Safe margin of 2.5x to 3x income, 100% long bond portfolio, built in inflation offset

[Earl E Retyre]

Quote:

Originally Posted by pb4uski The decision to get out is usually easy to see because the sky is falling.... the decision to buy back in is much more subtle and the Achilles heel of market timing IMO. Hence my view is that it is best to select an AA and stick to it and rebalance as needed.

I hear you ... and have read many people on this forum (and others) say the same thing. You are probably right (not being sarcastic). And, I will probably be giving that same advice to others over time when I get more and more used to the swings (or when and if I get burned by the Achilles heel).

I agree that it is much easier to sell when the sky is falling than to decide when to buy back in. My approach to get back into the market (if it ever hit my trigger points) would be to Dollar Cost Average as the market continues to dip down (perhaps every 1% it dips) until I am completely bought back in at the levels when it triggered. At that point, I would stay the course. If I had done this back in the dotcom bubble days it would have been awesome. However, I certainly see that if the market hits my trigger and then bounces back too quickly, I may not get back in at the levels I wanted and would be stuck holding the cash bag. Therefore, I agree it could be my Achilles Heel assuming the market continues to climb and I never get the opportunity to buy back in at the level I wanted.

IMO, the reason it is difficult for some of us to take the "just stick with the AA" approach no matter how low it goes, is due to what I will call the magic number syndrome. Most of us, work hard, save, work hard, save, and so on in order to hit that "Magic Number". The number each individual believes they need to hit in order to safely retire [early]. Once one hits the magic number, and takes the leap into retirement, they do not want to ever have their portfolio fall below that number they worked so hard to hit. After all, that was their magic number. They want their portfolio returns to cover their annual expenses and ideally their portfolio continues to rise (at least until social security, pension or some other additional revenue stream kicks in to play). Many will even work a little longer to have some pad to account for big dips so they never fall below their magic number. But, if the market ever takes a big enough dip, to where their portfolio would come back down to their "magic number" then it is scary. Not sure if that makes sense or if others agree ...

[daylatedollarshort]

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Originally Posted by sengsational +1 I wouldn't try to talk the OP into any % equities...that's not in the cards. The game has been won, it's time to eliminate as much risk as possible. If all of that is true, then a TIPS ladder seems like a perfect fit and would isolate the portfolio from the risks associated with lending money to corporations. There is a lot of overlap between corporate and government bonds, but if the game has been won, and corporate equity risk is too high, why not eliminate corporate lending risk too?

+1. My earlier point was that any mutual fund employee, be it Fidelity, Vanguard or wherever, is not going to go to great lengths to explain investment options like a TIPS ladder, a credit union CD ladder or I bonds. If an investor wants other advice other than mutual funds or products the mutual fund companies sell, he has to go to other sources for advice.

Amazon doesn't have links to library free Overdrive ebook rentals on their site, Toyota dealers do not steer customers to Ford, and Fidelity, Vanguard and other mutual fund reps may not be the best places to go to learn about TIPS ladders. Our experience is that we were discouraged from TIPS in favor of a stock / bond portfolio with a potential 50% worst year loss, when we are okay with the low returns from TIPS in order to avoid the big dips, which sounds like more of what the OP is looking for.

I am okay with anyone putting me on their ignore list for making these statements. I do not think they are untrue or unkind in any way, and the Zvi Bodie advice may be the kind of advice the OP is seeking.

[OrcasIslandBound]

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Originally Posted by Quantum Sufficit ... Tell me, why do I need the stock market in MY PARTICULAR SCENARIO? I would hard pressed to think of a LIKELY scenario where the fed allows a 10% annual inflation Rate. Also, this is a pure income "spend the dividends only" strategy. I really do not care about the share price, just share count. Each of those shares is a little cog in my income gear. If rates go up (and who said they will--->Japan comes to mind); principle will be "lost" but at least I will spend income generated. This is what is so attractive about this strategy--> None of it depends upon capital appreciation. As John Bogle said-the enemy of a good plan is the dream of the perfect plan. Is Anyone else on the forum living off the income of bonds exclusively??

