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Re: Go with TIPs or am I crazy?
Old 05-24-2005, 10:27 AM   #41
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Re: Go with TIPs or am I crazy?

I'm not sure where you read that but are they still printing Mad Magazine?
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Re: Go with TIPs or am I crazy?
Old 05-24-2005, 10:40 AM   #42
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Re: Go with TIPs or am I crazy?

Quote:
Originally Posted by MRGALT2U
If you don't need the risk (equities) why take it?*
IMHO think that you're confusing portfolio survival with volatility risk and I think that you both underestimate the corrosive power of inflation. *In our case we're expecting to be retired for at least six DECADES and we feel that inflation is much more of a net-worth risk than another Depression or 1973-4 or 2000-2003 or ??.

Many investors, risk-averse & otherwise, tend to retire with undercapitalized portfolios. *For example healthcare costs have risen well above everyone's estimate of inflation. *Insurance companies are finding out that they're woefully undercharging for long-tem care insurance and raising those premiums. *In addition retirees don't always factor in the capital expenses of a new roof, replacement cars/appliances, a kid's wedding, or a fantasy vacation. *

An investor diversified among several asset classes-- even without stocks as one of the classes-- has a chance to stumble across SOMETHING that will outperform inflation at various times over the portfolio's life. *So even the risk-averse can rise above their market fears and avoid invading principle (or at least exceeding SWR). *However an investor like you, Robert, has practically guaranteed that you'll never outperform inflation. *Your only choice is to cut expenses. *

The Terhorsts initially retired with a "safe" portfolio and, after nearly a decade, were forced to shift to stocks to catch up with inflation's inroads on their net worth. *Perhaps you should review "Your Money or Your Life" and then follow up on Joe Dominguez' last few years of life as he struggled to survive on his 100% Treasury portfolio. *Yeah, I know yours is different, and for your sake I hope the result is different too. *If you're truly risk averse then the logical result would seem to be diversification or at least purchasing an equity-based annuity. *You'll pay a lot in commissions but you'll have offloaded the equity risk onto an insurance company that's presumably more able to tolerate it.

You, John, at least have mitigated the inflation risk with junk & real estate. *In fact over the last couple years your results could have made you look like an investing genius. *And I know that you won't expect any sympathy from ANYONE if your decision turns out badly!
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Re: Go with TIPs or am I crazy?
Old 05-24-2005, 11:08 AM   #43
 
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Re: Go with TIPs or am I crazy?

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...don't want to spend my leisure time watching stocks go nowhere.
Remember that you have to weigh that against the possibility that you will put all your money in TIPS and then spend leisure time watching stocks go up.
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Re: Go with TIPs or am I crazy?
Old 05-24-2005, 11:25 AM   #44
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Re: Go with TIPs or am I crazy?

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Originally Posted by Texas Proud
OK, I am surprised someone has not proposed this as an alternative... so, let me know your thoughts on this..

I read somewhere that a good long term way to make sure that you will not run out of money is to buy an annuity.
While I do not like or have annuities there is a rational argument for how they can be PART of a retirement plan. The assumption is that the annuity will pay more than a bond issued at the time. And it is a different asset class, so it could be some diversification. For folks on this board I think they would rather manage themselves. But my Mom is 85 and we put some of her funds into an annuity as it gives her a higher payout for the next few years.
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Re: Go with TIPs or am I crazy?
Old 05-24-2005, 12:18 PM   #45
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Re: Go with TIPs or am I crazy?

Hmmm...tips, annuities, safe withdrawal rates, lots of new users...
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Re: Go with TIPs or am I crazy?
Old 05-24-2005, 01:09 PM   #46
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Re: Go with TIPs or am I crazy?

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In addition retirees don't always factor in the capital expenses of a new roof, replacement cars/appliances, a kid's wedding, or a fantasy vacation.
Yes, we need to consider costs of house and car maintenence, new furniture, any big ticket items (i.e., car, applicances). I am not sure about budgeting for a kid's wedding. They should be able to afford their own wedding and paying a down payment for a house instead of asking their parents.

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Re: Go with TIPs or am I crazy?
Old 05-24-2005, 01:20 PM   #47
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Re: Go with TIPs or am I crazy?

Quote:
Originally Posted by Spanky
Yes, we need to consider costs of house and car maintenence, new furniture, any big ticket items (i.e., car, applicances). I am not sure about budgeting for a kid's wedding. They should be able to afford their own wedding and paying a down payment for a house instead of asking their parents.

