Now Retired: We need 3% yield on a $1.1 mil nest egg

[24601NoMore]

+1. Why is it so hard for some folks to accept that what is best for them isn't necessarily best for everyone else? Personally, I would hate to see this forum become a place where 100% of posters agreed on any topic. Some of us simply expressed that we are okay with giving up some potential return from equities in exchange for the value of sleeping well at night. We don't desire to leave a bunch of $$ to heirs. We've reached the point in our lives where we really don't want the volatility that comes with equities. We've done the math, and we are reasonably confident we can fund our retirements without much equity exposure (and yes, even considering the effects of inflation). I am certainly not trying to convince anyone that how I fund my retirement is the way everyone should do it......so please, let's have some tolerance for alternative viewpoints.

EXACTLY. I have a spreadsheet that projects income and expenses (WITH INFLATION FACTORED IN YEARLY) until our mid 90s, and we end the game just fine with plenty left over - and that's with ~25% equities.

 

[pb4uski]

..... Anything left over is a planning error!

Exactly what I told DD. Not totally true because if I was thrying to get to zero we would be blowing dough like Robbie dreams of... but I woud just soon that DD (and DS) have low expectations so they make their own way.

 

[RunningBum]

The article below states TIPS, bonds, leveraged loans and real estate income as better assets for inflation protection. Stocks came in at #5 and a stock and bond portfolio at #7.

https://www.investopedia.com/articles/investing/081315/9-top-assets-protection-against-inflation.asp

I would be interested in the research showing stocks are the best inflation hedge. Most people interested in fixed income would buy a ladder or a fund with yields changing over time with the market, not lock themselves into an entire portfolio of 2% individual bonds for 30 years.

This appears to be based on a year-by-year basis. I'm a lot less interested in how many individual years I can beat inflation than I am beating inflation as a whole over the next 30-40 years.

 

[ncbill]

I would think the "rising equity glide path" approach starting with 25%-35% equities would satisfy the OP & the more conservative posters here.

Yet still provide inflation protection.

 

[pb4uski]

+1 something for him to consider... spend from the first 2 buckets and let the rest grow.

 

[ERD50]

Originally Posted by daylatedollarshort
The article below states TIPS, bonds, leveraged loans and real estate income as better assets for inflation protection. Stocks came in at #5 and a stock and bond portfolio at #7.

https://www.investopedia.com/article...-inflation.asp

I would be interested in the research showing stocks are the best inflation hedge. Most people interested in fixed income would buy a ladder or a fund with yields changing over time with the market, not lock themselves into an entire portfolio of 2% individual bonds for 30 years.

This appears to be based on a year-by-year basis. I'm a lot less interested in how many individual years I can beat inflation than I am beating inflation as a whole over the next 30-40 years.

That was my take as well. I think people take the "equities to fight inflation" too literally.

I'm not looking for my equities to outperform in every high-inflation period. What I think is meant by this is that the long-term higher gain in equities will provide a larger portfolio which can then succeed in a high inflation environment.

-ERD50

 

[ERD50]

Another point I'll make is that the common statements like " I sure don't want to watch potentially half of my net worth evaporate on paper like it pretty much did in 2008." aren't meaningful/helpful, because they lack some important context.

The kind of drops used in these examples are from the peak. And that is a peak that would not have existed if you were in fixed income. So it really has no meaningful comparison.


Those of us with significant equity exposure did not drop all that in there at the peak (like go from 0/100 to 60/40 or 70/30, all in October 2007). That money was put in, probably over decades, and grew over time. It's just not a realistic comparison to what fixed income does.

You can use the portfolio tool, with 3% inflation adjusted w/d :

https://www.portfoliovisualizer.com...bol2=VBMFX&allocation2_2=100&allocation2_3=40

Go back 5 years before a peak (a very rough approximation of DCA in over time). You will probably see that the 60/40 portfolio doesn't dip below the fixed income portfolio, even though it may make a large dip from its peak.

And going forward to current time, the 60/40 is 2.2x the fixed income fund. So even another 50% drop (unlikely for a 60/40 portfolio!) would leave you with a larger stash than the fixed income portfolio.

Its a bit like giving you a choice between $100 taxed at 10%, and $1000 taxed at 50%. Would you say that you don't want to be taxed at 50%, so reject it? Even though simple math shows you that $500 > $90? Always look at the net effect under reasonable circumstances.

This isn't an attempt to talk anyone out of 100% fixed income. But it is an attempt to get people to look at it in useful terms, and fully understand any pros/cons/risks to help them with their decision.

-ERD50

 

[Dtail]

Another point I'll make is that the common statements like " I sure don't want to watch potentially half of my net worth evaporate on paper like it pretty much did in 2008." aren't meaningful/helpful, because they lack some important context.

The kind of drops used in these examples are from the peak. And that is a peak that would not have existed if you were in fixed income. So it really has no meaningful comparison.


Those of us with significant equity exposure did not drop all that in there at the peak (like go from 0/100 to 60/40 or 70/30, all in October 2007). That money was put in, probably over decades, and grew over time. It's just not a realistic comparison to what fixed income does.

