Those Who Don't Have Pensions.............

[mb]

You forgot the ever popular "sponging off a working spouse" and the JG special "pulling it out of my @ss."

Wished I could learn to do that

 

[Nords]

You forgot the ever popular "sponging off a working spouse" and the JG special "pulling it out of my @ss."

Wished I could learn to do that 

You'll have to check with JG and see how that's working out for him...

 

[uncledrz]

To OP, I second (or third) the suggestion that if you will review the historical posts there has been quite a bit of discussion on how to retire and thrive with or without a pension.

In short, without a pension, an income stream has to be developed. That stream can come from a variety of income producing assets (positive cash flow real estate, bonds, dividend paying stocks, sale of capital appreciating stocks, etc.). A portion of the portfolio, however, must be dedicated to protect against inflation.

With a pension, a greater portion of the portfolio can be dedicated to protect against inflation.

While I personally don't like annuities because of the cost, RIT's method of purchasing a base annuity to cover expenses, and then purchasing additional annuities as needed when expenses increase seems to provide an inflation protection.

 

[maddythebeagle]

You forgot the ever popular "sponging off a working spouse" and the JG special "pulling it out of my @ss."

It is a trend..... but Nords and CFB sound to be FIRE on their own though....just based on the intelligence of their posts...well, usually....

 

[PsyopRanger]

futures in certain types of exotic cheeses. )

http://early-retirement.org/forums/index.php?board=6.0

B-E-A-V-E-R, I'd put all my best clients in it

I am favoring a mixture of my military pension, cashflow from real estate and dividends/4% Rule from my portfolio and if need be, a part time job. I think a minnow (Smelt for the Minnesotans) salesmen or wine taster would fit nicely into my plan.

 

[kcowan]

Nords, I have a non-COLA'd DB pension which covers most expenses too (for now) and so I am higher on my equity split (60-70%) than if I had no pension (~35%).  I feel it is important to disclose that as important information in personal asset allocations .....but to each his/her own.  A 70's type bear market would be devastating on a highly proportioned equity portfolio.

OK this is good. Let me make sure I understand this rule-of-thumb: for pension covering 100% of expenses an equity split (60-70%) is good; If there is no pension then an equity split (~35%) would be advised. Obviously this will be influenced by age of retirement, inflation,...but can I conclude that your ROT would suggest an equity split (50-55%) if half the expenses were covered by pension? Thanks.

Nords, if 10% cash covers you for 2 years, then you are good for 20 years PLUS the additional returns from the 90% equity over cash. Again I am not trying to be too inquisitive, just trying to get a feel for your general investment strategy. For your planning, what have you assumed for a) equity returns and b) inflation? Thanks.

 

[Nords]

Nords, if 10% cash covers you for 2 years, then you are good for 20 years PLUS the additional returns from the 90% equity over cash.

Well, that's the theory. Things would've been a bit ugly during 1966-82 and 2000-2004 but belt-tightening can reduce expenses. Money to pay for those expenses can be raised by selling whatever's lost the least while leaving the rest of the portfolio to recover in its own time. Note that most of 1966-82 was leavened by dividends, but that practice had dwindled to almost nothing by the end of the century.

Again I am not trying to be too inquisitive, just trying to get a feel for your general investment strategy. For your planning, what have you assumed for a) equity returns and b) inflation? Thanks.

Dimson's "Triumph of the Optimists", Bernstein's website/Four Pillars book, & Warren Buffett.

Inflation over the 20th century averaged about 3.5% (although it averaged 5% from roughly 1970-2000). Current concensus seems to be that total-market equity returns (dividends + growth) will be about 3-4% over inflation and Buffett has been predicting a 6-7% total return (dividends + growth) for the next few years. I think I first read about the Gordon Equation in Bernstein but that's been around for a long time.

There does seem to be a valid value/small-cap premium and REITs/commodities can make a difference in boosting returns while perhaps reducing volatility. Our portfolio doesn't have any of the latter two because they appear to be at least fully valued for now, but maybe we'll add them in the future.

Unless there's a big change to the current environment, we plan to stick with equities & two years' cash for the rest of our lives-- no bonds. Our retirement portfolio is currently about 30% Berkshire Hathaway stock (BRK.B), 20% Powershares' International Dividend ETF (PID), 15% S&P600 Small-cap Value ETF (IJS), 10% Tweedy, Browne Global Value (TBGVX), 10% DOW Dividend Index ETF (DVY), 7% individual stocks, and 8% cash. Over the next few years we'll spend down the Tweedy fund and buy more PID. Way, way off in the future we might move the Berkshire shares over to IJS but that's probably at least a decade away while we wait to see what Buffett comes up with next...