Spanky
I agree. As succesful big time breadwinner parents, I can see how you'd want to give your kids some of the finer things in life, easier time than you had etc. and it's speaks well of y'all. But the fact that we had to pay for the wedding, the house, the cars, school etc. on our own was probably one of the best gifts we ever got. We know how to budget, and we know we CAN budget. That sense of independence is invaluable. I have friends who recieve substantial finanical help, and they sort of count on it, and are still kind of stuck at a high school understanding of money, despite being 30 years old. I do get nice presents on occasion, but those are unexpected and can't be relied on (or spent as cash).

-the usual caveat, every situation is different, you know your own kids, I don't, the fact you are on this board vastly increases the chance you know what you're doing already, yadda yadda.
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Re: Go with TIPs or am I crazy?
Old 05-24-2005, 01:40 PM   #48
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Re: Go with TIPs or am I crazy?

Lots of good responses that give me lots to think about. *I want to thank each of you for taking the time to respond to my question. *But I'm still confused.

For a little more insight, my future expenses will not include any expensive weddings. *I've got the kid's college costs behind me and I'm just looking at a long and safe and hassle-free retirement.

Be it 100% TIPS or a simple couch potato portfolio or the slightly more complicated "four pillars", I just want to put my retirement into some sort of investment and forget about it. *I'm not your typical Fire-Calc poster. *I don't want to watch the DOW on a daily or even monthly basis. *I want it simple and when I'm gone, continue to keep it simple for my spouse.

No need for a big inheritance for the kids and no plans for a big funeral for me.

I know that no projection of expenses is perfect, but I do feel I have a good handle on it since it is modeled on my expenses of the past 30 years factoring in additional costs due to aging. *If anything, my standard of living may improve. My projected SWR will never exceed 2%. *I've been retired for several years now and my actual withdrawal rate is negative (i.e. I'm still putting money into savings each year).

Will I go broke with 100% TIPs at 1.75% yield and a withdrawal rate below 2%? *

If there is a worry about inflation growing faster than the CPI, should I sit on cash til the yields on TIPs go back to 2.25% or 2.50% keeping the yield I receive higher than my portfolio withdrawal rate? *(Cash sounds good to me!)

Running the FIRE-CALC calculator, it says I'm 100% safe and then some. Withdrawal rates over 3% are 100% safe. *Based on simple logic, it seems that I will also be safe. * If I don't need stocks, I don't want stocks. *

With a SWR of less than 2% and TIPS yielding 2%, will it work? *
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Re: Go with TIPs or am I crazy?
Old 05-24-2005, 01:54 PM   #49
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Re: Go with TIPs or am I crazy?

Quote:
Originally Posted by Mister Bill
Lots of good responses that give me lots to think about. *I want to thank each of you for taking the time to respond to my question. *But I'm still confused.

For a little more insight, my future expenses will not include any expensive weddings. *I've got the kid's college costs behind me and I'm just looking at a long and safe and hassle-free retirement.

Be it 100% TIPS or a simple couch potato portfolio or the slightly more complicated "four pillars", I just want to put my retirement into some sort of investment and forget about it. *I'm not your typical Fire-Calc poster. *I don't want to watch the DOW on a daily or even monthly basis. *I want it simple and when I'm gone, continue to keep it simple for my spouse.

No need for a big inheritance for the kids and no plans for a big funeral for me.

I know that no projection of expenses is perfect, but I do feel I have a good handle on it since it is modeled on my expenses of the past 30 years factoring in additional costs due to aging. *If anything, my standard of living may improve.* My projected SWR will never exceed 2%. *I've been retired for several years now and my actual withdrawal rate is negative (i.e. I'm still putting money into savings each year).

Will I go broke with 100% TIPs at 1.75% yield and a withdrawal rate below 2%? *

If there is a worry about inflation growing faster than the CPI, should I sit on cash til the yields on TIPs go back to 2.25% or 2.50% keeping the yield I receive higher than my portfolio withdrawal rate? *(Cash sounds good to me!)

Running the FIRE-CALC calculator, it says I'm 100% safe and then some. Withdrawal rates over 3% are 100% safe. *Based on simple logic, it seems that I will also be safe. * If I don't need stocks, I don't want stocks. *

With a SWR of less than 2% and TIPS yielding 2%, will it work? *
Looks like your in good shape although I think most of us would still recommend some diversification. My parents never invested in stocks and my mom is sitting on a pretty nice nest egg at the age of 87. So I say go for it!
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Re: Go with TIPs or am I crazy?
Old 05-24-2005, 01:54 PM   #50
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Re: Go with TIPs or am I crazy?

