View Poll Results: How will you fund your FIRE income
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100% Stock/Bond Portfolio
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42 |
61.76% |
70% TIPS Ladder with 30% Stock/Bond Portfolio
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6 |
8.82% |
Not sure, Not Applicable, or I use Lottery Tickets
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20 |
29.41% |
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FIRE Income Investment Poll
11-22-2010, 04:19 AM
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#1
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Give me a museum and I'll fill it. (Picasso) Give me a forum ...
Join Date: Feb 2007
Posts: 5,072
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FIRE Income Investment Poll
This poll is about preferences for solid reliable income vs taking on Additional Risk/Potential Reward.
Situation for the poll
You are 55 and have a portfolio where 70% of the current value is enough (on a Present Value basis.. today's $) along with (SS + Pension) to produce the desired income stream (your real target income) to meet your needs till age 95. If you are younger just assume more assets to produce the income. You and spouse (if applicable) will be die sometime before or at 95 (so longevity past 95 is not a risk in this poll).
You have 2 options:
- Invest in a portfolio of Stocks and Bonds (e.g., 60/40 Mix). The upside is potential for growing your money past the current PV of income needs over 40 years. In other words, you make about a 7.5% average return but will suffer bear markets, potential for less growth... The upside is 7.5% Average... the downside could be loss of 25% or 40% of your assets. Depending on how you manage it... you could run out of money. Essentially, you are risking your lifestyle somewhat to have a somewhat larger estate at the end
- Invest 70% of the Portfolio in a TIPS ladder out till age 95 such that the money adjusts with the CPI-U plus the small investment premium on TIPS. Invest the remaining 30% of the portfolio in a smaller portfolio of Stocks and bonds (e.g., 60/40 Mix). This portfolio is to be used for whatever and however.
Option2 has a total bond allocation of around 80% across all assets
What is more important? Stable income adjusted for inflation the rest of your life or potential for more growth (at the risk of more loss)?
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11-22-2010, 06:50 AM
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#2
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Give me a museum and I'll fill it. (Picasso) Give me a forum ...
Join Date: Mar 2003
Posts: 18,085
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I don't like the characterization of door number 1. Average upside of 7.5%? Not the real world. See my sig line for what I think of relying on averages.
I also think door number 2 is misleading. You would have to be real sure about TIPS, which have a very short history.
__________________
"All animals are equal, but some animals are more equal than others."
- George Orwell
Ezekiel 23:20
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11-22-2010, 07:57 AM
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#3
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Moderator Emeritus
Join Date: Jan 2007
Location: New Orleans
Posts: 47,468
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Quote:
Originally Posted by brewer12345
I also think door number 2 is misleading. You would have to be real sure about TIPS, which have a very short history.
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I agree. Door number 2 isn't very well diversified. I'd choose door number 1, and I would plan to deal with market fluctuations and a retirement longer than most, by withdrawing less than 4%.
__________________
Already we are boldly launched upon the deep; but soon we shall be lost in its unshored, harbourless immensities. - - H. Melville, 1851.
Happily retired since 2009, at age 61. Best years of my life by far!
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11-22-2010, 08:00 AM
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#4
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Full time employment: Posting here.
Join Date: Jan 2008
Posts: 649
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I voted Not Sure due to the wording of Door #2, but I can tell you I'm a "bird in the hand" kind of guy so I'm definitely in the camp of:
"Stable income adjusted for inflation the rest of your life"
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"There is no dignity quite so impressive, and no independence quite so important, as living within your means." Calvin Coolidge
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11-22-2010, 08:08 AM
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#5
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Give me a museum and I'll fill it. (Picasso) Give me a forum ...
Join Date: Sep 2005
Posts: 5,381
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Quote:
Originally Posted by brewer12345
I also think door number 2 is misleading. You would have to be real sure about TIPS, which have a very short history.
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What kinds of things would you worry about? It's one asset class I don't feel like I need to consult a historic record, at least with respect to a ladder.
The things I'd worry about wouldn't necessarily present themselves in a historic model: Manipulation or changing of the index. Personal inflation materially different from the index. Tax leakage at high inflation might show up, but that is also something that could be modeled without need for history.
I think if I could get my WR low enough, or if real yields were high enough, I'd seriously consider something like option 2.
__________________
Retired early, traveling perpetually.
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11-22-2010, 08:32 AM
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#6
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Give me a museum and I'll fill it. (Picasso) Give me a forum ...
Join Date: Mar 2003
Posts: 18,085
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Quote:
Originally Posted by Gone4Good
What kinds of things would you worry about? It's one asset class I don't feel like I need to consult a historic record, at least with respect to a ladder.
The things I'd worry about wouldn't necessarily present themselves in a historic model: Manipulation or changing of the index. Personal inflation materially different from the index. Tax leakage at high inflation might show up, but that is also something that could be modeled without need for history.
I think if I could get my WR low enough, or if real yields were high enough, I'd seriously consider something like option 2.
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Maybe if real yields were high enough I would be more comfy with the idea, but the issues you outlined would be the main ones I would worry about.
