Risk averse retirement investing

[brewer12345]

Wow, I go away for a weekend and you guys find the most inane things to squabble about. Everyone has different preferences and risk tolerances, [-]and since they are not the same as mine they are all wrong[/-] so live and let live. I will point out that the extreme conservatives are way outside the mainstream of the financial profession, academic research as a whole, and how institutional portfolios are managed. That said, it is their money so they can do whatever they want with it.

 

[daylatedollarshort]

I am sure my portfolio is outside the mainstream by institutional standards, but then again many institutional pension plan portfolios, both public and private, aren't getting returns as planned and are severely underfunded -

Pandemic of pension woes is plaguing the nation

"A CNBC.com analysis of more than 120 of the nation's largest state and local pension plans finds they face a wide range of burdens as their aging workforces near retirement. Thanks to a patchwork of accounting practices and rosy investment assumptions, it's not even clear just how big a financial hole many states and cities have dug for themselves"

Pandemic of pension woes is plaguing the nation

Underwater: Horribly Underfunded, The PBGC May Not Have Funds To Cover Failed Union Pensions | RedState

Fears Over Pension Funding - WSJ.com

 

[Turboslacker]

I guess I am with you. I cringe when I see first time, newly retired posters asking for conservative portfolio advice and they are told to put over half their money in stocks, with no mention of sequence of returns risk or pros and cons of that approach.

Bill Bernstein said in a recent article, "When you've won the game, why keep playing it? .......How risky stocks are to a given investor depends upon which part of the life cycle he or she is in. For a younger investor, stocks aren't as risky as they seem. For the middle-aged, they're pretty risky. And for a retired person, they can be nuclear-level toxic. "

http://money.cnn.com/2012/09/04/retirement/investing-mistakes.moneymag/

If doesn't sound to me like Bill Bernstein is as convinced that a high stock portfolio will necessarily provide higher spending power than a much more conservative portfolio.

I liked Ha's advice on giving advice from another thread -

"I think it is a mistake to tell people what to do with their money. People must "own" their plans about important things like this, or they will not believe in them and they might easily abandon the plans under heavy stress, which will certainly come from time to time. There is validity to many of these ideas, but they are not one size fits all.

I would not like to convince someone that s/he needs more stocks, right before stocks drop 40%. If we are honest and aware, we will realize that the future is unknowable, and be properly modest about what we say-particularly in the area of advice.

Ha"

http://www.early-retirement.org/forums/f28/fear-greed-and-aa-part-2-a-70212.html#post1405522

I don't see a problem. Someone posting to a public forum asking a bunch of strangers for investment advice is interesting unto itself. A question was asked and numerous responses were provided based on people's experience and beliefs which vary significantly.

 

[brewer12345]

We loves us some confirmation bias here.

 

[Turboslacker]

Very wise words, Alan. If all goes according to plan, when we retire in about 4 years, two cola'd pensions will just cover our expenses. Social security will kick in 2.5 years later and give us a nice 30% cushion above and beyond our needs. So what do we do with the money in our nest egg? It will be enough, at a 4% withdrawal rate, to cover 1.5 times our spending (if our pensions and SS should disappear). We could go ultra conservative, since we won't need any more money. We could also shoot for the moon. We don't have any children, so we don't need to leave an estate. And if we lost it all, it would not affect our lives. So what do we do? I suspect that we will do the same thing that got us here in the first place -- maintain a moderate asset allocation, probably 60/40.

But regardless of what we do, it would be irresponsible for me to give that same advice to someone who doesn't understand our situation, as it may be highly inappropriate for his or her own situation.

To offer a contrarian view, it's actually a bummer that you will have so much excess beyond your needs. The majority of Americans see this these days as taking too much from Society and not "giving back" enough.

Does this mean that you didn't "win the game" because you could have retirement earlier than you did?

Something more for us all to debate.

 

[ERD50]

Since we are experiencing the Pineapple Express here in the Bay Area I had time to play with this.

I got a quote from fidelity for a deferred annuity for a single man aged 60 deferring until age 70. And then determined the IRR, I hope correctly.

Investing 100000 at age 60 one would receive 13272 per year from age 70. The IRR of course depends on when you die. But if you are a conservative investor concerned with longevity, the results are quite good:

If you live to 100 the IRR is 6.468%
At 95 it's 6.117
At 90 it's 5.536
At 83 which is the life expectancy for a 60 yr old, it's 3.9
And of course goes down from there to a neg number if u die soon.

