The worst retirement mistake

[ScottishCanadian]

The worst retirement investing mistake - Sep. 4, 2012

Above link is to a Money.cnn article interviewing William Bernstein in Sep 2012, where he says since 2008 he has amended his thoughts on risk in retirement. In general he states that after you have won the game why keep playing.

 

[MichaelB]

That was discussed here http://www.early-retirement.org/forums/f28/the-worst-retirement-investing-mistake-63236.html

 

[Swamp Fox]

Good point. Once you have enough, why not walk away? The trick seems to be in KNOWING, how much is enough.

 

[EvrClrx311]

Doesn't help when you are drawing down and not adding in new funds, but worth noting that equities have never taken more than 6 years to hit a new high. Even in the worst drops in history, the market always returns to new highs... and usually a lot faster than people could have imagined. Think if you had a time machine to take you back to early 2009 and could tell people "don't worry, equities will be up 122% and DOW will be back above 14K in just 4 years. Don't panic now."

That said, I certainly won't be sitting in 100% equities when I'm 50+...

Might be a new timing signal to add to the list. If the market hasn't hit a new high in 3 years, invest a lot more heavily in stocks until it does, once it does (like now), pull back to a lower equity allocation. That is, if you enjoy playing the market timing game.

I'm off topic now, point of the article is a good one. If you have enough why expose yourself to the risk.

 

[pb4uski]

I just don't agree with this guy.

Let's say a ER needs $50k a year and has a 3.5% WR and $1.428 million in assets. This guy would have that retiree investing $1-1.25 million in "safe" investments and the rest in equities. I would think that a spike in inflation would screw the retiree.

I'll stick with more balanced portfolio.

 

[daylatedollarshort]

I think we will stay at no more than 15 - 20% equities for some diversification. That seems less risky than all fixed income.

The goal is to keep our basic retirement expenses to less than our full retirement age Social Security income. That should be pretty easy with no mortgage and just the two of us in a low cost of living area. Then it doesn't matter what the stock market does.

 

[W2R]

The article quotes Bernstein as saying, "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."

I wonder if he may possibly be forgetting that even when the market tanked back in 2008-2009, our equities did not go to ZERO. Sure, it was scary and volatile but diversified equity investments still had some value, even at the bottom of that crash. Those who did not sell, or even bought low, were able to survive or even profit from that drop.

Inflation is a cruel thief, and investing in equities may be helpful in protecting one's retirement income from the effects of inflation.

Edited to add: To me it just makes so much more sense to save at least 25 to 30 times your residual living expenses instead, and put 10 into equities. Even if the value of your equities drops to around half, as it did in 2008-2009, and stays there permanently this time, you would still have 20-25 times your residual living expenses. The reason for doing this would be to protect to some extent against BOTH investment risk and inflation risk, instead of just behaving like an ostrich and just protecting against only one of these risks.

 

[gerrym51]

i use lifestyle funds

 

[obgyn65]

I think the worst investment mistake one can do is to live beyond one's means. Everything else, i.e. AA, inflation assumption, etc is relative.

 

[ScottishCanadian]

His research is spot on. What he is saying is research and reality often don't match. We had fairly quick recoveries of the floor the last two time we had recessions. I expect we would all sing a different tune if equities stayed close to the bottom for 5 years.

Regarding his premiss to reduce risk in retirement

1. Once you reach a certain age you ability to earn back losses is gone

2. He states don't retire until you reach your number

3. A mix of bonds, treasuries and stock should still beat inflation. Move to quality and dividend paying stocks

4. A bond portfolio below 3 years will constantly increase higher yielding bonds to track inflation

His rational makes sense as long as you don't retire before you reach your number or to early that your time horizon forces excessive risk.

 

[REWahoo]

I just don't agree with this guy.

Let's say a ER needs $50k a year and has a 3.5% WR and $1.428 million in assets. This guy would have that retiree investing $1-1.25 million in "safe" investments and the rest in equities. I would think that a spike in inflation would screw the retiree.

I'll stick with more balanced portfolio.

+1

Far too many seek safety in what are inherently unsafe (from inflation) investments for the long term. Maybe I'll move my AA to 100% CD's when I'm in my late 90's...

 

[youbet]

+1

Far too many seek safety in what are inherently unsafe (from inflation) investments for the long term. Maybe I'll move my AA to 100% CD's when I'm in my late 90's...

+2

Our only source of COLA'd income is my SS. Therefore I manage the FIRE portfolio with creeping, long term inflation in mind. (Yes, that includes Wellesley. ) Current AA = 49/51.

 

[Donzo]

I feel light with equities at 50/50 - stocks/bonds & cash. I won't go lower -I don't want another loss (albeit shortish term) like the 08-09. Would rather lose less and have more dry powder to throw in if (OK, when) we see another bear of this magnitude.