Hello Quantum,
This bond fund appears to match the description of VWESX, a Vanguard long term bond fund. Do I have this right? Anyway, the price and dividends match up with your numbers.

My situation is closer to your situation than many others on this forum. While I have some equities, (40%), it is a lot less than most on the forum.

The way I see it, to retire, we need to approximately cover our living expenses + inflation. Bonds are much more predictable and less volatile then stocks are. The simple math, for me, is to consider stocks returning about 10% long term and bonds returning about 3%. A weighted averaged of 60% bonds + 40 % stocks produces a return of about 5.8%. This provides 3.5% to live off of and 2.3% for inflation.

In your case, the weighted average is simply the present return on that fund, which is about 4.5%. You seem to be able to live off of only about 1/2 of that amount providing about 2.2 or 2.3% for inflation. If this is what you expect for inflation, as I believe it is, then we'll both come out approximately o.k.

Another way to look at this is to compare the combined expected growth of money invested in 10% - 40% total stock fund + balance in VWESX, what you have, against a 100% invested in VWESX. If you ran this simulation, you'll likely find that the dips and peaks will be less volatile as you increase the % in stocks up through about 20% stocks (the minimum volatility %) and then the volatility increases again. Thus, by going with 20% of your investments in a total stock fund, you would have similar overall returns without having to watch declines in your total net worth.

Just my 2 cents, for what it is worth.

[Earl E Retyre]

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Originally Posted by sbwitte This bond fund appears to match the description of VWESX, a Vanguard long term bond fund. Do I have this right? Anyway, the price and dividends match up with your numbers. .

That fund looks a lot less risky than the fund I thought OP was talking about. Thanks for the clarification.

[eta2020]

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Originally Posted by sbwitte Bonds are much more predictable and less volatile then stocks are. The simple math, for me, is to consider stocks returning about 10% long term and bonds returning about 3%. A weighted averaged of 60% bonds + 40 % stocks produces a return of about 5.8%. This provides 3.5% to live off of and 2.3% for inflation.

Can You Rely on Income Spit Out by Stocks? - Barron's

Living of off equity dividend yield is much more predictable then living of off bonds. Trick is you have live from dividend yield not from selling stocks. Then you can care less if market goes 20% down or up.

OP has 2.4 million. That would easily generate 60k Dividend on which he would pay 0% federal taxes.

[Bestwifeever]

Per the OP:

Quote:

THEREFORE: Potentially 90k can return to the portfolio if I decide just to stick to my budget annually. 90,000 divided by 10.60 current share price x.0404 = 1st year income raise of $4100.00 (about a 10% annual inflation bump, somewhat less if I spend another 3k per month).

Personally, I would sleep quite well at night with a portion in the bond fund to generate enough to cover only my routine expenses (no "raise") and then break the other portion into other funds whose yields would cover the nonroutine expenses (and likely much more over time) plus diversify the portfolio. That would lessen the eggs-in-one-basket risk in my unsophisticated mind.

From reading his earlier posts, OP will be ~50 at retirement (and in other threads was interested in other AAs than the 100% bond fund) The nest egg will have to last a pretty long time for him and his spouse--is a single longterm bond fund the best way to preserve it for 40 to 50 years?

But I agree with others that it seems OP has already decided 100% in his bond fund is his plan so good luck to you.

[FIRE'd@51]

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Originally Posted by sengsational a TIPS ladder seems like a perfect fit and would isolate the portfolio from the risks associated with lending money to corporations.

In more normal times when TIPS had a real yield of 2.0 - 2.5% this could work, but not at today's rates. The real yield on 5-yr TIPS is negative 0.4% and on 30-yr TIPS 0.8%. There is no way to achieve a SWR of 1.75% using TIPS at these rates.

