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Re: Those Who Don't Have Pensions.............
Old 08-04-2006, 06:42 PM   #21
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Re: Those Who Don't Have Pensions.............

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Originally Posted by Nords
So our retirement portfolio is over 90% stocks, tilted toward small-cap, value, & international, with the remainder in cash (MM or CDs). No bonds.
Same for us, but, like Nord's, I have an inflation protected pension to offset the risk.

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But for those who absolutely positively don't want to outlive their money, their only "guaranteed" solution is an annuity with a COLA-- for which peace of mind they will pay dearly. It'll almost certainly require more than 33x expenses...
During one of the annuity wars threads I looked at a few annuities out of curiousity. I found some that were inflation protected up to 3%/yr for about 25X expenses. I didn't see anything that would cover serious inflation - do they exist? If so, I suspect Nord's 33x is about right.
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Re: Those Who Don't Have Pensions.............
Old 08-04-2006, 06:52 PM   #22
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Re: Those Who Don't Have Pensions.............

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Originally Posted by AltaRed
Well said until his 2nd last paragraph which is flawed because he doesn't disclose an existence of a healthy pension to justify a 90% stock portfolio.
Thanks, I think, but oh please, my signature would plagiarize the "forward looking statements" on most publicly-traded company's press releases.

My pension doesn't cover all expenses.* The pension certainly makes it easier to handle the volatility of an all-stock portfolio, but even without the pension we'd stay with the same retirement portfolio asset allocation.* As I've said before, inflation is the real problem for an eight-decade retirement, and we carry enough cash (two years) to ride out the majority of the downward volatility.* We're not going to worry about the upward volatility...
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Re: Those Who Don't Have Pensions.............
Old 08-04-2006, 07:03 PM   #23
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Re: Those Who Don't Have Pensions.............

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Originally Posted by donheff
Same for us, but, like Nord's, I have an inflation protected pension to offset the risk.
During one of the annuity wars threads I looked at a few annuities out of curiousity.* I found some that were inflation protected up to 3%/yr for about 25X expenses.* I didn't see anything that would cover serious inflation - do they exist?* If so, I suspect Nord's 33x is about right.
I confess that many years ago I sold annuities. It was impossible to get uncapped inflation protection, as the actuaries realistically believed that they couldn't be funded. (at that time, TIPS did not exist.)

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Re: Those Who Don't Have Pensions.............
Old 08-04-2006, 07:41 PM   #24
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Re: Those Who Don't Have Pensions.............

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Originally Posted by Nords
Thanks, I think, but oh please, my signature would plagiarize the "forward looking statements" on most publicly-traded company's press releases.

My pension doesn't cover all expenses.* The pension certainly makes it easier to handle the volatility of an all-stock portfolio, but even without the pension we'd stay with the same retirement portfolio asset allocation.* As I've said before, inflation is the real problem for an eight-decade retirement, and we carry enough cash (two years) to ride out the majority of the downward volatility.* We're not going to worry about the upward volatility...
Nords, I have a non-COLA'd DB pension which covers most expenses too (for now) and so I am higher on my equity split (60-70%) than if I had no pension (~35%). I feel it is important to disclose that as important information in personal asset allocations .....but to each his/her own. A 70's type bear market would be devastating on a highly proportioned equity portfolio.
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Re: Those Who Don't Have Pensions.............
Old 08-04-2006, 07:58 PM   #25
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Re: Those Who Don't Have Pensions.............

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Originally Posted by donheff
Same for us, but, like Nord's, I have an inflation protected pension to offset the risk.
During one of the annuity wars threads I looked at a few annuities out of curiousity. I found some that were inflation protected up to 3%/yr for about 25X expenses. I didn't see anything that would cover serious inflation - do they exist? If so, I suspect Nord's 33x is about right.
When I researched annuities (still haven't decided), I came to the conclusion that it was better for me to buy an IA for the amount I needed today; if/when inflation started to pinch I would purchase periodic additional smaller annuities from time to time (maybe every 3-4 years) to make up the difference.

The reasons for this strategy are that it spreads the annuities among different carriers, DCAs a bit since IA rates are tied to interest rates, allows you to tailor the amounts to REAL inflation rather than some projection with a cap, and lets your money stay in stocks until you need it to add on. Also, if your investments do much better than expected, you have the option of not adding to the annuity at all for that period.