 

[AltaRed]

OK this is good. Let me make sure I understand this rule-of-thumb: for pension covering 100% of expenses an equity split (60-70%) is good; If there is no pension then an equity split (~35%) would be advised. Obviously this will be influenced by age of retirement, inflation,...but can I conclude that your ROT would suggest an equity split (50-55%) if half the expenses were covered by pension? Thanks.

Directionally, yes.... but it also depends on the size of your investment portfolio relative to your pension and your expenditure needs. 

The point I was really trying to make is that IMHO there needs to be sufficient capacity in the Fixed component on a 3-7 year rolling forward basis to cover cash expenditure needs to avoid having to tap into equity during a prolonged secular bear market.  Whether it is 3, 5,7,10 years or some other number depends on your own personality, disposition and what helps you sleep at night. Each person needs to look at that for their specific situation.

Lacking any better information, I tend to default to the FPX benchmarks of FPX Growth (65/35) and FPX Income (35/65) as the rule-of-thumb end points for asset allocation... and thus the rationale for the numbers in my post. 

With a non-COLA'd pension that almost covers my expenses today, retired at 57, I could be close to Nords 90% equity portfolio (and maybe stay there if the pension was COLA'd).  But since I will need to tap into my investments more and more over time due to inflation, I have defaulted to about the FPX 65/35 Growth allocation - my personal sleep-at-night factor.  Indeed I am at 60% at the moment, with spare cash to invest in buying opportunities that I think will occur within the next 6 months and I would go as high ats 70% equity allocation over the next few years.

In theory, my equity allocation should slowly decrease as more and more cash needs to come from my investment portfolio. Whether it is 50/50 when my cash needs are 50% of my expenses remains to be seen and how well equities perform relative to fixed income and the income the whole portfolio throws off at that time. 

My bottom line is to be able to look out ~5 years and have certainty on cash flow, without needing to tap into equities as a boundary condition, and ideally no need to tap into capital (at current values) indefinitely.

 

[Gone4Good]

Let me make sure I understand this rule-of-thumb: for pension covering 100% of expenses an equity split (60-70%) is good; If there is no pension then an equity split (~35%) would be advised.

I'm not sure I agree completely. A pension can be discounted back to a present value and included in the portfolio as a "bond equivalent". With a pension covering 100% of your expenses you could conceivably have 100% of the rest of your portfolio in equities and probably still be a bit light on the equity portion. But if someone really has a pension covering 100% of expenses they ought to spend less time worrying about asset allocation and spend more time fishing.

It's a bit trickier for someone without a pension. Your inclination to ratchet up the fixed income portion of the portfolio to 65% to compensate for the absence of a pension seems logical. But such a high allocation to fixed income investments runs a very high risk of underperforming inflation. For anyone expecting to live a couple of decades in retirement (which is most 'normal' retirees and every early retiree) a 50% equity split seems to be the minimum that is advisable, unless you can compensate with a lower withdrawal rate. Keep in mind that 10 years of living expenses represents just 40% of a portfolio assuming a 4% withdrawal rate. In other words, a 60/40 equity/bond split gives you 10 years of (non-inflation adjusted) living expenses covered by the fixed income portion of the portfolio.

 

[kcowan]

I guess what I conclude from the foregoing discussion is that I have too little equity in my portfolio when compared to the likely forecast inflation. I am at 55% now when I include the present value of my non-indexed pensions (which cover 40% of our current living expenses).

 

[Gone4Good]

I guess what I conclude from the foregoing discussion is that I have too little equity in my portfolio.

As you well know, only you can decide the proper asset allocation for you. Play around with FIRECalc and fiqure out the mix that gives you the highest success rate that stays within your "equity allocation" comfort range. More equity is only the right answer if you are pretty comfortable you won't bail out during the next bear market. If 55% gives you good results in FIRECalc, then go with what you are comfortable with.