You can use the portfolio tool, with 3% inflation adjusted w/d :

https://www.portfoliovisualizer.com...bol2=VBMFX&allocation2_2=100&allocation2_3=40

Go back 5 years before a peak (a very rough approximation of DCA in over time). You will probably see that the 60/40 portfolio doesn't dip below the fixed income portfolio, even though it may make a large dip from its peak.

And going forward to current time, the 60/40 is 2.2x the fixed income fund. So even another 50% drop (unlikely for a 60/40 portfolio!) would leave you with a larger stash than the fixed income portfolio.

Its a bit like giving you a choice between $100 taxed at 10%, and $1000 taxed at 50%. Would you say that you don't want to be taxed at 50%, so reject it? Even though simple math shows you that $500 > $90? Always look at the net effect under reasonable circumstances.

This isn't an attempt to talk anyone out of 100% fixed income. But it is an attempt to get people to look at it in useful terms, and fully understand any pros/cons/risks to help them with their decision.

-ERD50

Great post showing a better apples to apples comparison.
As an aside, I would think that most retirees are not above a 60/40 mix and thus would not lose 50% even on paper with a 2008 loss scenario.

 

[camfused]

+1 for the rising equities approach, or some sort of bucket system. A combo of these is what I plan to do when I FIRE at the end of this year, since I equally am concerned about an eminent end of the bull.

 

[daylatedollarshort]

This isn't an attempt to talk anyone out of 100% fixed income. But it is an attempt to get people to look at it in useful terms, and fully understand any pros/cons/risks to help them with their decision.

-ERD50

Not an attempt to talk anyone out of stock and bond mutual funds, but a big part of the reason we are heavy on TIPS and light on equities are all the freakout posts here and Bogleheads whenever there any kind of market drops. I saw words like nerves of steel, gut punch and white knuckling it and I personally would like to avoid those feelings in my retirement plan, even if it means lower total returns.

 

[Texas Proud]

The article below states TIPS, bonds, leveraged loans and real estate income as better assets for inflation protection. Stocks came in at #5 and a stock and bond portfolio at #7.

https://www.investopedia.com/articles/investing/081315/9-top-assets-protection-against-inflation.asp

I would be interested in the research showing stocks are the best inflation hedge. Most people interested in fixed income would buy a ladder or a fund with yields changing over time with the market, not lock themselves into an entire portfolio of 2% individual bonds for 30 years.

Others have addressed this, but I will put it in different terms...


I am not interested in how many years the investments beat inflation compared to others (and they are not that far off anyhow), but by how much...



IOW, if equities beat inflation by 10X (20% gain to 2% inflation) but bonds only by 1.5X (3% vs 2%) I have much more money to start the second year... I can lose that year and still be way ahead of the higher winning pct... TIPS is a perfect example... they have not done well over the last 10 years...


The Vanguard TIPS ETF has gone up .05% per year the last 5 years, S&P 500 is up 13.28% per year.. 1.07% to 10.74% the last 3...

 

[daylatedollarshort]

The Vanguard TIPS ETF has gone up .05% per year the last 5 years, S&P 500 is up 13.28% per year.. 1.07% to 10.74% the last 3...

A TIPS mutual fund or ETF is very different that a TIPS ladder. That is why only individual TIPS are suggested for matching strategies. Held to maturity, our TIPS range from about .5% to 2.5% (+ inflation). We only need 0% + inflation on our overall portfolio for a 3.33% safe withdrawal rate (100 / 30 years = 3.33%). We just had some 5 years mature and the new rate if we bought today would be .68% + inflation. They are in an IRA so no tax differences for us from stocks for now.

 

[joeea]

Well, although any drunken monkey could have made money in the last year, including the correction, their portfolio made 9.16% net their fee.

So are you asking for recommendations regarding drunken monkeys?

 

[ShokWaveRider]

Give me 4% CD and I can live like a king... Based on our expenditure... 5% would be Nirvana...

 

[Corporateburnout]

Give me 4% CD and I can live like a king... Based on our expenditure... 5% would be Nirvana...

BankWest brokered 30 year CD through Fidelity pays 4%. Check it out and start living like a king........

 

[audreyh1]

I would think the "rising equity glide path" approach starting with 25%-35% equities would satisfy the OP & the more conservative posters here.

Yet still provide inflation protection.

That is certainly a clever way to reduce sequence of returns risk in the short term, and overcome inflation in the long run.

Too bad the method was not published until well after I had retired.

 

[njhowie]

BankWest brokered 30 year CD through Fidelity pays 4%. Check it out and start living like a king........

But...it's not call protected. If interest rates drop, and they call...no more living like a king.

 

[MuirWannabe]

Give me 4% CD and I can live like a king... Based on our expenditure... 5% would be Nirvana...

Wouldn’t that depend on inflation rate? Seems like for rates to get back up there, unfortunately inflation has to rise. I’m not sure. I would certainly love 4-5% CD’s at today’s inflation rate.

 

[audreyh1]

Give me 4% CD and I can live like a king... Based on our expenditure... 5% would be Nirvana...

