Fear / Greed and AA Part 2

[34rlsa]

Regarding my original post:

Link http://www.early-retirement.org/forums/f28/fear-greed-and-aa-70204.html

Thank you all for your responses. I appreciate everyone taking the time to reply and allowing me the opportunity to receive opinions and advice from experienced investors and ERs who are not trying to sell me something. And thank you for your warm welcomes!

Here are additional details regarding our circumstances and more questions:

Our pension is COLA’d and accounts for 66% of our after tax annual expenses.

Our withdrawal rate in the years prior to receiving SS would be 6.7%. After SS begins the withdrawal rate is 0% until RMDs. As mentioned in the original post… we are considering starting SS at 62; however, we intend to re-evaluate our situation based on actual expenses realized in the first few years of retirement and possibly delaying SS if it makes sense.

To disclose further we are already <20% equities... having very recently transferring the bulk of our portfolio out of financial institutions whose service was unacceptable and too expensive. Our portfolio is now split between IRAs with Etrade, PenFed and a 403B with Vanguard. We now face the difficult task of re-allocating our assets.

Now that we are in a position where our plan appears to meet our needs... I am much more risk averse. If our plan was far short of succeeding it would be easier for us to assume more risk out of necessity. Besides determining an appropriate AA we also need to consider how to buy back into the stock market. Lump sum?, DCA?, wait for the pull back? And what about the bond market? Is it wise to hold off for a few years and wait to see how interest rates change?

Given the above… is the “U Shaped Path” investing theory mentioned by Ready the best path forward for our situation? …. especially considering the recent bull run and the current interest rate risks. Is anyone using or considering the U Shape method?
A New Asset-Allocation Strategy for Investing in Retirement - WSJ.com

I agree inflation is the biggest threat to success. What annual inflation rate are you using in your plans to project future success? (ours is 3%)

What is the historical correlation between inflation and interest rates? If interest rates historically rise with inflation is it practical to protect yourself with laddered CDs? I recall my parents doing quite well in the 80s with CDs when inflation soared.

Last question… how do you treat the value of your home in your plan? I have not considered the value of our real estate in our plan.

Thanks again for all the replies... please keep em coming!

 

[daylatedollarshort]

What is the historical correlation between inflation and interest rates? If interest rates historically rise with inflation is it practical to protect yourself with laddered CDs? I recall my parents doing quite well in the 80s with CDs when inflation soared.

This chart has real lending interest rates by year and by country from the World Bank -

Real interest rate (%) | Data | Table

I haven't found anything comparable for CD rates, but my grandfather always seemed to do very well with CD ladders as well. He used to get appliances like toasters for opening accounts. Pre-Internet he would clip the CD ads from the local paper and collect them in a folder. When he got older either me or one of his other relatives would drive him to different banks, opening and closing CDs at the best rates and collecting small appliances.

 

[W2R]

As you have seen in your prior thread, there is no one recipe for investing. Our esteemed members are pretty opinionated, and while many of them have a great deal of expertise, they don't always agree.

In addition to posting here, I would suggest choosing about 5-6 books from the following list to read. They are all good and will give you a depth of understanding that I believe cannot be equaled by posting on a message board.

Investment Books

 

[brewer12345]

As you have seen in your prior thread, there is no one recipe for investing. Our esteemed members are pretty opinionated, and while many of them have a great deal of expertise, they don't always agree.

In addition to posting here, I would suggest choosing about 5-6 books from the following list to read. They are all good and will give you a depth of understanding that I believe cannot be equaled by posting on a message board.

Investment Books

+1. If it takes you a month or three to read, learn and cogitate, there will be nothing much lost. I can tell you what I would do, but it might not mean anything to you and you will have different risk tolerance and goals than me.

+1.

 

[Ed_The_Gypsy]

+1. If it takes you a month or three to read, learn and cogitate, there will be nothing much lost. I can tell you what I would do, but it might not mean anything to you and you will have different risk tolerance and goals than me.

+1.

This is good practice for the "Don't just do something--stand there!" approach to investing (anti-trading rant).

