4% rule failures?

[Nords]

OK, this may seem sort of naive, since for some reason we all are convinced we need balanced portfolios, but....HYPOTHETICALLY, let's say
Bob figures, applying the 4% rule, that he can live comfortably on $x/yr in 2010 dollars . Let's say he's figuring on a 30 year forward horizon until death. So if x represents 4% of his current holdings he would need 30 times x to retire and to be 95% secure, right?.

Well, let's say he has a buffer in excess of that figure. Would it not be logical for him to invest his ENTIRE nest egg in TIPS? If he could lock in at any real positive return over inflation over the course of his retirement (it would have to be at least positive ENOUGH to offset taxes on gains, etc, but that's not much), he would be free from most of the concerns expressed in this forum, which imply greater risk. Am I naive in assuming this strategy would be safer in assuring his likely financial comfort in retirement than the "balanced portfolio" strategy (since over the long run it would be very difficult for him to lose, unless confronted by unusual expenses which are always a risk).?

What element am I missing here?

First, you're describing the "Groucho Marx" retirement strategy as modified by Suze Orman and Oprah Winfrey, with an update for TIPS: "Sure, you can retire on Treasuries, as long as you have enough of them!"

Second, there's still plenty of uncertainty around parameters like "30-year longevity" and "real positive return over inflation". Longevity risk is only guaranteed by the Hemlock Society or some other form of ammunition, and 31 years into a 30-year retirement is a bad time to try to rectify the oversight. And while I feel that the CPI is a pretty good gauge of "real inflation", whatever that is, it's way too susceptible to political manipulation. Still, it's the best measurement available.

Third, 30-year TIPS have gone in & out of auction availability. I think they're back for now, but that's no guarantee of their availability in future years.

Finally, at today's TIPS rates it'd take a heapin' big steaming pile to guarantee an ER budget. Most ERs have neither the patience nor the stamina to endure the workforce stress for the time necessary to accumulate that stash. (Hey, if they did have those characteristics then they wouldn't be interested in ER in the first place.) It's much more tempting to go with the Trinity Study and hope that some sort of variable spending plan (like Bob Clyatt's "4%/95%" system from Work Less, Live More) or part-time work will paper over the [-]black swans[/-] gaps.

Or else they could buy a COLA'd annuity from Vanguard/AIG.

This has been discussed much by experts in the past. Something has changed fundamentally. Is it better or worse, I don't know, but the stock market is definitely different than it was before 1980 or 1990. The phenomenon of P/E expansion was what gave me the stash that I have now. I once thought its growth was due to my brilliance, but it now makes me leery.

I'd go for two factors:
- the markets and public accounting are much more heavily regulated today than even 20 years ago, let alone 50 years ago. Stocks have a much better reputation for being a "fair game" instead of a rigged casino.
- information is much more accessible to individual investors and analysis is much more widespread for all. Much of Buffett's success during the 1950s-1970s came from being able to read things that many people couldn't or wouldn't have access to (Moody's, thousands of company quarterly/annual reports for the price of 100 shares) and then from being able to critically analyze the data for opportunities that were well within the average MBA's capability.

Look at how much of that has been [-]dumbed down[/-] automated today for the convenience of millions of eager investors with no institutional memory. Imagine what Buffett could have done back then with Yahoo! Finance, a Morningstar Premium subscription, The Motley Fool, and discussion forums like GuruFocus & Seeking Alpha...

 

[chinaco]

Chapter 33 has some useful information about setting up a reserve portfolio to provide inflation protection for nominal SPIAs and Nominal Pensions.