Won the Game, take low risk path with $$?

[donheff]

I have a much more modest "won the game" approach. We're taking moderate risk with the portfolio (~50% equities). But once I draw income from my portfolio, I never return it. Unspent funds are put in short-term, safe investments. I see no need to risk those funds again.

I have a very similar approach except I keep my unspent SWR funds in a pseudo account consisting of a tracking number I subtract from the rest of the portfolio when calculating funds available for the upcoming SWR. I keep all fixed income and cash like funds (except the immediate year's expenses) in tax differed accounts to avoid generating excess dividends and interest. In theory this will allow me to tap the pseudo funds in bad years in the same manner that you would from a separate dedicated account. But I suspect in practice I would be unable to emotionally distinguish my pseudo fund from the overall decimated portfolio and would just cut spending and fail to tap it. I also suspect that if I kept in separate I would more likely to be willing to spend it when needed. But that likely irrational response irritates me so I refuse to liquidate it into a separate tax generating account. I guess my reaction against irrationality is itself irrational given the likely consequences.

 

[Dawg52]

I guess by most of these definitions I have ___ the game. I just can't say it, don't want the finance god's to send a lighting bolt my way!

 

[nun]

To me, won the game is having enough principal that you can afford to buy a COLAd immediate annuity with survivor's benefits (if you are married) that would at least fully cover your entire budget. I am not suggesting that anyone actually do this, but it is a handy bar for won the game.

I feel like I've "won the game", so I'm increasing my equity allocation because I can take the extra risk. I have enough in pension and rent to cover my expenses and when my UK and US SS checks begin I will have a large income surplus. So I'm taking more risk with my portfolio as I'm not worried about running out of money and the potential size of my portfolio is more important than capital preservation.

 

[mathjak107]

Probably the most "interesting" year in the last decade or so is 2008 when it seemed to many (myself included) that things were looking remarkably like the start of the Great Depression all over again. Like many here I held on and did not panic. It's still interesting to see the investment results for that year for some representative Vanguard Funds:

For instance, suppose you had invested $100,000 in each of the following Vanguard funds at the beginning of 2008. Could you afford to lose these amounts?

Vanguard Fund​

2008 Gain/Loss​

GNMA

$7,220​

Treasury Money Market

$2,100​

Wellesley (1/3 in stock

($9,840)​

Wellington (2/3 in stocks)

($22,300)​

S&P 500 Index (all stocks)

($37,020)​

REIT Index

($37,050)​

FTSE All World Ex-US Index

($44,090)​

It certainly looks like Unclemick's advice from long ago (Wellesley) held up remarkably well considering it's 1/3 stock allocation. Personally over time I've just drifted to Wellesley and Vanguard's Target retirement ( a relatively poor performing index alternative) from many other earlier and more aggressive choices and I'm thinking I'll get along with these two funds for the bulk of my investments into my late years (currently 67).

realistically though had you been in these investments prior to 2008 the cushion built up over the years would have made the fall not as great in comparison .

it is like the growth model portion of my portfolio took 100k in 1987 and turned it in to 2.20 million . had i never used that model and did cd's as an example instead i can lose more than 1/2 the growth model and still be way ahead.

so nothing is 9in isolation by itself . the time frame in and out matter .

 

[Danmar]

How would you define "spending utility function"? As a naturally analytical person, seems like something I'd be interested in learning about.

.

Just a fancy way of saying "could you happily spend more money?" Or if you had more to spend just couldn't think what you would spend it on. I usually include gifting as spending.

 

[brewer12345]

Based on Immediate Annuity .com for a 55 year old male with 54 YO female SO, to generate $100,000 per year at 3% COLA (100% Joint Survivor) would cost approximately $3,000,000 and at 4% COLA 3,900,000.

Pretty spicy pricing. Not even a real COLA, either.

 

[GTFan]

Even though we 'won the game' we're still 65/35/5 in the hopes of accumulating enough to afford a much nicer final retirement home than the one we have. Probably moving to FLA in the next few years, so the more the egg grows the better.

I don't think this is an unusual reason to stay in the equities game.

 

[pb4uski]

Probably the most "interesting" year in the last decade or so is 2008 when it seemed to many (myself included) that things were looking remarkably like the start of the Great Depression all over again. Like many here I held on and did not panic. It's still interesting to see the investment results for that year for some representative Vanguard Funds:

For instance, suppose you had invested $100,000 in each of the following Vanguard funds at the beginning of 2008. Could you afford to lose these amounts?