 

[daylatedollarshort]

As I noted in the other thread, I would add Risk Less and Prosper by Zvi Bodie for a conservative asset allocation point of view. Also, I have not read it yet, but I believe William Bernstein's latest book, Deep Risk, has incorporated some of the same ideas for retiree portfolios as are in the Bodie books.

 

[Ed_The_Gypsy]

I dunno about Bodie. He is an academic for whom annuities are the answer to every question. SS is my annuity/'fixed income' part of AA. When I get older, I may re-think this, when I start to worry about not having enough time to recover from a big dip, or my brains fall out (whichever comes first).

 

[daylatedollarshort]

I dunno about Bodie. He is an academic for whom annuities are the answer to every question. SS is my annuity/'fixed income' part of AA. When I get older, I may re-think this, when I start to worry about not having enough time to recover from a big dip, or my brains fall out (whichever comes first).

I am not sure that is an accurate summary of his main focus -

https://www.mint.com/blog/investing/risk-less-and-prosper-an-interview-with-zvi-bodie-022012/

"Use the lowest-risk government bonds (TIPS and Series I saving bonds) to cover your basic needs and invest in stocks only with additional money that you can afford to lose."

"I don’t like to ascribe negative motives to people, but let’s face it: If everybody starts investing in I-bonds and TIPS, both of them are buy-and-hold investments. How is the investment professional community going to make money? "

William Bernstein seem to have adapted a somewhat similar advice these days for retirees and those nearing retirement -

"When you've won the game, why keep playing it? How risky stocks are to a given investor depends upon which part of the life cycle he or she is in. For a younger investor, stocks aren't as risky as they seem. For the middle-aged, they're pretty risky. And for a retired person, they can be nuclear-level toxic."

"...you should save 20 to 25 times your residual living expenses -- that is, the yearly shortfall you have to make up after Social Security and any pension.This portfolio should be in safe assets: Treasury Inflation-Protected Securities, annuities, or even short-term bonds. Anything above that, you can invest in risky assets."

http://money.cnn.com/2012/09/04/retirement/investing-mistakes.moneymag/

 

[brewer12345]

I dunno about Bodie. He is an academic for whom annuities are the answer to every question. SS is my annuity/'fixed income' part of AA. When I get older, I may re-think this, when I start to worry about not having enough time to recover from a big dip, or my brains fall out (whichever comes first).

Bodie should be popular with many forum members, then.

 

[clifp]

As I suspected, It sounds like more than 100% of your needs are going to be covered by a COLA pension and social security. Which is pretty awesome congratulations. Generally speaking it is better to wait for SS as late as possible, but again in your situation if 100% of your needs are covered at 62, why wait.

After you've read a couple of the books on the suggested list, I like William Bernsteins E-books because they are short and very current (last couple of years).

Finally, I started a thread. Does anybody want to be rich when they get old. When started the thread I was actually thinking of precisely folks like yourself, who have "won the retirement game" and have very conservative portfolios. The thread got derailed (which is quite common) but I'd very much appreciate your thoughts on the questions I raised.

 

[frayne]

Good advice WR2, there is no cookie cutter template that fits everyone. Reading the books you mentioned should give the original poster the knowledge and confidence to stir up his own recipe for success.

 

[NW-Bound]

Some people perceive stocks as risky, and are willing to forego the potential upside. All I can do is to wish them well in finding some "safe" places to park their money and at least keep up with inflation.

The husband of my sister-in-law got cold feet about 2005, and put all of his rollover IRA into CDs. He did do very well with his 401k invested in stocks through the decades of 1980-2000. The problem was that while he used to look at his 401k every quarter, with the rollover IRA he was able to log on to his account everyday, and fretted about daily movements that he was not aware of earlier.

Recently, he talked about the Dow hitting 16,000. I tried to avoid his talk and diverted to another subject. There was no point. Some people are not suitable as stock owners, just like my children not eating seafood. It cannot be forced.

Last question… how do you treat the value of your home in your plan? I have not considered the value of our real estate in our plan.

