The Worst Retirement Investing Mistake

[imoldernu]

At 76, I agree with the "low risk" thingy. I think I'm reasonably "savvy"about economics, but frankly, just don't understand how kicking the can down the road will ever return the US to prosperity. Amazed that Greece hasn't brought down the World economy.
So... I watched my good friend's portfolio go from $800,000 to $400,000... and now back up to $800,000+. He's positive in his own mind that eventually, he'll be ahead of the game. He's 12 years younger... I hope he's right.

Our policy, ever since retiring in 1989, has been to be safe. Cash in a coffee can in the back yard keeps us more calm than watching a $100,000 investment lose 20%. I'll add here, that we're relatively poor.

We're content with our 2001-2003 30 year IBonds... still yielding 6%, a small, untouched annuity yielding 4%, and some 5 yr. IRA CD's around the same.

No, we're not keeping up with inflation, but so far, so good with our retirement plan. We sleep well at night, and watch CNBC for interest purposes, feeling dumb, when the market rises, and smart, when it drops.

In short... looking long range, for younger folks who will be around for another 20 to 40 years... I worry about a 16 trillion dollar debt.

I don't give advice... Am used to being ridiculed for my miserly approach to security. I respect those who have "made it", and wish them well.

Those who come here, "Early Retirement"... are IMHO, the ones who will succeed in the coming years. The hours spent in learning from others, will be will be more productive, than basing future plans on winning the lottery.

 

[Nords]

I am also disturbed by the language "having won the game, get out". Yes, there is definitely a different game after retirement than while you are working and investing for retirement. So yes, recognize that you're in a completely different game now and change your asset allocation accordingly. And the AA might even deserve to be tweaked while you age. But the "get out entirely" part ignores long term portfolio survival issues IMO.

You've probably hit the nail on the head. "You're super rich, stupid, don't take any more risk." Those folks have truly won the game.

If I had 100 years worth of retirement assets (or some unobtainable number), I might indeed "get out." But we have to continue to play the game, but at increasing lower exposure as we age.

I wish I had a good answer to "If you don't need it, you should invest it in risky assets" vs "If you don't need it, you should put it in a safe investment for [long-term care expenses or grandkids college fund or other scary elder spending]".

 

[audreyh1]

Hi imodernu!

I'm sure I would be taking a very different approach if I were 76 instead of in my early 50s. And that may be part of the disconnect with the article. If Bernstein's clients are already in their 70s and 80s, his new approach is much more sensible.

 

[audreyh1]

I wish I had a good answer to "If you don't need it, you should invest it in risky assets" vs "If you don't need it, you should put it in a safe investment for [long-term care expenses or grandkids college fund or other scary elder spending]".

Frankly, I can see it either way. I would say currently that I'm in the "I can afford to take a little more risk with a portion of my assets" camp since I have a low withdrawal % and a long time line. But I certainly understand the "I have enough that I don't need to own any risky assets" camp. Kind of like holding mortgages in retirement - it's really an individual thing.

 

[MichaelB]

I don't buy the argument that rich people will take less risk because they are rich. In fact, just the opposite. Wealthy people have a great deal more awareness of 1) how wealth can be lost from both inflation and asset price decline and 2) how wealth can increase from taking asset price risk.

Total aversion to equity-type risk is more likely from people who see their standard of living jeopardized by equity loss. They are at 4% withdrawal rates. In theory, historically, Bernstein's recommendation of TIPs and short term treasuries might work - in the 90's and 00's.

 

[nun]

We're content with our 2001-2003 30 year IBonds... still yielding 6%, a small, untouched annuity yielding 4%, and some 5 yr. IRA CD's around the same.

No, we're not keeping up with inflation, but so far, so good with our retirement plan. We sleep well at night, and watch CNBC for interest purposes, feeling dumb, when the market rises, and smart, when it drops.

At 6% and 4% you are beating inflation, which is a nice position to be in.

