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Too Conservative a plan???
Old 04-24-2009, 04:28 PM   #1
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Too Conservative a plan???

Hi all,
I'm new to the community, and look forward to all your advice and wisdom and I try to navigate into the world of retirement.
My wife and I are 62 years old and have accumulated $1 Million. Half in our IRA/401K and half in taxable accounts. We were wondering if this is too conservative a retirement plan: If we take our SS now, it will come to $30,000/yr. We could then put the $1M into 20 year TIPS which are paying about 2.3% over inflation. This would generate another 23,000/yr. The $53,000/yr would be sufficient for our needs and the principal would remain intact. Both the principal and income would grow with inflation. I know there are different tax consequences between the taxable and non-taxable accounts, and there's the "phantom" income from the TIPS. Part of the worry is putting all our assets in one security, even though it's guaranteed by the gov't. What do you think? Thanks for the help....C
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Old 04-24-2009, 04:35 PM   #2
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Welcome to the forum Canyon.
Quote:
Originally Posted by Canyon View Post
Part of the worry is putting all our assets in one security, even though it's guaranteed by the gov't.
There is much to be said for simplicity, but I would never, ever put all my eggs in one basket, even something backed by the US govt. Since you obviously are very conservative in your investment strategy, why not combine TIPs with a CD ladder simply to have some diversification? CD rates are lousy right now but that probably won't be the case over the long run.
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Old 04-24-2009, 04:43 PM   #3
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Originally Posted by Canyon View Post
Hi all,
We could then put the $1M into 20 year TIPS which are paying about 2.3% over inflation. This would generate another 23,000/yr. The $53,000/yr would be sufficient for our needs and the principal would remain intact. Both the principal and income would grow with inflation.
the last time i lookd tips werent paying 2.3% over inflation, as i recall, the rate was <2%. it has been a little bit since i looked so i could be wrong.
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Old 04-24-2009, 04:50 PM   #4
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TIPS are a great thing to buy, but would it be better to buy them in higher inflation? That would give you a chance to lock in a higher rate.
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Old 04-24-2009, 04:54 PM   #5
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the last time i lookd tips werent paying 2.3% over inflation, as i recall, the rate was <2%. it has been a little bit since i looked so i could be wrong.
OP is correct.


COUPON MATURITYDATE CURRENTPRICE YIELD


20-Year 2.500 01/15/2029 104-15 2.22%

Bloomberg.com: Government Bonds

Ha
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Old 04-24-2009, 08:54 PM   #6
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Originally Posted by Canyon View Post
We were wondering if this is too conservative a retirement plan:
If $53K meets your retirement needs, I don't think your plan is too conservative. You do face two risks that I can think of. 1) Reinvestment risk - what will you do if TIPS are yielding 1% or less when your bonds mature? But at the age of 82 you can probably safely start drawing down your principal balance, so maybe that isn't much of a problem. 2) Personal inflation risk - it's possible your personal inflation rate might exceed CPI.
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Old 04-25-2009, 12:36 AM   #7
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I like munis, but I wouldn't put them in a 401k. I don't know enough about TIPS, but I'm not sure I would want them in a 401k/IRA either, maybe in a roth, but would prefer higher earners in the roth.

I would think TIPs only (or munis only) would be too conservative. Why not invest maybe 30% in some less volatile reasonably higher dividend payers, such as KFT, JNJ, PG, etc, in your 401k/IRA along with some corp bonds, and munis and TIPs in your taxable? That way you have some diversity, good income, along with some potential for growth.

Just my 2 cents, FWIW. Oh, BTW, welcome to the board!

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Old 04-25-2009, 02:51 AM   #8
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Originally Posted by haha View Post
OP is correct.


COUPON MATURITYDATE CURRENTPRICE YIELD


20-Year 2.500 01/15/2029 104-15 2.22%

Bloomberg.com: Government Bonds

Ha
thanks for straightening me out
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Old 04-25-2009, 06:03 AM   #9
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I don't know enough about TIPS, but I'm not sure I would want them in a 401k/IRA either
Actually, a tax-sheltered account (IRA/401K) is the better place to hold TIPS, as you avoid the tax on the "phantom interest". You only pay tax on the amount withdrawn from the IRA/401K, which in OP's case, would be the coupon interest.
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Old 04-25-2009, 06:44 AM   #10
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Welcome to the forum Canyon.

There is much to be said for simplicity, but I would never, ever put all my eggs in one basket, even something backed by the US govt. Since you obviously are very conservative in your investment strategy, why not combine TIPs with a CD ladder simply to have some diversification? CD rates are lousy right now but that probably won't be the case over the long run.
I agree. You are sticking all of your eggs in one basket. While TIPs certainly seem like a safe investment. I think there are some other risk, first there is a very small but non zero chance Uncle Sam, may default on its debt. I doubt their would be a outright "sorry no money for you bond holders", but I can easily imagine some revision to how Inflation is calculated and paid on TIPs bonds. There is definitely reinvestment risk although in 20 years it may not matter than much. Finally the phantom income from a practical standpoint may reduce your income more than you are comfortable with.