Most people do not consider the value of the home, and quite a few here have two like myself. The only things that show up on my Quicken screen regarding my homes are the associated expenses.

I guess if things go bad enough, I may sell the 2nd home to reduce expenses as well as raising cash. And I do not foresee ever having to sell my main home and to move into my RV. If it comes to that point, there would be a lot of people living under bridges, and my RV would be considered luxurious housing.

 

[Options]

As you have seen in your prior thread, there is no one recipe for investing. Our esteemed members are pretty opinionated, and while many of them have a great deal of expertise, they don't always agree.

In addition to posting here, I would suggest choosing about 5-6 books from the following list to read. They are all good and will give you a depth of understanding that I believe cannot be equaled by posting on a message board.

Investment Books

+1
That I know of, no shortcut to investing knowledge exists besides acquiring it yourself. You'll always find varying opinions on just about any aspect of investing. I like the debates because they help me think through things I might not have seen before, or might have missed.

Best thing I've done was get educated first, absorb conflicting opinions, then take whatever action necessary based on my own history, personal situation, risk tolerance, etc.

 

[haha]

I think it is a mistake to tell people what to do with their money. People must "own" their plans about important things like this, or they will not believe in them and they might easily abandon the plans under heavy stress, which will certainly come from time to time. There is validity to many of these ideas, but they are not one size fits all.

I would not like to convince someone that s/he needs more stocks, right before stocks drop 40%. If we are honest and aware, we will realize that the future is unknowable, and be properly modest about what we say-particularly in the area of advice.

Ha

 

[REWahoo]

If we are honest and aware, we will realize that the future is unknowable, and be properly modest about what we say-particularly in the area of advice.

Bold advice indeed.

 

[34rlsa]

+1
That I know of, no shortcut to investing knowledge exists besides acquiring it yourself. You'll always find varying opinions on just about any aspect of investing. I like the debates because they help me think through things I might not have seen before, or might have missed.

Precisely why I post my questions. I enjoy the debates... but mostly I believe it gives me the opportunity to discover something I may not have considered or been aware of.

 

[34rlsa]

As I suspected, It sounds like more than 100% of your needs are going to be covered by a COLA pension and social security. Which is pretty awesome congratulations. Generally speaking it is better to wait for SS as late as possible, but again in your situation if 100% of your needs are covered at 62, why wait.

After you've read a couple of the books on the suggested list, I like William Bernsteins E-books because they are short and very current (last couple of years).

Finally, I started a thread. Does anybody want to be rich when they get old. When started the thread I was actually thinking of precisely folks like yourself, who have "won the retirement game" and have very conservative portfolios. The thread got derailed (which is quite common) but I'd very much appreciate your thoughts on the questions I raised.

Thanks for your comments.

I read the thread... but with the majority of our retirement income coming from pensions and SS... and not relying on a large portfolio to fund our plan, it's difficult to get "rich" by investing aggressively in equities given the current value of our portfolio.

I use Flexible Retirement Planner to plan and project. Using an aggressive AA the Monte Carlo simulation projects the potential of exceeding $1M by age 80 but only a 69% success rate.

My goal is to develop an AA that guarantees success in funding our planned spending. Could we do better with a more aggressive plan? Probably. However, enjoying our retirement without financial worry is more important to me than the possibility of becoming rich.

 

[Spanky]

Thanks for your comments.

I read the thread... but with the majority of our retirement income coming from pensions and SS... and not relying on a large portfolio to fund our plan, it's difficult to get "rich" by investing aggressively in equities given the current value of our portfolio.

I use Flexible Retirement Planner to plan and project. Using an aggressive AA the Monte Carlo simulation projects the potential of exceeding $1M by age 80 but only a 69% success rate.

My goal is to develop an AA that guarantees success in funding our planned spending. Could we do better with a more aggressive plan? Probably. However, enjoying our retirement without financial worry is more important to me than the possibility of becoming rich.

Have you try FIRECALC to check out your success rate?

 

[34rlsa]

Have you try FIRECALC to check out your success rate?

Yes.

FIRECALC is more optimistic.

