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Old 01-18-2014, 12:24 PM   #21
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NW, I freely admit I am not an investing expert and maybe it's just my cautiousness, but if one has a secure pension, most of its assets are in the stock market. So if I my pension ever needed to be cut it's because the stock market tanked. If my personal money was in stocks it would be tanking too. That is why I have most of my money in CDs and IBonds to diversify from my stock heavy pension fund. Do you believe my thinking wrong or just extra conservative?
What you have is counterparty risk, not equity risk. A contemplation of what makes your counterparty blow up would ne in order.
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Old 01-18-2014, 01:23 PM   #22
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I would say the enemy number one is living beyond your means.

... Inflation in my view is secondary. ...

Tautology? If you run out of money, you will be living beyond your means!

So if 30 years of inflation reduces your means (portfolio), and you wanted to maintain your buying power throughout your retirement, I guess you are now 'living beyond your means'. But it wasn't your portfolio that was the problem, it was your spending?

Seems to me inflation is key?

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Old 01-18-2014, 01:55 PM   #23
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NW, I freely admit I am not an investing expert and maybe it's just my cautiousness, but if one has a secure pension, most of its assets are in the stock market. So if I my pension ever needed to be cut it's because the stock market tanked. If my personal money was in stocks it would be tanking too. That is why I have most of my money in CDs and IBonds to diversify from my stock heavy pension fund. Do you believe my thinking wrong or just extra conservative?
I'm not a pension expert at all but this had me reaching for the latest annual reports from my private pension schemes and they all have less than 15% invested in equities, and are all over 90% funded. Consequently my AA these days is approaching 50% equities which is where I'd like to keep it going forward.
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Old 01-18-2014, 02:45 PM   #24
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About the "rich cats" here, remember that many do not have pensions. Their spending power may not be any higher than people with one. .... So, we have a mixture of people here, and that makes the conversation more interesting.
Back in 1999 at age 39, cocky me wouldn't have traded a million dollars for $40,000 COLA pension from a credit worthy organization. 15 years later, despite a much lower life expectancy, I'd do it in a heart beat.
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Old 01-18-2014, 02:58 PM   #25
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Just to present a couple of different points of views on equities in retirement, you may want to read these articles:

The worst retirement investing mistake - Sep. 4, 2012

The Biggest Urban Legend in Finance
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Old 01-18-2014, 03:33 PM   #26
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The two points of view always expressed are one needs equities and inflation is the devil. There have been many discussions here though about how inflation that people actually experienced over long periods of time was much lower than the government's CPI. So I recommend trying to calculate your personal inflation rate because that's the only one that matters to you. How can anyone offer advice about the impact of inflation without knowing your personal rate? As far as equities, historical numbers (will they be repeated?) say you should own some to enhance your portfolio, but if you can't handle the inevitable fluctuations, then it's not a place to be. My parents never owned a stock, were very middle class with no big nest egg, had a very small pension, collected SS and lived happily into their mid 80's. Laddered CD's will keep you capturing current rates. I don't remember reading stories about how people were ruined, needed to go back to work and/or became desperate because they managed their money too conservatively during the Great Recession.
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Old 01-18-2014, 03:42 PM   #27
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I don't remember reading stories about how people were ruined, needed to go back to work and/or became desperate because they managed their money too conservatively during the Great Recession.
Go look at the hapless 1966 retiree's experience instead. Or go look at someone who was 80% long bond starting in the late 60s. Not pretty.

As an ER/ESR at age 40, I am afeared of inflation enough that I decided I would keep my 30 year fixed rate mortgage in place as a hedge.
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Old 01-18-2014, 04:04 PM   #28
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I know many people here are Boglehead fans, personally I am more in the Zvi Bodie camp. I bought his Risk Less and Prosper book for my kids to read -

https://www.mint.com/blog/investing/...-bodie-022012/

He favors I bonds and TIPS for inflation protection with stocks okay for your fun money. Bill Bernstein seemed to move more towards this approach, at least for retirees, after the last stock market meltdown.

Here is another article on stocks, retirees and sequence of returns risk, and how to mitigate it with advice from various financial experts -

http://www.marketwatch.com/story/how...8?pagenumber=1
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Old 01-18-2014, 04:35 PM   #29
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One of the biggest blind spots that people have heading into (early) retirement is looking at risk of their portfolio versus overall risk to their total wealth and income stream. In the case of the OP, who I suspect may have saved hard for many years to acquire his current portfolio, this means accepting that a non-COLA pension (which we're all assuming is what he has) is a huge risk. Worse, it's a risk with a guaranteed downside: the only thing we don't know is how big that risk is. It's 25 years since we worried about non-housing inflation, and we forget how devastating it can be, but to summarise: it's worse than a bear market, because stocks bounce back, but money eaten by inflation is gone forever.

In our case, DW's salary and my pension are slightly more than we will be spending until she retires (probably about four years from now). Then we will draw down from the portfolio to complement our two pensions, which are both fully COLA'ed. But we also want to leave something substantial to our kids, so we are still thinking long-term: we want to protect this chunk of change for 30+ years, which means we ought to be even more into equities than we are (!).
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Old 01-18-2014, 04:35 PM   #30
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I bought his Risk Less and Prosper book for my kids to read -

Boy. My parents bought me stuff like bicycles and baseball bats/gloves.
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Old 01-18-2014, 05:00 PM   #31
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As Clifp says, inflation is enemy #1 in retirement, one that slowly strangles your financial independence if you don't take measures to offset it.

