Getting Close.......

[wheel9]

I am new to this Board and am glad for having found it. I am 55, eligible for retirement, and with work no longer being fun, I am exploring the ER option. With a gov pension (small index for inflation) and a decent nest egg, I am looking to go out soon. Due to my analytical side, I am trying to analyze this to death to be sure that we can outlive our money, and have a great retirement. We did not work hard to live so frugal that we can't do what we want to do after work is over.

So far I am reading old posts to catch up on the great knowledge that is here. I am sure that I will have lots of questions, so be gentle.

One starting question is that I have read that a portfolio mix of 60/40 stocks/bonds is a reasonably good balance when entering retirement. With the current yields on Money Markets and CD's, would they be a better substitute for Bonds at this time? Can they be interchangeable? Also, what is the way to characterize an I-Bond?

Thanks for any nuggets you can pass on.

 

[Nords]

Welcome to the board, Wheel!

With a gov pension (small index for inflation) and a decent nest egg, I am looking to go out soon. Due to my analytical side, I am trying to analyze this to death to be sure that we can outlive our money, and have a great retirement. We did not work hard to live so frugal that we can't do what we want to do after work is over.

The pension inflation indexing may seem small now but it'll have a huge cumulative effect. The other issue you'll want to look at, if you haven't already, is healthcare expenses.

One starting question is that I have read that a portfolio mix of 60/40 stocks/bonds is a reasonably good balance when entering retirement. With the current yields on Money Markets and CD's, would they be a better substitute for Bonds at this time?

You have to decide why you're investing in bonds in the first place. If you're trying to reduce correlation and portfolio volatility then bonds are the conventional wisdom. If you're trying to ensure a known amount of money at maturity then CDs or holding individual bonds to maturity are the way to go. If you're trying to make cap gains money on a bond fund then good luck with that.

Also, what is the way to characterize an I-Bond?

Your govt pension (especially if it's from the U.S. federal govt) is probably the equivalent in I bonds already-- stable, as good as "guaranteed" can be, and indexed to inflation. The I bond is still a bond, and adding bonds (in your personal retirement portfolio) onto a govt pension may result in your overall portfolio being low in equities. You could probably afford to have a retirement portfolio much higher in equities (whose volatility would be balanced by the reliable pension income) with 2-7 years' expenses in cash.

That's one of many financial solutions. There's also an emotional "sleep at night" component to the asset-allocation decision, so you have to consider doing what makes you comfortable... because you're probably going to have to stay the course through at least one bear market over the next four decades.

 

[wheel9]

The pension inflation indexing may seem small now but it'll have a huge cumulative effect. The other issue you'll want to look at, if you haven't already, is healthcare expenses.

The pension (CalPERS) does include health premiums - currently 100% paid. That makes the possibility of the early out work. It also includes the Medicare supplement at 65.

You have to decide why you're investing in bonds in the first place. If you're trying to reduce correlation and portfolio volatility then bonds are the conventional wisdom. If you're trying to ensure a known amount of money at maturity then CDs or holding individual bonds to maturity are the way to go. If you're trying to make cap gains money on a bond fund then good luck with that.
Your govt pension (especially if it's from the U.S. federal govt) is probably the equivalent in I bonds already-- stable, as good as "guaranteed" can be, and indexed to inflation. The I bond is still a bond, and adding bonds (in your personal retirement portfolio) onto a govt pension may result in your overall portfolio being low in equities. You could probably afford to have a retirement portfolio much higher in equities (whose volatility would be balanced by the reliable pension income) with 2-7 years' expenses in cash.

Since the pension is almost enough for us to live on, the nestegg is for all the "extras" so while not critical, it is a quality of life issue. I can see how the bonds counter the impacts of the stock market and provide balance to the portfolio.

From your comment, the value of the pension should be counted as part of the overall porfolio. My reading here indicates that it should be valued at 25X since it has a small inflation factor and it includes survivor benefits. So while I was looking at a 60/40 or 50/50 split, that was excluding the impact of the pension. Adding that back in would in fact allow my equity side to dramatically increase.

That's one of many financial solutions. There's also an emotional "sleep at night" component to the asset-allocation decision, so you have to consider doing what makes you comfortable... because you're probably going to have to stay the course through at least one bear market over the next four decades.

That's the level I am trying to get to as I start down the road. In order to project the most conservative outcome possibe, I am using a 3.5% rate of inflation (high) and a projected return of 4% in retirement. I figure if I can make the numbers work with those assumptions, I should be on the right course. Thanks for your comments.

 

[yakers]

I'm getting close too, 365 days more on my countdown clock, although there are a couple events that could extend work a bit. My wife retired in June from teaching in CA, she has a CalSTRS package which is pretty modest but does have the partial COLA provision. I expect a Federal pension; I am one of those who treat these pensions as bonds and so hold mostly equities. But that is a decision an individual has to make, you can take this risk and maybe get more return but don't 'have' to take the risk. I expect our pensions will cover our living expenses, the 403b/401k type funds will be for travel and spending time with the children & grandchildren. We are in the position of having our younger son start collage in Sept 07, so we have to include that in our budget. When he is done with school I expect to free up enough money for more exotic travel.

 

[donheff]

From your comment, the value of the pension should be counted as part of the overall porfolio. My reading here indicates that it should be valued at 25X since it has a small inflation factor and it includes survivor benefits. So while I was looking at a 60/40 or 50/50 split, that was excluding the impact of the pension. Adding that back in would in fact allow my equity side to dramatically increase.

I struggle with this issue all the time and never get it resolved in my mind. I have a substantial Federal pension and, like Nords, keep almost everything else in a diversified portfolio that doesn't include bonds - other than in the "near cash" component we keep for immediate spending. I don't, however, calculate the present value of my pension and treat it as a bond component because it won't have any direct effect on the volatility of the "real" portfolio. I definitely want the real portfolio to deliver on its promise because those "lifestyle" issues are very important to me.

But, at the end of the day, (to use a phrase you may be happily anticipating never hearing again) I am able to sleep at night with the higher volatility since I know the pension will be there in worst case scenarios.