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Old 11-25-2009, 09:57 AM   #16
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We are retiring next year and cut our risk down to 35% equities and 65%
everything else, in the 65% we got cash, corporate bonds, tips, floating rate loans, commodites,reit income funds and an un-traded reit.
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Old 11-25-2009, 10:46 AM   #17
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Be careful about rethinking this point. We've had very mild inflation for the last decade or two.

70s style inflation would have a real impact on most people's lifestyles, regardless of what Dominguez said.

Take comic book prices.

Comics were 10 cents for about 20 years straight.

In 1961, they went up to 12 cents and stayed there for 8 years.

In 1970, they were 15 cents
In 1971, they were 20 cents
In 1974, they were 25 cents
In 1976, they were 30 cents
In 1977, they were 35 cents
In 1979, they were 40 cents
In 1980, they were 50 cents
In 1982, they were 60 cents

Dominguez would probably have just stopped buying comic books ( and movies, and books, and anything else that went up in price) and said that inflation didn't exist. You can do that, but it amounts to a gradual reduction in your standard of living. You don't need to buy comic books, but if they are something you enjoy, planning for their likely price increases seems like a pretty important thing.


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Disclaimer, my own asset allocation is 55-65% equities, primarily because I bought into the equities for inflation argument. Now I have to think some more about this....
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Old 11-25-2009, 10:59 AM   #18
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Quote:
Originally Posted by Hamlet View Post
...
Take comic book prices.

Comics were 10 cents for about 20 years straight.

In 1961, they went up to 12 cents and stayed there for 8 years.

In 1970, they were 15 cents
In 1971, they were 20 cents
In 1974, they were 25 cents
In 1976, they were 30 cents
In 1977, they were 35 cents
In 1979, they were 40 cents
In 1980, they were 50 cents
In 1982, they were 60 cents

...
I bought in at 60-75˘ and saved them but remember 10-35 cents. Last I checked people were trying to sell the same issues for $2.00 each, $20 for the first in the series. Of course, that's not inflation, that's collectibility. I'm holding for now.
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Old 11-25-2009, 11:13 AM   #19
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Be careful about rethinking this point. We've had very mild inflation for the last decade or two.

70s style inflation would have a real impact on most people's lifestyles, regardless of what Dominguez said.

Take comic book prices.

Comics were 10 cents for about 20 years straight.

In 1961, they went up to 12 cents and stayed there for 8 years.

In 1970, they were 15 cents
In 1971, they were 20 cents
In 1974, they were 25 cents
In 1976, they were 30 cents
In 1977, they were 35 cents
In 1979, they were 40 cents
In 1980, they were 50 cents
In 1982, they were 60 cents

Dominguez would probably have just stopped buying comic books ( and movies, and books, and anything else that went up in price) and said that inflation didn't exist. You can do that, but it amounts to a gradual reduction in your standard of living. You don't need to buy comic books, but if they are something you enjoy, planning for their likely price increases seems like a pretty important thing.

My hat is off to you, Hamlet. I would have never thought/been able to work the price of comic books into a discussion of capital preservation! Well done
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Old 11-25-2009, 01:06 PM   #20
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Quote:
Originally Posted by Hamlet View Post
Be careful about rethinking this point. We've had very mild inflation for the last decade or two.

70s style inflation would have a real impact on most people's lifestyles, regardless of what Dominguez said.

Take comic book prices.

Comics were 10 cents for about 20 years straight.

In 1961, they went up to 12 cents and stayed there for 8 years.

In 1970, they were 15 cents
In 1971, they were 20 cents
In 1974, they were 25 cents
In 1976, they were 30 cents
In 1977, they were 35 cents
In 1979, they were 40 cents
In 1980, they were 50 cents
In 1982, they were 60 cents

Dominguez would probably have just stopped buying comic books ( and movies, and books, and anything else that went up in price) and said that inflation didn't exist. You can do that, but it amounts to a gradual reduction in your standard of living. You don't need to buy comic books, but if they are something you enjoy, planning for their likely price increases seems like a pretty important thing.
You are absolutely right, there are plenty of examples of items that have gone up at considerably higher rates than the CPI.

There are also many examples of items that have decreased in price over long time periods, primarily technology driven I would guess although commodities seem to get into long term price cycles too.

If one's must have's include items that are going up in price rapidly then obviously, one better account for that in ER when it's harder to increase income.

With that in mind I was just simply amazed at my own expenditures record because I'd never looked at it over the years and I just expected that it would reflect a lot of inflation and it hadn't
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