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Old 10-14-2008, 07:52 AM   #21
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Enjoy all the posts regarding fixed incomes and inflation. I tell all my buddies at the golf course that my wife has taken it on as her personal responsibility to bring this country out of the recession. Her greatest fear is that she will die and not have spent all the money. I have always been frugal and take great comfort in knowing that we can do OK even in a sorry economy. All our investments are in CD's and a bond fund. I might even move the bond funds into laddered CD's. Wish I knew more about laddering. However, I sleep well at night and don't ever want to change that. I'm 72 and my wife is 70. If I die before her, she will go through the money like Grant took Richmond. I've written her a letter that's in the satety deposit box with instructions on how to operate the funds. Hope she takes time to find the letter.
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IN Favor of Equity
Old 10-14-2008, 01:18 PM   #22
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IN Favor of Equity

I would not be retired today if I had not invested in equities. My allocation varied from maybe 20% to 120%. If you make very high wages and live very cheaply maybe you can do it with fixed income. Or if your timing is very good, like you bought long term treasury zeros in 1982. Otherwise, be aware of valuation but don't be afraid of stocks.

I use the same plan in retirement, but I think there are good arguments for keeping more of fixed income for older retirees. If we get a huge upmove, I'll shift some to TIPS.

IMO, and for my use only, I think valuations are very low right now in many sectors. I recently updated Andrew Smithers' implemetation of Tobin's Q. As of Monday close, the S&P was about -0.2, where 0 is set as neutral, +1.2 (220% above normal) was the 2000 peak, and -0.40 was the 1982 low. So even the 1982 low is no more than 25% more from here. The only lower readings in the 20th century were in 1920, at about -0.42.

My guess is that in certain areas like oil and gas if the same reasoning were applied, the "O&G Q" would be at an all-time low.

So my task now is to keep repeating to myself- No Margin For A Retired Man; I Must Not Think Bad Thoughts.

Ha
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Old 10-14-2008, 01:41 PM   #23
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I think there are good arguments for keeping more of fixed income for older retirees. If we get a huge upmove, I'll shift some to TIPS.
For me, it's a volatility vs return tradeoff. With equitites you get higher long term returns at the expense of higher short term volatility. For retirees who might consider 5 - 10 yrs of volatile, down equity markets a disaster, best to temper the volatility with a significant fixed income postion. Total portfolio returns will likely be lower, but the reduced volatility might keep you from having to postpone that trip of a lifetime you planned to take in your 60's.
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Old 10-14-2008, 01:45 PM   #24
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So my task now is to keep repeating to myself- No Margin For A Retired Man; I Must Not Think Bad Thoughts.
I know what you mean, HA. Margin is very tempting these days, with a not-insignificant number of seemingly good quality investments that pay you current income to carry them.
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Old 10-14-2008, 06:39 PM   #25
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Your situation sounds so much like my own. I retired early at 52 and didn't have a great deal of money. I retired 10 years ahead of my time but have never been sorry. Didn't have that 10 years to build up the 401k. You are still young enough to get a part time job if you need to. I worked real estate, property management and was even a substitute teacher. This was mostly to keep busy but also to cover my golf habit. Got out of stocks years ago and glad I did. All my money is in CD's and bond funds. Safety is first at my age (72). The rule of thumb is to take no more than 4% out of your investments each year and you'll never run out of money. So I took my SS and my wifes, plus 4% out of CD's and 4% withdrawal from 401k and made it work. Now I'm having to take mininum required distribution from 401k. My goal is to maintain my investment base so it always is supporting the withdrawals. It hasn't gone below thay level in four years. With inflation the way it is, who knows what life will be like in two-three years. We aren't big spenders but we don't save any money either. I spend about $5500 a year on golf and my wife spends a lot on her hobby. A lot of guys I know went back to part time whatever just to keep their hobbies going. If things get real bad, I can always give up the golf club.

Good luck to your in your retirement.
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Old 10-14-2008, 08:13 PM   #26
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Well, I think you can see the state of my thinking (or lack of) or perhaps my fear of getting in a bad/stagnant stock market.:confused:
I'll just say that the time to be worried about getting in the market is when it is UP, not so much when it is down. And boy, are we DOWN!

You have to follow your comfort zone, but you might want to get your head around the idea that your fear is out of sync with the market. That might help.

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Originally Posted by haha View Post
TIPS real rates may go higher, with the tremendous demand for liquidity in the world. But IMO they are definitely getting into a buying zone.

3% real goes a long way toward solving the retirement funding problem, albeit with none of the fun of the last few weeks.

ha
haha, please keep us informed - I've ignored TIPS as everyone has been saying the real returns have not looked good for a long time. My portfolio could probably stand some of these, at the right yield.

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I would not be retired today if I had not invested in equities. My allocation varied from maybe 20% to 120%.

