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Preservation stage vs accumulation
Old 11-03-2018, 08:21 AM   #1
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Preservation stage vs accumulation

Weíve reached that point where we have accumulated what we feel will be comfortable for us in retirement. We retired a few years ago in our early 60ís and DH did some consulting work to give us a little bit of money so our withdrawals werenít significant at all. We havenít started SS and will wait another year or two. No pensions. Our largest expense is healthcare. DH is now on MC and I have 2 more years. We can hopefully get a little help with a subsidy, but weíre looking at 2 more years, which amounts to $25K. Own our home and car, but weíll need a new car in a year.

Iíve been a diligent saver all my life and have enjoyed learning a little about our financial health. Keep a log of expenses so we have a very clear handle on our output. Firecalc consistently gives us 100%. Fidelity gives us the all ok as well.

So, onto my issue. We are getting to the point of changing our allocation significantly. We want to keep a small percentage in the Index 500 account (Vanguard) and move the rest to something safe. We thought CDís. Opened one last weekend at Ally when they had their extra 1% offer. I donít think we should go anywhere further out than 2 years right now. But, what else is there? What are we overlooking?

I have a year of expenses sitting in a MM.

This is a far different concept than weíve been accustomed to. I know that inflation will eat away a bit if I donít keep more in the market. But, we canít afford to lose anymore and are willing to take the risk of being too safe.

Appreciate any and all responses. Any questions please ask. Thank you
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Old 11-03-2018, 09:20 AM   #2
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I am in a similar situation, although I also have a small pension. I basically use a CD ladder to provide for most income outside of the pension. Like you, I am not going out any further than about 2 years right now, while rates are still rising.

I expect that you will get some other replies telling you that you are too young to stop investing in equities, because of the effects of inflation over time. There is some truth to that, but there is also something to be said for protecting your assets from sudden market drops. Only you can decide what is right for you. Personally, I like to sleep at night, and so I'm satisfied with my approach.

If FireCalc gives you 100%, you are probably in great shape.
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Old 11-03-2018, 09:33 AM   #3
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We're in a similar position but we are 4 years away from medicare. We get subsidies in the ACA because we saved in MM to balance the income to remain in ACA. Your post brings up the question we DH/me disagree. I think CD's are important for 2 reasons.
1. Obvious guaranteed return. We have 2 CD's right now, 50K in 2.8% for 1 year and $50K 3.1% for 18 months.

2. They are FDIC insured.


As of today our RR is 1.5% of our VG portfolio. Awful and scary. If this keep up and it may go down, not good! It's been as high as 8% returns (over 10 years) with 50/40/10. But we have a portfolio outside of VG of bonds (I bonds and EE bonds that are very old) and cash to last until 65. The I bonds earning 4%, cannot get that today.



I think safe returns of 2.5-3.1% at our age is wise at this point in the game. The problem is the taxed income portion. If we sell to buy CD's the taxed income would throw us out of the ACA.


So, the question is, do we continue using the funds we have to get to 65 hoping the VG portfolio weathers the storm and rebounds in 5 years. When I use Firecalc and other calculators to estimate 30 year safety, they always ask estimated RR. I always put 5% which is conservative. But again, we're at 1.5%/for the year. Question is do you have faith in the markets?
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Old 11-03-2018, 09:44 AM   #4
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I get a drift of some "freak out" feeling due to the expected 8% growth now at 1.5% YTD. Understand timidity but it's now just part of the late growth cycle of this ten year bull market.

There should be a portion of anyone's portfolio that's retired which included CD's or some fixed asset investment. One thing that I would bring up is we'll probably be seeing a higher inflation rate in the next two years than we've seen in the last ten. So, as you commit to your fixed income percentages, I would keep it shorter term for now as to be able to adjust as time goes on. If we start seeing 3+% inflation you'll find yourself treading water at best.
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Old 11-03-2018, 10:01 AM   #5
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If FireCalc gives you 100%, you are probably in great shape.
FireCalc has a base assumption of equities. I think itís a 60/40 assumption. Doesnít matter. If you want to rely on FireCalc, you need to make sure it reflects the lower equity position. I doubt the OP is in great shape without any equities.
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Old 11-03-2018, 10:02 AM   #6
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to Carol 1862: A lot of what you said fits us exactly at our stage in life. I will be interested in hearing what people wiser than me will contribute to this conversation. Hope we can all figure out what is best for us, our future monies, and sleeping soundly at night.
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Old 11-03-2018, 10:45 AM   #7
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FireCalc has a base assumption of equities. I think itís a 60/40 assumption. Doesnít matter. If you want to rely on FireCalc, you need to make sure it reflects the lower equity position. I doubt the OP is in great shape without any equities.

