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The Ages of the Investor: A Critical Look at Life-cycle Investing
Old 06-29-2012, 06:02 PM   #1
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The Ages of the Investor: A Critical Look at Life-cycle Investing

First off, I admit I am a William Bernstein follower, my portfolio is based on The Four Pillars of Investing to this day. His new short eBook is well worth the $4.50 in Kindle format IMO if only for the one chapter entitled "A Few Real World Endgames." He walks through four examples as introduced in the second quote below. He adheres to the same floor income plus added portfolio approach that Wade Pfau seems to advocate [they may be wearing me down]. FWIW...

It's not for beginners, note the following:
Investing for Adults is an online series of short e-books aimed at those who hunger for a more advanced appreciation of finance. I use the word "adult" figuratively, as it stands in metaphorical contrast to investment "children" who believe in the financial equivalents of Santa Claus, the Tooth Fairy, and the Easter Bunny: the market timing fairy (strategists who can predict future price changes), the returns fairy (managers who can generate alpha), and the risk fairy (options counterparties who will cheaply insure you against market losses).

This series makes a further assumption beyond investment adulthood: it assumes that the reader has at least a passing familiarity with basic academic finance. When I mention Eugene Fama, for example, I am not going to add the descriptive phrase, "famous University of Chicago financial economist and inventor of the efficient market hypothesis and three-factor model." I assume you already know who he is, what he's done, and what it all means. The same goes for Harry Markowitz, Zvi Bodie, Paul Samuelson, mean-variance analysis, kurtosis, and time-period dependency.
Originally Posted by from The Ages of the Investor: A Critical Look at Life-cycle Investing (Investing for Adults) by William J Bernstein

...illustrate how the Liability Matching Portfolio and the Risk Portfolio fit together (assuming that a retiree is lucky enough to have both), let’s consider four fictional cousins from the Frick family who demonstrate how the choices in this table play out in the real world.

The first, Fenwick, has just retired at age 62 from his school superintendent position in rural Kansas. He has a superb health-care package to supplement his Medicare coverage and $850,000 in an IRA rollover from his 403(b) plan. He has also made nearly the maximum in Social Security contributions. His house is paid for, and he and his wife enjoy a secure but spare lifestyle. Current living expenses, including taxes, amount to just $36,000 per year.

Next, consider his twin brother Frank, who also wound up a school superintendent, but in California’s Sonoma Valley. His rollover IRA size*and Social Security and health-benefit profile are identical to Fenwick’s, and he is just as frugal. But, fortunately or unfortunately, depending on your perspective, he lives in Northern California, with its much higher living expenses, of $56,000 per year. He, too, would be a fool to refuse the cheap, but partial, longevity insurance offered him by Uncle Sam. So like brother Fenwick, Frank elects to start the full $36,000 annual Social Security “benefit” at age 70.

Frasier struck it rich with his robotics company, which was bought by a larger firm, a purchase that left him with a lump sum, after taxes, of $10,000,000. Consequently, he has no sheltered assets. It is not being too flip to say that Frasier really doesn’t need much of an investment or retirement strategy. Although TIPS ladders are a good way, in general, of protecting against inflation, they are problematic in a taxable account. The gain in the inflation component of the price is taxable each year, which is a real accounting headache. Almost any prudent mix of indexed global stocks and, on the bond side, short-term Treasuries, munis, and CDs will last Frasier nearly forever.

Fritz also succeeded, after a fashion, but not as well as Frasier. The sale of his Internet startup netted him “only” $4,000,000 after taxes. Clearly, Fritz has a problem. Even if he completely annuitizes his new $4,000,000 nest egg at age 62, he’ll only receive about $142,000 per year in inflation-adjusted annual income. To the extent that he employs any of the strategies considered by his cousin Frank involving TIPS and deferred annuities, he’ll have even less annual income, albeit with more control and perhaps greater safety of his money. The optimal solution for Fritz, alas, likely involves some combination of fixed annuities purchased somewhat later in life, part-time work to supplement his income, and a reduction in his standard of living.

No one agrees with other people's opinions; they merely agree with their own opinions -- expressed by somebody else. Sydney Tremayne
Retired Jun 2011 at age 57

Target AA: 60% equity funds / 35% bond funds / 5% cash
Target WR: Approx 2.5% Approx 20% SI (secure income, SS only)
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Old 06-29-2012, 07:35 PM   #2
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Does he say anything about putting a portfolio in autopilot when you reach the age where you no longer understand how to put a portfolio in autopilot?

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