Another eternal reciprocated diatribe
(Reciprocate: 1 : to give and take mutually
2 : to return in kind or degree
Diatribe: 1 archaic : a prolonged discourse
2 : a bitter and abusive speech or writing
3 : ironical or satirical criticism)
Own or rent? Mortgage or debt-free? Active or indexed? 4.000% or 2.389% or "it depends"? Stocks or bonds? Growth or value? Small-cap or large? Tastes great or less filling?
Then there's the debate over assessing your stock/bond allocation. One camp, led by Bogle, claims that you should convert all your pensions to their cash equivalent of a suitable asset class. Add up all the assets and decide your asset allocation. This tends to lead to equity-heavy retirement portfolios, and I'd bet that 85% is a LOW number.
Bogle inspires a great exercise for left-handed INTJ number-crunchers because there's lots of room for debate. SS was probably the equivalent of 30-year Treasuries until TIPS came along. 10-year, 20-year, or 30-year? What about the extra trading costs of 30-year TIPS on the secondary market? Or is SS more like I bonds? What equivalent annuity rate do you use for your corporate pension, and what if it has a COLA? Is it corporate bonds or junk? What's the cash value of your medical benefits? It's also cool to add all of this stuff up to achieve a present value of millions of bucks.
But when the exercise is over, you still have to pay expenses out of your retirement portfolio. If it's 100% stocks, you'd better have a low withdrawal rate and an incredible tolerance for volatility. If your retirement portfolio is a little undercapitalized and you're led astray by Bogle, then in a couple of bad (downwardly volatile) years your withdrawal rate may zoom up over 6% and you'll have a hard time preserving the portfolio's survival. It's essential to keep a few years in cash to avoid having to sell equities in a down/sideways market. (How many years of cash? Two? Three? Seven?! Fifteen?!?) The only other alternative is cutting expenses.
Bloomberg's Wealth Advisor magazine had an article on this subject a couple months ago. An investor was complaining to his advisor "Hey, we beat the S&P500 again this year, but I can't pay my bills!" Great asset allocation but lousy liability funding. A more conservative way (sorry, Jack) to view the situation is to devote your retirement portfolio to paying for unfunded expenses (liabilities). If you're spending $30K/year but $25K of that is funded by pensions/SS, then your unfunded liability is $5K and all you have to do is design a portfolio that will handle an annual $5K withdrawal. (Don't even get me started on "other" liabilities-- college funds, new roofs, new car/appliances, etc.) That portfolio could be all stocks but it'd need a lot of wiggle room (bigger portfolio or extra buckets of cash) to handle the volatility. Bernstein's "Four Pillars" would probably be able to design a SMALLER portfolio (with lower volatility) just by adding bonds and reducing equities.
The end approach is to design a portfolio that annuitizes the liability. Instead of drawing it down over some estimated life expectancy (If you live long but don't prosper, better have a Plan B!) the portfolio throws off enough cash each year to handle the liability plus volatility & inflation without actually eroding the principle. Then it's up to the retiree to decide how to balance the size of the portfolio against volatility & other risks. When you die, the pensions stop and the retirement portfolio becomes your heirs' problem.
I can't claim that one method is better than another, but funding liabilities is certainly simpler than Bogle's approach. We've tried playing Bogle's pension-equivalent game. Instead we've elected to fund our liabilities with an oversized self-sustaining portfolio of equities and a couple years' expenses in cash.
We now return you to your regular reciprocated diatribe...
What is the horse you rode in on and how good a rider are you? Show me your SD, R squared, SEC yield, your analysis of how your portfolio is expected to perform with 73-4 type bear or a 1966-1982 type flat spot. Forget 2000-02 - that was a nit, not a real bear.
