Warning from Fidelity to Boomers

[BoodaGazelle]

If inflation is nothing then your actual purchasing power will not change anyway?

I guess the real question is about substantial inflation due to the government continuing to print money irresponsibly.


My concern is that if the government would do that (I don't see how anyone can look at history and think we are exempt), then they wouldn't have to honor the TIPS promise to keep your money at its old value.


I realize this is still speculative at best, and expect to get shouted down, but I am concerned that after we get to (say) a generation or more of "quantitative easing" that all of our FIRE hard work will be for naught... at 63 I may have 25 years left and I hope it is not under the Socialist States of America, which conceivably could happen under at least 2 of the current candidates.

 

[gerntz]

We have all our money at Fido.
We are ages 71/62.
We are 74% stocks and expect to be 74.5% later this afternoon.

I have a whole different approach.
My question is: Do we have enough in cash/bonds to survive a 7-year market meltdown at our current (and expected) withdrawal rate?
If yes, then we don't need a greater % in cash/bonds.

+1. About same ages & we're slowly increasing our stocks %. We're in the low 60's% stocks plus 4-5% gold ETF's range now.

 

[OldShooter]

I thought TIPS were essentially nothing more than T-bills, which pay almost nothing. If so, non-inflation of nothing doesn't really address the end goal: preserving your money's actual purchasing power. Does it?

TIPS are widely misunderstood, but really aren't all that complicated. Let me try to explain:

Scenario: I buy $100K worth of 20 year TIPS and $100K worth of 20 year treasury bonds on the auction at par. Each has a coupon. If inflation over the 20 years averages 2%, at maturity Treasury will pay me $148,590 on the TIPS and $100,000 on the bonds. The buying power of that $100K from the bonds has declined with inflation and is now $67,300. During the 20 years both the TIPS and the bonds have been paying their coupon rate.

Like anything, the bold print giveth and the fine print taketh away:

Takeaway #1: The IRS considers the increased value of the TIPS to be taxable income. Worse, it taxes each year's increase during the year. So if the TIPS are held in a taxable account, the holder ends up paying cash taxes annually on gains not physically received. Moral: TIPS are best held in tax-sheltered accounts.

Takeaway #2: TANSTAAFL. The coupon on the TIPS will be lower than the coupon on the bonds. Call the difference "the inflation insurance premium." We buy fire insurance on our house and pay an annual premium. In our opinion, the greatest financial risk to our retirement is unexpected high inflation (such as might occur with a significant dollar devaluation). So we also buy inflation insurance without paying a lot of attention to the actual cost of the premium.

Said in terms of formal risk management, we are looking at a high impact, low probability risk that is relatively inexpensive to mitigate. YMMV, of course.

Sort of Takeaway #3: There is also some fine print about what happens during an extended period of deflation, but that is not on my radar/not something I am worried about.

Regarding the government's creditworthiness I don't see any difference between TIPS and plain vanilla bonds. I also don't worry about it. If we do get a good shot of high inflation, though, Treasury will almost certainly stop selling TIPS, aka stop pouring gas on a fire. When/if that happens our TIPS will spike in value, bid up by panic-stricken buyers. It is possible that we will be able to take advantage of that.

 

[OldShooter]

I guess the real question is about substantial inflation due to the government continuing to print money irresponsibly. ...

That's not on my worry list. As has been pointed out in other threads, we can inflate our way out of any debt so there is no reason to default.

My worry is that the dollar gets knocked off its peg as the world's reserve currency. Basically everyone hates us and there are frequent attempts to knock us down, lately/usually by proposing a basket of currencies. Our salvation to date is the perilous state of the Euro, Russia's ill-advised move into Crimea, and the fact that no one trusts the Chinese. Ongoing political turmoil in Brazil and Argentina helps us too.

So what if we got knocked down and the dollar declined by 20%? Well, all imports would cost 25% more, as would all commodities that are traded on world markets like oil and agricultural products. This is inflation that neither monetary policy nor fiscal policy can affect. It would not be fun, even for us with our wad of TIPS.

 

[jim584672]

If you have an income flow from pension/SS then you can be more aggressive on your equity allocation since these flows are basically equal to bonds.