Furthermore, if individual TIPS are held in a taxable account, the "phantom interest" is taxed as well as the actual interest paid.

[FIRE'd@51]

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Originally Posted by daylatedollarshort My earlier point was that any mutual fund employee, be it Fidelity, Vanguard or wherever, is not going to go to great lengths to explain investment options like a TIPS ladder, a credit union CD ladder or I bonds. If an investor wants other advice other than mutual funds or products the mutual fund companies sell, he has to go to other sources for advice.

One of the best position papers on TIPS that I have read was written by Vanguard. Remember, Vanguard (and Fidelity) have brokerage businesses as well as mutual funds.

[FIRE'd@51]

Funny how we all look at the world so differently; that is to say, have significantly different utility functions.

While I agree that OP's 100% VWETX portolio would work at a 1.75% SWR; if I had a large enough portfolio that I could live well off a 1.75% SWR, my inclination would be to put 100% of my portfolio into an S&P 500 index fund (currently yielding about 1.85%) and live off the dividends, probably in perpetuity. Over the past twenty years the S&P 500 dividend has increased about 2.5 percentage points above inflation annually. This not only maintains the CPI purchasing power of one's income, but more importantly, it maintains (or grows) the "living well" purchasing power, which I believe exceeds the CPI.

[daylatedollarshort]

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Originally Posted by FIRE'd@51 One of the best position papers on TIPS that I have read was written by Vanguard. Remember, Vanguard (and Fidelity) have brokerage businesses as well as mutual funds.

From a Zvi Bodie interview:

"I don’t like to ascribe negative motives to people, but let’s face it: If everybody starts investing in I-bonds and TIPS, both of them are buy-and-hold investments. How is the investment professional community going to make money? Now, I have an answer to that, but from their point of view, it’s really been easy money up until now. "

https://www.mint.com/blog/investing/...-bodie-022012/

Rate are very low right now. The idea of a ladder is to get a rolling average without ever losing principal. Rates have not been that low for the past 10 years.

The Zvi Bodie and also Harry Browne ideas are to make your money from your human capital, then invest more towards portfolio preservation rather than portfolio gains. It is a different concept than many here follow. The mutual fund approach may be right for you and not right for others. Some posters here can live off income steams like rental income or pensions alone and may be happy with just making a riskless 0% real return on their portfolios. Even a 20% drop on a $2M portfolio is $400K. For retirees who can live on $40K a year, that is ten years worth of living expenses gone in one year. For a retiree household they might never live long enough to get that principal back.

[FIRE'd@51]

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Originally Posted by daylatedollarshort The idea of a ladder is to get a rolling average without ever losing principal.

How do you withdraw 1.75% real from a ladder earning less than 1.75% real and not lose real principal? And that's before taxes.

[daylatedollarshort]

Quote:

Originally Posted by FIRE'd@51 How do you withdraw 1.75% real from a ladder earning less than 1.75% real and not lose real principal? And that's before taxes.

I posted "Some posters here can live off income steams like rental income or pensions alone and may be happy with just making a riskless 0% real return on their portfolios." YMMV.

The OP can look at what returns he could get in TIPS relatively risk free and decide how much risk he is willing to take on from there for the potential of a greater return but without the inflation protection of guaranteed return of principal.

[brewer12345]

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Originally Posted by FIRE'd@51 How do you withdraw 1.75% real from a ladder earning less than 1.75% real and not lose real principal? And that's before taxes.

Money fairy.

[Katsmeow]

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Originally Posted by daylatedollarshort I posted "Some posters here can live off income steams like rental income or pensions alone and may be happy with just making a riskless 0% real return on their portfolios." YMMV.

And, that is the thing. Yes, there are people who have so much money -- either from rental income or pensions or just having a humongous portfolio that they can spend what they want to (that is, an acceptable lifestyle to them) and they don't care if they get any return on their portfolio.