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An investor diversified among several asset classes-- even without stocks as one of the classes-- has a chance to stumble across SOMETHING that will outperform inflation at various times over the portfolio's life
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Re: Go with TIPs or am I crazy?
Old 05-24-2005, 02:48 PM   #51
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Re: Go with TIPs or am I crazy?

Quote:
Originally Posted by Texas Proud
OK, I am surprised someone has not proposed this as an alternative... so, let me know your thoughts on this..
Annuities make more sense for people who are a bit older than the average ER. If you price an annuity for a 45 or 50 year-old, you will find it pays less than the typical SWR of 4%, and you've given the money away, besides! (It is sometimes easy to forget that return on a CD is interest, and you still own the principal. Return on an annuity is all you get until you die or other terms are met.) Then there is the niggling problem of credit risk. Despite my earlier comments, I would still trust the U.S. Treasury more than any company over the 50 years + that I want them to be paying me monthly payments. In fact, AIG is the company behind many annuities, including the ones at Vanguard.

Mister Bill -- I am sure you could do your retirement just fine on 100% TIPS, though DCA'ing into them, in case real interest rates move up, might be worthwhile. But there we go again, trying to finesse things! If you are going the 100% TIPS route, you should have the personality that would just say, 'to heck with it, I'm locking this down for the rest of my life", and forget about what could happen or might change in their prices. If you can do that, you probably have the constitution for it.

But I'm with Nords. The future is long, and I want a diversified portfolio to deal with whatever may come along. (And I can't afford to live on an all-TIPS portfolio, either -- fair disclosure) And a part of me is hoping the future isn't bad and I'll be able to raise my sights a bit in the years ahead based on some good market returns.

Stocks may stumble, but they won't melt to zero. A single stock might, but an index won't. People stilll need to eat, furnish their homes, drive around, communicate with each other, stay healthy.... companies exist to provide these products and services and stocks just gives you an ownership in solving these evolving and renewing needs. Index investing isn't gambling. And if you diversify, the volatitlity isn't even that bad -- some things go up when others go down and the whole thing feels more like an ocean liner than a little fishing boat. Plus, you can always just not check your prices.

'Nuf said... if you hate all volatility and worry a lot at night, then TIPS may be the best thing for you.
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Re: Go with TIPs or am I crazy?
Old 05-24-2005, 05:49 PM   #52
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Re: Go with TIPs or am I crazy?

ESRBob/Nords,

Good posts. You have stated your case well and, frankly, given me some food for thought. I agree that, barring Armageddon, we will not likely see equities go to zero. However, most (but not all) commentators seem to believe that equities are trading a very high multiples right now, thus there is little hope for high returns going forward. And, historically, there have been long periods where equities have delivered virtually nothing. Given this backdrop, "locking in" a safe approach via TIPS becomes more attractive. But, I will reconsider how much I should allocate to TIPS. Perhaps it is wise to hold some equities in the event the future is a bit rosier than it now appears.

This is a very tough environment in which to make wise investment decisions. I sometimes feel like I am attempting to navigate a minefield. Discussions such as this one help.

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Re: Go with TIPs or am I crazy?
Old 05-24-2005, 07:09 PM   #53
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Re: Go with TIPs or am I crazy?

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However, most (but not all) commentators seem to believe that equities are trading a very high multiples right now, thus there is little hope for high returns going forward. And, historically, there have been long periods where equities have delivered virtually nothing
I can't predict a damn thing but I can argue a different side. Corp balance sheets are nice and flush with cash. I think more boards will be willing to increase payouts (investors now favor dividends vs the late 90's retained earnings) as we have seen in a lot of big blue chips. Increase in payout rates could help produce moderate returns. You will never eliminate some of the bumps in the road and you just have to live with it.
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Re: Go with TIPs or am I crazy?
Old 05-24-2005, 08:40 PM   #54
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Re: Go with TIPs or am I crazy?

Quote:
Originally Posted by Spanky
I am not sure about budgeting for a kid's wedding.
Well, ideally the kid is related to you.* And if we want to invite a bunch of freeloading guests to watch our kids get married, then perhaps helping to pay for it is the polite thing to do.* I'll subsidize our kid's first car, too, but it sure won't be a Bentley.* And if the kid wants to use the wedding-party budget for bedroom furniture or money for a house down payment, then I can support that worthy goal.