So if you are worried about longevity the deferred annuity allows you to swap a large positive IRR if you live a long time for a large negative one, if you die early.

If you have good genes and your parents lived to a ripe old age , and you're healthy, then, for me anyway, there's a good case to be made that this is way better than a conservative income portfolio...unless I screwed up the calculation

I'd welcome opposing opinions or someone seeing holes in this as I have severe longevity in my family

Thanks for that analysis. My viewpoint is, an annuity (and delaying SS) is buying 'longevity insurance'. Like any insurance, we really are not looking for a 'return', we hope to never cash it in, we are looking to protect something.

So I ignore IRR calcs, and I just want to see what an annuity could do for protecting me from running out of money during my lifetime. So I made some FIRECalc runs to compare no annuity to half your money in an annuity. For each case, I set "Investigate" to find spending level for 100% success:

A) $1M portfolio, 40 years, all other defaults. Result: $33,413.

B) $500K portfolio (the other half was spent on the annuity), 40 years. On "Other income/spending" add a $66,360 non-inflation adjusted income in year 2024 ( the annuity payout - $13,272 X 5). Result: $28,372.

So, if I simulated the deferred annuity numbers given above correctly (pay now, start collecting 10 years later for life?), then historically, an annuity at today's rates hurt you.

Some caveats - the failure most likely would have been the 1966 run. Maybe interest rates were higher that year, and an annuity purchased in that year may have had a higher payout? I'm not sure which interest rates are relevant. So more investigation, and it takes an annuity payout 1.5x the above to match the non-annuity portfolio spend level. Would payouts have been that much higher in 1966?

-ERD50

 

[Alan]

To offer a contrarian view, it's actually a bummer that you will have so much excess beyond your needs. The majority of Americans see this these days as taking too much from Society and not "giving back" enough.

Does this mean that you didn't "win the game" because you could have retirement earlier than you did?

Something more for us all to debate.

Needs and wants are quite different and I have been giving back by spending much more than I need, and doing my bit in boosting consumer spending and stimulating the economy. As a wage earner any extra money I got used to go into savings, now I spend it.

 

[34rlsa]

Isn't this a forum? ... a place, meeting, or medium where ideas and views on a particular issue can be exchanged.

I'm the OP of Fear and Greed parts 1 and 2... and I have no problem with anyone offering advice opinions or whatever to questions I or anyone else posts on this forum. I'm here for the camaraderie of a shared goal... nothing else.

If you're relying on this or any internet social media to exclusively direct your investment/retirement decisions you may be taking another type of "risk".

All of our circumstance are unique. But by sharing our varied scenarios here on this forum... are we not helping each other to apply or consider alternative and possibly better courses of actions to achieve our goals?

 

[ERD50]

Isn't this a forum? ... a place, meeting, or medium where ideas and views on a particular issue can be exchanged.
...
All of our circumstance are unique. But by sharing our varied scenarios here on this forum... are we not helping each other to apply or consider alternative and possibly better courses of actions to achieve our goals?

Sharing ideas and viewpoints is great. The problem some of us have with some posts/posters, is they repeatedly supply information without context.

Context is important. Sure, you need to do your own due diligence on anything offered here, but information w/o context just adds to the noise, and makes this forum less useful.

Just my 2 cents.

-ERD50

 

[obgyn65]

Alan - I cannot give "the full picture" every time I answer a question about financial advice from a newbie. I have no time for this, it is not practical, and in my view it is not reasonable to expect posters to give a "full picture" about their financial profile and choices whenever they answer a question asking them for financial advice.

Did other posters, including under this thread, give the full picture about themselves ? They didn't. I just answered the OP's question truthfully from my viewpoint, which is what a public forum is about. Newbies and others can use the google function under this site to search for our previous answers or look at our user profiles and get more info about our financial circumstances to see where we come from.

On a side note, I do not have a "solid foundation of pensions covering the basic expenses". I have not worked many years in the US and my salary in Europe was a fraction of what I make here. Plus, I spent many, many years studying. This is why I will also have to rely on US social security and the UK state pension - if they are still around in 10 or 20 years' time.

I didn't give any financial advice, and the reason I didn't is because, like you, I have a solid foundation of pensions covering the basic expenses. The point of my post is that when YOU give financial info to a newbie of what your AA is, that you should give the full picture, otherwise they may make the wrong assumptions.

 

[obgyn65]

Indeed. My user profile on this website and even my signature under every post clearly state that I am very conservative with my investments. Newbies and others can read, can't they?