I have an even more heretical view than Bernstein. IMHO retirement saving is to ensure income after you stop working, not to maximize your portfolio's value or to ride on the efficient frontier. Therefore, I have had annuity type products in my portfolio right from the beginning and given the chance to contribute to the UK SS system as well as the US system I took it against the advice of many friends who said I'd get a better return in the stock market.

So I'd like to see every one with something like TIAA-Traditional as the core of their portfolio right from the start. Once they have that they can add some equity spice.

 

[Midpack]

I wish I had a good answer to "If you don't need it, you should invest it in risky assets" vs "If you don't need it, you should put it in a safe investment for [long-term care expenses or grandkids college fund or other scary elder spending]".

I should have said, reduce my equity exposure significantly instead of "get out" - though my comment was framed with a nest egg of 100X times annual expenses (at that level one could afford to "get out" of equities altogether). Along the lines of MichaelB's thought, which I agree with, I'd probably have about 33-50X safely tucked away, and have the rest invested including a substantial equity position. I can't think of circumstances where I'd "get out" entirely and I don't think Dr B advocated zero equity - but less equity/volatility for those who can afford to. Dr B may not be as bullish on the future as he once was. I think we may all be somewhat in "heated agreement."

 

[NW-Bound]

IMHO retirement saving is to ensure income after you stop working, not to maximize your portfolio's value or to ride on the efficient frontier.

I don't see anything wrong with riding the "efficient frontier" at all times. The problem many of us have asked is that "Is the future efficient frontier any different than what it has been?". All that portfolio theory is based on historical data, and there have been numerous discussions on how the US, the British, the Spanish, and the Roman, etc... have had their time in history. So, where is that future efficient frontier?

I would like to point out once more that even Malkiel, the author of the well-read A Random Walk down Wall Street, has recently touted the emerging markets as being better valued than developed markets. Malkiel cited all the usual metrics, such as P/E ratios, growth prospects, dividend yields, and even the public debt ratio relative to a country's GNP.

 

[mathjak107]

there are 2 ways to look at things as im dwelling on exactly a similiar issue as we get ready to retire..

one way is your going to bake a cake and these are the ingrediants ill need, as opposed to show me the ingrediants we have and ill tell you what i want to make.

way one is similiar to the first example. look at your expenses and what you think you will need for descretionary spending and see what you need to draw from savings.

if i do it that way i need a low risk portfolio and about a 2% withdrawal rate.

the other way of looking at things is i have a pretty high pucker factor so lets see what a 4 % withdrawal rate equals in income and then ill mold a lifestyle around the higher income and higher risk.

our inclination is to go lower income, less expensive lifestyle and stay around 2% withdrawal.

 

[unclemick]

I thought the idea was to stick with your allocation, rebalance and ride out market [-]crashes[/-] fluctuations. Those of us who did that in 2008/9 may have some mental scars, but came through without serious financial damage.

Bernstein seems to assume everyone was guilty of bailing out at/near the bottom and not getting back in. Sounds like his mental scars are pretty bad...

Not to mention a great bellybutton quiver. Pegged the old Chickenheartedness meter several times - but stayed the course(ala Jack Bogle) and cut expenses although not near my legendary low - thanks to the income stream effect of early non cola pension and SS. ? maybe cut back to 2% SWR during the worst of my panic.

heh heh heh - Full auto by 2008/9 so those trusty Vanguard computers rebalanced for me. While I did my best imitation of 'a deer in the headlights'. Of course to tell it now I had nerves of steel - right? .

 

[nun]

I don't see anything wrong with riding the "efficient frontier" at all times. The problem many of us have asked is that "Is the future efficient frontier any different than what it has been?". All that portfolio theory is based on historical data, and there has been numerous discussions on how the US, and the British, the Spanish, and the Roman, etc... have had their time in history. So, where is that future efficient frontier?

That's my point, where is the frontier and how will it impact my retirement. I don't worrying about that as I know that my incorrect estimation of the frontier's edge will have zero impact on my ability to live comfortably in retirement. It will affect my portfolio's value, but won't change my retirement income, because I expect it to come from stable sources.