Retiring at 60 is definitely early retirement and the odds are at least one of you will live to be 90+. If your pension isn't COLAd (few are) you'll need some way to help keep up with inflation - and that something is usually investing in stocks in some form, FIRECalc indicates at least 35% to 40%.

I view going all cash for the long term as the boiled frog approach to financial security. By the time you realize you're in hot water it will be too late.
+1000

REWahoo's posts always seem so sensible and down to earth. I couldn't agree more.
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Old 01-18-2014, 05:12 PM   #32
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Boy. My parents bought me stuff like bicycles and baseball bats/gloves.
When you were an adult?
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Old 01-18-2014, 05:39 PM   #33
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Well, if one is risk averse and puts money in CDs, it's not the end of the world, the way I look at it. It's not an irreversible process.

If inflation picks up, and to be fair it has not reared its ugly head so far, it will be gradual. As long as one recognizes the risk, he/she can still diversify out of "safe" money to equities. That is assuming that he/she does not jump into the market at the wrong time just to see it tanks. That's the tough thing about equities that some people cannot handle: the volatility.
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Old 01-18-2014, 06:32 PM   #34
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Back in 1999 at age 39, cocky me wouldn't have traded a million dollars for $40,000 COLA pension from a credit worthy organization. 15 years later, despite a much lower life expectancy, I'd do it in a heart beat.
Well, there may come a time when we again will want something higher than a 4% COLA annuity. Yeah, dream on as some people will say.

As I have children and want to leave them something, I am OK with the present 3.5%WR, with COLA I certainly hope. I am willing to give up that 0.5%WR to give my children a chance to ER too, in case they run into trouble with their career later in life.
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Old 01-18-2014, 06:36 PM   #35
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Well, if one is risk averse and puts money in CDs, it's not the end of the world, the way I look at it. It's not an irreversible process.

If inflation picks up, and to be fair it has not reared its ugly head so far, it will be gradual. As long as one recognizes the risk, he/she can still diversify out of "safe" money to equities. That is assuming that he/she does not jump into the market at the wrong time just to see it tanks. That's the tough thing about equities that some people cannot handle: the volatility.
Maybe I am missing something, but isn't it that inflation itself is not so much a problem as negative real return rates? With fixed income ladders and short term bond funds isn't inflation really only an issue when prolonged real interest rates are lagging the inflation rate?

And aren't TIPS and I bonds more of a sure inflation hedge than stocks? It seems like from what I have read and some of the links I posted that there have been extended periods in the past where stocks did not keep up with inflation, and they may or may not do so in the future.

I get if you want to play the odds that a higher equity position will most likely lead to a higher rate of return long term, potentially a much higher rate of return, but I think for just a pure inflation hedge wouldn't that be more investments like delaying SS (since it has a COLA), obtaining a fixed rate mortgage when rates are low, inflation indexed annuities, TIPS and I bonds?
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Old 01-18-2014, 06:47 PM   #36
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For the OP: here is an excellent list of books on these topics.

Investment Books
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Old 01-18-2014, 07:19 PM   #37
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... It seems like from what I have read and some of the links I posted that there have been extended periods in the past where stocks did not keep up with inflation, and they may or may not do so in the future. ....

This may be the case, but I think it may not be the point.

I'm mostly just guessing here, but I think the advantages of stocks over a 30-40 year period is that the average higher gains will carry you through a period of high inflation. Those gains may not necessarily occur at the same time as the high inflation hits, but if they occur before and/or after, it helps you overall.

Regardless the reasons, FIRECalc clearly shows that a low stock exposure has been very risky over a 30-40 year time frame.

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Old 01-18-2014, 07:35 PM   #38
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As I am not obscenely wealthy, I would like to get some gains more than just keeping up with inflation. Historically, a balanced portfolio will carry 4% withdrawal rate through 30 years. Throw in some SS, and one should be safe. I have dialed back the WR to 3.5% to be even safer.

If I were to put my money into something that will barely keep up with inflation, my 3.5% WR would only last me 100/3.5 = 28.6 years. While I may not live beyond that, my wife may. SS alone might be all that she needs, but having nothing else would not let her feel safe. And then, I want to leave something to my children.

I guess if one is really risk averse to stocks, he/she can justify CDs and annuities. As for me, I prefer to have diversification (never 100% in any single thing), and frankly I am quite comfortable holding some equities and do not perceive them as risky compared to anything else. The value of my homes or the price of gold have been going up/down as much or more.
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Old 01-19-2014, 07:47 AM   #39
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Unfortunately my financial modeling skills are not great, but wouldn't a retiree spending 1.75% above his/her SWR be more at risk of depleting his/her assets over 30 years than another retiree who would spend a constant amount of money over 30 years (thus ignoring 1.75% rate of inflation)?

Happy to change my mind on this topic if presented with evidence.

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+1000

REWahoo's posts always seem so sensible and down to earth. I couldn't agree more.
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Old 01-19-2014, 08:46 AM   #40
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Unfortunately my financial modeling skills are not great, but wouldn't a retiree spending 1.75% above his/her SWR be more at risk of depleting his/her assets over 30 years than another retiree who would spend a constant amount of money over 30 years (thus ignoring 1.75% rate of inflation)?

Happy to change my mind on this topic if presented with evidence.
I may be mistaking what you are saying. Do you mean that you start out spending, say, $40K/yr, and 30 years later you are still spending $40K/yr? If so, your financial quality of life will be devastated. Even at 1%/yr inflation, you would be living on less than 3/4 what you started with. And I don't think anybody is predicting ongoing 1% inflation. At a more standard 3% you would be living on the equivalent of $16.5K per year. That's below the poverty level.

But, as I said, I may have misinterpreted your example.
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