So my task now is to keep repeating to myself- No Margin For A Retired Man; I Must Not Think Bad Thoughts.

Ha
I laughed an evil laugh at that one! The only thing that beats the excitement of the adrenaline rush of seeing your leveraged investment go up, up, up - is the "excitement" of watching your leveraged investment go down, down, down... ever so quickly.

What's the old saying? Experience is the best teacher? The good thing about my painful lesson was that I learned it BEFORE I retired. I'd hate to think what I might do to myself w/o that experience.

I do dabble it in a bit from time-to-time (options can really be the same as margin). But, before I do, I force myself to do the numbers and say OUT LOUD - "if this investment goes to ZERO, where will that leave me, and am I comfortable with that?". If I cannot answer that ZERO is an acceptable risk (small % of NW), I don't hit the SUBMIT THIS ORDER button.

I might re-phrase your statement a bit - margin is for people who can consider (and are capable of) going back to work!

-ERD50
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Old 10-14-2008, 08:53 PM   #27
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Inflation is the norm... but these are not normal times.

Periodically the economy goes through [necessary] periods of deflation.

We are in such a deflationary period now.

Deflation favors those who are in cash and debt free.
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Old 10-14-2008, 10:47 PM   #28
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With inflation the way it is, who knows what life will be like in two-three years.
That's why I'm interested in HA's comment regarding TIPS. If inflation really gets bad in a couple years like many are predicting, fixed CD rates might not cut it. I need to do some studying on TIPS, especially from a tax perspective and perhaps even a TIPS ladder.
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Old 10-14-2008, 10:49 PM   #29
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FASTFADE. I do try and maximize my CD rates by using websites that follow rates nationwide. The best IMO so far is "bankdeals.blogspot.com".

It cover's banks and credit unions. After you search out these websites and read the forums for a couple of years, You will sorta of get a feel for what is true, what to watch out for and "learn from other peoples experiences"

Also, IMO, If you follow the crowd, you will end up like the CROWD. So sometimes it does makes sense to not do what everyone else tells you to do.

If I had followed the advice of the "experts", I would have lost a lot of my networth during the past month.

Also, during the dotcom boom, I was fortunate enought to get out before the drop, and invest my proceeds in 7% 5 year CD's at the time.

Now that I'm retired, I agree with you.....but as I mentioned before.....if you talk to a financial expert they will prove to you that you are wrong.
Without equities, inflation will eat you up.

Again, as I mentioned before, don't spend more that you earn, and use the excess earnings to protect you against future inflation.

Also, plan for future expenses, ie. car, vacations, etc.

One concern I do have is the ability to pay for long term care for a spouse.
Managing my monther-in-laws assisted living expenses is very expensive.
Here is CA, it's $2900 a month. If the person requires extra care it's ranges up to $4000 a month.

If you have not already, you might look into long term care insurance.
The price varies depending on if you want only a couple of years worth of coverage or lifetime.

In my experience, to save money, it seems males don't last to long after they get sick. At the most maybe 2 years. So longterm care for 2 years.

Females as we all know, live much longer. So longtermcare for them should be longer.

I'm still debating if we should purchase long term care.

I might just get it for my wife.

Back to inflatiion:

In my case, we have about 10% in equities, I was going to increase that percentage slightly because the market is so low, but I'm still not sure when.

Sorry again for the rambling story.
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Old 10-15-2008, 06:31 AM   #30
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With equities you get higher long term returns at the expense of higher short term volatility.
That's not a fact. It's a prediction based on a variety of assumptions that may or may not continue to be valid as the future unfolds. Determining the proper confidence level for a prediction means determining a confidence level for each of the assumptions supporting the prediction. This is more work than many people want to do.
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Old 10-15-2008, 06:46 AM   #31
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FASTFADE. I do try and maximize my CD rates by using websites that follow rates nationwide. The best IMO so far is "bankdeals.blogspot.com".

One concern I do have is the ability to pay for long term care for a spouse.

If you have not already, you might look into long term care insurance.
The price varies depending on if you want only a couple of years worth of coverage or lifetime.

I'm still debating if we should purchase long term care.

I might just get it for my wife.
Hey there Wolf... Thanks for the link to "bankdeals.blogspot.com". I've put it in my Favorites and will take a look at it shortly.

As to Longterm Health Care, my wife and I purchased a policy from Genworth about 2.5 yrs ago. We got the "Shared Coverage Option with a monthly maximum of $3900 & Lifetime Max of $468,000. It also, includes a 5% Equal Benefit Increase on each Policy Anniversay. Our annual fixed Premium is $3471.

It's a faily standard policy and if one spouse dies, the surviving spouse can continue the policy at a reduced annual rate of 125% of the survivor's rate (~$1950/yr).

Thanks for sharing your experience and opinions
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Old 10-15-2008, 09:20 AM   #32
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Inflation is a big risk. TIPS are not a true inflation hedge, although some on here will disagree. That being said,I know folks 100% in CDs that are blissfully happy. I guess "to each their own"...........