 

[macdaddy]

My uncle has no pension, no investments, and 20k in the bank. He never made more than 40k/year in his life. He has a 1 million dollar home in Northern California. The plan is to work until 62 so he can start medicare and social security. Then sell his house (800k, post-bubble) and move to the southeast somewhere. 300k for a new house and 500k into a retirement account. 20k a year from the retirement account and 12k a year from social security. He'll inherit another 250k at some point which will provide another 10k a year. So that's 42k a year living in the southeast in a nice paid off home. He got lucky (moving to California in the 70s and buying a house) and he knows it. Without that, he'd be pretty screwed. I wonder how many people are in this situation.

 

[unclemick]

Hmmmm

Here's one for the market timers - unclemick2's lefthanded, Sunday afternoon portfolio with credit to Fama and French's value premium, Ben Graham's 25 to 75% equity range and of course the Norwegian widow:

Buy Wellesley and mix in amounts of Wellington until you get 4% current yield - periodically changing the mix(rebalancing at set intervals) to hold 4%(aka da magic number theorywise). Take out the 4% current yield and live on that. Of course some of the more attactive portfolios I've run across use Dodge and Cox in the mix - but I think they are still closed to new investors.

One could create an index fund equivalent OR an all asset class extreme slice and dice(like Ben of Thailand's ten slices yielding 3%).

More than one way to skin a cat. You gotta first decide where your head is at - value, index, slice and dice, hands on the throttle, or more passive.

heh heh heh heh - maybe an extreme portfolio thread?

 

[haha]

My uncle has no pension, no investments, and 20k in the bank.  He never made more than 40k/year in his life.  He has a 1 million dollar home in Northern California.  The plan is to work until 62 so he can start medicare and social security. 

Better remind him that although he can get SS at 62, it is 65 for Medicare.

Ha

 

[dmpi]

  He'll inherit another 250k at some point which will provide another 10k a year. 

I wouldn't bet the farm on even getting an inheritance. So many things could happen. Good luck.

 

[macdaddy]

Oops I meant 65 not 62. The inheritance is pretty secure but w/o it his retirement income would be 32k/year. Point was, without the house in California, he would be screwed and looking at poverty in retirement. 30 years ago he moved to California and bought a house in an area that's now upscale, and that act will keep him out of relative poverty for the rest of his life.

 

[FinanceDude]

Oops I meant 65 not 62.  The inheritance is pretty secure but w/o it his retirement income would be 32k/year.  Point was, without the house in California, he would be screwed and looking at poverty in retirement.  30 years ago he moved to California and bought a house in an area that's now upscale, and that act will keep him out of relative poverty for the rest of his life.

Better to be lucky than good............

 

[bbuzzard]

But for those who absolutely positively don't want to outlive their money, their only "guaranteed" solution is an annuity with a COLA-- for which peace of mind they will pay dearly. It'll almost certainly require more than 33x expenses...

IMHO, very dangerous advise to the uninformed (I know this does not include you). Your annunity is owned by an insurance company that is going to invest it in a diversified stock portfolio, skim some off the top every year (after skimming 5% up front), and return the rest to you. Given a similiar investment strategy (which you should have), the risk that they will go bust is actually higher than the risk that you will go bust. Look at is this way, to match the same return as the COLA annuity, your may only have to use a 2.5% to 3% SWR. What are the chances of this failing? Probably less than the chances of Big Insurance Inc. failing.

I think the annuity is much riskier than investing the money for yourself (assuming you are rational and competent). Am I wrong?

 

[brewer12345]

IMHO, very dangerous advise to the uninformed (I know this does not include you). Your annunity is owned by an insurance company that is going to invest it in a diversified stock portfolio, skim some off the top every year (after skimming 5% up front), and return the rest to you. Given a similiar investment strategy (which you should have), the risk that they will go bust is actually higher than the risk that you will go bust. Look at is this way, to match the same return as the COLA annuity, your may only have to use a 2.5% to 3% SWR. What are the chances of this failing? Probably less than the chances of Big Insurance Inc. failing.

I think the annuity is much riskier than investing the money for yourself (assuming you are rational and competent). Am I wrong?

Ummm, no, that isn't how annuities are managed by insurers. You give the money to an insurer who agrees to give you a stream of payments. The insurer invests the money mostly in gigh grade bonds and backs the money with some of its own capital. You get your promised stream of payments and the insurer gets whatever is left. If the insurer goes bust, you are backed by the state guaranty fund, which is a weak sister to the FDIC and not nearly as good. Assuming you can buy an annuity with a full COLA adjustment, your bggest risk is credit exposure to the insurer. This can be mitigated by spreading the money around and picking top shelf insurers to do business with. No way TIAA-CREF or Northwestern Mutual is ever going down the tubes, for example.