Vanguard Fund​

2008 Gain/Loss​

GNMA

$7,220​

Treasury Money Market

$2,100​

Wellesley (1/3 in stock

($9,840)​

Wellington (2/3 in stocks)

($22,300)​

S&P 500 Index (all stocks)

($37,020)​

REIT Index

($37,050)​

FTSE All World Ex-US Index

($44,090)​

It certainly looks like Unclemick's advice from long ago (Wellesley) held up remarkably well considering it's 1/3 stock allocation. Personally over time I've just drifted to Wellesley and Vanguard's Target retirement ( a relatively poor performing index alternative) from many other earlier and more aggressive choices and I'm thinking I'll get along with these two funds for the bulk of my investments into my late years (currently 67).

You would only lose those amounts if you sold.

For VTSAX as an example, with dividends reinvested:

1/1/2008.....................$100,000
12/31/2008.....................63,012
12/31/2009.....................81,175
12/31/2010.....................95,183
12/31/2011.....................96,213
12/31/2012...................111,976

12/31/2016...................190,338

 

[Blue Collar Guy]

i agree

Even though we 'won the game' we're still 65/35/5 in the hopes of accumulating enough to afford a much nicer final retirement home than the one we have. Probably moving to FLA in the next few years, so the more the egg grows the better.

I don't think this is an unusual reason to stay in the equities game.

mausoleums are very expensive

 

[Chuckanut]

You would only lose those amounts if you sold.

<Nitpick On>

Just curious. In regards to the people (like me) who didn't sell in 2008 should we calculate our 2008 net worth based upon the previous high, an average price, or ??

<Nitpick Off>

 

[2017ish]

Originally Posted by capjak View Post
Based on Immediate Annuity .com for a 55 year old male with 54 YO female SO, to generate $100,000 per year at 3% COLA (100% Joint Survivor) would cost approximately $3,000,000 and at 4% COLA 3,900,000.

Pretty spicy pricing. Not even a real COLA, either.

Yikes. I hadn't looked up the pricing until you posted--non-adjusted Immediate using the same criteria and 3,000,000 is $154,032 a year. That is indeed spicy pricing for the adjustment.

 

[Meadbh]

<Nitpick On>

Just curious. In regards to the people (like me) who didn't sell in 2008 should we calculate our 2008 net worth based upon the previous high, an average price, or ??

<Nitpick Off>

I calculate my NW every year based on current valuations. So it dropped by 15% in 2008-09, despite the fact that I was w*rking. I hung in there, and dumped cash into equities as soon as I felt confident that the nadir had passed. It all worked out.

 

[Major Tom]

I don't really know what my definition of having "won the game" is, as I don't think very much in those terms. If I had way more than I needed, I'd feel even more comfortable with a high equity stake. The only reason I have a bond component in my AA is to even out the volatility. If I had plenty, I'd be 100% equities, living solely from the dividends in a couple of low cost index funds, comfortable in the knowledge that even if my portfolio took a huge dive, I'd still have more than enough to live on.

 

[GravitySucks]

But what's the low risk path?
Intermediate bonds and CDs carry interest rate risk and aren't even paying enough to cover inflation.
I guess I can bump my cash up to cover a few years expenses will help, but then it's a loss of about 1% real a year on those funds. Otherwise keep the rest in a 60/40 AA.

 

[nun]

I don't really know what my definition of having "won the game" is, as I don't think very much in those terms. If I had way more than I needed, I'd feel even more comfortable with a high equity stake.

I retired with a 60/40 allocation and as I have most of my expenses covered by a pension and rent I'm going to a higher equity percentage. However, to get there I've decided to just stop rebalancing and I should slowly drift up to something north of 70% and then maybe 80% over the next decade.

 

[Major Tom]

We think alike, nun. If your expenses and expected standard of living are already covered, or close to, why not take a bit more risk with equities? Others would instead say, "Why take the extra risk?"

We're all different.

 

[Dash man]

We think alike, nun. If your expenses and expected standard of living are already covered, or close to, why not take a bit more risk with equities? Others would instead say, "Why take the extra risk?"



We're all different.

There's a wide range of risk in equities depending on the individual stocks owned. Two companies, one with a high debt load in an industry where a competing company with a technology edge and low debt load can have different results in a market crash or debt crisis. Mutual funds, especially index funds, carry the good and the bad. That's why I like to pick individual stocks.

 

[NW-Bound]

"Won the game. Take Low Risk Path"

So, what does one do with that pile of money? Let's say we buy something like TIPS which provides for protection against inflation but no chance for growth, in exchange for no volatility.

Then, for a retirement period of 30 years, we can spend 3.33% each year. It's because 3.33% times 30 years is 100%.

