Using CD Investments Like a Self Managed Annuity Question?

[ShokWaveRider]

Quote:

Originally Posted by Dash man Have you figured in risk of inflation and what that would do to your portfolio if we had a period of prolonged higher inflation. Pure cash would be a risky place to be if it did happen.

Yes, use this calculator. Put in $25k per year for SS.

The FourPercentRule Retirement Calculator

[Dash man]

Quote:

Originally Posted by ShokWaveRider Yes, use this calculator. Put in $25k per year for SS. The FourPercentRule Retirement Calculator

I think you need to look a bit harder into inflation risk than a calculator. Doesn’t take long for the value of your cash to be cut in half if inflation kicks in.

[brokrken]

Quote:

Originally Posted by Dash man I think you need to look a bit harder into inflation risk than a calculator. Doesn’t take long for the value of your cash to be cut in half if inflation kicks in.

+1

[pb4uski]

Quote:

Originally Posted by ShokWaveRider William Bernstein advises retirees and near-retirees to avoid investing in risky assets such as stocks, at least with money needed to provide an adequate income stream. Is anybody acting on this advice and what is your strategy? “In other words, once the game has been won by accumulating enough safe assets to retire on, it makes little sense to keep playing it, at least with the “number”: the pile of safe assets sufficient to directly provide or indirectly purchase an adequate lifetime income stream.” This is what I would like to discuss. I think it may be referred to as preservation of capital, as opposed to accumulation.

When Bernstein totally changed his stripes after the 2008 great recession and became uber conservative he lost all credibility in my view.

That said, in many cases a conventional 60/40 AA plays right into his strategy once SS and/or pensions are considered. If I take our basic annual spending.... not what we actually spend but a lower amount that we would spend if we needed to tighten our belts because of a downturn... then subtract SS and any pensions... then multiply by 35 years and divide by our nestegg.... I get a % that is pretty close to our 40% allocated to bonds and cash.... but I don't think of myself as playing it safe.

IOW, if I took our bonds and cash divided by 35 and added SS then we would have enough to live on.... but there would be inflation risk and not a lot of luxury.

I actually have the opposite view... if you have "won the game" then you can well afford to keep playing prudently and gain the benefits of continuing to play (in our case for DD, DS, charity and perhaps some splurges).... I plan to dance with the girl that brought me to the dance so to speak.

[OldShooter]

Quote:

Originally Posted by Dash man I think you need to look a bit harder into inflation risk than a calculator. Doesn’t take long for the value of your cash to be cut in half if inflation kicks in.

Our answer to that is to hold TIPS as inflation insurance. I consider any shortfall between the TIPS total return and any alternatives to simply be an insurance premium payment.

Also, if we really get some exciting inflation I expect the TIPS to be bid up well beyond their bond-calculator value by panicked buyers. This will be exacerbated because Treasure will stop selling new TIPS in order to not be pouring gasoline on the fire. So we will make some money there.

To belabor the point, TIPS are inflation insurance just like I buy fire insurance on our houses. I won't be disappointed if we don't get the inflation any more than I would be disappointed if we didn't have a house burn down. Both are low-probability, high-impact events though the house fire IMO is lower probability than a period of exciting inflation.

[audreyh1]

Quote:

Originally Posted by ShokWaveRider William Bernstein advises retirees and near-retirees to avoid investing in risky assets such as stocks, at least with money needed to provide an adequate income stream. Is anybody acting on this advice and what is your strategy? “In other words, once the game has been won by accumulating enough safe assets to retire on, it makes little sense to keep playing it, at least with the “number”: the pile of safe assets sufficient to directly provide or indirectly purchase an adequate lifetime income stream.” This is what I would like to discuss. I think it may be referred to as preservation of capital, as opposed to accumulation.

No, I am not acting on his new advice, because I made it through the 2008 crisis without making the major mistakes some of his clients did. I even managed to buy more stocks at the bottoms because I rebalanced, even thought it was an unbelievably difficult thing to do, psychologically speaking.

[pb4uski]

+1 I'm following his old advice.

[Red Badger]

Quote:

Originally Posted by OldShooter Our answer to that is to hold TIPS as inflation insurance. I consider any shortfall between the TIPS total return and any alternatives to simply be an insurance premium payment. Also, if we really get some exciting inflation I expect the TIPS to be bid up well beyond their bond-calculator value by panicked buyers. This will be exacerbated because Treasure will stop selling new TIPS in order to not be pouring gasoline on the fire. So we will make some money there. To belabor the point, TIPS are inflation insurance just like I buy fire insurance on our houses. I won't be disappointed if we don't get the inflation any more than I would be disappointed if we didn't have a house burn down. Both are low-probability, high-impact events though the house fire IMO is lower probability than a period of exciting inflation.