That is, give me a portfolio of $10,000,000 and a plan that has to last 30 years and even considering inflation I don't really care what the portfolio earns. I can stick the money in a mattress and won't run out.

The thing is that most people don't have that situation.

What I don't like about the whole "if you've won the game why keep playing mantra" is that it implicitly says that if you need to have a return from your portfolio in order to retire at your desired level then you haven't won the game and you are, in fact, a loser.

Basically, if you need to invest in equities for portfolio return so that the portfolio isn't eaten away by inflation then you haven't "won the game" and you are a loser.

By that standard, then I will say that I am a loser. I can't afford to have my portfolio earning a 0% real return and I can't afford to have my portfolio eaten away by inflation.

To have that kind of portfolio I would have had to worked for many additional years as would DH.

We aren't afraid of equities. We don't equate low volatility with low risk. I see the OP's portfolio as way more risky than a diversified portfolio with some equities.

Yes, it would be nice to be able to say that my portfolio could loss half its value due to inflation and I could get 0% real return and I would still have so much money that I could withdraw enough to meet all my spending needs for the rest of my life.

But, like probably most people, I can't say that. I don't have that kind of wealth. But, I don't feel I need to work another 10 years to get that kind of wealth just so I can avoid having any equities. To the extent there is risk from equities, I would rather take that risk than have to work another 10 years.

But -- to be clear -- I think the risk of inflation is one that is often underestimated by many who refuse to have any equities (not saying that is you, but it is some people).

I don't consider having equities, by the way, as a form of "playing." I consider having a diversified portfolio as a way to reduce overall risk, including inflation risk.

[daylatedollarshort]

The "won the game" phrase is the term Bill Bernstein uses, is used frequently on Bogleheads and other financial writers have used the phrase. I am sorry you do not like it but I did not originate it. The "won the game" phrase appears 123 times on the Google indexed pages for the Boglehead forum alone.

Here are some references:

If you've won the game, stop playing - MarketWatch

Asset Allocation Guide: How much risk do you need? - CBS News

Why Keep Playing The Stock Market Game If You Already Won?

http://whitecoatinvestor.com/bernste...ame/?print=pdf

It does not refer to having $10M. It generally refers to retiring with 25 X living expenses saved up at retirement and then no longer taking a risk with that amount of money. If you move to Mexico your won the game amount could be $500K or you could have won the game if you are 62+ and can live happily on less than your SS checks.

As for keeping up with inflation, TIPS and I bonds are indexed to inflation (before taxes) while stocks do not have the same guarantee:

"By contrast, during the five periods of high inflation since 1940, as defined by a jump in the CPI of more than 8.5% year over year, the S&P 500 fell an average of 2.15%. The inflationary periods averaged 21 months, compared with 10 months for the deflationary periods."

From: http://online.wsj.com/news/articles/...89942194044712

[Katsmeow]

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Originally Posted by daylatedollarshort The "won the game" phrase is the term Bill Bernstein uses, is used frequently on Bogleheads and other financial writers have used the phrase. I am sorry you do not like it but I did not originate it.

I did not think that you originated it. I'm sorry I wasn't clear about that. I am aware that others use that phrase. I dislike their use of it for the reasons I stated.

AS far as 25x living expenses --

First - I don't think that even having that would allow one to safely have a 0 equities portfolio. I don't think you can withdraw 4% per year with zero equities which is what 25x living expenses would require without any SS or pension. So, I don't think those advocating zero equity portfolios are seriously advocating a 4% withdrawal rate in today's environment. Most of the zero equity portfolios that I've seen require a portfolio far in excess of 25x living expenses.

Second - I also think that for people at or near SS age that it isn't necessary to have a portfolio of 25x expenses. I think it is perfectly reasonsable to think that some of the expenses will be covered by SS.

