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Fear / Greed and AA
Old 01-18-2014, 02:36 AM   #1
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Fear / Greed and AA

I’m looking for some feedback regarding our personal circumstances.

I’ve only been a member here for a very short time… I have learned quite a bit… but not sure if we fit in or even belong here. My wife and I are ~58 and will be retiring at 60… so not really that “early” of a retirement. Our portfolio appears to be significantly less than the average represented by other members of the forum. We are very middle class with a goal of maintaining our current lifestyle through retirement. Fortunately we have a very good pension available at 60.

Our withdrawal rate will be significant in the years before we receive SS. After we begin receiving SS benefits the portfolio will primarily be used as a hedge against inflation. We haven’t determined exactly when we will elect to take SS... our original thought is to begin at 62. At 62 all of our living expenses (including taxes) can be covered by pensions and SS. Health insurance is covered by my wife’s employer and we have 0 debt.

Running the numbers using “Flexible Retirement Planner” (and FIRECalc) assuming an average annual inflation rate of 3% and 0% return on investments we could live until we’re 97 years old before our plan fails. A modest 3% annual return (e.g. PenFed CDs) and we could increase our annual expenses by 18% and live until we’re 95 before our plan fails.

Eventually interest rates will rise and >3% guaranteed returns should be readily available.I realize over the long term we could possibly do much better than 3% by continuing to invest in the market. But for us personally… is it worth the risk? Where do you draw the line between need and greed?

I’m considering going to ~80% cash and buying additional CDs as rates improve.

Given similar circumstance what would you do or suggest?
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Old 01-18-2014, 06:47 AM   #2
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60 is still an early retirement.

There are several financial risks, the one that most people are concerned is bear market.

However, inflation IMO is just as serious a threat. While 3% is reasonable long term inflation, much like the stock market has bad decades like the the the 2000s, we have had some bad bouts with inflation.

The equivalent of $40K retirement in 1971 is $6,954. In order to keep up with inflation the the 1971 retiree would need his income to be $15,608 by 1981. This is more than 8% average inflation rate for the decade. I don't think there was any fixed income investment during that time that kept up with inflation, especially after taxes (rates were higher back then).. There are plenty of smart people who are predicting much higher inflation (now we have been wrong for 5 years...). I think people with a heavy concentration of bonds who retire into an early period of high inflation vast the same risk as folks with real high equity concentrations face with a early bear market or two in their retirement.

Portfolio with %<40% tend to fail in the late 60s when the combination of a sideways market and high inflation kills them. So I don't characterize having more than 20% equity position as being greedy but rather being prudent.

Of course SS has inflation protection and if your pension also has a COLA than it is less of a risk. If your pension has a COLA provision, that it is more than likely government one. I think reduction of COLA to the military pension could very possibly be a signal of upcoming changes to government pension at all levels.

At a low enough withdrawal rate than any amount of equities is probably safe. However, if you want to keep equities to a minimum than historically your choices for protecting against inflations are gold, or real estate, although I think a better choice would be TIPs bonds. The 10 years have ~.75% yield and the 30 years are 1.58%.
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Old 01-18-2014, 07:02 AM   #3
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Adding to clifp's excellent advice, you should do some research on optimal social security strategies. In light of your rather extreme desire for low risk, inflation will be the killer and by delaying social security, the COLA adjusted monthly payments will increase significantly. There is a ton of info on the board on when to take SS. Being married, it is nearly always better for the higher earning spouse to delay taking payouts until age 70. I'd look at using your effectively non-growing nest egg to supplement the pension until SS kicks in.
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Old 01-18-2014, 07:09 AM   #4
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Originally Posted by 34rlsa View Post
Given similar circumstance what would you do or suggest?
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.
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Old 01-18-2014, 07:12 AM   #5
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Originally Posted by clifp View Post
60 is still an early retirement.

There are several financial risks, the one that most people are concerned is bear market.

However, inflation IMO is just as serious a threat. While 3% is reasonable long term inflation, much like the stock market has bad decades like the the the 2000s, we have had some bad bouts with inflation.

The equivalent of $40K retirement in 1971 is $6,954. In order to keep up with inflation the the 1971 retiree would need his income to be $15,608 by 1981. This is more than 8% average inflation rate for the decade. I don't think there was any fixed income investment during that time that kept up with inflation, especially after taxes (rates were higher back then).. There are plenty of smart people who are predicting much higher inflation (now we have been wrong for 5 years...). I think people with a heavy concentration of bonds who retire into an early period of high inflation vast the same risk as folks with real high equity concentrations face with a early bear market or two in their retirement.