OK; I was not aware of that. Probably need to use a different calculator then, that does not have such a base assumption, and see where the OP comes out.
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Old 11-03-2018, 10:51 AM   #8
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FireCalc has a base assumption of equities. I think itís a 60/40 assumption. Doesnít matter. If you want to rely on FireCalc, you need to make sure it reflects the lower equity position. I doubt the OP is in great shape without any equities.
You can adjust your portfolio in FIRECalc. Many people don't bother to read the instructions and just rely on the defaults, but it's actually quite flexible.
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Old 11-03-2018, 11:00 AM   #9
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OK; I was not aware of that. Probably need to use a different calculator then, that does not have such a base assumption, and see where the OP comes out.
No, you can still use FIRECalc. Just go to the "Your Portfolio" tab and change the allocation to the one you want. The default is 75% equities. I use 65% equities. You could plug in 25% equities (or even less) if you like.
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Old 11-03-2018, 11:07 AM   #10
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OP, you need to run some simulation using a low return %. Putting most in CDs will will likely loose value to inflation. But if your plan works....
I'm still about 65% equities, but I'm planning a long retirement.
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Old 11-03-2018, 11:09 AM   #11
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I've posted these before. I have no affiliation with this blog, but certainly have learned a lot from following it. We implemented his 'bucket strategy' concept in July. Glad we did with the way the markets have been in the past few weeks. I like to sleep at night, and this has helped:

How to Build A Retirement Paycheck From Your Investments - The Retirement Manifesto

Our Retirement Investment Drawdown Strategy - The Retirement Manifesto

Good luck and keep us posted!
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Old 11-03-2018, 11:26 AM   #12
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No, you can still use FIRECalc. Just go to the "Your Portfolio" tab and change the allocation to the one you want. The default is 75% equities. I use 65% equities. You could plug in 25% equities (or even less) if you like.
+1
Your 100% success rate is probably based on the 75% equity allocation.
Once one drops under ~35-40% Equity allocation in Firecalc, the success rates can be squeezed down much more so.
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Old 11-03-2018, 12:11 PM   #13
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So, onto my issue. We are getting to the point of changing our allocation significantly. We want to keep a small percentage in the Index 500 account (Vanguard) and move the rest to something safe. We thought CD’s. Opened one last weekend at Ally when they had their extra 1% offer. I don’t think we should go anywhere further out than 2 years right now. But, what else is there? What are we overlooking?
The "I'll sleep better at night" factor is huge for many folks and it sounds like you would be in that group. So, as long as you can afford it, I'd recommend taking a very conservative approach even though in the long run your risk of portfolio depletion will actually be greater than if you chose a moderate AA.

Bonds, CD's, conservative AA funds such as Vanguard Wellesley, etc. would work. You'll get less short term variation (not to be confused with reducing portfolio depletion risk which will actually increase) and therefore you'll feel more comfortable and "sleep better."

It's a very real fact that the higher short term variability in a moderate portfolio makes some retirees very uneasy and, literally, unable to sleep. This despite the fact they understand that a less variable, very conservative AA brings increased risk of portfolio depletion along with it. While I'm comfortable with a moderate AA, I get it and suggest you go with what relieves your uneasiness. Just don't dwell on FireCalc results which, on a historical backtesting basis, would show you'd be better off stomaching some short term variation in trade for superior long term outcomes.
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Old 11-03-2018, 12:27 PM   #14
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Bonds, CD's, conservative AA funds such as Vanguard Wellesley, etc. would work.

