Fixed Rate Investments & Inflation

[Fastfade]

I’m new to the forum and seeking other’s opinions regarding inflation concerns with fixed rates in view of the current market situation.

I’m 64, wife 62, both retired and drawing SS & small company pension.

We also have retirement savings funds that are invested in fixed contracts of 3-4 & 5 years paying 4% -5.5%. (Yes, I’m very (too) conservative). If needed, we can withdraw annually (without penalty) up to 10% of these funds.

I know that inflation can erode the purchasing power of investments (for both fixed and equity investments). I know that stocks can potentially provide a higher rate of return to help offset the effects of inflation. However, I just don’t know whether this will be true over the next 2-5 years given the current market crisis.

My thinking is we will be better off keeping our retirement funds in fixed rates of return (4%-5%) for the next 3-5 years. I’m guessing that regardless of the rate of inflation, my fixed ROR will beat the market (ETFs, etc). I know that I will miss getting in near the bottom but if the bottom sits there for 2-3 years with little or no sustained growth, what have I really missed? At least I’m making 4-5% on my investment.

Many knowledgeable people today are saying that it may be 2-3 years minimum before the market begins recover. Many of these same people seem to think that with all the new regulations that will be imposed, we will not see the rapid sustained growth in the market that we’ve experienced in the past.

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.

Most likely I’m wrong with my thinking and I would appreciate hearing other’s thoughts on this subject.

Thanks,

 

[riskadverse]

I'm thinking most investors would like to trade places with your current situation. I doubt if one can predict accurately when the market will turn around, but it looks like you at least had a pretty good feel for when not to invest in stocks, so you might want to stick with your own thinking on this.

 

[Alan]

If you have never invested in stocks and are retired in your 60's then I wouldn't recommend going into the market now unless you have some money you can absolutely do without.

For those of us still working, if we screw up then we can keep on working.

 

[haha]

I’m new to the forum and seeking other’s opinions regarding inflation concerns with fixed rates in view of the current market situation.

I’m 64, wife 62, both retired and drawing SS & small company pension.

We also have retirement savings funds that are invested in fixed contracts of 3-4 & 5 years paying 4% -5.5%. (Yes, I’m very (too) conservative). If needed, we can withdraw annually (without penalty) up to 10% of these funds.

I know that inflation can erode the purchasing power of investments (for both fixed and equity investments). I know that stocks can potentially provide a higher rate of return to help offset the effects of inflation. However, I just don’t know whether this will be true over the next 2-5 years given the current market crisis.

My thinking is we will be better off keeping our retirement funds in fixed rates of return (4%-5%) for the next 3-5 years. I’m guessing that regardless of the rate of inflation, my fixed ROR will beat the market (ETFs, etc). I know that I will miss getting in near the bottom but if the bottom sits there for 2-3 years with little or no sustained growth, what have I really missed? At least I’m making 4-5% on my investment.

Many knowledgeable people today are saying that it may be 2-3 years minimum before the market begins recover. Many of these same people seem to think that with all the new regulations that will be imposed, we will not see the rapid sustained growth in the market that we’ve experienced in the past.

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.

Most likely I’m wrong with my thinking and I would appreciate hearing other’s thoughts on this subject.

Thanks,

I am thinking that you are thinking like a speculator. I would try to look at it as if you were buying a piece of a business, with an interest in its earnings and dividends rather than putting a win bet on a horse.

You didn't say what your "contracts" are. A lot of mischief can lie behind that innocent sounding word. But for the moment I will assume that there is no credit risk in these contracts.

As of Friday's close you could buy Philip Morris International (PM) yielding 5.5%, or Diageo (DEO) yielding 4.6%. PM is a recent spinoff from Altria, and is the fast growing part of that immensely profitable business. Russia is one of their major markets and manufacturing sites. Diageo is the world's largest marketer of hi-end booze, plus Guinness brewed beverages and some high end wine labels. I first bought into this when it was still Guiness in the early 90s. Not long after they merged with United Distillers, which owned Smirnoff, Johnny Walker Scotch and other high end liquor brands. Over the years they have acquired other brands, streamlined marketing and promotion and prospered. It has never failed to raise the dividend smartly each year.

So, who cares what happens to the stock market? These two companies (in the case of PM its parent Altria) prospered in previous recessions. DEO is a play on Asian prosperity, in particular on disposable income of well to do young professionals in China, Japan, Hong Kong, Taiwan, etc. PM must get along with Putin, which is definitely a risk, but they are not new at this sort of thing.

Nothing is perfect, but I would at least consider the idea that guessing what "the market" is going to do is not the best approach.

Ha

 

[Fastfade]

Thanks for sharing your thoughts

Glad I found this forum...lots of interesting discussions and links

 

[socca]

At least I’m making 4-5% on my investment.

