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Old 11-20-2015, 11:37 AM   #21
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Good point that the OP's essential expenses might only be some percentage of the 35-40k desired spending level. And that would certainly make it more feasible.

I think so few people on this board actually use the liability matching approach (except trivially where they have more than enough pensions/SS) it would be helpful to see more detailed examples (with asset allocation, how they moved from an accumulation portfolio, what they used for life expectancy, etc.). You may not care share your details, but I think it would be very illuminating.
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Old 11-20-2015, 05:37 PM   #22
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Good point that the OP's essential expenses might only be some percentage of the 35-40k desired spending level. And that would certainly make it more feasible.

I think so few people on this board actually use the liability matching approach (except trivially where they have more than enough pensions/SS) it would be helpful to see more detailed examples (with asset allocation, how they moved from an accumulation portfolio, what they used for life expectancy, etc.). You may not care share your details, but I think it would be very illuminating.
Yes I agree.

The OP is looking at an initial 4.4% withdrawal and with a consistent 0% real return he can survive until 85. With 1% he is golden. So if the OP is risk averse and is happy living on an inflation adjusted $40k then a CD ladder, I-bonds or an annuity will work just fine, just make sure to save all the initial extra income from an SPIA to cover inflation or do something like an annuity ladder.

A 60/40 portfolio like the OP has now (but with fewer funds) might be able to support the 4.4% withdrawal rate for 30 years with all the usual caveats about sequence of return risk, but it's cutting it close IMHO as I think 4% is optimistic.

Of course you could split the difference and guarantee a floor of income and let the rest ride in the stock market.
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Old 11-20-2015, 07:16 PM   #23
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You may not care share your details, but I think it would be very illuminating.
It is not very interesting: Our post college, annual retirement expenses < (SS @ 62 + pensions @ 55 + .5% of current portfolio). The mainly non-COLA pensions are taken as annuities and cover the interest on a fixed rate mortgage. I also have hobby income which is not included.

At a zero real return, a 40 year plan would allow for a SWR of 2.5% per year (100/40 = 2.5). With a TIPS ladder with an average .6% yield one could draw down ~3.1% per year and have the portfolio last 40 years, with as much risk as is normally attributed to individual U.S. Treasury bonds.
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Old 11-20-2015, 09:47 PM   #24
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For people with a .5% WR (or even a 2 or 2.5% WR) a liability matching strategy is feasible and there is a small subset of retirees who it might make sense for if they are particularly risk adverse.

Regarding Bernstein, as I recall he was whistling a very different tune some years ago so I'm not sure whether I believe him now or then. Actually, probably more then than now.

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Old 11-21-2015, 09:46 AM   #25
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It is not very interesting: Our post college, annual retirement expenses < (SS @ 62 + pensions @ 55 + .5% of current portfolio). The mainly non-COLA pensions are taken as annuities and cover the interest on a fixed rate mortgage. I also have hobby income which is not included.
You are in a really nice position and matching the non cola pension with the mortgage is great. Thanks for posting your details.

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At a zero real return, a 40 year plan would allow for a SWR of 2.5% per year (100/40 = 2.5). With a TIPS ladder with an average .6% yield one could draw down ~3.1% per year and have the portfolio last 40 years, with as much risk as is normally attributed to individual U.S. Treasury bonds.
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For people with a .5% WR (or even a 2 or 2.5% WR) a liability matching strategy is feasible and there is a small subset of retirees who it might make sense for if they are particularly risk adverse.
At the low end of the OP's expenses, he might be able to get to ~3% with SS at 62 (depending on his returns from 58-62). So I don't think it's infeasible, especially for essential expenses.

Quote:
Regarding Bernstein, as I recall he was whistling a very different tune some years ago so I'm not sure whether I believe him now or then. Actually, probably more then than now.
I think he changed his opinion due to his clients behavior in the past recession (i.e. selling at the bottom and doing irretrievable damage). However, his clients need to have a minimum of $25M and have clearly "won the game" where an extra million or two (or five) won't make much difference. With my puny stash, I'd be thrilled with extra gains from equities and so I have not seriously considered liability matching.
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Old 11-21-2015, 01:12 PM   #26
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.....I think he changed his opinion due to his clients behavior in the past recession (i.e. selling at the bottom and doing irretrievable damage). However, his clients need to have a minimum of $25M and have clearly "won the game" where an extra million or two (or five) won't make much difference. With my puny stash, I'd be thrilled with extra gains from equities and so I have not seriously considered liability matching.
Client behavior doesn't make the strategy bad or inappropriate.... if that is the case it is an implementation problem, not a flawed strategy.


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Old 11-21-2015, 01:57 PM   #27
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For the OP to generate max income it would be best to be 100% equities....of course that would also maximize volatility and might be bad if we have some down years. The OP could implement a negative glide path and rebalance each year to an AA with a higher percentage of equities. This can be done by taking disproportionately more income from bonds or other fixed income sources. Of course whether the OP feels comfortable with this strategy is the question. IMHO the portfolio is a bit small to do it and sleep well.
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Old 11-22-2015, 06:44 AM   #28
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I would also suggest simplifying the portfolio to a few mutual funds. You don't want to focus on income, as this will lead you into a "chasing yield" mind-set. Focus on total return and just sell what you need to get your funds each year. If you maintain 2-3 years of withdrawals in your bank account (near term 'bucket'), then you can handle some volatility. You're going to want to be in the 50 - 70% equity range for the AA.
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Old 11-22-2015, 12:30 PM   #29
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You are in a really nice position and matching the non cola pension with the mortgage is great. Thanks for posting your details.
You are welcome. We just had a lightbulb moment one day when we realized if we lowered our overhead we would never have to work again unless we wanted to as well as not have any interest rate or stock market stress ever again. So we all have our own paths to ER. There is low upside potential with a matching strategy, but also limited downside risk.
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Old 11-26-2015, 05:02 AM   #30
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i thought this was interesting...
Barclays 2016 outlook for stocks laid out in a flow chart

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Old 11-26-2015, 05:51 AM   #31
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Outside of a messy, high expense PF, I wonder if the OP is just spooked by a zero growth market year. A new retiree, looking at a bad year like 2015 might assume the worst.