Just another approach you may wish to consider if annuities are part of your plan.
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Re: Those Who Don't Have Pensions.............
Old 08-04-2006, 09:42 PM   #26
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Re: Those Who Don't Have Pensions.............

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You forgot the ever popular "sponging off a working spouse" and the JG special "pulling it out of my @ss."
Wished I could learn to do that
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Re: Those Who Don't Have Pensions.............
Old 08-04-2006, 09:49 PM   #27
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Re: Those Who Don't Have Pensions.............

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Originally Posted by brewer12345
You forgot the ever popular "sponging off a working spouse" and the JG special "pulling it out of my @ss."
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Originally Posted by mb
Wished I could learn to do that*
You'll have to check with JG and see how that's working out for him...
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Re: Those Who Don't Have Pensions.............
Old 08-05-2006, 06:06 AM   #28
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Re: Those Who Don't Have Pensions.............

To OP, I second (or third) the suggestion that if you will review the historical posts there has been quite a bit of discussion on how to retire and thrive with or without a pension.

In short, without a pension, an income stream has to be developed. That stream can come from a variety of income producing assets (positive cash flow real estate, bonds, dividend paying stocks, sale of capital appreciating stocks, etc.). A portion of the portfolio, however, must be dedicated to protect against inflation.

With a pension, a greater portion of the portfolio can be dedicated to protect against inflation.

While I personally don't like annuities because of the cost, RIT's method of purchasing a base annuity to cover expenses, and then purchasing additional annuities as needed when expenses increase seems to provide an inflation protection.
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Re: Those Who Don't Have Pensions.............
Old 08-05-2006, 11:19 AM   #29
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Re: Those Who Don't Have Pensions.............

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You forgot the ever popular "sponging off a working spouse" and the JG special "pulling it out of my @ss."
It is a trend..... but Nords and CFB sound to be FIRE on their own though....just based on the intelligence of their posts...well, usually....
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Re: Those Who Don't Have Pensions.............
Old 08-05-2006, 11:25 AM   #30
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Re: Those Who Don't Have Pensions.............

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futures in certain types of exotic cheeses. )

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I am favoring a mixture of my military pension, cashflow from real estate and dividends/4% Rule from my portfolio and if need be, a part time job. I think a minnow (Smelt for the Minnesotans) salesmen or wine taster would fit nicely into my plan.
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Re: Those Who Don't Have Pensions.............
Old 08-05-2006, 11:54 AM   #31
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Re: Those Who Don't Have Pensions.............

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Originally Posted by AltaRed
Nords, I have a non-COLA'd DB pension which covers most expenses too (for now) and so I am higher on my equity split (60-70%) than if I had no pension (~35%).* I feel it is important to disclose that as important information in personal asset allocations .....but to each his/her own.* A 70's type bear market would be devastating on a highly proportioned equity portfolio.
OK this is good. Let me make sure I understand this rule-of-thumb: for pension covering 100% of expenses an equity split (60-70%) is good; If there is no pension then an equity split (~35%) would be advised. Obviously this will be influenced by age of retirement, inflation,...but can I conclude that your ROT would suggest an equity split (50-55%) if half the expenses were covered by pension? Thanks.

Nords, if 10% cash covers you for 2 years, then you are good for 20 years PLUS the additional returns from the 90% equity over cash. Again I am not trying to be too inquisitive, just trying to get a feel for your general investment strategy. For your planning, what have you assumed for a) equity returns and b) inflation? Thanks.
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Re: Those Who Don't Have Pensions.............
Old 08-05-2006, 12:48 PM   #32
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Re: Those Who Don't Have Pensions.............

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Originally Posted by kcowan
Nords, if 10% cash covers you for 2 years, then you are good for 20 years PLUS the additional returns from the 90% equity over cash.
Well, that's the theory. Things would've been a bit ugly during 1966-82 and 2000-2004 but belt-tightening can reduce expenses. Money to pay for those expenses can be raised by selling whatever's lost the least while leaving the rest of the portfolio to recover in its own time. Note that most of 1966-82 was leavened by dividends, but that practice had dwindled to almost nothing by the end of the century.

