I Took All My Money Out of the Stock Market and It Feels Amazing

[mathjak107]

Not sure I like the X-Axis. Risk isn't equal to a standard deviation. A flat +5% isn't more risky than a few years of +2% and +8%.

Risk is about losing money, not fluctuating gains.

risk and volatility are two very different things . many times the words risk are used but really mean plain ole volatility .

volatility only becomes risk when you speculate on individual companies ,sectors or try to beat markets at their own game , exhibit poor investor behavior ,or mis-match long term investments with short term needs .

buy a diversified fund is volatility .you simply ride the cycles which have always existed . in the typical 30 year retirement time frame or 30-40 year accumulation period markets have generally ended up within 1 or 2% of each other . that is hardly risk but it can be volatile

 

[RISP]

you really can't just divide by 30 because inflation is what creates the biggest sequence risk , not market returns.

Just keeping up with inflation should be doable, no? Put 100% in TIPS and spend 1/30 the first year, 1/30 +inflation in coming years?

(I'm not 100% sure how TIPS work and whether they keep up with inflation perfectly, I must admit.)

 

[mathjak107]

the cpi price changes and ones personal cost of living are two different things . no one tracks the cpi .

your personal cost of living is based on a lot more parameters and you can be way behind the curve .

a personal cost of living is based on how many times you buy a particular product or service x the price change x a quality factor .

higher end goods tend to see bigger price changes and higher inflation than lower end goods but you may buy them less times .

millions here in nyc who live in stabilized housing which is 1/2 of all housing here saw no rent increases the last 2 years . that is very different from many other parts where rents are soaring .

on the other hand my sister refinanced and is paying less today over all as a monthly budget than years ago . we rent so our costs are much higher and certainly higher than the cpi would indicate .

so the answer is that you can get all to easily caught up in poor inflation sequencing using tips or counting on cola adjusted increases and that causes excessive spending down in those years .

 

[34rlsa]

you really can't just divide by 30 because inflation is what creates the biggest sequence risk

You are assuming the author of the article hasn't considered historical inflation.

If your plan uses historical inflation and assumes a 0% return in your portfolio and it still succeeds you have won.

What is the risk? How is it different from assuming historical market returns?

I'm not saying its the best way to go... but for conservative risk averse people any return over 0% is gravy.

ER for many is freedom... freedom from the "man"... freedom from the clock... and... freedom from the market.

Sure... the authors methods probably leaves a lot of easy money on the table.

Most everyones financial situation is unique. What each of us value is unique.

The goal here is to personally succeed.

And I hope everyone here succeeds... whatever their method.

 

[mathjak107]

no , historical averages mean nothing when spending down . it is no different than trying to use historical return averages when spending down . you can be off as much as 15 years once actual sequencing happens .

the historical averages for the worst case scenario's look decent . it was the actual sequencing that hurt them especially the actual sequencing of inflation .

in his now famous paper sequence of returns and retirement ruin , milevsky goes in to the math as to why averages can't work . that is the basis for firecalc too

 

[34rlsa]

the historical averages for the worst case scenario's look decent . it was the actual sequencing that hurt them especially the actual sequencing of inflation .

Why wouldn't the authors "tips" and CD ladder protect the portfolio from high inflation?

 

[RISP]

Why wouldn't the authors "tips" and CD ladder protect the portfolio from high inflation?

This. TIPS track actual, not average historical inflation (as measured by CPI), don't they?

the cpi price changes and ones personal cost of living are two different things . no one tracks the cpi .

your personal cost of living is based on a lot more parameters and you can be way behind the curve .

That's of course true, but don't you think that 'personal' inflation will usually be reasonably close to CPI? Especially if you are willing to make some adjustments? The one exception I could think of is if you are renting in a booming housing market. That could be a major item on your budget going up way more then CPI. But apart from that? If you own your primary residence (as I suppose most posters here do), mortgage-free or with a longer-term, fixed rate mortgage, I would expect your personal inflation to be close to (or usually below) CPI.
I know that our personal inflation rate is very low. Single biggest item is the mortgage, and that is fixed for the next ten years. Now if beer increases ten-fold, guess I'll drink more scotch instead.