The point is that many retirees fail to adequately capitalize their retirement portfolios because they don't consider the surprises.* No one can.* I could have brought up charitable contributions, replacing GE appliances every 11 months, or other scary capital expenses but very few retirees consider all the ways in which their retirement spending will change.* The only way to handle surprises is to keep an "overcapitalized" portfolio that has more than you think you'll need.*

Quote:
Originally Posted by Mister Bill
Be it 100% TIPS or a simple couch potato portfolio or the slightly more complicated "four pillars", I just want to put my retirement into some sort of investment and forget about it.
We all want to do that-- especially the retirees in the steel & airline industries who want their old pensions back.* But being taken care of worries me far more than taking care of myself-- and if I'm gonna worry then I want to do it constructively.* (Preferably with the helpful suggestions of this board's members.)* Handling my own investments, or finding someone trustworthy to do it for me, controls that worry.* Probably the best compromise is to pick an asset allocation and only rebalance when it really gets out of whack.

Quote:
Originally Posted by Mister Bill
I know that no projection of expenses is perfect, but I do feel I have a good handle on it since it is modeled on my expenses of the past 30 years factoring in additional costs due to aging.* If anything, my standard of living may improve.* My projected SWR will never exceed 2%.* I've been retired for several years now and my actual withdrawal rate is negative (i.e. I'm still putting money into savings each year).
Well, past isn't necessarily prologue but a negative SWR will certainly cover that issue.*

I have over 100,000 Quicken transactions covering a couple decades of spending, but it's worthless at predicting the future.* (All I'm asking for is one set of quotes from tomorrow's market in today's news!)* It sure can't forecast what new child-raising expenses we'll encounter or where our property taxes will go or whether one of us will need lifelong prescription medication & dialysis.

Quote:
Originally Posted by Mister Bill
Will I go broke with 100% TIPs at 1.75% yield and a withdrawal rate below 2%?
Well, yeah, you know the answer to that one.* FIRECalc only guarantees withdrawals that exceed yields for a finite number of years.* Hopefully your lifespan doesn't exceed that either, but do you really want to risk being wrong?* Not invading principle principal will work just fine... but only if you have the opportunity to control your expenses.* Life would be great without all those surprises.

Quote:
Originally Posted by Mister Bill
If there is a worry about inflation growing faster than the CPI, should I sit on cash til the yields on TIPs go back to 2.25% or 2.50% keeping the yield I receive higher than my portfolio withdrawal rate?* (Cash sounds good to me!)
Well, you could do that, but then you'd have to keep an eye on the TIPS yield and time your entry successfully.* Most of us don't care to do that, and I don't think you would either.

Quote:
Originally Posted by Mister Bill
If I don't need stocks, I don't want stocks.*
We hear ya.* But we're not trying to get you to buy stocks-- we're trying to persuade you of the benefits of asset allocation & diversification.* That does not necessarily have to include stocks-- but it should include different types of bonds or bond funds of different maturities & qualities.* It should probably also include REITs or REIT mutual funds, CDs of different maturities/yields, and commodities (or their mutual-fund equivalent).*

Heck, it could even include krugerands-- I know a guy whose portfolio is 25% gold bullion, 50% commodities, and the rest in CDs.* (He sold his home three years ago because the market was overpriced.)* He probably buys shotgun shells, bottled water, & freeze-dried rations, too, but he doesn't have to agonize over the stock market.* And he's diversified enough to take pleasure in watching some portion of his portfolio rise in value no matter what kind of day the world has.

There's a portion of a Four Pillars chapter where Bernstein designs different portfolios for different investors.* You don't have to adopt one of those portfolios, but you can apply Bernstein's logic & methods to your own personal preferences to develop your own personal diversified portfolio.* And then you only have to mess with it when it no longer meets your personal preferences.

Quote:
Originally Posted by Mister Bill
With a SWR of less than 2% and TIPS yielding 2%, will it work?*
Well, again yes, but only if your expenses don't invade the principle and you don't outlive the decline.* Rotsa ruck.

But, hey, I may not be the most credible source for this discussion.* After all, I'm only 44 and I'm hoping to be tracking my expenses for at least another 60 years.* But I do know a couple of credible sources-- go over to the Vanguard Diehards discussion board and wave your 100% TIPS portfolio in front of SamBro (age 92), Taylor Larimore (age 80+), Mel Lindauer (retired and a big fan of bonds), & "Ol' Meph" (an expert on annuities).* They may not be able to predict your future, either, but they can sure tell you what the roadmap looks like.
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Re: Go with TIPs or am I crazy?
Old 05-25-2005, 07:33 AM   #55
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Re: Go with TIPs or am I crazy?

