Your opinion and risk tolerance

[Rob]

Hi all,
I've posted here a few times, but read your comments all the time. I'm 63 , and still teaching high school overseas in international schools. I'm going to definitely retire in less than a month and live in a country that has become my home,Singapore. I know the cost of living there and can do alright, especially through tutoring and minimal part-time teaching.

My retirement plan is through TIAA-CREF. I've been with them since 1975 sending money in pretty consistently. I currently am receiving $2,650/month on the interest from my TIAA annuity. If I annuitized that account, I'd receive about $4,500, which given my simple lifestyle is more than adequate. However, I will live off the interest ($2,650) for the next few years and not annuitize until I'm almost 70.

I have enough in my bank account to last a year or even 18 months. I will most likely hold off on receiving social security until I'm 65 or 66 but receive only $700-$800/month My concern comes from the $170,000 in my TIAA-CREF I have left to play around with. For many months I had that money in a money market account with TIAA-CREF, and while it preserved the principal, the interest was 0%. I recently transferred all the money into CREF stock (70%) and CREF bonds (30%).

Would you consider that reckless, conservative, or aggressive? Is it logical in your opinion to know that if you have a stable income from TIAA-CREF coming in (and enough in your bank account for emergency funds) until you kick the bucket, is throwing the rest into the stock and bond market reckless? I look at the 10% drop in the market, and I could kick myself for transferring my funds into stocks and bonds.

Thanks for any insights or opinions.

Regards,
Rob

 

[brewer12345]

The only person's risk tolerance that matters is yours. If you are exceeding it, you have an issue.

But to frame the issue a bit, will a 10% move either way in the short term make any difference to your retirement plans or income?

 

[samclem]

Is the annuity indexed for inflation? Most aren't, and I'd think inflation is your largest long-term risk given your situation. Your Social Security check will be indexed for US inflation, which will help a little bit.
Your own comfort level with risk is much more important than what I think. If you are going to sell your stocks if they go down 20%, then you probably shouldn't buy them in the first place. But, having said that, if I were in your shoes I'd want something like the healthy dose of stocks and bonds that you've chosen to help me stay ahead of inflation over the coming decades. I'd probably cut it a little and build a larger cash cushion than you have now--maybe 3-5 years of living expenses instead of 18 mos. I'd also want to have a hedge in case the performance of the Singapore economy and currency differs markedly from the US--it looks like all your assets are denominated in US dollars, but most of your expenses will be in Singapore dollars. That could be a problem. If the USD loses value against the SGD you'd have to tighten your belt.

 

[Coach]

Rob, is your annuity all invested in the TIAA traditional account, which provides a guaranteed return? If so, I'd say your approach is fairly conservative and (simply my opinion) reasonable for your situation. Will you select the graded option, which provides some inflation protection?

I agree with samclem about the currency risk, and I don't know enough about that stuff to know how to factor it in.

Coach

 

[Rob]

Coach, i will most certainly go with the graded approach with the TIAA annuity, but for now am getting the interest only which amounts to about $2,650/month. The inflation protection is minimal, however, but still there is some.
Samclem, I can afford the stock going down 20% short-term if I focus on the longer term, but I was just wondering what some of you thought of my plan. The idea I had was that having an income of about $4,500/month with some inflation protection, plus social security (maybe $700-$800/month) would allow me to be somewhat agressive with the rest of my money with TIAA-CREF. Your comment about an even greater cushion of money in the bank is noted, but knowing that I can liquidate any part of the $170,000 used for stocks and bonds anytime is almost like having money in the bank.

Thanks Brewer.I know that the risk tolerance depends on me. However, I was just curious if my plan of having a lifetime income through the TIAA annuity allowed me a certain level of agressiveness with the rest of my funds, and could still label myself as being conservative.

Regards,
Rob

 

[Moemg]

.I know that the risk tolerance depends on me. However, I was just curious if my plan of having a lifetime income through the TIAA annuity allowed me a certain level of agressiveness with the rest of my funds, and could still label myself as being conservative.

Regards,
Rob

You can be as aggressive as you want but can you really handle it for the long term . I have a pension & SS which cover all my basic needs so I've always been aggressive but the last few years have made me rethink my plan . The problem is by the time you think maybe you've been too aggressive you've already lost a bundle . If I were you I'd start closer to 60% and then crank it up if the economy looks great .

 

[LOL!]

What do you need that money for? Why would you need to take the risk? Others have shown there is not much difference in outcomes whether you are 30:70 to 70:30 or anywhere in-between.

So to go from 100% money market to 70% equities in one big jump seems reckless. And the use of the money "to play around with" speaks to how aloof you are with your money.

I would suggest 30:70 stocks:bonds for the first year, then re-evaluate.

I am not risk averse with my own money so consider that I usually fall in the "take lots more risk" class when giving advice here. Not in this case though.

 

[Rob]

LOL, I hope that I did not give the impression I was aloof with my money by stating that I went from 100% money market to 70% stocks/30% bonds all at once. I probably shouldn't use the words "play around with my money". I was just asking what some of you thought of the plan where a person like myself has invested mostly in the TIAA annuity. That represents a conservative investment and a guaranteed income, although the inflation protection is minimal. My question concerned whether it was reckless to use the remaining investments in TIAA-CREF for more risky endeavors like stocks or bonds.

Anyway, I appreciate your advice, Thank you.