 

[Dawg52]

inflation was 2.50% -3.50% . who would have guessed in 3 years time it would have doubled and by 1974 it would be 11%. it was crushing to a retiree. but with inflation so low who ever expected a 4x increase coming .

inflation proof investments like tips do not help much either . being linked to the cpi which is just a price change index on a basket of goods and services for the 1500 mini economies that make up our country has little in common with your own personal cost of living. they do not track each other well at all .

My parents never invested in stocks. Inflation went up and cd rates went up. Perhaps their investments didn't keep up with inflation dollar for dollar, but it was no where near 'crushing' status. CD rates were 10% in 1974. My Dad did have a nice pension so they were not living just off investment income as many early retirees.

CD Interest Rates: A Historical Perspective | moneybasicsu.com

 

[mathjak107]

cd's lagged inflation more often than not historically . back in those high interest days cd's were always behind the curve . it was nice once inflation fell to have a long term cd but that was only after inflation fell .

 

[mathjak107]

This. TIPS track actual, not average historical inflation (as measured by CPI), don't they?



That's of course true, but don't you think that 'personal' inflation will usually be reasonably close to CPI? Especially if you are willing to make some adjustments? The one exception I could think of is if you are renting in a booming housing market. That could be a major item on your budget going up way more then CPI. But apart from that? If you own your primary residence (as I suppose most posters here do), mortgage-free or with a longer-term, fixed rate mortgage, I would expect your personal inflation to be close to (or usually below) CPI.
I know that our personal inflation rate is very low. Single biggest item is the mortgage, and that is fixed for the next ten years. Now if beer increases ten-fold, guess I'll drink more scotch instead.

no i don't think the cpi will track anyone in particular . it is one of those things that represents everyone but follows no one .

my medical insurance increases alone surpassed many years of cpi increases when there even were any .

 

[mathjak107]

Why wouldn't the authors "tips" and CD ladder protect the portfolio from high inflation?

cd ladders always lag the curve . in 15 of the last 45 years cd rates had negative real returns . 1979 was the worst when rates lagged inflation by 3% real returrn. historically the median is under 2% real return before taxes . but median and average don't work when spending down because of sequences of actual negative real returns .

 

[REWahoo]

My parents never invested in stocks. Inflation went up and cd rates went up. Perhaps their investments didn't keep up with inflation dollar for dollar, but it was no where near 'crushing' status. CD rates were 10% in 1974. My Dad did have a nice pension so they were not living just off investment income as many early retirees.

Same with my parents - although they had no pension, only SS.

I think the fact they were so frugal they saved part of their SS check each month also played a role.

 

[Dawg52]

I think the fact they were so frugal they saved part of their SS check each month also played a role.

Mine too which is a way to compensate for bad inflation years. I'm no where near as frugal as them, but could make cuts if inflation moves to a serious level.

 

[UnrealizedPotential]

My parents didn't invest much in stocks at all. But they get pensions I could never hope to get. They just don't give pensions like that anymore. I will get a pension but it's moderate,or at least I am supposed to get one in ten years . My parents also get SS. So between the pension and SS, they didn't really need stocks, but I do.

 

[daylatedollarshort]

The matching strategies methodology is designed to take inflation into account as much as possible. In our case we have a fixed rate, low interest mortgage. The CPI may not keep up with a retiree's personal inflation, however a retiree's personal inflation rate might also be lower, not higher than the CPI. Our mortgage interest expense goes down every year of retirement as our mortgage gets paid off and will eventually go to zero.

We also have a low withdrawal rate, under ~.5% depending on the latest budget tweak, which we could ramp up to adjust for inflation. Personally, I'd rather up the withdrawal rate in the future than risk a big stock market loss like 2008. Our inflation protection outside of TIPS, I-bonds, SS, Medicare, a fixed rate mortgage and the potential to downsize is we aren't big spenders relative to our retirement income and net worth. The main thing we want to "buy" with our savings is tranquility, not stuff, which seems similar to the woman in the article.

 

[mathjak107]

just like markets can always do better , a retirees personal rate of inflation may be lower .

or it could be higher -which is why thinking in terms of personal rates of inflation counting on anything adjusted via an index can be akin to trying to take a draw rate with a lower success rate . the more mis-matched you get the greater the risk of it not working out

 

[Ally]

Guaranteed by whom, if you don't mind me asking? It's probably not FDIC insured, is it?