 

[work4beer]

Not sure why y'all are so down on annuities. Yes, many suck, but go to Vanguard and get an instant online quote. I did a dual survivor, 44 and 41 year old, inflation-adjusted annuity. $100K gets you $313 a month or ~3.7% real return. Pretty dang close to the 4% SWR, a lot better return than TIPS, and a lot safer, since Vanguard bears the risk/reward of you living too long/short. Seems like many would want to consider it for at least a portion of their RE, as "honey I shrunk the portfolio" insurance.

WW4B

 

[Rich_by_the_Bay]

Not sure why y'all are so down on annuities. Yes, many suck, but go to Vanguard and get an instant online quote. I did a dual survivor, 44 and 41 year old, inflation-adjusted annuity. $100K gets you $313 a month or ~3.7% real return. Pretty dang close to the 4% SWR, a lot better return than TIPS, and a lot safer, since Vanguard bears the risk/reward of you living too long/short. Seems like many would want to consider it for at least a portion of their RE, as "honey I shrunk the portfolio" insurance.

Do you really mean "real return" (i.e. after inflation?). My calculator says it is spinning off 3.76% per year (like a decent MMF, lower than a CD today). Not real appealing to me, if I understand your post.

I've posted before some arguments for an IMMEDIATE annuity as longevity insurance, etc. as you get older (this is where CFB usually jumped in) but the allure of variables escapes me except in those particular situations posted above.

 

[unclemick]

Been a very long time - but in the 70's - I worked with a number of Brit/Commonwealth engrs. concerned with the French problem - aka home currency - talking up Swiss annuities as a way to blunt the issue.

I have yet to see annuities touted recently as a way of hedging against devaluation - does the home country inflation indexing eliminate the problem? If I have an annuity in a 'strong??' currency - will that help me as an ex-pat living on a squishy currency?

heh heh heh heh

 

[macdaddy]

Not sure why y'all are so down on annuities. Yes, many suck, but go to Vanguard and get an instant online quote. I did a dual survivor, 44 and 41 year old, inflation-adjusted annuity. $100K gets you $313 a month or ~3.7% real return. Pretty dang close to the 4% SWR, a lot better return than TIPS, and a lot safer, since Vanguard bears the risk/reward of you living too long/short. Seems like many would want to consider it for at least a portion of their RE, as "honey I shrunk the portfolio" insurance.

WW4B

How do they measure inflation? If they use CPI, which I believe is considered understated, over time this could erode the return.

 

[brewer12345]

Been a very long time - but in the 70's - I worked with a number of Brit/Commonwealth engrs. concerned with the French problem - aka home currency - talking up Swiss annuities as a way to blunt the issue.

I have yet to see annuities touted recently as a way of hedging against devaluation - does the home country inflation indexing eliminate the problem? If I have an annuity in a 'strong??' currency - will that help me as an ex-pat living on a squishy currency?

heh heh heh heh

Those guys liked CHF-denominated annuities because the Swiss still back their currency with gold, unlike the vast majority of countries. So their currency is regarded as a "hard" currency not overly prone to inflation.

If you are inflation indexing in the home country, I think you are pretty much solving the inflation issue assuming that the index used to measure inflation is reasonably accurate. I personally think that CPI is mostly accurate, at least over long periods of time, so I am comfy with the idea.

 

[work4beer]

Yes, $313/month would be the real return, since next year (or whenever the inflation adjustment is done) it will be 1.X * $313 a month. Contrast this to the 2.4% or so real return on current TIPS, and the TIPS annuity doesn't seem a bad deal to me at all. If you spend your 5% MMF return, you're not adjusting the principal for inflation.

Or to put it another way, 4% SWR means I would take out $333/month from a $100K starting balance, and next year take out 1.X * $333 a month. But I'm bearing all the risk of portfolio meltdown, etc. and withdrawing from a portfolio that could be aroud 65% stocks. Why not trade some principal at death to take 3.7% real return on a portion of your portfolio and mitigate some of that risk?

Re: CPI being higher/lower than your real CPI. That could be, but firecalc, stock historical returns, etc. are also premised on being compared to CPI. So still seems pretty apples-to-apples to me.

M