Keep in mind that even after a fairly large pullback in oil, food and energy prices are FAR above the "fake" inflation numbers the govt feeds us........
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Old 10-15-2008, 10:02 AM   #33
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That's why I'm interested in HA's comment regarding TIPS. If inflation really gets bad in a couple years like many are predicting, fixed CD rates might not cut it. I need to do some studying on TIPS, especially from a tax perspective and perhaps even a TIPS ladder.
I think the market is severely overestimating the chances for a period of prolonged low inflation (or even deflation). With the printing presses being cranked up to shore up banking systems and the credit market, I don't see a long period of low inflation.

If you believe that inflation (even the watered-down, dubious numbers the feds calculate) will exceed 1% for the next 20 years, TIPS are a better buy than regular Treasuries of the same maturity.
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Old 10-15-2008, 11:21 AM   #34
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If you believe that inflation (even the watered-down, dubious numbers the feds calculate) will exceed 1% for the next 20 years, TIPS are a better buy than regular Treasuries of the same maturity.
But NEITHER are a true hedge against inflation........
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Old 10-15-2008, 11:23 AM   #35
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But NEITHER are a true hedge against inflation........
Not "real" inflation. TIPS are a hedge against the inflation calculation the government uses, which can be much different than the realities many people are feeling.

At least before taxes.
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Old 10-15-2008, 11:26 AM   #36
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Not "real" inflation. TIPS are a hedge against the inflation calculation the government uses, which can be much different than the realities many people are feeling.

At least before taxes.
So, they're flawed, just like I said........

The fixed base rate is WAY too low, and the arbitrary measuring they do every 6 months is even sillier. Yet, many people like them a lot......
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Old 10-15-2008, 11:28 AM   #37
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Enjoy all the posts regarding fixed incomes and inflation. I tell all my buddies at the golf course that my wife has taken it on as her personal responsibility to bring this country out of the recession. Her greatest fear is that she will die and not have spent all the money. I have always been frugal and take great comfort in knowing that we can do OK even in a sorry economy. All our investments are in CD's and a bond fund. I might even move the bond funds into laddered CD's. Wish I knew more about laddering. However, I sleep well at night and don't ever want to change that. I'm 72 and my wife is 70. If I die before her, she will go through the money like Grant took Richmond. I've written her a letter that's in the satety deposit box with instructions on how to operate the funds. Hope she takes time to find the letter.
laddering CDs is easy. You decide on a 5 or 7 year ladder or whatever, and then divide the money into equal amounts and invest. For instance, 20% of your CD money in a 1-year CD, 20% in a 2-year CD, etc. It's quite easy........
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Old 10-15-2008, 11:33 AM   #38
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So, they're flawed, just like I said........

The fixed base rate is WAY too low, and the arbitrary measuring they do every 6 months is even sillier. Yet, many people like them a lot......
Are you kidding? The current base rate when compared to standard Treasuries of the same duration is less than 1% in many cases! Why would someone buy a regular Treasury unless they think inflation will be less than 1% on average for a long time?

I don't believe a fixed rate approaching 3% is "WAY too low." But again, I do also believe that the inflation numbers are cooked -- but not so cooked that they won't register more than 1% over the long term.
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Old 10-15-2008, 11:37 AM   #39
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Are you kidding? The current base rate when compared to standard Treasuries of the same duration is less than 1% in many cases! Why would someone buy a regular Treasury unless they think inflation will be less than 1% on average for a long time?

I don't believe a fixed rate approaching 3% is "WAY too low." But again, I do also believe that the inflation numbers are cooked -- but not so cooked that they won't register more than 1% over the long term.
Does ANYONE REALLY think inflation is 3.1% or whatever? Because, I don't.........

Did I ever say TIPS OR Treasuries WERE an inflation hedge? I don't think so.......

I am just in awe of the "flight to quality" that is happening, people locking in permanent losses and buying non-inflation hedge stuff. Of course, when the market rebounds, they're the same ones asking "when the right time to get in" is, usually when the Dow is over 11,500........
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Old 10-15-2008, 12:47 PM   #40
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But NEITHER are a true hedge against inflation........
What non-volitile investmets DO you think are the best-but-imperfect hedge against inflation? If you eliminate equities, commodities, real estate, and all the other things that tend to be either volitile or illiquid, it doesn't seem like much is left. Right now, TIPS look like a better bet than ordinary bonds (Treasury or high grade corporate) and probably better than CD laddering. You probably have some things in mind, please comment.
BTW, I am NOT suggesting an all-TIPS portfolio or even that all of someone's fixed income allocation, should be in TIPS.
Although I haven't done the detailed work necessary to prove or disprove it, my own personal inflation rate seems pretty close to the government numbers.
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