Regards,
Rob

 

[haha]

There are two parts to risk aversion, one is the look forward probabilities in the real world, another is one's own emotional control under adversity.

I would say that the only truly consevative stance is one determined by whichever of these aspects suggests more conservatism.

If a person is comfortable with high levels of risk, and market valuations are very low, a lot of risk assumption is OK. But even when market valuation levels are low, if the investor is subject to panic or anxiety over losses which he may believe to be temporary, but cannot be assumed such until he has the sold the investment, then a lower exposure to loss is prudent.

Contrariwise, if the investor sees himself as one with nerves of steel but objective valuations are high, he should avoid risk no matter how he feels.

One comment directly to your situation Rob- although we have heard many reassuring things about inflation, how the bears on inflation have been wrong, etc., etc., it is easy to confuse an outcome with a journey.

I would not consider any plan that doesn't try to minimize the effects of inflation to be a sound one.

BTW, this IMO is not necessarily an argument for near term exposure to stocks.

Ha

 

[samclem]

The idea I had was that having an income of about $4,500/month with some inflation protection, plus social security (maybe $700-$800/month) would allow me to be somewhat agressive with the rest of my money with TIAA-CREF.

If your annuity is inflation indexed, that would address some of the problem. Is it?

Your comment about an even greater cushion of money in the bank is noted, but knowing that I can liquidate any part of the $170,000 used for stocks and bonds anytime is almost like having money in the bank..

Well, yes and no. It's true that the money is available in case you have an unanticipated spending requirement (great deal on a house, unanticipated medical expenses, etc.). But one of the other good reasons to have a cash "buffer" is so that you can avoid selling stocls and bonds when they are down in price. Sometimes they do both go down in price together (as we've recently seen). It is helpful to not think of having $170,000 in stocks and bonds, but instead to realize that you own XX shares in funds that own stocks and bonds. The number of shares you own stays the same, the value of each share varies by the day. When the market goes down you'd have to sell more shares to get the same amount of dollars for your spending, and those are shares that will never have a chance to recover when the market bounces back. This is a good reason to have some money in cash (MM, CDs, etc) that you can use while waiting for the market to bounce back. These market downturns usually only last a few years. So, the cash cushion is more than just a fund for your own personal "emergencies", it's a very real buffer that allows you to not sell your stocks and bonds when their prices are depressed. This can result in your portfolio doing better over many years.

 

[LOL!]

Rob, I think you will get quite a lot out of reading Otar's "Unveiling the Retirement Myth". You may wish to move your CREF bond fund into the inflation-linked bond fund.

I have had TIAA-CREF 403(b) for more than 2 decades. While I do like and use the TIAA traditional annuity, I no longer use CREF funds since they have higher expense ratios than the similar offerings from Vanguard. You may not wish to switch, but I have to remind you that there are other places to put your money than TIAA-CREF. In particular the Vanguard bond funds are among the best that are out there, so the Vanguard inflation-protected securities may be something to look into. I do not own it.

 

[Rob]

Thank you very much, LOL. I will most likely keep my the CREF funds, but move more to bonds and even the Real Estate.

SamClem, I also might well move some back into the CREF money market, which will certainly add to my 18 month cushion of funds I have in the bank.

Thank you again.

Regards, Rob

 

[brewer12345]

Rob, were I in your shoes, I would make sure I had enough liquid savings for a healthy cushion and then the rest would be in everything but bonds/money market, which you are already heaily weighted in via your annuity. I'd have real estate, commodity/commodity producer equity, small caps, emerging markets, some large cap equity, etc. The account value would jump around quite a lot, but I would not really acre because this would be solely intended to hedge inflation risk and hopefully provide growth over time. But you would have to be willing not to make rash moves in response to market fluctuations.

 

[Rob]

Thank you, Brewer. I need to concentrate on the liquid savings more. I thought, however, that a moneymarket is considered a liquid savings. With CREF, the moneymarket can be withdrawn at any time with no penalty.

You mentioned that I should have real estate, commodity/commodity producer equity, small caps, emerging markets, and some large cap equity. Unfortunately, most of my funds with TIAA-CREF are self-remitters, all after tax. The good part of that is pay taxes only on the earnings or interest. The bad part is I am not eligible to invest in most of those funds just mentioned, except real estate. I removed my funds from TIAA Real Estate a couple years ago when it was clear that the real estate market was collapsing. The TIAA-Real Estate fund now seems to be growing fairly consistently, so I will most likely return to that.

My home is in Singapore, and dealing with the list of funds you mentioned from around the world might prove difficult. I most likely will work through TIAA-CREF and go with 20% stocks, 20% TIAA-Real Estate, 50% bonds, and 10% money market. Brewer, I'm finding a little 10% drop in stocks this last week causing sleepless nights, and I don't think I'd be contented with continuing with wild fluctuations in the stock market. I need to limint that exposure.

Regards, Rob

 

[brewer12345]

My home is in Singapore, and dealing with the list of funds you mentioned from around the world might prove difficult. I most likely will work through TIAA-CREF and go with 20% stocks, 20% TIAA-Real Estate, 50% bonds, and 10% money market. Brewer, I'm finding a little 10% drop in stocks this last week causing sleepless nights, and I don't think I'd be contented with continuing with wild fluctuations in the stock market. I need to limint that exposure.

Regards, Rob

Like I said, that is what I would do, not what you should do. You are the one that has to live with whatever the results turn out to be, so make choices that suit you best.