Portfolio with %<40% tend to fail in the late 60s when the combination of a sideways market and high inflation kills them. So I don't characterize having more than 20% equity position as being greedy but rather being prudent.

Of course SS has inflation protection and if your pension also has a COLA than it is less of a risk. If your pension has a COLA provision, that it is more than likely government one. I think reduction of COLA to the military pension could very possibly be a signal of upcoming changes to government pension at all levels.

At a low enough withdrawal rate than any amount of equities is probably safe. However, if you want to keep equities to a minimum than historically your choices for protecting against inflations are gold, or real estate, although I think a better choice would be TIPs bonds. The 10 years have ~.75% yield and the 30 years are 1.58%.
+1
You're smart to be cautious when your draw rate it high, but inflation could get you into trouble. The lowest risk portfolio is not all fixed income, it's actually one with some stocks to provide diversification and an inflation hedge. Statistically/historically, the portfolio with the least volatility is about 30% diversified stocks and 70% bonds and cash. As an example, check out the long-term performance of the Vanguard Wellesley fund. I think there are forum members here who lean on this fund quite a bit.

BTW, I don't think you need to FIRE in your 40s or have $5 million to fit in here... it's a great resource for people with all sorts of profiles!
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Old 01-18-2014, 07:45 AM   #6
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An alternative POV could be that automation and globalization will continue to put downward pressure on wages, one of the primary drivers of inflation, for the foreseeable future.

It's impossible really to predict what inflation or the markets will do and too much planning for one or another contingency may not be the best approach IMHO.

A 60/40 AA of stocks and bonds seems to be what most suggest is the optimum mix.

Your SS, pensions and retirement healthcare benefits should be a big help toward maintaining your lifestyle through retirement.
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Old 01-18-2014, 07:52 AM   #7
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You said your WR will be high until SS comes in, but not how high. I think it is prudent to hold significant cash, meaning CD and short-term bonds, but 80% may be too high, again not knowing what your WR is. As earlier posters imply, a balanced fund is best for the long term. However, for your short-term need, a supplementary cash AA outside of these funds would let you feel more secure. The question is how much.

About the "rich cats" here, remember that many do not have pensions. Their spending power may not be any higher than people with one. And then, there are posters who manage to live on $20K a year, but you may not know that if you only read the "Travel" forum. So, we have a mixture of people here, and that makes the conversation more interesting.
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Old 01-18-2014, 09:42 AM   #8
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Welcome, 34, and yes everyone is readily accepted here. I will respond because I am a similar smaller net worth person, who is fortunate to have a pension that I
is my only source of income along with a 2% annual cola that just kicked in again this month. Not knowing whether your pension is COLA'd is big for future planning. If the numbers are good and safety and preservation of capital is most important to you, then maybe you should lean that way with a significant amount of your holdings. 70% of my stash is IBonds or CDs, though now I do make a modest monthly automatic purchase of total stock index fund. You consider instead of just cash, starting yearly 20k (per couple) purchase of government I Bonds from Treasury Direct. If purchased before end of April they have a fixed .2% rate plus inflation adjustment added on and they can never lose money. Many people on this forum have them in their portfolio.
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Old 01-18-2014, 09:52 AM   #9
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I would say the enemy number one is living beyond your means. Inflation in my view is secondary.

To the OP: I am a big fan of CDs also. I think you are on the right track. Have you considered SPIAs?

.
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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.

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Old 01-18-2014, 10:16 AM   #10
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BTW, I don't think you need to FIRE in your 40s or have $5 million to fit in here... it's a great resource for people with all sorts of profiles!
+1

I'm also relatively new to this forum (since 2011), and I can tell you it's a very diverse, knowledgeable and welcoming community. It's been of tremendous benefit to me. You'll find lots of useful advice and support here. Welcome 34!
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Old 01-18-2014, 10:24 AM   #11
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+1 I'm also relatively new to this forum (since 2011), and I can tell you it's a very diverse, knowledgeable and welcoming community. It's been of tremendous benefit to me. You'll find lots of useful advice and support here. Welcome 34!
Speaking of Huston's comment the advice here is good and sometimes very uplifting. When I joined here, like you 34, I just thought of myself as a relatively poor person. A poster told me to put my pension into a annuity calculator and suddenly in seconds I went from poor to "multi millionaire".
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Old 01-18-2014, 10:37 AM   #12
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34, as others have hinted I think you want to set aside preconceived notions about what risk is (equity market might go down) and look at what your specific risks are. Unless your pension is COLAd, I would be most worried about inflation risk and consider pretty much everything else secondary. If I were in your shoes, I would probably set aside in cash and/or CDs enough money to get you to whenever you decide you will take SS (and I would make that decision before you set up your portfolio). A CD ladder would be ideal for this, IMO. The rest of the portfolio I would actually invest fairly aggressively, especially if your pension is not COLAd. Think of it this way: you will not need that money on a regular basis because your expenses will be covered by the pension and SS. However, you have significant risks in the form of inflation, bad stuff happening (need new roof/car/whatever), long term care, etc. All of those things are far off in the future, so match your long term portfolio to your long term needs.

