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Maximizing Predictable Income in Retirement by Bob
Old 01-01-2010, 04:44 PM   #1
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Maximizing Predictable Income in Retirement by Bob

I wanted to draw everyone's attention to a thread over on Boglehead's from Bob of "Bob's Financial Website" which discusses "Maximizing Predictable Income in Retirement"

Bogleheads :: View topic - Article: "Maximizing Predictable Income in Retirement&q

Bob shows how combining Social Security benefits, a TIPS ladder, and an inflation-linked fixed immediate annuity interact in 21 different scenarios to provide a reliable inflation-linked income stream. The author comes up with a conclusion about whether to delay SS benefits, when to start the inflation-linked immediate annuity, and how much of TIPS ladder you might need.

This is reminiscent of the work of Jim C. Otar that has been discussed here before.

It seems like the article is more appropriate for folks here in or near the decumulation phase than for Bogleheads who are mostly in the accumulation phase.

I think it is simply a superb analysis which all the engineers here will like. It's not from me, but I admire the guy who wrote it: Thanks Bob!
(Maybe Bob posts over here, I don't know.)
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Old 01-02-2010, 08:30 AM   #2
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Thanks, LOL! Another great page by Bob!

I fiddled with the withdrawBengen.xls spreadsheet and found that it was not set up to deal with a fixed WD rate with no ranges.

It looks to me that a CD-ladder should be at least 10 years long.

1969 and 1929 were really bad years to retire in. I am guessing that 2008 was/will be, too.
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Old 01-02-2010, 09:35 AM   #3
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Some observations:

Bob assumes
  • a 30-year retirement,
  • replacing ALL stocks and bonds with TIPS and annuities,
  • 10-year maturity TIPS at 1.3% real return,
  • 4% inflation-adjusted withdrawals.

An interesting conclusion is that it pays to defer SS to age 70 with equivalent income from a TIPS ladder. (!) He calls this a TIPS stopgap. (His example who retires at 65 and defers SS to 70 would have to use 5-year maturity TIPS, not 10-year. I suspect that the return would be less. CD's instead?)

From Bernstein's Efficient Frontier stuff, I have always liked 70/30 equities/income securities for minimum volatility. (This article is about reducing volatility--producing a secure income stream.) At a 4% (not inflation adjusted) withdrawal rate, 30% in income securities (bonds/CD's/TIPS) is about 7.5 years of distributions. This suggests that a 7 or 8-year bond/CD/TIPS ladder would be about right.

What to you think?
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Old 01-02-2010, 09:42 AM   #4
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OK, so I can't make up my mind on how long a CD ladder should be. Still thinking about it.
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Old 01-02-2010, 10:04 AM   #5
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How about not buying a replacement CD if the returns on one's equities is <4%? This depletes the CD ladder, but double-up when returns come back.
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Old 01-02-2010, 10:26 AM   #6
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Feelin' lonely, Ed?

I was thinking about your last question in planning for my 2010 TFSA, where I am planning to build a CD ladder. I started this time last year with a 5 year closed GIC at 4.25% (which matures 4 years from now). Interest rates have gone down since then, but are expected to increase later in 2010. My first strategy would be to try to get the best 5 year rate for GICs and I am willing to wait till later in 2010 to see what happens. Meanwhile I would want liquidity; either keep it in cash or in a 1 year GIC in anticipation of higher interest rates in 2011.
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Old 01-02-2010, 12:46 PM   #7
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Bob's article is about producing a reliable bullet-proof inflation-indexed income stream, so CDs are not part of the picture. You have only 3 legs to the stool: (1) social security, (2) TIPS, and (3) inflation-indexed immediate annuity.

One could have 0% TIPS or 0% inflation-indexed immediate annuity if any of the other legs of the stool would support your desired income. He did restrict the inflation-indexed immediate annuity amounts to those guaranteed by the state guarantee mechanism. Presumably SS and government-TIPS are not going to default either.

Presumably, one would use this 3-legged stool to provide for the required expenses that you would have (your needs). You could use CDs, stocks, other investments to provide for your wants.
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Old 01-02-2010, 02:45 PM   #8
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Quote:
Originally Posted by LOL! View Post
Presumably SS and government-TIPS are not going to default either.
Could be a big assumption. At the very least, it would be unwise for a younger person to plan on social security working as it does now. Any sort of means testing could change the conclusions reached in the article. So could a change in the normal retirement age. Additionally, in a rapidly rising inflation environment, TIP's may run perennially behind the curve.

Quote:
Originally Posted by LOL! View Post
Presumably, one would use this 3-legged stool to provide for the required expenses that you would have (your needs). You could use CDs, stocks, other investments to provide for your wants.
That was my interpretation of the article, and the way I would do it.

Thanks for posting.
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