Now, FIRECalc says that a 50/50 portfolio will allow us to spend 3.71% in the worst case. That worst case is not a whole lot better than that 3.33%. In most cases, we will do a lot better but that is of course not guaranteed.

So, just because one invests in stocks does not mean that he is counting on big returns to survive. Rather, if there is growth he can either upgrade his living, or leave money behind to his heirs. If there is no growth, he is not worse than the guy with TIPS.

But that is for 30 years. A longer retirement period involves a lot more unknowns.

How to define won the game (inspired by burned more than once) based on an extremely low risk investment AA and still come up with 100% success rate at age 100?

I would say based on investment AA of 0% stock, using estimated spending (high end of estimate), age to 100 with 100% success rate on Firecalc would meet the "won the game" definition...

So, let's say we want to plan for 50 years of retirement, or perhaps even 60 for someone who retires at 40 and want to plan to 100.

Now, using TIPS, he can spend only 100%/60 years = 1.67%. Now, the S&P even with its low dividend at the present is still paying 1.92%. Even if the S&P does not have principal appreciation, I will take the S&P over TIPS for the dividend.

Then, I will spend only 1.67% out of that dividend, reinvest the remainder, and watch my stash grow. When the principal grows, its dividend will also grow. In 10, 20 years, the dividend will far outgrow the puny 1.67% that the TIPS guy can spend.

 

[traineeinvestor]

You can choose which risks to worry about the most but you can't choose not to take risks of some kind because all investments carry some form of risk.

Over the longer term I view bonds as being higher risk than equities because of the effects of inflation.

When I FIREd I was 47 and DW 40. She lives a healthy lifestyle and comes from a long lived family so I planned on 50+ years of retirement which might as well be forever. The financial objective was to be able to maintain our chosen lifestyle over that indefinite time period. Most of our assets are in real estate or equities which (hopefully) will have at least the potential to more or less compensate for inflation over long periods of time with only a small allocation to bonds, cash and other assets to plug any short term gaps. I also prefer to carry modest amounts of debt as an additional inflation hedge and plan to continue doing so as long as the banks will continue lending to me.

The thought of what inflation would do to an all/mostly bonds portfolio over 50 years scares me far more than having to ride out market fluctuations.

FWIW, what passes for an annuity out here where we live is a really really bad way to lose money and inflation linked bonds are almost non-existent and priced in terms which guarantee a rate of return below the rate of inflation.

 

[photoguy]

Now, using TIPS, he can spend only 100%/60 years = 1.67%. Now, the S&P even with its low dividend at the present is still paying 1.92%. Even if the S&P does not have principal appreciation, I will take the S&P over TIPS for the dividend.

Then, I will spend only 1.67% out of that dividend, reinvest the remainder, and watch my stash grow. When the principal grows, its dividend will also grow. In 10, 20 years, the dividend will far outgrow the puny 1.67% that the TIPS guy can spend.

That's pretty much how I see it as well. But I wonder at what real return for TIPS would I prefer that approach? At one point in my investing career TIPS were returning 3% real.

 

[NW-Bound]

I have never purchased TIPS, but imagine that it does not pay much now.

If it ever paid 3% real, it must have been 20 years ago when I-bonds were also paying as high as 3.6% above inflation. At that point, the S&P was rising 20% a year, so not too many cared. I was among the ones not so astute to know it was a good deal.

 

[tinlizzy]

realistically though had you been in these investments prior to 2008 the cushion built up over the years would have made the fall not as great in comparison .

it is like the growth model portion of my portfolio took 100k in 1987 and turned it in to 2.20 million . had i never used that model and did cd's as an example instead i can lose more than 1/2 the growth model and still be way ahead.

so nothing is 9in isolation by itself . the time frame in and out matter .

I like this - a lot! Focus on the average.

 

[photoguy]

If it ever paid 3% real, it must have been 20 years ago when I-bonds were also paying as high as 3.6% above inflation. At that point, the S&P was rising 20% a year, so not too many cared. I was among the ones not so astute to know it was a good deal.

I didn't remember the timing well so I went back and checked. The 10-year tips hit 3% in late 2008 and there were multiple times it was between 2 and 3% from 2003 to 2008.

30-year tips was above 2% as recently as 2011.

 

[NW-Bound]

TIPS yield is tricky, and has been negative during the Great Recession too from what I have read.

Some data published by the Treasury is compiled from secondary market prices, and I have not studied it to understand it, particularly as different issues would behave differently in a deflationary period, which was of course short-lived during the Great Recession.