Another excellent post! Re. diversification, I'm in total agreement.
There are many ways to make ER work and you can do it easily with no stocks (or no bonds, CDs, TIPs, etc). If it works, it works, end of story.......................

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Re: Go with TIPs or am I crazy?
Old 05-25-2005, 02:45 PM   #56
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Re: Go with TIPs or am I crazy?

For Mister Bill:

I don't understand why so many people want to talk you out of your original idea. It is not as if you were locking yourself into a single decision. In fact, most people in a situation such as yours would set up a 10-year (or possibly a 20-year) TIPS Ladder. This means that you would be getting 10% (or 5%) of your principal (plus inflation) back each year. You would be able to redeploy almost all of that money if you wanted to. You would be removing only a very small fraction of principal for living expenses.

Remember that the principal is adjusted to match inflation. Even if TIPS stopped paying interest, you could still withdraw 2% of your original balance (plus inflation) for 50 years. If you can get 1% interest from TIPS, you can withdraw 2% of your original balance (plus inflation) for 70 years.

If 50 years is long enough and if you get 1% interest, you could increase your withdrawals to 2.55% of your original balance (plus inflation).

Of course, you have to consider taxes and so on.

There is nothing difficult or limiting if you start out with a TIPS Ladder.

Have fun.

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Re: Go with TIPs or am I crazy?
Old 05-25-2005, 03:11 PM   #57
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Re: Go with TIPs or am I crazy?

You're certainly not limiting yourself to the decision, but the value of tips on the secondary market is NOT fixed. If you had to or wanted to get out, you might find yourself giving up a lot of principal.

TIPS also DO NOT track inflation, they track CPI. Johnny...the reason why so many people dont listen to you is that you keep repeating the same inaccuracies. If CPI lags inflation by 1% (and its worse than that in my area of the world), you're losing 1% of purchasing power per year. So by year 50 of your super duper plan, you'll be eating cat food and living in a box.

Also, nice example given but I'm unaware of most retirees being able to live on 2% of their money; usually 4% is a push. In that case your money lasts 25 years. Super, I'll be out of cash when I'm 68. I guess if I use my last $250 on a used smith and wesson, thats a good plan...:

But this is the sort of advice I'd expect to get from a guy who is living off of a cola pension and plays with investment money he doesnt need to live on...how about some people who adhere to it that have to rely on their investment income? Oh yeah, Joe Dominguez did that... :P
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Re: Go with TIPs or am I crazy?
Old 05-25-2005, 03:13 PM   #58
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Re: Go with TIPs or am I crazy?

Quote:
Originally Posted by Nords
Perhaps you should review "Your Money or Your Life" and then follow up on Joe Dominguez' last few years of life as he struggled to survive on his 100% Treasury portfolio.


First post since being involved with one of the older Retire Early Homepage boards a few years ago....

I searched for a story on Joe and can not find it. Everything I'm finding is about the book and his great contributions. I'm a fan of his book ( in general concept, but I'm not a fan of living my life in a frugal manner) and would love read about his last few years. He seemed to be a caring man that deserved better.....

Thanks for all of the wisdom on this board. I'm about 5 years from FIRE, provided I don't mess up....
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Re: Go with TIPs or am I crazy?
Old 05-25-2005, 03:18 PM   #59
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Re: Go with TIPs or am I crazy?

"Frugal" doesnt quite measure up what Joe went through towards the end. Mind you, his fundamental idea of getting off the hampster wheel was a good one. His choice of investing through a single low-yielding investment asset class wasnt.

The stress of running out of money and having his entire life revolve around a desperate attempt to hold onto his last few dollars was far worse than what most people experience in dilbert-land.
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Re: Go with TIPs or am I crazy?
Old 05-25-2005, 04:28 PM   #60
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Re: Go with TIPs or am I crazy?

I believe from the get go - Mister Bill said he had a 'decent pension' plus 'some other money'. I also got the impression stocks gave him the willy's - so why not?

Me - I would never do it. But someone else?

My newly added financial advisor Bear Bryant says play defense in retirement like a linebacker -'agile, mobile and hostile.'

By 2006: as income streams -

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29% early SS
21% dividend stocks
21% Pension - non cola - will fade in the stretch.

The first 10-12 years were easy - a lot of good breaks. I'm with those that feel - valuations are high - and the the next decade may need more defense.

Still overall a stock cat though - with dividends.
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