I predict I'll have $80k in guaranteed annual income when I turn 65, which is like $53k in today's dollars. That's from my TIAA-Traditional annuity, small DB plan, US and UK SS checks and rental income. I expect my equities and bonds to provide quite a lot on top of that, actually $50k at 4% return, but it will just get reinvested because with no mortgage my expenses are way less than $53k /year.

 

[Bikerdude]

I have the 20+ years Bernstein recommends if my portfolio income stream does not fall below 50% of what it is currently. I do not use principal for normal living expenses. I think I'm fairly safe.

 

[HFWR]

Worst investing mistake? Not being born Warren's Buffett's son?

 

[NW-Bound]

But, but, but, I have read that Warren already decided to leave most of his estate to charity, and to give his descendants diddly squat. OK, that diddly squat may still be $10 million or some large sums, but it is not billions or tens of billion like people would think.

 

[cute fuzzy bunny]

Worst investing mistake? Not being born Warren's Buffett's son?

I'd rather have been Warren Beatty's hands.

 

[audreyh1]

I have an even more heretical view than Bernstein. IMHO retirement saving is to ensure income after you stop working, not to maximize your portfolio's value or to ride on the efficient frontier. Therefore, I have had annuity type products in my portfolio right from the beginning and given the chance to contribute to the UK SS system as well as the US system I took it against the advice of many friends who said I'd get a better return in the stock market.

So I'd like to see every one with something like TIAA-Traditional as the core of their portfolio right from the start. Once they have that they can add some equity spice.

I predict I'll have $80k in guaranteed annual income when I turn 65, which is like $53k in today's dollars. That's from my TIAA-Traditional annuity, small DB plan, US and UK SS checks and rental income. I expect my equities and bonds to provide quite a lot on top of that, actually $50k at 4% return, but it will just get reinvested because with no mortgage my expenses are way less than $53k /year.

I'm simply not willing to buy an income stream at this point and lose access to the principal. I'm only 53 (almost), so I have a long time horizon. There aren't inflation adjusted SPIAs out there worth buying (they are not reasonably priced at the moment), and I'm not willing to buy a fixed rate one at my age. I'd rather try to live off a stock dividend income stream if I had to. I'm a year 2000 retiree, so I've already been through the ringer twice! So far I've managed to stay the course and blossom. It's OK if the future is not as bright. A 3.33% [not inflation adjusted] draw on my portfolio more than covers our income needs (I even set some of it aside for a rainy day fund). I have some cash buffers that let me ignore short term market volatility/events.

I think there are multiple approaches that work, and what matches a person's situation best depends on how early they retired, how high a withdrawal rate they need (that is, whether their portfolio is more than ample or marginal), whether the bulk of their retirement funds come from investments or they had some type of annuity/pension available in their retirement plan. It very much depends.

I'm not looking to max out on long term performance of the portfolio, but I am trying to hit a sweet spot between short-term volatility and inflation-adjusted return with a eye to a terminal value >>0. At the moment these seem to imply a range of AA of 50/50 to 40/60 stocks/bonds at least for the next couple of decades. As my needed portfolio survival period shortens my allocation will probably be adjusted.

If I live long enough I'll get to tap into my SS annuity .

 

[haha]

I'd rather have been Warren Beatty's hands.

If you are wanting to go all the way with adopting body parts, Warren must have a better part to channel.

 

[cute fuzzy bunny]

If you are wanting to go all the way with adopting body parts, Warren must have a better part to channel.

Yeah, I'd have gone with the better part, but I think it was in pitch darkness most of the time.

 

[REWahoo]

Yeah, I'd have gone with the better part, but I think it was in pitch darkness most of the time.

You are speaking of his brain, right?

 

[mathjak107]

i have been following a popular newsletter for 25 years and have been very happy with them for decades.

my entire life i followed the growth model but about 5 years ago we switched to their income and capital preservation model.

that model was about 30% equities but at this this point in time we are 100 various domestic and international bond funds.

we run about a 4% yield and have capital gains to boot as a few of the funds act and respond more like stocks then bonds.

as of right now if we were to retire this mix works for us as we will need about a 2% withdrawal or so.

the model may increase its equities holdings at some point so its not going to be all bonds forever.

the point is this model works for us because we will have other income coming in . if we didnt then i would have to increase risk to match but at this point as they say " if you already won the game why keep playing"

at this stage im trying to have as little risk as my income needs allow.