My MIL is in a similar situation to you except that she is a divorcee (so no spousal considerations) and she is roughly a decade further along than you are. When she was 61 she retired with a pension that more than covered her expenses and a modest IRA balance (no debt). Her pension was COLAd, but only at the largesse of the state legislature (not guaranteed), so she has significant inflation risk. I set up a 65% equity portfolio for her with the other 35% including chunks of TIPS, non-USD bonds and merger arbitrage funds with an eye toward trying to ward off inflation. This has worked out well for her. Yep, her portfolio took a nosedive during the collapse, but it did not matter because she was not and is not drawing on it. It is still there for whatever she needs (will be drawing this year to replace a large deck on her house) and it has grown considerably in the past decade.
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Old 01-18-2014, 10:38 AM   #13
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I would say the enemy number one is living beyond your means. Inflation in my view is secondary.

To the OP: I am a big fan of CDs also. I think you are on the right track. Have you considered SPIAs?

.
OP already has a giant SPIA in the for of the pension.
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Old 01-18-2014, 10:58 AM   #14
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Originally Posted by 34rlsa View Post
I’m looking for some feedback regarding our personal circumstances.

I’ve only been a member here for a very short time… I have learned quite a bit… but not sure if we fit in or even belong here. My wife and I are ~58 and will be retiring at 60… so not really that “early” of a retirement. Our portfolio appears to be significantly less than the average represented by other members of the forum. We are very middle class with a goal of maintaining our current lifestyle through retirement. Fortunately we have a very good pension available at 60.
Here's my feedback. You certainly do fit in. Many of us retired early (that is before the SS full retirement age) but certainly not in our 50's. It's all relative. People here who retired at 52 think I did not retire early. My friends who will be working until they are 70 think retiring before being eligible for any SS is early! Take your pick.

Some of people here have big portfolios, guaranteed medical supplements, fat severance checks and generous pensions from MegaCorp. But, most don't. What most have is the ability to save, invest, live below their means, and plan ahead. Most will draw out more in the early years and less when SS and/or pensions kick in. Your situation sounds rather typical to me.


Good Luck.
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Old 01-18-2014, 11:00 AM   #15
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OP already has a giant SPIA in the form of the pension.
Yes. SS+pension+covered healthcare = secured income. Need more equity for diversification!

The only question is the gap until SS and pension kick in.
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Old 01-18-2014, 11:07 AM   #16
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Yes. SS+pension+covered healthcare = secured income. Need more equity for diversification! The only question is the gap until SS and pension kick in.
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?
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Old 01-18-2014, 11:10 AM   #17
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I also have a pension and SS but I still plan to buy SPIAs at a later stage in my life. Opinions differ on this topic and that's ok.

Quote:
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Yes. SS+pension+covered healthcare = secured income. Need more equity for diversification!

The only question is the gap until SS and pension kick in.
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Old 01-18-2014, 11:17 AM   #18
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This may be a case where the U Shaped AA strategy makes the OP feel more comfortable with tolerating risk in their investment portfolio. There was a recent thread about this concept, but in a nutshell, it suggests starting off with a lower percentage of equity holdings right at retirement (such as 25%), and gradually increasing it over the retirement period up to possibly 50%. The study suggests this would lower the probability of depleting the portfolio over a 30 year period, while allowing the retiree to start off with a relatively low exposure to equities at a time when they may feel a bit vulnerable to having too much on the table right at the beginning of their retirement.
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Old 01-18-2014, 11:23 AM   #19
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... 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 am no pension expert, so will concede that you may have a good concern there. On the other hand, not all pensions are alike, so that risk varies with each case, I guess.

But even if a pension runs into trouble, it will not happen overnight. I would think you will see plenty of handwriting on the wall to shift your own investment. Still, don't blame me if it does not work out like that.
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Old 01-18-2014, 11:37 AM   #20
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Given: 1) Pension + SS= expenses at age 62.
2) Portfolio will be both inflation hedge and cash for expenses until
62.
3) Pension at age 60
4) 2years to retirement
Then I would suggest cash(CD's or equivalent) to cover the age 60-62 gap and equities for the rest. While equities have market risk, over long periods of time equities are more likely to keep up with inflation than fixed income investments.
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