 

[daylatedollarshort]

Could we do better with a more aggressive plan? Probably. However, enjoying our retirement without financial worry is more important to me than the possibility of becoming rich.

Years ago I used to read all of the total freak out posts on the Boglehead forum every time the market would drop and decided I don't want to spend every day of my retirement worried about what the stock market is going to do that day and whether or not I could stay retired.

While I can't predict Black Swans like the government defaulting on TIPS, the risk of that is relatively low compared to a major stock market drop, especially in the beginning of our retirement years. A 50% drop in our retirement savings would mean we'd have to make 100% back just to recover what we started out with initially, plus the inflation rate in the intervening years.

A large drop early on in retirement just seems so devastating. To each his own on the investing front, but for me I'd rather settle for comfortable as we are now and have an investment portfolio likely to keep us that way. I think of it as using our money to buy peace of mind.

 

[34rlsa]

Years ago I used to read all of the total freak out posts on the Boglehead forum every time the market would drop and decided I don't want to spend every day of my retirement worried about what the stock market is going to do that day and whether or not I could stay retired.

While I can't predict Black Swans like the government defaulting on TIPS, the risk of that is relatively low compared to a major stock market drop, especially in the beginning of our retirement years. A 50% drop in our retirement savings would mean we'd have to make 100% back just to recover what we started out with initially, plus the inflation rate in the intervening years.

A large drop early on in retirement just seems so devastating. To each his own on the investing front, but for me I'd rather settle for comfortable as we are now and have an investment portfolio likely to keep us that way. I think of it as using our money to buy peace of mind.

Thanks for your reply.

IMO... there is considerable real value to peace of mind.

 

[obgyn65]

+1.

Some posters around here who keep telling other more conservative posters like me to take more risks with their money should read the quote below from time to time.

I bought a 3.3%, 10-year CD last week, very happy with that investment.

I think it is a mistake to tell people what to do with their money. People must "own" their plans about important things like this, or they will not believe in them and they might easily abandon the plans under heavy stress, which will certainly come from time to time. There is validity to many of these ideas, but they are not one size fits all.

I would not like to convince someone that s/he needs more stocks, right before stocks drop 40%. If we are honest and aware, we will realize that the future is unknowable, and be properly modest about what we say-particularly in the area of advice.

Ha

 

[Chuckanut]

+1.

Some posters around here who keep telling other more conservative posters like me to take more risks with their money should read the quote below from time to time.

I bought a 3.3%, 10-year CD last week, very happy with that investment.

If it works for you and your financial plan, who can argue? And even if it doesn't, who am I to judge? (I just love quoting "il Papa".)

Still, there is risk involved. Mainly the risk that interest rates will return to normal and in two or three years one can get 5% or 6%. Full disclosure: took a similar risk when I signed up for 2.25% CD's several years ago. It paid off compared to other insured investments. I again took that risk when I recently bought several 3% 5 Year CD's from PenFed. Time will tell....

 

[daylatedollarshort]

If it works for you and your financial plan, who can argue? And even if it doesn't, who am I to judge? (I just love quoting "il Papa".)

Still, there is risk involved. Mainly the risk that interest rates will return to normal and in two or three years one can get 5% or 6%. Full disclosure: took a similar risk when I signed up for 2.25% CD's several years ago. It paid off compared to other insured investments. I again took that risk when I recently bought several 3% 5 Year CD's from PenFed. Time will tell....

I think that is the strategy behind rolling ladders of bonds or CDs - to get an rolling average of interest rates that stays ahead of inflation. Or with CDs that are not broker CDs, that can be cashed in with a minimal penalty.

I suspect there are many inflation beating strategies (I bonds, TIPS, CD ladders with credit union CDs) that do not get much press because they do not make recurring income, or sometimes any income at all, for the large investment companies. Even a .17% fee over 50 years on a $1M average portfolio balance adds up to $85K.

 

[Ready]

I bought a 3.3%, 10-year CD last week, very happy with that investment.

Was this a brokered CD or a direct purchase from a bank or credit union?