 

[cute fuzzy bunny]

You are speaking of his brain, right?

Yep. Now you have to guess if I'm talking about using the right brain or the left brain.

Good news: only about 4 more years of random puns are still in storage.

 

[MichaelB]

I'd rather have been Warren Beatty's hands.

Hey, better watch out what you wish for - you never know what he is doing behind closed doors.

Yep. Now you have to guess if I'm talking about using the right brain or the left brain.

Good news: only about 4 more years of random puns are still in storage.

With a young son, you are soon to learn many more.

 

[pb4uski]

I thought the idea was to stick with your allocation, rebalance and ride out market [-]crashes[/-] fluctuations. Those of us who did that in 2008/9 may have some mental scars, but came through without serious financial damage.

Bernstein seems to assume everyone was guilty of bailing out at/near the bottom and not getting back in. Sounds like his mental scars are pretty bad...

We stayed in throughout the meltdown and even rebalanced a little behind the curve. Ironically, the discipline to hold on for me comes largely from not wanting to pay income taxes, and less due to pure investing discipline. Same thing I did throughout the 2000 dot.com bust, I rode it out mostly to avoid income taxes. Whatever works?

+1 I'll put a reasonable low cost equity/bond portfolio periodically rebalanced against this clown's approach any day of the week.

I did two firecalc trials with a 900k portfolio (30k a year * 30 years), 30k initial withdrawal rate with 3% inflation and two different investment portfolios: 50/50 equities and LT bonds and 90% 5 year treasuries and 10% equities. The 50/50 mix has 1 failure and an average $1.2m ending portfolio. The more conservative alternative actually has 14 failures (out of 111 cycles) and an average ending portfolio of $.5 million..

 

[ejman]

I'm simply not willing to buy an income stream at this point and lose access to the principal. I'm only 53 (almost), so I have a long time horizon. There aren't inflation adjusted SPIAs out there worth buying (they are not reasonably priced at the moment), and I'm not willing to buy a fixed rate one at my age. I'd rather try to live off a stock dividend income stream if I had to. I'm a year 2000 retiree, so I've already been through the ringer twice! So far I've managed to stay the course and blossom. It's OK if the future is not as bright. A 3.33% [not inflation adjusted] draw on my portfolio more than covers our income needs (I even set some of it aside for a rainy day fund). I have some cash buffers that let me ignore short term market volatility/events.

I think there are multiple approaches that work, and what matches a person's situation best depends on how early they retired, how high a withdrawal rate they need (that is, whether their portfolio is more than ample or marginal), whether the bulk of their retirement funds come from investments or they had some type of annuity/pension available in their retirement plan. It very much depends.

I'm not looking to max out on long term performance of the portfolio, but I am trying to hit a sweet spot between short-term volatility and inflation-adjusted return with a eye to a terminal value >>0. At the moment these seem to imply a range of AA of 50/50 to 40/60 stocks/bonds at least for the next couple of decades. As my needed portfolio survival period shortens my allocation will probably be adjusted.

If I live long enough I'll get to tap into my SS annuity .

A well reasoned approach that I agree with and follow as well. Only difference is that I decided to tap the SS annuity this year as I turn 62.

 

[pb4uski]

I don't buy the argument that rich people will take less risk because they are rich. In fact, just the opposite. Wealthy people have a great deal more awareness of 1) how wealth can be lost from both inflation and asset price decline and 2) how wealth can increase from taking asset price risk.

Total aversion to equity-type risk is more likely from people who see their standard of living jeopardized by equity loss. They are at 4% withdrawal rates. In theory, historically, Bernstein's recommendation of TIPs and short term treasuries might work - in the 90's and 00's.

+1 In most cases the rich are self-made and got rich by taking calculated risks - why would they stop now?