 

[sengsational]

You can sneak your equity position a little higher with 'bondish' equities (utlilities). The IRR on the two utility stocks I've owned the last 30 years always bring a smile. In hindsight, I would have liked to have 100% in those. I think inflation will return, so any excuse to nudge the equities up is a good thing to act upon.

--Dale--

 

[Milton]

I think the worst investment mistake one can do is to live beyond one's means. Everything else, i.e. AA, inflation assumption, etc is relative.

+1

 

[growing_older]

If I wait to ER until I have such a large portfolio that even if I put it all in bonds and ride out any inflation based only on the size of my stash, I would have to delay my ER a long time. That doesn't sound like winning the game to me. Maybe people who get a huge windfall can pursue this strategy, but I've been creeping up on my number for a long time, I don't want to have to creep way past it in order to afford a bond-only portfolio in retirement.

 

[Dawg52]

His research is spot on. What he is saying is research and reality often don't match. We had fairly quick recoveries of the floor the last two time we had recessions. I expect we would all sing a different tune if equities stayed close to the bottom for 5 years.

Regarding his premiss to reduce risk in retirement

1. Once you reach a certain age you ability to earn back losses is gone

2. He states don't retire until you reach your number

3. A mix of bonds, treasuries and stock should still beat inflation. Move to quality and dividend paying stocks

4. A bond portfolio below 3 years will constantly increase higher yielding bonds to track inflation

His rational makes sense as long as you don't retire before you reach your number or to early that your time horizon forces excessive risk.

Does to me too. Pretty much what I follow. And he doesn't say you shouldn't invest in some risky assets............

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. That's your risk portfolio. If you dream about taking an around-the-world trip, and the risk portfolio does well, you can use it for that. If the risk portfolio doesn't do well, at least you're not pushing a shopping cart under an overpass.

 

[audreyh1]

He's trying to address the clients who sold at the bottom in 2008 and stayed out too long. Apparently a lot of his clients did this and royally screwed themselves. If you didn't abandon ship in 2008, then you'll probably be fine with a more traditional allocation. Me? I'm more concerned about keeping up with long-term inflation. I'll keep my equity allocation, thanks. Besides, I have a few years of cash and short-term bond funds to help me weather the storm in the short term.

 

[sengsational]

I'm more concerned about keeping up with long-term inflation. I'll keep my equity allocation, thanks. Besides, I have a few years of cash and short-term bond funds to help me weather the storm in the short term.

+1

 

[HighRoller]

Does to me too. Pretty much what I follow. And he doesn't say you shouldn't invest in some risky assets............

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. That's your risk portfolio. If you dream about taking an around-the-world trip, and the risk portfolio does well, you can use it for that. If the risk portfolio doesn't do well, at least you're not pushing a shopping cart under an overpass.

I tend to follow this logic/strategy too. But I can also agree that it's not for everyone. The key for me was really reaching and then significantly exceeding my FI goals early enough to still ER. I also have a seperate "risk portfolio”, which the author talks about. Works well for me.

 

[easysurfer]

I read this and couldn't help but thinking about a football analogy. If you have a lead near the end do you sit on the lead or continue trying to score?

 

[mickeyd]

Thankfully, I have not made many mistakes when it comes to retirement preperation or actual retirement. The only negative that comes to mind is that I failed to recognise that I had accumulated enough assets and retirement options to last us a lifetime and did not realize it until I found myself unemployed at age 58.

Once "retired" I began to do some simple calculations and read forumns like this and suddenly realized that I should be smiling, not frowning.

I'm still very happy.

 

[Helen]

Thankfully, I have not made many mistakes when it comes to retirement preperation or actual retirement. The only negative that comes to mind is that I failed to recognise that I had accumulated enough assets and retirement options to last us a lifetime and did not realize it until I found myself unemployed at age 58.

Once "retired" I began to do some simple calculations and read forumns like this and suddenly realized that I should be smiling, not frowning.

I'm still very happy.

That is one of the best "failure" stories I have heard! Thanks for sharing.

 

[HighRoller]

I read this and couldn't help but thinking about a football analogy. If you have a lead near the end do you sit on the lead or continue trying to score?

Good analogy. It depends on how much of a lead. If I were 24+ points ahead with ~10 mins to play in the 4th quarter, I'd pull my 1st string out and play it very safe. If I were more than 30 points ahead, I'd pull them even sooner.

 

[easysurfer]

Good analogy. It depends on how much of a lead. If I were 24+ points ahead with ~10 mins to play in the 4th quarter, I'd pull my 1st string out and play it very safe. If I were more than 30 points ahead, I'd pull them even sooner.

I'm thinking more like the Broncos/Ravens during the playoffs. One completed 1st down and the Broncos could have pretty much iced the game in regulation. But instead the Broncos ran the ball and got stopped, then punted. That's always a tough choice for the coaches. To run the ball and run off time or put a nail in the coffin but risk clock stoppage or an interception. Decisions, decisions...play conservative or risky.