While I can see sticking all of your IRA money in TIPs. I tihnk you'd be better off with investing your taxable money, in some combination of
Vanguard GNMA, Total Stock Market, Total International Market, Wellsley and CD ladder.
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Old 04-25-2009, 08:48 AM   #11
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Why not put the money in CD's then when inflation is higher go with your TIPS idea. The way the government is spending money your wait should not be to long.
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Old 04-25-2009, 09:48 AM   #12
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Thanks for all the replies. The way I understand TIPS is that you lock in a real rate, and then the principle is adjusted for inflation. If inflation goes up in the future, the real rate may go up or down....no way of knowing. I would assume that with high inflation the demand would increase and the rate might actually decrease...but who knows? I had to live with the decision to live on less, rather than put off my retirement due to stock losses. I guess what I'm looking for is a way to safeguard the assets we have and still generate a liveable return. CDs only look good if I start going out 2-3 years. I might decide to tie up some money for that long...but wouldn't want to miss the chance to lock in some higher interest rates if they begin to rise. I remember getting 13% interest in 1983....wouldn't we love to lock in that rate now. I'm not convinced that with the recovery it will be business as usual, so perhaps I'm being too cautious now...and maybe will start going back into the market later on. Any other ideas? Thanks....C
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Old 04-25-2009, 02:01 PM   #13
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$53000 may cover your needs, but how about your "wants"? I would invest the money in a more conventional asset allocation (60% bonds / 40% stocks?) and draw the pretty standard 4% per year for income. That will give you $70000 including your SS and you can enjoy your retirement.

The odds of another prolonged market meltdown on the heels of the last 2 we've had the past decade are fairly low in my opinion. If the market does turn south 5 years from now and you get worried, you could easily lower your withdrawal rate to 2.5-3% which should be pretty safe.

So to answer your question, I would say "Yes" your plan is too conservative.
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Old 04-25-2009, 03:52 PM   #14
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OP you clearly understand TIPS and what you are doing more than many of the people here that are trying to give you advice. You are correct that as the inflation rate rises or the anticipation of inflation rises the coupon rate will drop. That is why your move into TIPS right now is a very good one. All of it, though? That may be a little excessive. Another thing purchasing TIPS in a tax sheltered account is smart, but you should also way it against the auctions, too. The treasury direct 20yr auction is in a couple of months and it has an * next to it; that means that they are selling more TIPS than usual. The coupon yield should be higher. Last note about TIPS you purchase 20 year at 2.5 and several years down the road high inflation rates cause the new coupon rates to approach 0. You can sell your TIPS for a very beautiful profit, and get ready to load up on high yielding bonds for when inflation subsides on the other side.

I still don't get why people are professing CD latters. They are paying crap and you get locked in. In an inflationary environment--what the OP is clearly worried about, CDs are probably the single worst thing to be in. And several high yield savings and reward checking accounts are paying much more at 3 to 5%.

OP while I think that TIPS is the best place to put your money given your situation, I wouldn't put it all there. Take a descent percentage and put it in equities. Taking a descent amount of money and lrate chasing in high yield/ reward checking accounts may be a good idea as well. Those will rise with inflation(unlike your locked CD) and the liquidity allows you to jump on other opportunities. Also, since my father is in the same position as you, I'll tell you what he is doing. He is moving a substantial portion of his pension into oil drilling programs. The one that he is looking at is almost entirely deductible(oil drilling deduction) and at current oil prices is paying out 5-8% a year payed monthly. Oil would have to drop below $30 a barrel for the return to drop below 3% and as inflation rises the returns on these will rise with it--natural inflation hedge. The particular one that we are looking at has 90% oil discovery rate which is why it is very consistent, but doesn't yield as much as some of the other programs.

JDW. It does matter how many years the TIPS are for. The 20 year yields more than the 10 year and you are probably referring to the 10 year when you mentioned less than 2.3.
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Old 04-25-2009, 08:00 PM   #15
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Before you invest in a single asset, perhaps you should review VaCollector's experience with being heavily invested in a single asset that drastically cut its dividend.

Here's another (probably apocryphal) story from a journalist commenting on Suze Orman's multi-million-dollar municipal bond portfolio:
Quote:
In fact, Orman's portfolio is reminiscent of a story about Groucho Marx, the famous comedian who purportedly once toured the New York Stock Exchange and held court with the floor traders after the closing bell.
Knowing that Groucho was wealthy, one trader yelled out, "Hey Groucho, where do you invest your money?"
"I keep my money in Treasury bonds," is what the leader of the Marx brothers reportedly replied.
"They don't make you much money," a trader shouted back.
"They do," Groucho said drolly, "if you have enough of them."
The issue is making sure that you not only have enough "sufficient for our needs", but also enough to take care of replacing vehicles, appliances, furniture, and roofs. Plus you'd like to have enough left over for the occasional family emergency or fantasy vacation...
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Old 04-26-2009, 08:55 AM   #16
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In fact, Orman's portfolio is reminiscent of a story about Groucho Marx, the famous comedian who purportedly once toured the New York Stock Exchange and held court with the floor traders after the closing bell.
Knowing that Groucho was wealthy, one trader yelled out, "Hey Groucho, where do you invest your money?"
"I keep my money in Treasury bonds," is what the leader of the Marx brothers reportedly replied.
"They don't make you much money," a trader shouted back.
"They do," Groucho said drolly, "if you have enough of them."