Plus, it is interesting to note that those like me outside the mainstream 'way of thinking' on this website are basically told not to give advice. It's a real shame on a so-called public forum. This is my last post under this thread.

I will point out that the extreme conservatives are way outside the mainstream of the financial profession, academic research as a whole, and how institutional portfolios are managed. That said, it is their money so they can do whatever they want with it.

 

[pb4uski]

KFJWI = Kindle Fire HD 8.9 WiFi evidently, in case anyone else wonders...I didn't know.

Sent from my (old) iPad2 64GB using my index fingers

Thanks for that. I was wondering what the heck KFJWI was.

What are crediting rates?

Crediting rate is the interest rate that is credited to your policy account value and pertains principally to deferred annuities (also universal life insurance). Alternatively, it is the IRR on a deferred annuity or a period certain annuity.

 

[Lucantes]

Plus, it is interesting to note that those like me outside the mainstream 'way of thinking' on this website are basically told not to give advice. It's a real shame on a so-called public forum. This is my last post under this thread.

FWIW: obgyn65 I have no problem with anything I have seen you post (either here or in any other topic/thread). You are much more conservative with your investments than I personally am at this point in my life, but it doesn't mean either one of us is "right" or "wrong" and I value the difference of opinions I see here. I have no problem understanding the "context" that you use when you post, as it seems to be quite clear to me. I do not feel that caveats would be required for your postings of your opinions or providing information on what you do that works for you.

If the financial views here were all the same then I do not think this website would be for me.....and I would also be wondering what "they" were trying to sell.

 

[Gumby]

Does this mean that you didn't "win the game" because you could have retirement earlier than you did?

I'm not interested in "winning the game". I'm interested in living my life.

 

[MichaelB]

People post questions asking for advice, we all offer our suggestions, both in response to the request and also challenging each other. We do so respectfully and the end result is a healthy debate that benefits the OP and many others. Always keep in mind from our community rules

People who are professionals in a variety of fields post on this forum and share their general knowledge. Many of them are brilliant. Some are doofi.

The only people that are told to not give advice are salescritters here looking to drum up new business, and they are dealt with ruthlessly, by members and site staff alike. All others are welcome to engage and contribute

 

[Midpack]

This. A thousand times this. Midpack, Alan, ERD and others - bookmark this please.

I didn't give any financial advice, and the reason I didn't is because, like you, I have a solid foundation of pensions covering the basic expenses. The point of my post is that when YOU give financial info to a newbie of what your AA is, that you should give the full picture, otherwise they may make the wrong assumptions.

+"1000."

Plus, it is interesting to note that those like me outside the mainstream 'way of thinking' on this website are basically told not to give advice. It's a real shame on a so-called public forum. This is my last post under this thread.

You weren't told not to give advice. There are risks associated with too much risk, and there are other risks associated with little or none - providing the "fill picture" is more helpful, newbies can be easily misled otherwise.

 

[Midpack]

Does this 20-25 year period need to begin at any specific age?

Yes...the age you decide to retire.

From Dr Bernstein's 2012 eBook on this topic:

 

[Ready]

From Dr Bernstein's 2012 eBook on this topic:

I see that he is stating by age 70, but I would guess that is based on a more traditional retirement age of 65, or maybe even a bit later. I don't remember if his book addresses anything in particular about early retirees. But if you plan to retire 10-20 years earlier than the typical age, you have to make some adjustments to the recommendations in these books.

In general, I remember his theory being to keep enough in fixed income to cover your very basic expenses for 20-25 years, and then invest the rest in equities, with the understanding that your basic expenses will always be covered, and if equities do well, you will have lots of extra for luxuries. If not, you still have your basics covered. I think this makes a lot of sense.

 

[Ready]

If the financial views here were all the same then I do not think this website would be for me.....and I would also be wondering what "they" were trying to sell.

+1

I enjoy reading everyone's viewpoints here. Clearly there are going to be some very conservative investors on a forum this large, and I always enjoy reading their posts.

Obgyn65, I'm glad you continue to post your viewpoints here and I always learn from them. Thanks for sharing your insights. You have to invest in a manner that's comfortable for you, and clearly you are doing so. There's nothing wrong with that.

 

[calmloki]

All y'all are whack.

Best thing in this thread is "Pandemic of pension woes is plaguing the nation". I can hear my financial adviser, Danny Kaye, repeating that after his famous maxim: "The pellet with the poison's in the vessel with the pestle; the chalice from the palace has the brew that is true!"