__________________
"All animals are equal, but some animals are more equal than others."
- George Orwell
Ezekiel 23:20
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11-22-2010, 09:44 AM
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#7
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Thinks s/he gets paid by the post
Join Date: Oct 2010
Location: Waimanalo, HI
Posts: 1,881
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I wouldn't put any money in interest-bearing securities, since right now interest rates are low. I realize that I am not on the same page as most of you on this. I do appreciate the undesirability of common stocks' volatility, but it just doesn't make sense to me to invest in securities whose worth is probably going to decrease.
__________________
Greg (retired in 2010 at age 68, state pension)
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11-22-2010, 10:02 AM
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#8
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Give me a museum and I'll fill it. (Picasso) Give me a forum ...
Join Date: Mar 2005
Location: Chicago
Posts: 13,149
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Quote:
Originally Posted by Gone4Good
I think if I could get my WR low enough, or if real yields were high enough, I'd seriously consider something like option 2.
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This sounds like a subset of the axiom that low WR's allow conservative investments. I certainly agree.
Hindsight is wonderful. If I'd been on my game and snapped up a bunch of 3% real TIPS when they were available, I'd be happy as a clam right now.
Ref the poll: I don't like polls where none of the choices appeal to me so I'll just pass. None of the three choices reflects the summary question
Quote:
What is more important? Stable income adjusted for inflation the rest of your life or potential for more growth (at the risk of more loss)?
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very well.
Brewer - your comments ref "averages" are right on! Few would actually experience the "average" 7.5% return that OP references. Most would get something higher or lower. But the "average" would be 7.5% just the same.
__________________
"I wasn't born blue blood. I was born blue-collar." John Wort Hannam
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11-22-2010, 10:26 AM
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#9
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Full time employment: Posting here.
Join Date: Nov 2010
Posts: 628
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I am not comfortable with either of those choices. I see stagflation in the near term. USA service economy doesn't create real wealth. The housing bubble popping evaporated savings for too many. Jobs are scarce. I also expect another energy crunch/crises. Net result is cash hoarding and paying down debt. Locking in bonds at this time is a loser, TIPs or not.
Personally, I am trying to diversify, but having trouble in allocating in what I see as guaranteed losers when the markets are irrational.
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11-22-2010, 03:41 PM
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#10
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Dryer sheet wannabe
Join Date: Nov 2010
Posts: 24
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Interesting poll. Seems basically asking about TIPS. But I suspect percentage in TIPS or purchase more dictated by when and what rates were. Hard to imagine now putting too much new money in TIPS.
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11-22-2010, 04:09 PM
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#11
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Thinks s/he gets paid by the post
Join Date: Oct 2006
Posts: 4,629
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I see the question as a straightforward risk tolerance choice. I happen to be on the conservative side, so I choose 2 because I sleep better. That means I'm expecting TIPS to pay out as promised.
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11-22-2010, 04:55 PM
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#12
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Give me a museum and I'll fill it. (Picasso) Give me a forum ...
Join Date: Feb 2007
Posts: 5,072
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I have been reading about managing income distribution in retirement. A couple of authors make comments about risk and investing. For retirement income in the distribution phase... take no more risk than is necessary to create the income needed.
So I thought I would take a poll to see the forum's opinion.
In this fictitious poll... you have enough money... the question gets down to what is important to people....
1) Chance of making a lot more money with increased risk (and the problems it might create)
or
2) Stable income by setting aside enough reliable fixed securities (in this case indexed bond ladder) to cover one's target income level and a smaller portfolio of stocks and bonds for some growth.
----- for some of the other comments about securities and stock market returns ----
TIPs have been issued since 1997. They are relatively new compared to other bonds. However, I would be a bit more concerned about the govt manipulating the CPI-U than the bond not paying off. But you would have to have some faith that the CPI-U is a reasonable inflation adjustment index.
Assume that the TIPs can do their job and keep up with the CPI-U. Or If you think regular treasuries can do the job better, substitute them. Or for that matter an inflation indexed annuity. Some fixed and reliable security that has a good chance of keeping up with inflation... but laddered to eliminate volatility. With Low to No credit risk.
About stock returns looking forward... who knows?
One Investment Bank's projection on returns for the next 10 years.
http://www.jpmorgan.com/cm/cs?pagena...capitalmarkets
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11-22-2010, 07:36 PM
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#13
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Give me a museum and I'll fill it. (Picasso) Give me a forum ...
Join Date: Jun 2005
Posts: 10,252
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And I guess you know you can't construct a true TIPS ladder anyways with maturities to match your needs.
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11-23-2010, 03:59 AM
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#14
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Give me a museum and I'll fill it. (Picasso) Give me a forum ...
Join Date: Feb 2007
Posts: 5,072
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Quote:
Originally Posted by LOL!
And I guess you know you can't construct a true TIPS ladder anyways with maturities to match your needs.
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I believe it can be done. Whether now is a good time to do it (because of artificially depressed rate) or practical problems that might need to be overcome in constructing it (even if it took several years)... all of those are real issues that could and should be considered.
