The Worst Retirement Investing Mistake

[nun]

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 .

I have the same approach as you to my invested portfolio, but I am arguing for a more conservative approach early on to provide an income stream in retirement that will supplement SS. My TIAA-Traditional has paid 7%, but it's now at 4.2% and I'll be glad of it when I retire. I'm a little strange as I can get SS from two countries, but one is from voluntary payments and I made the decision to pay extra tax to get the benefit. I have been doing that for 30 years and this year I can stop paying that voluntary tax as I have maxed out my pension benefit.

Right now my plan is to need 0% from my IRA, 403b, and after tax portfolio once all my stable income sources start....., there will be rollovers and RMDs of course.

 

[traineeinvestor]

Putting 20-25 years worth of expenses into an asset class which is currently showing a negative real return does not work for us - when I FIRE next year DW will be 40 so the money will have to last for 50+ years. I'll keep a few years worth of expenses in cash/near cash/bonds to ride out any fluctuations in the cash flow from our real estate and equities and any major emergencies, but much more than that would increase our vulnerability to inflation - over the longer term, I worry more about inflation than I do about market volatility.

That said, I do agree that an investor who is likely to panic and sell at the bottom may benefit from a different approach.

 

[Nords]

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

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.

I realize these are humorous comments, but I've read Buffett's biography "The Snowball". You would have not wanted to be one of his kids. Even the family dog ran away from home.

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 remember a decade ago when nobody would by an inflation-adjusted SPIA because they were capped at "only" 10%/year. We all knew that inflation was going to be a lot higher than that as soon as the economy recovered from the recession.

Heh... it's almost a decade ago that our portfolio hit rock bottom during the 2002 recession. I'd been ER'd for barely over four months back then and was already beginning to wonder if I'd made a horrible mistake.

Putting 20-25 years worth of expenses into an asset class which is currently showing a negative real return does not work for us...

I believe that you've just described the concept of value investing.

 

[HFWR]

I realize these are humorous comments, but I've read Buffett's biography "The Snowball". You would have not wanted to be one of his kids. Even the family dog ran away from home.

But Bill Gates is too young to be my dad.

 

[audreyh1]

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.

I'll probably wait till I'm 60 to make the decision on when to tap my SS annuity.

Well, actually, since DH is 4.5 years older, I suppose we might be looking at the issue a tad sooner.

 

[audreyh1]

I have the same approach as you to my invested portfolio, but I am arguing for a more conservative approach early on to provide an income stream in retirement that will supplement SS. My TIAA-Traditional has paid 7%, but it's now at 4.2% and I'll be glad of it when I retire. I'm a little strange as I can get SS from two countries, but one is from voluntary payments and I made the decision to pay extra tax to get the benefit. I have been doing that for 30 years and this year I can stop paying that voluntary tax as I have maxed out my pension benefit.

Things worked out just the opposite for me. I was able to retire very early because I put some [not all] of my savings into company stock options that then grew over many years to dominate my net worth and ultimately grow large enough to retire early. I just hung on tight. I saved and invested in addition, but I didn't divest any of the company stock until I had more than enough to retire and that during my last working year. Why didn't I diversify earlier and start building safe asset streams? Because I was young enough to work a lot longer if I needed to. No financial advisor will ever tell you to do what I did. But that was my opportunity, and I took full advantage of it.

In fact, if I had held on even longer, not divested and diversified when I did, I would have had an even bigger nest egg because in spite of the dot.com bust my company continued to do well in the 2000s. But I had reached my goal and was ready to take on a new kind of life....

There are many paths.

 

[ejman]

Things worked out just the opposite for me. I was able to retire very early because I put some [not all] of my savings into company stock options that then grew over many years to dominate my net worth and ultimately grow large enough to retire early. I just hung on tight. I saved and invested in addition, but I didn't divest any of the company stock until I had more than enough to retire and that during my last working year. Why didn't I diversify earlier and start building safe asset streams? Because I was young enough to work a lot longer if I needed to. No financial advisor will ever tell you to do what I did. But that was my opportunity, and I took full advantage of it.