$900K with $10K in dividends ain't bad and a 4% withdrawal coupled to SS in a few years should easily cover his expenses.
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Old 11-26-2015, 06:33 AM   #32
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i thought this was interesting...
Barclays 2016 outlook for stocks laid out in a flow chart


Nice chart. 5% S&P increase plus 2% dividends equals 7%, which is quite satisfactory for many people.
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Old 11-26-2015, 06:52 AM   #33
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Nice chart. 5% S&P increase plus 2% dividends equals 7%, which is quite satisfactory for many people.
Someone on Bloomberg yesterday pointed out that (IIRC) since WWII, every year that was flat/down was followed by a year of 10% or greater (with two exceptions)
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Old 11-26-2015, 04:20 PM   #34
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Someone on Bloomberg yesterday pointed out that (IIRC) since WWII, every year that was flat/down was followed by a year of 10% or greater (with two exceptions)
Hmmm - I guess I remember negative years 2001 and 2002 just too well (after down year 2000).

There are actually at least 5 yearly exceptions to this stated fact, not two.

Scroll down the left 'Year and Return%' window under CAGR of the Stock Market. http://www.moneychimp.com/features/market_cagr.htm
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Old 11-26-2015, 06:13 PM   #35
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It's a shame that the enthusiasm for "liability matching portfolios" occurred after they became largely impractical to implement due to the lack of suitable investments. It might have worked pretty well for more people using those 3.5% real interest I-Bonds.
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Old 11-26-2015, 06:17 PM   #36
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Client behavior doesn't make the strategy bad or inappropriate...
Oh, but it does from the FA's perspective, and that's Bernstrien's perspective. "Liability matching" helps assure he'll get fewer panicked calls if the markets are volatile, and that's what he wants. Lost potential? So what?
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Old 11-26-2015, 06:46 PM   #37
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It's a shame that the enthusiasm for "liability matching portfolios" occurred after they became largely impractical to implement due to the lack of suitable investments. It might have worked pretty well for more people using those 3.5% real interest I-Bonds.
I think largely impractical depends on your individual situation. According to Vanguard study, median financial wealth among wealthier retiree households is $395K. Even at a zero real return, a 30 year SWR would be 3.33% prior to portfolio depletion. Each 1% SWR increase would be $3,950 extra a year.

At low levels of financial wealth investment income is minimal no matter how the money is invested, and at very high levels of wealth (like Bernstein's clients) or retirees with other income sources, risk is optional, so like with LTC insurance (whether to buy insurance of self insure) there is probably only a certain range of financial wealth / risk tolerance / spending requirements where risk level becomes a big decision.
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Old 11-27-2015, 04:31 AM   #38
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the problem is even getting zero real return can be a challenge .

with real returns negative on both cash and total bond funds you already own , getting that zero real return on even a 50/50 mix may be challenging . the s&p 500 has only seen a 1.80% real return the last 16 years with dividends re-invested ..

so going forward it may be tough just staying at zero real return with all these head winds .

high stock valuations never happened before with such low rates . . at the historical times rates were so low like back in the 1920's the cpi fell so much they were actually great returns at 1.50% on bionds
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Old 11-27-2015, 10:30 AM   #39
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with real returns negative on both cash and total bond funds you already own , getting that zero real return on even a 50/50 mix may be challenging . the s&p 500 has only seen a 1.80% real return the last 16 years with dividends re-invested ..
Is total bond return giving negative real returns? Just looking at vanguard's performance summary of total bond (VBTLX) seems to show zero or positive real return over 1,3,5,10 year periods. (I'm just eyeballing it)

In any case, one option Bernstein is recommending are short-term bonds which should do a much better job tracking inflation than a total bond fund with longer duration. I'm guessing, but don't know for sure, that if real yields on TIPs increased he would prefer that option over short-term.
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Old 11-27-2015, 11:21 AM   #40
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the problem is even getting zero real return can be a challenge .

with real returns negative on both cash and total bond funds you already own , getting that zero real return on even a 50/50 mix may be challenging . the s&p 500 has only seen a 1.80% real return the last 16 years with dividends re-invested ..

so going forward it may be tough just staying at zero real return with all these head winds .

high stock valuations never happened before with such low rates . . at the historical times rates were so low like back in the 1920's the cpi fell so much they were actually great returns at 1.50% on bionds
This is why I sold most of my bond funds and my fixed income is now TIAA-Traditional. I figure a guaranteed 4% is hard to pass up today.

The OP has the problem of poor bond fund returns and a high stock market P/E ratio. However, if we use historical trends and data the OP will be able to generate most income from a 100% stock portfolio, but who know what that will do to his/her mental health.
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