No, not really. It's better to consider the net return (your rate of return after inflation, taxes, etc) than look at the gross return. Your personal rate of inflation may be different than the published numbers depending upon your personal situation.

Which is better for you: 1-2% net return (or more, or less) with little risk, or higher net return with substantial risk? No one can say.

I sat on the sidelines during the great late 90's stock market boom (remember DOW 36,000?), and I'm mostly on the sidelines now. I have no regrets regarding my strategy. I'd rather plod along in desultory and boring fashion than put up with the oscillation between euphoria & despair I see in the folks who enjoy speculating in the stock market casino. To each their own.

 

[OAG]

At your ages (I am 68, DW is a tad older) be VERY careful because if you lose a bunch you DO NOT have as long a time horizon to recover losses. The question I would try to answer is "do I and DW have enough NOW to live comfortably in retirement and can we MORE than pay our expenses and are we DEBT Free." If the answer to all of those is "yes" be very happy and enjoy yourselves not changing anything. If you cannot answer all those things "yes" you should be extremely careful in what you do - IMO cut expenses, get a part time job, and then see where you are.

 

[Fastfade]

socca...

I'd rather plod along in desultory and boring fashion than put up with the oscillation between euphoria & despair...

That pretty much describes my approach

Your personal rate of inflation may be different than the published numbers depending upon your personal situation.

I agree very much with this comment. Many prefer to cite the National inflation rate as the gospel. For me, I'm the only one that really knows what my inflation rate is.

 

[Fastfade]

The question I would try to answer is "do I and DW have enough NOW to live comfortably in retirement and can we MORE than pay our expenses and are we DEBT Free." If the answer to all of those is "yes" be very happy and enjoy yourselves not changing anything.

We can thankfully answer "yes" to that question as we have always been good savers and our living expenses are very modest. However, the reason for my post is that it seems everytime I mention that all my personal retirement funds are 100% in fixed, I continually get the proverbial comments regarding inflation and how it will erode my buying power.

It's a legitimate comment but I start to questioning whether I'm making a big mistake. The opinions of others help me better understand the pros & cons.

To plagiarize others, I'm so conservative I make Scrooge look like Goodtime Charlie

 

[Independent]

Nobody has mentioned TIPS yet. If your real concern is inflation, why not go directly at that issue by getting CPI indexed securities?

Yes, the current real yield is low, but the real yield on something paying a fixed 4%-5% seems just as low.

 

[haha]

Nobody has mentioned TIPS yet. If your real concern is inflation, why not go directly at that issue by getting CPI indexed securities?

Yes, the current real yield is low, but the real yield on something paying a fixed 4%-5% seems just as low.

Actually, the current real yield is higher than it has been for 4 or 5 years, and very close to 3% real at 10 years.

For me, this is much better than any nominal bond or CD available. There are strong worldwide deflationary pressures, but governments everywhere know that letting CPI deflation set in will get a lot of them overthrown. I don't mean replaced in lawful elections, I mean boom, boom, you are in prison or dead and I am Presidente.

All over the world governments are setting aside laws, constitutions and precedent to throw money at banks and other stressed firms. Eventually this may cause the mother of inflations.

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

 

[OAG]

We can thankfully answer "yes" to that question as we have always been good savers and our living expenses are very modest. However, the reason for my post is that it seems everytime I mention that all my personal retirement funds are 100% in fixed, I continually get the proverbial comments regarding inflation and how it will erode my buying power.

It's a legitimate comment but I start to questioning whether I'm making a big mistake. The opinions of others help me better understand the pros & cons.

To plagiarize others, I'm so conservative I make Scrooge look like Goodtime Charlie

I have been fixed (financially) for about 30 years now. I have learned to ignore that comment - and I have gotten it here many times. Slow and steady is not all that bad! You have to do what you want to, no one is going to bail you out except yourself.

 

[UncleHoney]

Hey Fastfade, welcome to the club. I'm one of those fixed income guys too.

It's not really fixed income, more of what I call sloooow moooo dynamic. Things change with time but the rate of change is something you can watch and adjust over time.

Now a little story about the stock market. In March 2006 I jumped in with a portion of my Vanguard 401K. I lasted a whole 30 days and got out April 2006. Yes, I'm a big chicken but it was a good learning experience for me. The part I hated was the wild changes from day to day. One day you are up $3500 and two days later you are down $4500. After 30 days of hair raising fluctuations I pushed the sell button and went back to the stable value fund that was paying about 4.9%. In October 2007 I rolled my whole 401K into a nice IRA paying 5.56% when I retired.

If you want to see your heart rate go from zero to 200 as the market jumps around follow some stocks for a while on paper and see what happens. You can make up a spread sheet and take a ride on the wild side.

Here's what I had back in 2006, just for fun you could watch them and see how poor or rich I could be today.

VHCOX 1002 shares

VINIX 553 shares

VISGX 3636 shares

VTSMX 666 shares

When I bought in I paid $189000, thirty days later I sold it all for $193000. Yes, I'm a dirty market timer.