Only safe investing style is zero pension, SS enough to feed a cat, an unerring buy high,sell low history in the stock market, and rental real estate. Works for me, and I'm the authority. on me.

 

[ERD50]

I guess I am with you. I cringe when I see first time, newly retired posters asking for conservative portfolio advice and they are told to put over half their money in stocks, with no mention of sequence of returns risk or pros and cons of that approach. ...

Maybe I've missed them, or maybe my viewpoint filters them out, but is it really common for posters here to 'tell others to put over half their money in stocks, with no mention of sequence of returns risk or pros and cons of that approach.'?

First - no one can really 'tell someone what to do'. We can express opinions, share information, share viewpoints (hopefully provide data to back it up), whatever - but then the reader needs to figure out what to do for themselves.

Second - The default for FIRECalc (and the general advice from a wide range of sources) is 75% stocks. I think it is pretty well understood that some volatility is to be expected. So maybe it doesn't get explicitly called out each and every time. But when someone is expressing a very different approach, there is more reason to spell out the pros and cons.


If I were to promote the advantages of a 100% stock portfolio (approx 2X average and maximum returns over a 45 year period) my post would be misleading if I didn't also point out the disadvantages (increased volatility, slightly lower success rate ( 99% versus 100% for a 3.2% WR) of the approach over the default 75%. Stating only the positives is just noise.

And conversely, If I were to promote the advantages of a 0% stock portfolio (lower volatility) my post would be misleading if I didn't also point out the disadvantages (much lower success rate - only 30% compared to 99% and 100% above, and much lower/negative min/max.avg returns ) of the approach over the default 75%. Stating only the positives is just noise.

To put numbers to this - FIRECalc reports that for the same success rate as 75% stocks for a 45 year period, a 0% stock portfolio would need to start with a portfolio 1.8X the size (or cut WR by that ratio).

So I think it's fine if someone were to post that they just can't handle volatility, so they chose to wait to build their portfolio to 1.8X in order to do that. That is a personal choice, and people should do what suits them. We can disagree on whether it suits each individual or not, that's not a problem, that's just acknowledging that one size does not fit all. Neither approach is 'better', they are different, with different 'risks'.

-ERD50

 

[Midpack]

I see that he is stating by age 70, but I would guess that is based on a more traditional retirement age of 65, or maybe even a bit later. I don't remember if his book addresses anything in particular about early retirees. But if you plan to retire 10-20 years earlier than the typical age, you have to make some adjustments to the recommendations in these books.

In general, I remember his theory being to keep enough in fixed income to cover your very basic expenses for 20-25 years, and then invest the rest in equities, with the understanding that your basic expenses will always be covered, and if equities do well, you will have lots of extra for luxuries. If not, you still have your basics covered. I think this makes a lot of sense.

He doesn't talk about early retirement as I recall (don't think he advocates in general), though your interpretation make sense to me.

I've spent some time reading Dr B's more recent posts on LMP's and he concedes it's even harder/more expensive (and not without other risks) in the current low yield environment than it was in 2009-2012 when he formulated some of this thinking. Times are tough, no way around it, and he says as much more recently.

In his eBook and elsewhere he notes that part of his LMP writing comes from watching his clients somewhat unexpectedly panic sell (to some extent) in the 08-09 meltdown.

Having more money than you'll ever need always makes it easier...

 

[daylatedollarshort]

+1

I enjoy reading everyone's viewpoints here. Clearly there are going to be some very conservative investors on a forum this large, and I always enjoy reading their posts.

Obgyn65, I'm glad you continue to post your viewpoints here and I always learn from them. Thanks for sharing your insights. You have to invest in a manner that's comfortable for you, and clearly you are doing so. There's nothing wrong with that.

+2. I think we live in a very consumer oriented country, and it is refreshing to find someone who lives way below his means, and has the financial ability and foresight to invest very conservatively and does not need to take any risks in the stock market.

In a country of failed pension plans, unprecedented mortgage foreclosures, a trillion dollars in student debt, and a large percent of the population financially unprepared to retire, I'd rather be a conservative financial outlier like obgyn65 than broke with the mainstream.

 

[Spanky]

Having more money than you'll ever need always makes it easier...

or a guaranteed stream of inflation adjusted income that will cover all expected and unexpected expenses will definitely help.

 

[Spanky]

I think we live in a very consumer oriented country, and it is refreshing to find someone who lives way below his means, and has the financial ability and foresight to invest very conservatively and does not need to take any risks in the stock market.

Only a handful of people fit this profile, however. For most, exposure to equity is needed.