The mechanics of it was not the point. Use of TIPS was not really the point. It was just that TIPS probably represent the closest security (today) that deals with inflation risk.... a ladder.. rolling or non-rolling, however constructed is a mechanism to deal with market risk. The combination is a tool to project money into the future to preserve their purchasing power (with reduced risk)
If I had presented the poll as these two questions:
- Stable desired income for life with a low chance of significant loss that could jeopardize your income.
VS.
- Chance to make a couple of percent more compounded with much greater risk of losing money and chance of you (not the market) making a big mistake that could permanently impair your lifestyle.
It would have been a little less like a real description of a viable approach ... it would have been more nebulous and a little less real (whether you agree that either approach is right for you or not).
This board is heavily tilted toward the Constant Mix/SWR approach so I am not surprised with the voting results.
I would recommend that everyone do more study on the subject of managing the income distribution phase (including what it might mean as they age and perhaps are less sharp)... and keep and open mind. Challenge your current belief system (reasonably so) and try to at least be confident you are on the correct path for yourself or if there may be a better approach. This is one of those topics where age and stage of life can definitely change ones outlook. IOW - It lookd different at 35 and working than it does at 55 and getting ready to FIRE...
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11-23-2010, 05:12 AM
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#15
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Give me a museum and I'll fill it. (Picasso) Give me a forum ...
Join Date: Jun 2005
Posts: 10,252
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Quote:
Originally Posted by chinaco
I would recommend that everyone do more study on the subject of managing the income distribution phase (including what it might mean as they age and perhaps are less sharp)... and keep and open mind. Challenge your current belief system (reasonably so) and try to at least be confident you are on the correct path for yourself or if there may be a better approach. This is one of those topics where age and stage of life can definitely change ones outlook. IOW - It lookd different at 35 and working than it does at 55 and getting ready to FIRE...
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I believe Otar's book does this extremely well. Have you read it?
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11-23-2010, 07:12 AM
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#16
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Give me a museum and I'll fill it. (Picasso) Give me a forum ...
Join Date: Sep 2005
Posts: 5,381
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Quote:
Originally Posted by chinaco
But you would have to have some faith that the CPI-U is a reasonable inflation adjustment index.
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This is a fair criticism of TIPS and one that is widely held and commented on. But seemingly less recognized is that it is not a criticism unique to TIPS. I have a feeling many people who distrust CPI (and therefore TIPS) underestimate their own exposure to the index. FIRECalc and similar models also rely on CPI, and their results also assume that the index is reasonable. If one's personal inflation rate, or if the "true" rate of inflation is higher than CPI, a 100% Safe FIRECalc approved withdrawal strategy is no longer 100% Safe, even in its historic context.
I don't really see CPI's reasonableness as any more of a problem for TIPS than for a different strategy that relies on CPI to back test its results (e.g. FIRECalc). In each case you need to build in a cushion, over and above what the model considers "Safe" to try to insure against all of these known, and unknown, potential shortcomings.
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Retired early, traveling perpetually.
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11-23-2010, 03:30 PM
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#17
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Give me a museum and I'll fill it. (Picasso) Give me a forum ...
Join Date: Feb 2007
Posts: 5,072
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Quote:
Originally Posted by LOL!
I believe Otar's book does this extremely well. Have you read it?
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No... but I remember seeing something about it.
I will check it out.
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11-23-2010, 03:47 PM
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#18
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Thinks s/he gets paid by the post
Join Date: Sep 2008
Posts: 2,171
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Quote:
Originally Posted by chinaco
(snip) What is more important? Stable income adjusted for inflation the rest of your life or potential for more growth (at the risk of more loss)?
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I didn't vote, but to me, a stable income for life is much more important than growth potential. My motto is "I'd rather be in a seaworthy canoe than a leaky ocean liner".
I didn't look at the results until after I wrote that. "Growth potential" outnumbers "stable lifetime income" by a six-to-one ratio. There must be a lot of that "thrill-seeker" gene in this population.
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11-23-2010, 04:39 PM
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#19
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Give me a museum and I'll fill it. (Picasso) Give me a forum ...
Join Date: Apr 2003
Location: Hooverville
Posts: 22,983
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Quote:
Originally Posted by kyounge1956
I didn't look at the results until after I wrote that. "Growth potential" outnumbers "stable lifetime income" by a six-to-one ratio. There must be a lot of that "thrill-seeker" gene in this population.
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that may be more a comment on distrust regarding TIPS and CPI manipulation, and/or dissatisfaction with current TIPS rates than actual abstract preferences. This is a practical group.
Ha
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11-23-2010, 04:56 PM
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#20
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Give me a museum and I'll fill it. (Picasso) Give me a forum ...
Join Date: Feb 2007
Posts: 5,072
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Quote:
Originally Posted by kyounge1956
I didn't vote, but to me, a stable income for life is much more important than growth potential. My motto is "I'd rather be in a seaworthy canoe than a leaky ocean liner".
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I couldn't have stated it better myself.
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