Wellesley's return has been pretty poor of late.............0.18 YTD. Most pure bond funds have lost money this year. I understand that these types of investments will bounce back eventually, but it's kinda hard (for me, anyway) to put $$ in these things right now when you can earn 3%+ in a CD, and not worry about loss of principal. And yes, I know about the effect of inflation over time........
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Old 11-03-2018, 12:27 PM   #15
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I'd study up a bit more on inflation risk, as it is too easy to get fixed on day to day market risk. Inflation is like rust, slow but steady.
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Old 11-03-2018, 12:37 PM   #16
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Wellesley's return has been pretty poor of late.............0.18 YTD. Most pure bond funds have lost money this year. I understand that these types of investments will bounce back eventually, but it's kinda hard (for me, anyway) to put $$ in these things right now when you can earn 3%+ in a CD, and not worry about loss of principal. And yes, I know about the effect of inflation over time........
RAE, I was just mentioning the types of investments one might chose from in building an ultra-conservative portfolio. Definitely not recommending any particular one for investment at this moment. Especially since OP did not give a specific timeframe.

Regarding inflation and FIRE portfolio survival........ It's just one of those uncomfortable facts. Historically, a very conservative portfolio with the accompanying low level of short term variation brings along with it a lower long term survival rate. If someone can't stomach the variation historically inherent in a moderate (say 50/50) portfolio, I think they should definitely go conservative and "sleep better." The only caveat is that it takes a larger portfolio to ensure survivability if you go ultra-conservative so be sure you have those extra dollars when you pull the plug.
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Old 11-03-2018, 12:39 PM   #17
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I'd study up a bit more on inflation risk, as it is too easy to get fixed on day to day market risk. Inflation is like rust, slow but steady.
And..... according to FireCalc, has caused more portfolio failures (historically) than market crashes or bad SOR's.
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Old 11-03-2018, 12:52 PM   #18
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I know that inflation will eat away a bit if I donít keep more in the market. But, we canít afford to lose anymore and are willing to take the risk of being too safe.
Inflation will eat more than a "bit". Inflation is cumulative and permanent. Right now it is about 2.4%. In five years, you will have lost about 12% of your net worth if it were all cash, to inflation. In ten years you will have lost about 27% of value. That is substantial.

If you are determined to not be in the market, then I recommend at least considering TIPS which are guaranteed to keep up with inflation, whatever it is. But the key to TIPS (IMO) is only buy them if you are certain you can hold onto it until term. Five years is the shortest term TIPS. I would never buy a TIPS fund as they are subject to volatility. The other key to TIPS is due to tax considerations they are best owned within a tax sheltered account.
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Old 11-03-2018, 01:03 PM   #19
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If you are looking towards fixed income for safety and where your retirement nest egg will reside, I believe you need to be considering beyond two years. Though shorter term rates look good today, what happens when rates stop going up? Your two year CDs mature, then what do you do? This is the exact problem that fixed income retirees faced while rates were pushed down to zero. How many folks around here are still patting themselves on the back for the 5 year 3% PenFed CDs they bought and are coming up for maturity?

If you won't realistically need all of the money in two years, consider maybe only doing 50% for two years, take 25% and ladder 5 to 10 years, and then keep the final 25% to be picking up more at 10 years (or beyond) over time while the first maturities in the 5 to 10 year range haven't begun to mature yet. The percentages and maturities don't need to follow exactly, but do consider what could happen with rates, if you want/require some kind of return, and other "what if" scenarios. I would contend that having the money locked up at today's rates for a longer term with rates continuing higher would be less of a problem than loading up on shorter term and then having the rates head lower. Remember, it's only a bit more than two years out from when Congress was jumping all over Yellen for not taking interest rates negative like the rest of the world.

Anyhow, food for thought.
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Old 11-03-2018, 01:21 PM   #20
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FireCalc has a base assumption of equities. I think itís a 60/40 assumption. Doesnít matter. If you want to rely on FireCalc, you need to make sure it reflects the lower equity position. I doubt the OP is in great shape without any equities.
Hmmm, not really. You can input your equity allocation. Itís the fifth tab called ďportfolioĒ
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