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

[marko]

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.

That's true. I had overlooked the TIPS aspect and was reacting more to the general "freakout" going on here and the run toward CDs.

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.

Yes, I have. It was no fun but I learned that despite the white knuckle ride, it turned out to be more than ok. 2008 emboldened me once I realized that "the end of life as we know it" was quite over sold.

Apologies to all for my earlier rant. Had a few drinks and I know I shouldn't post afterwards.

 

[REWahoo]

Apologies to all for my earlier rant. Had a few drinks and I know I shouldn't post afterwards.

The hazards of PUI...

 

[marko]

The hazards of PUI...

Just glad the retirement police aren't out tonight. Done for the night now.

 

[Clone]

Just glad the retirement police aren't out tonight. Done for the night now.

Wait!! Is frequent posting in violation of the terms of retirement?!?!
I knew that blogging for money was in the grey area, but didn't realize that non-profit posting was also in the grey area. But I suppose that is similar to volunteering...

 

[Sunset]

Just glad the retirement police aren't out tonight. Done for the night now.

Hey the night is young

 

[Sunset]

The total TIPs idea is interesting, as long as for a couple I take 1/40th per yr, and pray neither of us go past the 40 yrs of retirement.
One danger I see with the TIPs approach is using it for 25 yrs, and then then stop TIPs, so you get off the TIP train, with a tiny bucket of cash left, 15/40 of today's value, and perhaps catch the regular CD or bond Bus to finish off while hoping inflation stays away.

 

[Sunset]

I don’t know. I can see not noticing 10% or 15% loss in purchasing power, because your personal inflation rate is very low. But over the past 20 years official inflation was 54%. It is hard for me to believe that someone would not experience a large percent of that.

I think it would be hard to notice as 54% over 20 yrs is an average of 2.5%/yr.
I cannot recall the price of 80% hamburger 4 years ago, and if I'm buying bread right now at $1.16 a loaf, I won't really notice if in August it is $1.17, and then in January it's $1.18 and come next year in June it is $1.19 yet that is more than 2.5% increase in a year.

Like sitting in a hot tub, it's hard to notice the slow cooking effect..

 

[Bigdawg]

I don’t know. I can see not noticing 10% or 15% loss in purchasing power, because your personal inflation rate is very low. But over the past 20 years official inflation was 54%. It is hard for me to believe that someone would not experience a large percent of that.

Don't the big three (housing, transpo and food) make up like 75% of a normal persons expenses? 20 years ago I was paying almost $5/gallon in California. Today I filled up at $2.59/gallon. 20 years ago I was paying $455/mo on a new Chevy Tahoe. Today I am car payment free (for 4 years now). 20 years ago I was paying 6% on a $364,000 mortgage. Today I am paying 3.22% on a $349,000 mortgage. So no, I have not seen my purchasing power go down 50% in the past 20 years. Also my income has gone up like X 4. Airfare seems just as cheap. CC rewards are better. IDK. FI but not RE so I'm here auditing.

 

[redduck]

I am a market guy, but would switch to CD's, etc if I had won the game.

Suppose you "won the game" at age 40. Would you switch to CD's then? What percentage in CD's are we talking about?

 

[UnrealizedPotential]

I think it would be hard to notice as 54% over 20 yrs is an average of 2.5%/yr.
I cannot recall the price of 80% hamburger 4 years ago, and if I'm buying bread right now at $1.16 a loaf, I won't really notice if in August it is $1.17, and then in January it's $1.18 and come next year in June it is $1.19 yet that is more than 2.5% increase in a year.

Like sitting in a hot tub, it's hard to notice the slow cooking effect..

To me taken individually yes , I agree, trying to notice a price increase on a loaf of bread over a year, you probably wouldn't notice it. Maybe over two years you wouldn't. But, if ones income is the same and they are not buying just a loaf of bread, but $175 worth of groceries a week, and most items will have seen price increases , then yes, one will certainly notice those increases.