+1.

TIPS make up ~50% of our bond holdings. I too will be happy if my WIN button stays in the souvenir box

[Dash man]

Just like investments need to be diversified, IMO, so does risk of inflation. TIPS are fine as a part of that, but need to be in an IRA to avoid annual tax hits. Real Estate investments can help beat inflation in two ways: rent increases and appreciation of the property you hold. Dividends in strong companies that give regular income and often see increases every year for the best companies. Precious metals, the physical kind and not the over leveraged ETFs, provide some protection, though since they do not pay you dividends no more than 5-10% should be in your portfolio.
Bonds, CDs and cash are losers in a high inflationary environment since interest rates will rise to combat high inflation.

[OldShooter]

Quote:

Originally Posted by Dash man Just like investments need to be diversified, IMO, so does risk of inflation. TIPS are fine as a part of that, but need to be in an IRA to avoid annual tax hits. Real Estate investments can help beat inflation in two ways: rent increases and appreciation of the property you hold. Dividends in strong companies that give regular income and often see increases every year for the best companies. Precious metals, the physical kind and not the over leveraged ETFs, provide some protection, though since they do not pay you dividends no more than 5-10% should be in your portfolio. Bonds, CDs and cash are losers in a high inflationary environment since interest rates will rise to combat high inflation.

Well, the reason for diversification is to reduce risk. With TIPS the risk is negligible; the buyer will get what is promised. So WADR I think precious metals on top of a TIPS portfolio only add risk to a risk-free investment. And I mean real risk, not just Markowitz' idea that volatility is risk.

Real estate is a little different. Without leverage, IMO the risk of holding individual properties far outweighs the benefit. (And I have held many individual properties over the years.) Leveraged with fixed-rate financing in inflationary times, of course, holding individual properties can be wonderful. But that is not really just hedging inflation.

Using REITs, the risk of holding individual properties should be diversified away, but without leverage you have to believe that the properties will appreciate more than inflation or risk-free TIPS are the better choice. Leveraged REITs, OTOH, may be attractive.

Dividends, same issue. As an inflation hedge they are much riskier than TIPS. So they can only be attractive if you're expecting them to grow in excess of inflation -- in excess of what you could get from TIPS. Otherwise, why add the risk?

[Dash man]

Quote:

Originally Posted by OldShooter Well, the reason for diversification is to reduce risk. With TIPS the risk is negligible; the buyer will get what is promised. So WADR I think precious metals on top of a TIPS portfolio only add risk to a risk-free investment. And I mean real risk, not just Markowitz' idea that volatility is risk. Real estate is a little different. Without leverage, IMO the risk of holding individual properties far outweighs the benefit. (And I have held many individual properties over the years.) Leveraged with fixed-rate financing in inflationary times, of course, holding individual properties can be wonderful. But that is not really just hedging inflation. Using REITs, the risk of holding individual properties should be diversified away, but without leverage you have to believe that the properties will appreciate more than inflation or risk-free TIPS are the better choice. Leveraged REITs, OTOH, may be attractive. Dividends, same issue. As an inflation hedge they are much riskier than TIPS. So they can only be attractive if you're expecting them to grow in excess of inflation -- in excess of what you could get from TIPS. Otherwise, why add the risk?

You obviously trust the government more than I do to pay what is promised. There is risk when the government can change the rules or debt levels get so high that default does become a possibility. Big test will be if we get a big SS haircut in a few years.
I personally draw the line on leveraging any investment. That increases the risk exponentially with real estate and any other investments. Don’t have to look too far back to 2008 to remember those who lost properties because they were too highly leveraged. Hedge funds are dropping like flies because of too much leverage hurting many investors.
I thought this topic was about staying conservative. All eggs in one basket...including TIPS is not conservative. Enjoy the tax bill if you’re not in a Roth.

[OldShooter]

Quote:

Originally Posted by Dash man You obviously trust the government more than I do to pay what is promised. There is risk when the government can change the rules or debt levels get so high that default does become a possibility. Big test will be if we get a big SS haircut in a few years. I personally draw the line on leveraging any investment. That increases the risk exponentially with real estate and any other investments. Don’t have to look too far back to 2008 to remember those who lost properties because they were too highly leveraged. Hedge funds are dropping like flies because of too much leverage hurting many investors. I thought this topic was about staying conservative. All eggs in one basket...including TIPS is not conservative. Enjoy the tax bill if you’re not in a Roth.