In fact, if I had held on even longer, not divested and diversified when I did, I would have had an even bigger nest egg because in spite of the dot.com bust my company continued to do well in the 2000s. But I had reached my goal and was ready to take on a new kind of life....

There are many paths.

Yes there are many paths. The stock options in the company I was working for as I was contemplating ER went up in smoke as it went belly up. Fortunately I had diversified my retirement investments because of an experience many years earlier where another company I worked for also tanked taking its stock along. Many paths. Sometimes one gets lucky and sometimes not.

 

[truenorth418]

I think 20 years is too high an allocation for non-equity part of the portfolio, at least for a person in their 40s or 50s. 2000-03 and 2008-09 periods were severe but market largely recovered within a few years, to the benefit of those that stuck with it or better yet jumped in at the bottoms. Sounds like good advice for an older retiree, though.

 

[Telly]

No one has mentioned the "scary teeth woman" yet. IIRC, she has all of her millions in bonds, and gives out financial advice left and right on TV. I cannot remember her name, her show is on CNBC on Saturday nights. I'm having a mental block... I think it was those scary teeth... maybe best that I don't remember... keep my sanity... not have nightmares...

 

[NW-Bound]

I have not watched CNBC for a while, let alone on Sat nights. But I do not recall anyone with teeth like these, if that's what you meant.

 

[Nords]

But I do not recall anyone with teeth like these, if that's what you meant.

I thought he meant the one whose eyes bug out like she's just been hit in the back of the head...

 

[NW-Bound]

First teeth, now eyes. What else is scary about this woman?

OK, just kidding. I knew who Telly was talking about, and I was just fooling around. It's just that I do not get scared that easily.

 

[ShokWaveRider]

OK. So if one has amassed 30 - 35 years of expenses should we just lay back, put our feet up, and tap the matress every month?

 

[audreyh1]

OK. So if one has amassed 30 - 35 years of expenses should we just lay back, put our feet up, and tap the matress every month?

Well you still need to earn some interest on your money to keep up with inflation. So maybe CDs?

 

[haha]

No one has mentioned the "scary teeth woman" yet. IIRC, she has all of her millions in bonds, and gives out financial advice left and right on TV. I cannot remember her name, her show is on CNBC on Saturday nights. I'm having a mental block... I think it was those scary teeth... maybe best that I don't remember... keep my sanity... not have nightmares...

Perhaps Suzi Orman?

 

[marko]

Can someone steer me toward anything on the "20/25 year expenses" concept?

Despite reading this forum every day for a few years, for some reason I've missed this. Or is this just another way of restating the ~4% SWR?

 

[REWahoo]

Can someone steer me toward anything on the "20/25 year expenses" concept?

http://www.early-retirement.org/forums/f28/the-worst-retirement-investing-mistake-63236.html

 

[cute fuzzy bunny]

Perhaps Suzi Orman?

Shhh...do not speak its name or it will appear!

 

[nun]

Things worked out just the opposite for me. I was able to retire very early because I put some [not all] of my savings into company stock options that then grew over many years to dominate my net worth and ultimately grow large enough to retire early.

That's good! But it could so easily have gone in another direction. I have a friend who worked for Polaroid and had all his retirement money in company stock. When they went bankrupt he lost a lot of it. My starting point for retirement saving was to guarantee (as much as is possible) a base of retirement income, so an annuity product had a place in my portfolio from the start. I just don't want to put all my money on one horse and hope that things work out well. If the DOW tumbles I'll be annoyed, but it won't be catastrophic for me.

 

[audreyh1]

Can someone steer me toward anything on the "20/25 year expenses" concept?

Despite reading this forum every day for a few years, for some reason I've missed this. Or is this just another way of restating the ~4% SWR?

Not really, although this probably does assume a 4% withdrawal. But according to the Safe Withdrawal Rate studies, such an allocation would not survive 30 years.