Especially over a two year period one will begin to notice those increases but it wouldn't be that big of a deal yet. Fast forward ten years into the future, with an income that is the same as ten years ago, and there is a problem. Your buying power is fast eroding, but I think one will notice the loss of buying power long before then.

 

[ERD50]

The total TIPs idea is interesting, as long as for a couple I take 1/40th per yr, and pray neither of us go past the 40 yrs of retirement.
One danger I see with the TIPs approach is using it for 25 yrs, and then then stop TIPs, so you get off the TIP train, with a tiny bucket of cash left, 15/40 of today's value, and perhaps catch the regular CD or bond Bus to finish off while hoping inflation stays away.

Sure, but as I stated, an over-simplification just to demonstrate. I'd bet that DLDS has thought that through, probably with a stash that's not counted in the 1/X calculation, and X being conservatively large, so there would always be a minimum available for those unknowns.

And all that comes with a cost. So IMO, it's fine if you understand and can afford it. I see it as trading off one set of risks for another. But if one appeals to you, there you go.

-ERD50

 

[camfused]

...I think it would be hard to notice as 54% over 20 yrs is an average of 2.5%/yr...

I am definitely not good with math, but isn't that 1.22%, not 2.5%?

Formula: take the 20th root of 54.

 

[camfused]

Hey, all you folks that weathered the 2008 storm, you probably needed money for a year or so during that time frame. Did you sell stocks, bonds, use cash? In other words, how did you weather it?

 

[REWahoo]

Many of us had (and still have) enough $ in cash accounts to carry us for a couple of years or longer so that we did not have to sell anything.

 

[ERD50]

Hey, all you folks that weathered the 2008 storm, you probably needed money for a year or so during that time frame. Did you sell stocks, bonds, use cash? In other words, how did you weather it?

Good question, and this is another one that usually elicits cries of "OMG, you end up selling stocks at a low! The horrors!"

As REW just posted, some hold a cash reserve (I don't keep much, usually ~ 3 months, just for easy cash flow purposes). But also consider, for a somewhat conservative person, their WR is probably < 3.5%. A 60/40 or so portfolio is likely kicking off 3% from the fixed side, and 2% from Equities, so ~ 2.4%. So they only need another ~ 1%.

And if stocks are down, you will be selling bonds to cover that 1%, and to rebalance. That can go on for quite a few years before you would sell any stocks at a low point.

Some also decided to take SS/pension earlier than they might have, so that's another option for some. But pretty much, just the same routine.

-ERD50

 

[REWahoo]

To add to what ERD50 said and elaborate on my "cash" response, I also relied on dividends and decided to take SS earlier than I'd planned.

 

[audreyh1]

Don't the big three (housing, transpo and food) make up like 75% of a normal persons expenses? 20 years ago I was paying almost $5/gallon in California. Today I filled up at $2.59/gallon. 20 years ago I was paying $455/mo on a new Chevy Tahoe. Today I am car payment free (for 4 years now). 20 years ago I was paying 6% on a $364,000 mortgage. Today I am paying 3.22% on a $349,000 mortgage. So no, I have not seen my purchasing power go down 50% in the past 20 years. Also my income has gone up like X 4. Airfare seems just as cheap. CC rewards are better. IDK. FI but not RE so I'm here auditing.

I think you must have moved away from California otherwise no way the $2.59 per gallon gas.

Also you are drawing a wage or something, since you are not retired, so big difference. Good for you your wage increase exceeded inflation, unlike for many working Americans.

The point was about retirees counting on yield from fixed income investments to fund a long retirement and ignoring the long term effects of inflation.

 

[audreyh1]

Hey, all you folks that weathered the 2008 storm, you probably needed money for a year or so during that time frame. Did you sell stocks, bonds, use cash? In other words, how did you weather it?

Had plenty of living expenses cash on hand, so was able to rebalance even though it was a very scary time.