 

[ER2B]

If you have an income flow from pension/SS then you can be more aggressive on your equity allocation since these flows are basically equal to bonds.

I would like to buy stocks with bonds when they go on a firesale. I feel I will have the guts to do this at a 60/40. We have 2 colad pensions, rental income. SS at 70.

 

[GravitySucks]

I am offended by this post!
PS and bring back Matlock!

I've been rethinking AA lately. I want enough in bonds to hold me the 9 years to full SS. At that point I can live quite nicely on SS and tiny annuity. No action needed as this is very close to the 60/40 AA that I'm at. I am going to high quality bonds even though Treasuries are paying nothing. I may let the AA glide up to 70/30 at my year 65 reset.

Oh and as for Fido reps telling people what the market is going to do next year- Bull! No body knows nothing.

OK Boomer[emoji23][emoji23]

(Not aimed at anyone in this thread.)

 

[meleana]

I do 100 minus my husband's age because he is 2 years older than me and leave it at that.

 

[maestro]

If it helps you sleep better at night, then you've done the correct exchange. It comes down to your risk tolerance, however IMO, you're also trying to time the market, which I am, too, currently, and will move accordingly when the big correction happens. Others here say timing the market is not for everyone, and a losing game.

 

[GoBears]

So I decided to trade $50k of Fidelity Small Cap Discovery to Fidelity Total Bond (which I already hold) and $50k of Fidelity Low Priced Stock to Fidelity Capital and Income. I discovered through my research that the two stock funds historically have done about the same performance as the bond funds. So I **think** I preserved my growth potential while also reducing risk...

Is anyone else contemplating changes based on the Fidelity guidance? Or have opinions on my exchange?

Others have already commented on Total Bond versus US Bond Index, so I will not. Instead, I wonder why you believe Capital and Income is likely to reduce your risk significantly. That fund currently is comprised of around 20% in stocks and almost 70% in high yield “junk” bonds. Less than 10% of its bonds are rated BBB or above. High yield bonds are almost as risky as and their performance is highly correlated to stocks.

Capital and Income lost 31.9% in 2008 and 5.79% in 2018. In comparison, Fidelity bond index fund’s total return was virtually unchanged in 2018 and Vanguard Total Bond Index’s (Fidelity didn’t have one at the time) total return went up by 5.18% in 2008. (Data from Yahoo Finance). Bogleheads recommend taking investment risk in equities and using bonds for safety. Capital and Income isn’t safe enough for my liking. YMMV.

 

[HMMY]

I didn't read the article, but I did go from 80/20 to 70/30 the year I hit my target and to 55/45 the next year when I retired. My retirement rule is to keep the lesser of 45% or 12 yrs expenses in fixed income. At the moment, I have 12 yrs expenses in fixed income and a ratio of 59/41.

 

[DSC800]

The old conventional wisdom was to hold 100% less your age in stocks. In my case, I would have been 30 % in stocks in 2008, and 20 %. now. I would have missed the run up in those 10 years big time. BTW, I am 100% in equities..now and then.

Souschef, I'm with you, 100% equities (actually >95%, but close enough). I'm 58 and my wife and I both just retired. Everyone is different with the biggest factors being how much we've accumulated, how much we need and our tolerance level. For us, I only invest in DGI stocks, a rental I've owned for 30 years along with zero debt of any kind. We expect to live another 30 years, plan on a 2-3% WR, but could live off of 1% of current assets if we had too (eat more oatmeal). This does not count SS, which might be enough by itself (more oatmeal though).

Bonds, Treasurys, CD's, just don't perform well, with little to no inflation protection and are usually taxed as ordinary income. Dividends and LTCG have a favorable tax treatment, including zero up to $77k.

Considering all, after managing my own investments all my life, I'd have a difficult time even going to 20% fixed income, so why bother with any since that allocation would not be much of a cushion.

 

[Markola]

About the best one can do is set an AA based on one’s risk tolerance and keep it there, diversify, keep costs low.

 

[inkitnow]

No gain, no pain

I told my financial guy five years ago that I don’t care about making a killing or even seeing substantial gains. I just don’t want to lose anything.

I’m in 80% municipal bonds; 20% stocks.