[daylatedollarshort]

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Originally Posted by Katsmeow I did not think that you originated it. I'm sorry I wasn't clear about that. I am aware that others use that phrase. I dislike their use of it for the reasons I stated. AS far as 25x living expenses -- First - I don't think that even having that would allow one to safely have a 0 equities portfolio. I don't think you can withdraw 4% per year with zero equities which is what 25x living expenses would require without any SS or pension. So, I don't think those advocating zero equity portfolios are seriously advocating a 4% withdrawal rate in today's environment. Most of the zero equity portfolios that I've seen require a portfolio far in excess of 25x living expenses. Second - I also think that for people at or near SS age that it isn't necessary to have a portfolio of 25x expenses. I think it is perfectly reasonsable to think that some of the expenses will be covered by SS.

If you need 100K in retirement expenses, and you have $2.5M saved up (or equivalent paid out as pensions, SS or annuities or guaranteed income like rental properties or royalties). Then all you have to get is 0% real and theoretically you have enough. Or $40K and $1M.

$2.5M / 25 years = $100K per year investing at 0% real. Or $600K / 25 = $24K. It is The Money or Your Life approach, only the book did not allow for inflation, which could be solved by substituting TIPS or I bonds for the Treasuries.

Personally I would use more than 25 years and not go to zero, but the basic idea stays the same.

[Katsmeow]

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Originally Posted by daylatedollarshort If you need 100K in retirement expenses, and you have $2.5M saved up (or equivalent paid out as pensions, SS or annuities or guaranteed income like rental properties or royalties). Then all you have to get is 0% real and theoretically you have enough. Or $40K and $1M. $2.5M / 25 years = $100K per year investing at 0% real. Or $600K / 25 = $24K. It is The Money or Your Life approach, only the book did not allow for inflation, which could be solved by substituting TIPS or I bonds for the Treasuries. Personally I would use more than 25 years and not go to zero, but the basic idea stays the same.

Well, I don't think most people interested in early retirement want to plan for a 25 year retirement...

And, if you did want to plan for a 25 year retirement, then you do have to account for inflation. I question the 0% real with a zero equity portfolio at this time.

[MooreBonds]

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Originally Posted by daylatedollarshort As for keeping up with inflation, TIPS and I bonds are indexed to inflation (before taxes) while stocks do not have the same guarantee: "By contrast, during the five periods of high inflation since 1940, as defined by a jump in the CPI of more than 8.5% year over year, the S&P 500 fell an average of 2.15%. The inflationary periods averaged 21 months, compared with 10 months for the deflationary periods." From: http://online.wsj.com/news/articles/...89942194044712

And if you look at the dividend yield on that same S&P 500 index:

S&P 500 Dividend Yield

you'll see that the dividends alone have thrown off typically more than 3%. In fact, only since around 1985 onward has the yield shrunk considerably below the previous historical average of 3.5%+ (with correspondingly low inflation).

So even if the index price had dropped during inflationary periods, the dividends alone were giving you 3.5%+....which is just about equal to the oft-cited 4% SWR for a 30 year period, and would not have required you selling much (if any) equities.

[Quantum Sufficit]

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Originally Posted by clifp Excellent points, the one lesson I have learned (often over and over again) is in the world of investing all investment have risk. If you think otherwise you don't understand the investment. A couple of years ago, a Warren Buffett described bonds as offering "return free risk". As a general rule if you find your doing the opposite of Warren Buffett suggests, you'd be very well advised to ask yourself what do I know about investing that Oracle of Omaha doesn't. The other thing I am really curious to find out from the OP and to a less extent Earl is why is having a modest say 1/3 (like Wellseley) of your assets in stock so terrifying? I am not arguing I am just trying to understand why it's scary.

Its not that it is scary at a 10% stock allocation (1/3 of 1/3), I just think plenty of risk in equities does not make me "warm and fuzzy" as another poster said above. I think I like this plan because month after month, the dividends roll in. I am looking at (with part time 3k per month) having FOUR TIMES my expenses on a monthly basis. I just like that buffer and it allows me to reinvest dividends probably monthly to continue to increase my income stream.