Interestingly, Groucho then proceeded to invest his life savings in the stock market and lost it all on Black Tuesday (Oct 29).
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Old 04-26-2009, 09:31 AM   #17
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Originally Posted by riskadverse View Post

Interestingly, Groucho then proceeded to invest his life savings in the stock market and lost it all on Black Tuesday (Oct 29).
I believe Groucho's tour of the New York Stock Exchange and his remarks about Treasuries took place in 1950.



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Old 04-26-2009, 11:20 AM   #18
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Quote:
Originally Posted by Canyon View Post
Hi all,
I'm new to the community, and look forward to all your advice and wisdom and I try to navigate into the world of retirement.
My wife and I are 62 years old and have accumulated $1 Million. Half in our IRA/401K and half in taxable accounts. We were wondering if this is too conservative a retirement plan: If we take our SS now, it will come to $30,000/yr. We could then put the $1M into 20 year TIPS which are paying about 2.3% over inflation. This would generate another 23,000/yr. The $53,000/yr would be sufficient for our needs and the principal would remain intact. Both the principal and income would grow with inflation. I know there are different tax consequences between the taxable and non-taxable accounts, and there's the "phantom" income from the TIPS. Part of the worry is putting all our assets in one security, even though it's guaranteed by the gov't. What do you think? Thanks for the help....C
I don't see what is wrong with your plan as stated. You ask if that plan is too conservative. How could a plan that successfully addresses your concerns and deals with inflation risk be "too conservative." After all, if you lose capital you are in trouble. If on the other hand you just fail to keep abreast of some benchmark, so what?

If you want inflation adjusted, fixed income (and I think this is a very intelligent desire for a retiree) I can think of 4 ways to seek that goal: TIPS, I-bonds, corporate indexed bonds and indexed SPAs.

Of these, TIPS alone provide a good real yield and absolute security. Any move away from this would be di-worsification, not diversification.

THE FOLLOWING IS NOT ADVICE!!! I HAVE LOST TOO MUCH MONEY TO GIVE ADVICE!!!

OK, with that out of the way I would consider putting all your IRA money into TIPS. You have a choice- take all 20 year, feeling that the rate will work for you, or make a ladder hoping to catch a break and buy some of them at higher real yields.

Next, read everything you can here and elsewhere about delaying social security and employing special strategies suitable for married couples. I don't follow these discussions as I am not married, but I think you can win twice by giving it some careful study and setting up your plans accordingly.

Then compare your annual cash flow and your pro-forma balance sheets going forward with various strategies.

If you delay some of your SS you will wind up with a larger SS entitlement, which IMO is a gold-plated indexed SPA, and a smaller investment balance when compared to your plan of buying all TIPS now. But it would also end-run the phantom income issue in your taxable accounts.

Check it out; I hope you will share the results of your research with us.

Ha
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Old 04-26-2009, 12:26 PM   #19
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Another option is to delay SS until age 70, which will increase your payout to about $49K per year, which will come near to meeting your "needs". To do that, you need about $400K (plus inflation) to make the gap -- about 50% of your stockpile. Then you will have SS and the remainder of your stash to live on. During the interim, you can convert some of your 401(k) to a Roth IRA, as has been discussed here a lot -- if that makes sense for your post-70 tax situation.

Obviously, the decision to postpone SS should be made based on your health status. Also, a tricksy thing to do is to wait until both spouses reach full retirement age (66?) and then one can apply for spouse's benefits (50%) based on the other's record. Only one spouse can do this -- it has been discussed in some detail by SScritic at the Bogleheads board -- he seems to know the SS system and rules much better than anyone else I've ever seen posting anywhere. See this thread for more info:
Bogleheads :: View topic - Spouses and Soc Security Benefits
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Old 04-28-2009, 02:04 PM   #20
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Hi Canyon, welcome to the monkey house. I like the suggestion of
delaying SS income as long as possible. As HaHa suggested, it is
like buying a gold plated, inflation indexed immediate annuity at a
big discount (read Scott Burns of the Dallas Morning News for further
amplification). It is also wise, IMHO, to delay withdrawal from your
IRA until RMD rears its head. You could do as Robert suggested and
convert some each year to a Roth.

This strategy means you will have to live off of your taxable account
until you start taking SS. In your shoes I would put 2 years of living
expenses in my taxable MM account and the rest of my taxable in an
intermediate term bond fund like Vanguard's Intermediate Term Investment Grade .... currently paying about 6%. Keep replenishing
the MM every year to keep a 2 year cushion indefinitely even after
you start drawing SS and RMD. In your IRA I would probably use a combination of Wellesley and Vanguard's 5% Managed Payout along
with a 2 years of RMD in a MM account. Don't lump into these funds
all at once .... I would recommend DCA over a 3 year period to help
guard against another big dip in the stock market.

Go slowly and study a lot ..... read Swedroe, Burnstein and Bogle to
get the right mind set.

Cheers,

charlie
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