 

[aja8888]

I told my financial guy five years ago that I don’t care about making a killing or even seeing substantial gains. I just don’t want to lose anything.

I’m in 80% municipal bonds; 20% stocks.

If you told him you didn't need any performance, why use him at all?

 

[inkitnow]

I ask his advice on a small Fidelity account I “play” with and I do have some stocks. He oversees the bond management company too. Besides, he talks me down from the ledge from time to time.

 

[Mike93]

Some watercooler talk:

I heard that the more robocalls you get from annuity salesmen means the more the market is likely to go up. The idea being that selling an annuity to lock in your returns is a bad business deal if the market goes down. I guess this implies that it has to be one of those 'hybrid' annuities.

Mike

 

[Ducati52]

.He did say that they see US economy slowing down next year and being down for a year and then coming out of it.

I've heard one "expert" or another say that every year since [-]2014[/-] 1817.

Fixed it for you . . .

 

[Running_Man]

Did you buy Fidelity Total Bond -- the high expense ratio actively-managed bond fund? Why that one and not a total bond market low-expense ratio index bond fund?

Because index bonds are forced to purchase negative yielding bonds

 

[audreyh1]

Because index bonds are forced to purchase negative yielding bonds

Which index bond funds? FXNAX? It has a very small exposure to non-US bonds and I suspect they might be corporate bonds.

This is an issue for international bond index funds.

 

[pb4uski]

Which index bond funds? FXNAX? It has a very small exposure to non-US bonds and I suspect they might be corporate bonds.

This is an issue for international bond index funds.

+1. Not a significant issue for domestic bond funds, or probably even managed international bond funds... principally index international bond funds.

 

[PoorOldCountryBoy]

I've basically seen the same article three or four times today that Fidelity is sounding the alarm to baby boomers within 10 years of retirement to cut back on stocks. They are recommending that people in this category have their portfolio in 70% or less stocks. I've been in the process over the last few years to increase my bond holdings. My DH and I fired our financial planner a few years back and he had us in all stocks (some market sector mutual funds - like healthcare and real estate). I've been slowing shedding some of that stuff and rebalancing. I logged in today and discovered that I am at 76% stocks.

So I decided to trade $50k of Fidelity Small Cap Discovery to Fidelity Total Bond (which I already hold) and $50k of Fidelity Low Priced Stock to Fidelity Capital and Income. I discovered through my research that the two stock funds historically have done about the same performance as the bond funds. So I **think** I preserved my growth potential while also reducing risk...

Is anyone else contemplating changes based on the Fidelity guidance? Or have opinions on my exchange?

Long-term most of the reasonable choices (60/40, 70/30, etc) are actually going to perform similarly. Retirement is different - you need to have the peace of mind to know **exactly** where you'll be getting the money. Plan out at least 3 years of guaranteed income (tbills, cash, cds). Years 3-5 should be low risk funds like a medium duration investment grade bond portfolio. Anything after 5 years can be a little more risky.

You want to survive a period like 1929-1937. That means guaranteed liquid investments.

If you're more than 5 years away from retirement, then you still have time to go.

 

[Koolau]

I'm sure I've said this before. I guess I've never understood why those of us who've "won" the FIRE game (amassed enough of a stash to be FI and RE) keep more than a minimum amount in stocks. Yes, we need to have a strategy to counteract inflation. My personal approach is about 30% stocks or so (plus a few % in PM.) More than that, I begin to feel like I'm trying to play the Lotto - when I don't need to. Thus far, my "stash" has continued to grow with my strategy (beginning in '05). I even weathered the unpleasantness of '08 to '10 without losses. As always, YMMV.

 

[DrRoy]

Due to the great run this year, I have pulled more to spend next year, and along with rebalancing for that, also notched my AA down another point to 58%.

 

[UnrealizedPotential]

I am age 50. I have a 50/47/3 portfolio. I still remember in 2007 when I was riding the market to the highs. Then in 2008/2009 I rode it to the market lows.
It was ugly for me and I never forgot the experience. I fully recovered and since then I have never been in 100% equities again.
No, I have no idea what the stock market will do in 2020 but then neither does anyone else. I do know what a full blown bear market will do to a portfolio that is 100% in equities and it isn't pretty.