Yup. All true if you don't trust the gummint to deliver on its promises the TIPS are not zero risk and all the arguments for diversification come into play. Re leverage I generally agree, but I bought a lot of residential real estate with 20% down and it worked just fine. I was done by the time the housing bubble inflated but I could see that train wreck coming as could many others. But no one knew when and virtually everyone was astonished by the scope. We had some friends that bought a couple of investment houses during that period and we just cringed and kept our mouths shut. Hard to do, actually, and they did lose a bundle.

I guess if you don't think TIPS are conservative that is a pretty fundamental difference. For myself, I don't see precious metals as conservative so I guess we can just agree to disagree.

Re taxes on TIPS ours are in IRAs but I don't think the tiny annual negative cash flow should be a big deal to most people. I guess if we see 15% inflation again it could be a little exciting but at that point I'll be ecstatic to have the TIPS. YMMV of course.

[brucethebroker]

Collins had a great interview with a retiree/advisor on this very topic. His pal, "Mr. Moose" has a plan that might be of interest to you.

Sleeping soundly thru a market crash: The Wasting Asset Retirement Model

[ShokWaveRider]

Quote:

Originally Posted by brucethebroker Collins had a great interview with a retiree/advisor on this very topic. His pal, "Mr. Moose" has a plan that might be of interest to you. Sleeping soundly thru a market crash: The Wasting Asset Retirement Model

I like WARM......

[copyright1997reloaded]

Quote:

Originally Posted by Dash man You obviously trust the government more than I do to pay what is promised. There is risk when the government can change the rules or debt levels get so high that default does become a possibility. Big test will be if we get a big SS haircut in a few years. I personally draw the line on leveraging any investment. That increases the risk exponentially with real estate and any other investments. Don’t have to look too far back to 2008 to remember those who lost properties because they were too highly leveraged. Hedge funds are dropping like flies because of too much leverage hurting many investors. I thought this topic was about staying conservative. All eggs in one basket...including TIPS is not conservative. Enjoy the tax bill if you’re not in a Roth.

I don't trust the government. But there is no reason the government would default on debts issued in its own currency. They can simply print more.
. That is a reason why I favor TIPS over other debt instruments which pay back using nominal (non-inflation-adjusted) currency. Is it perfect? Not by a long shot. That is why I also have non US assets, and things like land and other things that have an inflation hedge to them.

[Perryinva]

If one can can basically live on CD or similar interest earned plus a small reduction in principle, then doesn’t it become inflation protected anyway, since CD rates always rise with inflation? The net is all that matters.

[copyright1997reloaded]

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Originally Posted by ShokWaveRider Not us, I can resist easily. I do not need the headaches or the loss of sleep, that seems to plague me when doing anything involved with the stock market . Quite honestly, if we just took the stash divided it by 35 years (No Interest or return) we would be more than comfortable. I would like to get 3 - 4% for "Insurance". DW DOES currently use the ACA. It is a consideration.

Once again, you still have risk. Loss of capital is only one type of risk. Inflation risk is another. If I could invest my capital in a way that would simply allow me to withdraw it over 35 years and be guaranteed today's buying power I WOULD DO SO IN A NANOSECOND.

[Dtail]

Quote:

Originally Posted by Perryinva If one can can basically live on CD or similar interest earned plus a small reduction in principle, then doesn’t it become inflation protected anyway, since CD rates always rise with inflation? The net is all that matters.

Was thinking the same thing too, but what about this scenario?
Forget the exact math.

If product A costs 100 and the CD rate is 2% and inflation is 2%.
Inflation and CD rate go up to 4%. Product A goes up to 102.

Now Inflation and CD rate go back down to 2%, but you know the product is still at 102.
So now one is earning the same lower interest whether the product is at 102 or 104. Thus is CD is not keeping up with the cost of goods?
Am I missing something?
Is my example too simple?

[Perryinva]

No, that is a good example, as well as the fact that rates don't track inflation exactly anyway, its a broad stroke. So if you buy a 5 year CD, then inflation tanks, you are beating it, and vice versa. On a large scale, WHILE the rate was high you profited. Rates will never track fast steep changes in inflation , its just a rolling average that is compounded. The idea is that when the rates increased, your principal increased and is now earning more, which levels the playing field on the increased price. It is the rate of change that matters, not the absolute price.

[pb4uski]

So in your examp!e, what are the CD balances and cost of product A at the end of years 1, 2 and 3?