And I hope you put a good chunk of that interest back to help build the principal with inflation, else your income is shrinking every year (assuming you are trying to live off of interest only).

 

[marko]

Not an attempt to talk anyone out of stock and bond mutual funds, but a big part of the reason we are heavy on TIPS and light on equities are all the freakout posts here and Bogleheads whenever there any kind of market drops. I saw words like nerves of steel, gut punch and white knuckling it and I personally would like to avoid those feelings in my retirement plan, even if it means lower total returns.

But that's what I'm talking about.

Why the freakout posts? Anyone who's worked the market for a while (or done decent historical research) would see that the downturns, as scary as they might be at the time, are generally short lived and those who hang on are well rewarded. 2008 was no fun but the following ten years sure have been!

Those who hide in near risk-free vehicles run a real risk of inflation erosion. And if you try to jump in and out when you think the market is right, well....good luck with that.

I wonder if the general heightened media negativity is causing those otherwise cool heads to start thinking Armageddon is on the horizon. (?) Where did the guys saying "I hope and pray for a downturn so I can buy cheap" go?

There's no free lunch. You can't have risk free and returns that will hedge you against inflation. Not over the long term.

I said it earlier: The mantra here had always been "stay the course, keep your AA and don't panic". Now it's "I can't handle a correction!" What's changed?

Better yet, go over to our holy FireCalc and run numbers with a 60/40 against 3% CDs over 30 years. See what you get.

 

[ERD50]

Not an attempt to talk anyone out of stock and bond mutual funds, but a big part of the reason we are heavy on TIPS and light on equities are all the freakout posts here and Bogleheads whenever there any kind of market drops. I saw words like nerves of steel, gut punch and white knuckling it and I personally would like to avoid those feelings in my retirement plan, even if it means lower total returns.

From what I recall of your previous posts, you do have a very good understanding of the pros and cons, and have made an informed decision that works for you, which is great. And it provided me with some 'food for thought', regarding TIPS.

But I think the paradox is, if you have a large portfolio relative to needs, such that a conservative WR can be met by fixed income & TIPS, you also have a portfolio that will survive a worse than the worst conditions in history. So it becomes kind of a moot point whether someone who has "won the game" decides to become conservative because they don't need growth, or stays aggressive, because they can withstand a downturn.

At that point, it's just a preference. And someone in that position shouldn't really need 'nerves of steel' to get through a 2008 scenario, they have plenty of buffer.

I don't have that kind of buffer, but I was calm through the 2008 drop. I do recall looking at the numbers, and saying "wow, this is an historic drop". But that is what FIREcalc tests against, and I was more conservative than a 100% safe spend amount, so I pretty much shrugged, and said "this is what that buffer is for". I didn't change my spending habits, freak out, or any of those things. And now, my portfolio is even better positioned for a downturn (through growth), and I'm nearer pension/SS, and a few less years to plan for.

And building up a large enough buffer to get by on fixed has its 'costs' for some - they may have to work many more years to get there, and you never know how that might turn out.

-ERD50

 

[OldShooter]

... There's no free lunch. You can't have risk free and returns that will hedge you against inflation. Not over the long term. ...

Not to start an argument, just to make an observation: TIPS provide returns that will hedge you against inflation at essentially zero risk. Long term? Well, 20 years anyway.

 

[ERD50]

....

There's no free lunch. You can't have risk free and returns that will hedge you against inflation. Not over the long term. ...

DLDS is heavily invested in TIPS. Of course they don't return much above inflation, but I understand shes counting on the math of (over-simplifying here, and just an example) that if you are planning for a 40 year retirement, you can w/d 1/40th inflation adjusted a year, from a TIPS portfolio.

cross-posted with OldShooter, but yes, 20 years - hmmmm, what if TIPS aren't offered at some point?

-ERD50

 

[daylatedollarshort]

But that's what I'm talking about.

Why the freakout posts? Anyone who's worked the market for a while (or done decent historical research) would see that the downturns, as scary as they might be at the time, are generally short lived and those who hang on are well rewarded. 2008 was no fun but the following ten years sure have been!

But you've used the term "Having white-knuckled the 2008 Great Recession" and "I just white-knuckle it down". Great that it works for you, but that is the feeling I want to avoid. We have a pretty low withdrawal rate now so no reason to for us to take any risk for money we would not spend. Inflation is not a big concern for us by using matching strategies like a low fixed rate mortgage, TIPS and I-bond and overall low overhead. In my spreadsheet models we come out ahead with high inflation.

 

[aja8888]

DLDS is heavily invested in TIPS. Of course they don't return much above inflation, but I understand shes counting on the math of (over-simplifying here, and just an example) that if you are planning for a 40 year retirement, you can w/d 1/40th inflation adjusted a year, from a TIPS portfolio.

-ERD50

I suppose if your lifestyle doesn't radically change and you have no (or very little) significant big cost surprises in 30 to 40 years, having a fixed income, mostly TIPs, portfolio, you will be OK. Hopefully, one in that position has anticipated major health costs and potentially big health surprises. That's a big IF for long term.