3% guaranteed sounds great, but personally I would be nervous having all my eggs in one basket, unless it was a SUPER-SAFE basket. Actually even then.

It's a general account fund that our company contracted with Mutual of America for back in 1979. M of A used to handle nonprofits exclusively, but now has branched out to other companies. There are also options to invest with all or part of our retirement money, which I did when I was still working. At the time of our original contracted plan, the general account was 7%, and was guarantee to not go lower than 3%, which no one ever thought would happen. If we were ever to change the terms of the plan, only those grandfathered in would still have that 3%. I was the director and our nonprofit contributed 5% of our salaries. If we were ever to require a match or reduce the contribution, it would require a new plan and new members would have a much lower rate. It's my understanding that our plan is not protected by the FDIC. However, Mutual of America is a strong company and rated from AA-- to A+.

If worse comes to worse, we have my husband's pension, which goes to me if he should not out live me. We have some other options and resources as well. So, for me, I have more peace of mind doing this than staying in the stock market.

 

[AndyS]

My parents didn't invest much in stocks at all. But they get pensions I could never hope to get. They just don't give pensions like that anymore. I will get a pension but it's moderate,or at least I am supposed to get one in ten years . My parents also get SS. So between the pension and SS, they didn't really need stocks, but I do.

Well, I get a Federal pension, have some investment monies, that come in, and assume I'll be getting some SS money here in a few years.

But ... just as a hedge .... I kind of have the sense Jack Daniels and good scotch whiskey seem to outpace inflation each year and only get better with age ... so kinda been thinking in investing in a few thousand bottles of that !

And for any "preppers" out there, think about it ..... if the S ever does HTF .... good whiskey will always be in demand, no?

 

[pb4uski]

It's a general account fund that our company contracted with Mutual of America for back in 1979. M of A used to handle nonprofits exclusively, but now has branched out to other companies. There are also options to invest with all or part of our retirement money, which I did when I was still working. At the time of our original contracted plan, the general account was 7%, and was guarantee to not go lower than 3%, which no one ever thought would happen. If we were ever to change the terms of the plan, only those grandfathered in would still have that 3%. I was the director and our nonprofit contributed 5% of our salaries. If we were ever to require a match or reduce the contribution, it would require a new plan and new members would have a much lower rate. It's my understanding that our plan is not protected by the FDIC. However, Mutual of America is a strong company and rated from AA-- to A+.

If worse comes to worse, we have my husband's pension, which goes to me if he should not out live me. We have some other options and resources as well. So, for me, I have more peace of mind doing this than staying in the stock market.

Many of the old line mutuals wrote product with 3% guaranteed minimum interest rates "back in the day".... I wouldn't fret about credit risk on your MoA product.

 

[devans0]

The CPI is close to bond return, currently. My costs increase at CPI-R. Why would I agree to an investment guaranteed to lose.

 

[foxfirev5]

cd's lagged inflation more often than not historically . back in those high interest days cd's were always behind the curve . it was nice once inflation fell to have a long term cd but that was only after inflation fell .

Agreed. However bond funds will also be behind the curve. The age old question is where to go? I'm big time CD ladder investor and willing to lag a little.

 

[mathjak107]

historically intermediate trm bonds have tracked inflation for the most part but they still are a poor choice alone to try to live off of unless your draw is quite low .

 

[fosterscik]

For those who haven't seen it, this is a nice article discussing the librarians choice:
Considerations for Cashing Out of the Stock Market
It does a good job highlighting the benefits of not completely cashing out of the market and retaining some equity allocation

 

[ncbill]

For those who haven't seen it, this is a nice article discussing the librarians choice:
Considerations for Cashing Out of the Stock Market
It does a good job highlighting the benefits of not completely cashing out of the market and retaining some equity allocation

So, another vote for "always at least 20%" in equities?

 

[GTFan]

Given history, sure. I think anyone pulling out of the market completely has to know that they're essentially living off of savings, not expecting a return. With increased risk, not less, if using bonds only.