Which Would You Prefer?

[teejayevans]

Your heirs will Love you!

Which brings up a serious question, how many people today are counting on their
parents dying to provide them with their retirement income.
Tom

 

[Empty Pockets]

My plan takes into accout $0 from any outside sources, including potential inheritance and social security.

 

[cute fuzzy bunny]

Pretty much the same here. Although there are pensions, social security, and a probable inheritance from my dad. I figure the unexpected bad stuff readily available from other places will offset those if they even materialize.

 

[perinova]

Not accounting for taxes Plan C 40%-stock rebalance-yearly provides 17.94%

 

[Nords]

Which brings up a serious question, how many people today are counting on their parents dying to provide them with their retirement income.
Tom

I'm counting on our parents dying before we have to provide them with our retirement income...

That inheritance plan may not always work out in time. When the previous world's oldest woman died at the age of 114, her daughter was reportedly 80 years old.

 

[audreyh1]

I'm counting on our parents dying before we have to provide them with our retirement income...

That inheritance plan may not always work out in time. When the previous world's oldest woman died at the age of 114, her daughter was reportedly 80 years old.

We're already using our retirement income to help parents out!

I have a feeling quite a few folks on this board are much better off financially than their parents. So perhaps fewer are "counting" on that inheritance than Tom might think.

Audrey

 

[youbet]

Which brings up a serious question, how many people today are counting on their
parents dying to provide them with their retirement income.
Tom

Unless you are in an extreme circumstance which almost guarantees a significant inheritance, "counting" on mom and dad's estate to bail out your retirement is a tad risky!

We received a small inheritance when my dad died, a relatively inconsequential amount. But now we're spending money helping DW's mom survive on her $12K annual SS income.

I agree with Audrey. I doubt many on this board "count" on inheritance dollars for retirement funding. But most on this board would manage an inheritance wisely should they receive one.

 

[TromboneAl]

If you held 60% in the equity portion, and 40% in a guaranteed 4% investment, and rebalanced, your return would be better than either of the above options: 17.75%

Perhaps someone can check my calculations:

 

[haha]

My purpose was not so much to find the best back-tested method of getting rich- only to illustrate the difference between arithmetic averages and geometric.

Ha

 

[wabmester]

I love how many people reinforced their belief in rebalancing with this one. For them, I'll provide an alternative to rebalancing annually.

If you start with 100% stocks, and then switch to 100% CDs after three years, your return would have been 50.6%!

So, CFB's market timing algorithm is superior to rebalancing. (At least with a priori knowledge.)

 

[Nords]

(At least with a priori knowledge.)

What time today do they publish tomorrow's edition?

 

[cute fuzzy bunny]

Well lets see...the last time (and one of the few times) we've had a run-up of the S&P500 like the three year period Ha is proposing, it was the last 3 years of the 90's. Even the 3 last good years comes nowhere near those figures.

I bailed out then, I'd do it again. I'm getting itchy right now in fact.

I'm not much of a market timer, but I think there are times when you have to respond to market stupidity at both ends. 40% in three years is market stupidity.

 

[wabmester]

40% in three years is market stupidity.

Dude, 40% over 3 years is 12%/year. Is there a stock class that hasn't done that over the last 3 years?

FWIW, I do agree that it's a bad sign. Whenever stocks grow faster than the economy, they eventually come back down. Same with real estate growing faster than wages. Commodity prices growing faster than demand. Etc. It's been an interesting few years, eh?

 

[cute fuzzy bunny]

Dude, 40% over 3 years is 12%/year. Is there a stock class that hasn't done that over the last 3 years?

Hmmm...the s&p 500's last three years are: 15.64% 4.77% and 10.74%.

So yes!

2003 before THAT was a whopper, but it WAS coming from a fairly deep low at the bottom of a mini-bear.

Granted stuff like reits, emerging markets and energy have done a lot better than that, but I dumped those already. Stuff with price charts that look like launch trails make me invoke the "stupid!" rule. While I might be 'selling too soon', I do get to keep the upside and not have to ride the other side of the stupid coaster.

 

[chinaco]

The CD vs Equity comparison sems to be on opposite ends of the investment spectrum (excluding short sells, options, derivatives, things that are hedges).

It seems to me that type of choice would depend on whether or not I was in a wealth accumulation stage or retired plus the time horizon.

If I need to grow my wealth and have 25 years to do so, equity investments are only realistic option. On the other hand, if I am retired and in my mid 70s and have a small to medium nest egg, I might choose CDs.

 

[ShokWaveRider]

Damn, I KNEW I shoulda put everything in those Penfed 6.25% CDs !

I did!

SWR

 

[cute fuzzy bunny]

It'd also be interesting to see the series extended to 15-20 years...with inflation adjustments kicked in...

 

[chinaco]

It occurred to me that a balanced portfolio would be best. Therefore I would prefer both investments. Probably balanced 60/40

If one decided to create a portfolio with 60% stock at the gains/losses listed and 40% at the CD rate and rebalanced at the end of each year, the portfolio would wind up being larger than either single class of security. The results of the three portfolios based on an initial investment of $100 iis shown below (hope I didn't make a mistake).

100% Stock: $115.99
100% CD: $ 116.99
60% Stock / 40% CD: $117.75

Now if one makes a marginal tax assumption of a 25% on interest and 15% on long-term capital gains with a Mutual Fund fee of .0018% (Like a Vanguard S&P 500 index fund) and cash out of the potfolios at the end of the period, you would get slightly different results.

100% Stock: $112.84 net after fees & taxes
100% CD: $ 112.55 net after taxes (no fees on the CD)
60% Stock / 40% CD: $113.50 net after fees & taxes


It looks like a balance portfolio is better even considering a basic tax scenario. Because of the lower rate of long-term capital gains, it looks like the 100% stock portfolio beats the 100% CD also.