I was highly rewarded for sticking to my AA via rebalancing, but I also recognize that it could have been worse, and the down market times certainly could have lasted much longer. But I had a large enough fixed income allocation I knew that I could survive on that for many years if need be. That knowledge is what helped me rebalance at the bottom which meant I actually had to sell some fixed income to buy some stocks (which might have continued to drop).

 

[RAE]

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?

I guess I don't get it. Why is it necessary to have any particular "mantra" for any topic on the forum? I understand that a lot of folks favor the course you describe, but are you really surprised (and upset?) that a few folks don't favor that approach for their particular situation? I personally welcome all viewpoints, whether I agree with them or not.

 

[audreyh1]

I think it would be hard to notice as 54% over 20 yrs is an average of 2.5%/yr.

The annualized inflation rate was 2.18% - remember inflation compounds, you can’t divide the cumulative inflation by 20 to get the annual rate.

The point is, you might not notice over a year or two, but you will definitely notice after a few years even at low annual inflation rates!

I am definitely not good with math, but isn't that 1.22%, not 2.5%?

Formula: take the 20th root of 54.

I used a compound interest rate calculator to get an annualized rate over the past 20 years. I know inflation didn’t average 1.2% because it averaged above 2.5% in the 2000s, and averaged 1.86% from 2010-2015, so I knew the answer had to be above 2%.

 

[ERD50]

..... But I had a large enough fixed income allocation I knew that I could survive on that for many years if need be. That knowledge is what helped me rebalance at the bottom which meant I actually had to sell some fixed income to buy some stocks (which might have continued to drop).

I forgot to mention the active rebalancing. I did mention that any selling to cover expenses would be from the fixed side, but many would be actively rebalancing as well.

I didn't do much, but in OCT 2008, I moved 5% of my portfolio from bonds to SPY, at $89.41. SPY went lower, but was back to that level about 7 months later, and is now at $274 (not counting divs, lost a little of that to the lower divs vs bonds).

So yes, doubling my money in 10 years (adjusted for BND/SPY total return), even though I didn't get the timing even close to perfect, is pretty sweet.

-ERD50

 

[njhowie]

20 years ago I was paying almost $5/gallon in California. Today I filled up at $2.59/gallon.

I believe your memory is very incorrect on this.

http://legacy.sandiegouniontribune.com/uniontrib/20060430/news_lz1n30list.html

 

[youbet]

Dunno. Don't want to get into an argument over it but we haven't sold a share in the 14 years that we've been RE'd. Just living off dividends (and SS).

We have a healthy dividend bucket as a set-aside and over the years the portfolio has grown (doubled) and the dividends have increased as well.

True, inflation has been tame but I don't see a risk to the strategy at this point in time.

In that point in the discussion, we were referring to "living off the yield" of the fixed portion (CD's were highlighted) of your FIRE portfolio. Not equities.......

 

[marko]

In that point in the discussion, we were referring to "living off the yield" of the fixed portion (CD's were highlighted) of your FIRE portfolio. Not equities.......

Then in that case I agree with you 100%! I might rename my boat Non Sequitur

 

[youbet]

To add to what ERD50 said and elaborate on my "cash" response, I also relied on dividends and decided to take SS earlier than I'd planned.

Exactly what I did. And I'll add, we didn't reduce spending a penny. We had plans and were quite "adventure minded" early in retirement and have no regrets regarding not cutting back on travel, remodeling, etc., during the recession.

DW had already started her pension. I started my SS in '09 at 62. We had a bit of cash. Divs and interest covered the balance. No selling of fixed or equity positions.

Like ERD50, I marvel at the thought of what kind of income streams (or lack of income streams) and/or AA's folks have in retirement that they feel they'll need to sell equities early in a down market. Maybe something like no pension or hobby job income, no SS and a 100% equity allocation invested in a non-dividend payer like Berkshire Hathaway?