If I had stayed in and sold last October when I retired I could have raked in $227000.

If I was still invested today, that portion of my nest egg would be a smoking shattered shell worth $128000.

As it stands that portion of my nest egg is slowly climbing past $218000 and projected to pass the the October 2007 high sometime in the next year.

Hee hee, +5.56% trumps -45% any day.

Thick skinned, hard headed Uncle Honey.

 

[Fastfade]

HaHa/Independent... thanks for your comments regarding TIPS. They make sense for someone with my risk aversion, notwithstanding the current debate regarding the potential for deflation vs possible hyper inflation. However, as they say

..."the time to buy insurance is when you don't need it".

However, my current fixed annunity contracts don't start to expire for about 10 mos (1/3 in 10 mos., another 1/3 in 1yr & 10 mos and the final 1/3 in 2 yrs & 10 mo. So it looks like I'm locked in for at least 10 mo.

One thing about the Fixed annuntiy contracts is that I can (if needed) withdraw up to 10% per year without penalty. My guess is that TIPS don't provide that mechanism and I would need to make adjustments to my emergency fund.

And, I'm sure there are better investment strategies than my deferred fixed annunties...TIPS being one

OAG... you and I are two peas in a pod

Slow and steady

 

[Fastfade]

Thick skinned, hard headed Uncle Honey

UncleHoney... thanks for the background...you, me and OAG seem to think a lot alike

and, thanks for the welcome...it's a great site for me

 

[Rich_by_the_Bay]

Whenever this comes up, it seems to be the case that a largely fixed income portfolio works for those with a great big cushion in their savings; that is, if you have considerably more in your portfolio than you need to live your desired lifestyle. Why accept risk if your nest egg would support you fully without it (other than estate considerations)?

But my guess is that most members here have (or plan to have) enough to retire in comfort (e.g. 20-25x expenses), a decent cushion designed to weather the bear markets, but not enough to maintain plan A in the face of a long catastrophic drop like we are seeing to day. At the very least, Plan B involves consdierable reduction in expenses.

The conventional way to address this in the face of inflation is to have some of your portfolio in stocks, holding for 10-15+ years to fight volatility. So, huge nest egg: stick with fixed or TIPS if you want; standard nest egg: stocks have a role. It seems like a "cushion" decision, more than a planning strategy.

 

[Meadbh]

To plagiarize others, I'm so conservative I make Scrooge look like Goodtime Charlie

Well then you've come to the right place!!!

 

[ziggy29]

HaHa/Independent... thanks for your comments regarding TIPS. They make sense for someone with my risk aversion, notwithstanding the current debate regarding the potential for deflation vs possible hyper inflation.

TIPS are being dumped and the yields are very attractive now. I think the market is overstating the case for little or no inflation, personally.

If I were closer to retirement, I'd probably be overweighting my portfolio in TIPS right now.

 

[wolf]

"FastFade". Relax, I agree with you. I'm 61, retired at 55. Wife retired at 46. I'm about 90% fixed. 10% equity.

I've heard the statement, you must invest in equity, otherwise inflation will use up your buying "power". Having majored in Business and studied the number's it's very logical and makes sense. IN fact, it is very hard to disagree with the "experts.". IN a debate, you would lose.

However, in our case, our expenses are less than our CD's interest income. This concept is VERY important IMO. The interest not spent is re-invested in other CD's, which will cover future inflation increases.

Also, Having observed the stock market for the last 50 years, there are periods (years) when the return is negative. If one is older, and we fall into a falling market, Forget inflation. Being older, We don't have time to wait for the recovery.

Again, the argument for equity to combate inflation is valid on paper. IMO,
real life is a very different story.

One exception: When I was much younger, in my 20's, and working, I invested in equities 100%. Had many years wait out any long downturns.

Fastfade...Sorry for the long story....in anycase...so far my wife and I are doing just fine....with my planning...so far

 

[Fastfade]

Wolf...

However, in our case, our expenses are less than our CD's interest income. This concept is VERY important IMO. The interest not spent is re-invested in other CD's, which will cover future inflation increases.

Thanks for the comments and reassurance Wolf

... your comment above reflects my thinking also. However, sometimes the drumbeat of "INFLATION" becomes so loud I begin to question my own thinking (which is good, imo)

I'm not trying to get rich in my retirement but I don't want to lose any of my principal and I detest not making at least ~CD interest.

Also, I know that my current position in Deferred Fixed Annunities is not necessarily the best place for me. So, I'm very interested in seeking the opinions of others more experienced than me.

After Friday's & Monday's big moves the equity market is no place for someone with my risk aversion

 

[JOHNNIE36]

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.

 

[haha]

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

 

[youbet]

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.

 

[FIRE'd@51]

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.

 

[JOHNNIE36]

Reply to FASTFADE

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.