I finally decided that the number of years might be more of a "panic threshold" for Bernstein's scarred clients.

It's very confusing, because Bernstein never states where the 20 to 25 years number comes from. Or what withdrawal rate his clients are using. It's all a bunch of hand waving.

 

[audreyh1]

That's good! But it could so easily have gone in another direction. I have a friend who worked for Polaroid and had all his retirement money in company stock. When they went bankrupt he lost a lot of it. My starting point for retirement saving was to guarantee (as much as is possible) a base of retirement income, so an annuity product had a place in my portfolio from the start. I just don't want to put all my money on one horse and hope that things work out well. If the DOW tumbles I'll be annoyed, but it won't be catastrophic for me.

Sure, I made my bets, and I took my chances. It was a once in a lifetime opportunity. Otherwise I would have been just like any other engineer working in the high tech business - a much longer career and saving and investing like mad [but not in company stock] while the salary was good.

My approach might have "seemed" risky on the surface, but it wasn't. Because the initial investment in buying company options didn't take all my savings - it was a small portion, in no way were ALL my savings tied up in company stock. The fact is that the investment grew to dwarf all my other investments. It's not like I didn't have other investments growing as well, and I continued to aggressively add to them. What holding onto the stock I initially bought accomplished, was moving my retirement date up 1.5 to 2 decades! Otherwise, I would have simply had a normal career, and maybe with luck and care retired by 55 instead of 39.

 

[bssc]

So, what you are saying is that you never rebalanced and your options did very well.

What I took from the article was that people can't time the market since they panic, get out at the bottom and then procrastinate and get back in at the top.

I had a friend, who after the dot.com bust kept telling me that he was going to wait for another pullback to get back in.

 

[audreyh1]

So, what you are saying is that you never rebalanced and your options did very well.

I didn't rebalance or have an AA anyway while I was working (i.e. in the accumulation phase). Since I was only in my 20s and 30s, I was focused on maximizing the long-term growth, so I was 100% equities. Since additional savings were invested elsewhere, I was diversifying as best I could from company stock without touching "the mother lode", but I was still 100% equities overall.

Hey, it was the 80s and 90s!!!! But really, my young age had the most to do with it.

I did make one prudent diversification a few years before I retired (as the real possibility came into view). I sold a wee bit of the company stock to pay off our house. We didn't owe a whole lot on it anymore and we no longer had a high mortgage interest deduction - so no tax benefit. Paying off the house was a way to mitigate any "sudden unemployment" risk, and I did have the standard emergency fund set aside as well.

 

[audreyh1]

What I took from the article was that people can't time the market since they panic, get out at the bottom and then procrastinate and get back in at the top.

I had a friend, who after the dot.com bust kept telling me that he was going to wait for another pullback to get back in.

I think that's the gist of it. And it seems to me for the folks that really panic and bail, getting back in is even harder. So they are really stuck.

 

[FIREd]

My approach might have "seemed" risky on the surface, but it wasn't. Because the initial investment in buying company options didn't take all my savings - it was a small portion, in no way were ALL my savings tied up in company stock. The fact is that the investment grew to dwarf all my other investments. It's not like I didn't have other investments growing as well, and I continued to aggressively add to them. What holding onto the stock I initially bought accomplished, was moving my retirement date up 1.5 to 2 decades! Otherwise, I would have simply had a normal career, and maybe with luck and care retired by 55 instead of 39.

Similar story here. A concentrated bet in company stock allowed us to reach FI in our 30s*. Without it, we would still have reached FI in our 40s I think because we were saving over half of our regular income. Despite some divestment in 2010, DW's company stock once again represents a sizable portion of our portfolio due to tremendous growth this year. Because we are FI and don't need to shoot for the moon anymore, we will continue to divest as the stock price goes up. But we may keep a small amount for the hormones...

* Yes, we understood the risks as company stocks blew up in our face several times in the past.