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Originally Posted by kcowan
Again I am not trying to be too inquisitive, just trying to get a feel for your general investment strategy. For your planning, what have you assumed for a) equity returns and b) inflation? Thanks.
Dimson's "Triumph of the Optimists", Bernstein's website/Four Pillars book, & Warren Buffett.

Inflation over the 20th century averaged about 3.5% (although it averaged 5% from roughly 1970-2000). Current concensus seems to be that total-market equity returns (dividends + growth) will be about 3-4% over inflation and Buffett has been predicting a 6-7% total return (dividends + growth) for the next few years. I think I first read about the Gordon Equation in Bernstein but that's been around for a long time.

There does seem to be a valid value/small-cap premium and REITs/commodities can make a difference in boosting returns while perhaps reducing volatility. Our portfolio doesn't have any of the latter two because they appear to be at least fully valued for now, but maybe we'll add them in the future.

Unless there's a big change to the current environment, we plan to stick with equities & two years' cash for the rest of our lives-- no bonds. Our retirement portfolio is currently about 30% Berkshire Hathaway stock (BRK.B), 20% Powershares' International Dividend ETF (PID), 15% S&P600 Small-cap Value ETF (IJS), 10% Tweedy, Browne Global Value (TBGVX), 10% DOW Dividend Index ETF (DVY), 7% individual stocks, and 8% cash. Over the next few years we'll spend down the Tweedy fund and buy more PID. Way, way off in the future we might move the Berkshire shares over to IJS but that's probably at least a decade away while we wait to see what Buffett comes up with next...

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Re: Those Who Don't Have Pensions.............
Old 08-05-2006, 02:21 PM   #33
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Re: Those Who Don't Have Pensions.............

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Originally Posted by kcowan
OK this is good. Let me make sure I understand this rule-of-thumb: for pension covering 100% of expenses an equity split (60-70%) is good; If there is no pension then an equity split (~35%) would be advised. Obviously this will be influenced by age of retirement, inflation,...but can I conclude that your ROT would suggest an equity split (50-55%) if half the expenses were covered by pension? Thanks.
Directionally, yes.... but it also depends on the size of your investment portfolio relative to your pension and your expenditure needs.*

The point I was really trying to make is that IMHO there needs to be sufficient capacity in the Fixed component on a 3-7 year rolling forward basis to cover cash expenditure needs to avoid having to tap into equity during a prolonged secular bear market.* Whether it is 3, 5,7,10 years or some other number depends on your own personality, disposition and what helps you sleep at night. Each person needs to look at that for their specific situation.

Lacking any better information, I tend to default to the FPX benchmarks of FPX Growth (65/35) and FPX Income (35/65) as the rule-of-thumb end points for asset allocation... and thus the rationale for the numbers in my post.*

With a non-COLA'd pension that almost covers my expenses today, retired at 57, I could be close to Nords 90% equity portfolio (and maybe stay there if the pension was COLA'd).* But since I will need to tap into my investments more and more over time due to inflation, I have defaulted to about the FPX 65/35 Growth allocation - my personal sleep-at-night factor.* Indeed I am at 60% at the moment, with spare cash to invest in buying opportunities that I think will occur within the next 6 months and I would go as high ats 70% equity allocation over the next few years.

In theory, my equity allocation should slowly decrease as more and more cash needs to come from my investment portfolio. Whether it is 50/50 when my cash needs are 50% of my expenses remains to be seen and how well equities perform relative to fixed income and the income the whole portfolio throws off at that time.*

My bottom line is to be able to look out ~5 years and have certainty on cash flow, without needing to tap into equities as a boundary condition, and ideally no need to tap into capital (at current values) indefinitely.
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Re: Those Who Don't Have Pensions.............
Old 08-06-2006, 10:47 AM   #34
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Re: Those Who Don't Have Pensions.............

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Originally Posted by kcowan
Let me make sure I understand this rule-of-thumb: for pension covering 100% of expenses an equity split (60-70%) is good; If there is no pension then an equity split (~35%) would be advised.
I'm not sure I agree completely. A pension can be discounted back to a present value and included in the portfolio as a "bond equivalent". With a pension covering 100% of your expenses you could conceivably have 100% of the rest of your portfolio in equities and probably still be a bit light on the equity portion. But if someone really has a pension covering 100% of expenses they ought to spend less time worrying about asset allocation and spend more time fishing.

It's a bit trickier for someone without a pension. Your inclination to ratchet up the fixed income portion of the portfolio to 65% to compensate for the absence of a pension seems logical. But such a high allocation to fixed income investments runs a very high risk of underperforming inflation. For anyone expecting to live a couple of decades in retirement (which is most 'normal' retirees and every early retiree) a 50% equity split seems to be the minimum that is advisable, unless you can compensate with a lower withdrawal rate. Keep in mind that 10 years of living expenses represents just 40% of a portfolio assuming a 4% withdrawal rate. In other words, a 60/40 equity/bond split gives you 10 years of (non-inflation adjusted) living expenses covered by the fixed income portion of the portfolio.
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Re: Those Who Don't Have Pensions.............
Old 08-06-2006, 01:13 PM   #35
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Re: Those Who Don't Have Pensions.............

I guess what I conclude from the foregoing discussion is that I have too little equity in my portfolio when compared to the likely forecast inflation. I am at 55% now when I include the present value of my non-indexed pensions (which cover 40% of our current living expenses).
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Re: Those Who Don't Have Pensions.............
Old 08-06-2006, 01:36 PM   #36
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Re: Those Who Don't Have Pensions.............

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Originally Posted by kcowan
I guess what I conclude from the foregoing discussion is that I have too little equity in my portfolio.
As you well know, only you can decide the proper asset allocation for you. Play around with FIRECalc and fiqure out the mix that gives you the highest success rate that stays within your "equity allocation" comfort range. More equity is only the right answer if you are pretty comfortable you won't bail out during the next bear market. If 55% gives you good results in FIRECalc, then go with what you are comfortable with.
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Re: Those Who Don't Have Pensions.............
Old 08-06-2006, 02:43 PM   #37
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Re: Those Who Don't Have Pensions.............

My uncle has no pension, no investments, and 20k in the bank. He never made more than 40k/year in his life. He has a 1 million dollar home in Northern California. The plan is to work until 62 so he can start medicare and social security. Then sell his house (800k, post-bubble) and move to the southeast somewhere. 300k for a new house and 500k into a retirement account. 20k a year from the retirement account and 12k a year from social security. He'll inherit another 250k at some point which will provide another 10k a year. So that's 42k a year living in the southeast in a nice paid off home. He got lucky (moving to California in the 70s and buying a house) and he knows it. Without that, he'd be pretty screwed. I wonder how many people are in this situation.
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Re: Those Who Don't Have Pensions.............
Old 08-06-2006, 02:47 PM   #38
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Re: Those Who Don't Have Pensions.............

Hmmmm

Here's one for the market timers - unclemick2's lefthanded, Sunday afternoon portfolio with credit to Fama and French's value premium, Ben Graham's 25 to 75% equity range and of course the Norwegian widow:

Buy Wellesley and mix in amounts of Wellington until you get 4% current yield - periodically changing the mix(rebalancing at set intervals) to hold 4%(aka da magic number theorywise). Take out the 4% current yield and live on that. Of course some of the more attactive portfolios I've run across use Dodge and Cox in the mix - but I think they are still closed to new investors.

One could create an index fund equivalent OR an all asset class extreme slice and dice(like Ben of Thailand's ten slices yielding 3%).

More than one way to skin a cat. You gotta first decide where your head is at - value, index, slice and dice, hands on the throttle, or more passive.

heh heh heh heh - maybe an extreme portfolio thread?
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Re: Those Who Don't Have Pensions.............
Old 08-06-2006, 03:45 PM   #39
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Re: Those Who Don't Have Pensions.............

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My uncle has no pension, no investments, and 20k in the bank.* He never made more than 40k/year in his life.* He has a 1 million dollar home in Northern California.* The plan is to work until 62 so he can start medicare and social security.*
Better remind him that although he can get SS at 62, it is 65 for Medicare.

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Re: Those Who Don't Have Pensions.............
Old 08-06-2006, 04:34 PM   #40
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Re: Those Who Don't Have Pensions.............

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* He'll inherit another 250k at some point which will provide another 10k a year.*
I wouldn't bet the farm on even getting an inheritance. So many things could happen. Good luck.
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