Will Boomers Cash In

[Hyperborea]

It appears that the fast food outlets and the giant restaurant portions in the US may save Social Security though they may cause problems for Medicare.

http://www.theglobeandmail.com/serv...16.wdeth0316/BNStory/specialScienceandHealth/

Surging obesity rates in the United States over the next half-century could reduce life expectancy by as much as five years, new research shows.

<snip>

An accidental by-product, said epidemiologist and lead researcher Dr. Jay Olshansky, is that the American government-run pension plan may be saved from bankruptcy simply because people will be drawing less from it. At the same time, though, health-care costs are expected to explode.

<snip>

Dr. Olshansky, an epidemiologist at the University of Illinois at Chicago, said that current obesity levels in the United States reduce life expectancy by between four and nine months, a seemingly small total that still represents more than the effects of homicides, suicide and accidental deaths combined.

 

[yakers]

Donner and others, great posts, very thoughtful. My own intuitive, since I can't find useful numbers, ideas are that there will not be a major derailment that an ER /LBYM type will not survive or even prosper from at least relatively to a lot of boomers. One, boomers have not saved enough so expect a lot to keep working. I do not worry about SS because of this but Medicare could be a bigger issue as they (we) all will get that old and have large calls on medical resources. Second, I would flee to CDs/cash and the like (only 20% in my G TSP fund) except that direction that economic/political system could take us is towards inflation. Makes it a lot easier to pay back those large debts and hurts savers like us. Holding assets like real estate (could this be why we see house price inflation?) or other assets and even equities is then better than cash and much better than bonds.
So what do I do? Without a greatly detailed plan, diversify across various types of assets. A paid off house, COLAd pension, 401 type funds-some in foreign funds(20%TSP I fund), a few ibonds and equity/DRIP funds, and some cash in the credit union. If there is deflation and not inflation, cash will be king. But I really don't know, but I see inflation as as big an issue as any and would not go for more cash and I am limiting bond exposure.
This sounds a lot more organized than it is, I just sort of landed here by adding what I forecast to be good assets without divesting any previously acquired assets except for moving out of the TSP F bond fund. So far, fingers crossed, it has worked well for me.
But I like the reasoning of Donner and others, there could really be a big financial negative event, but I just see it as just as likely to be inflation as anything else. If it is a major negative (deflation) event and I lose say 50% of my assets but others lose even higher percentages of theirs then I may still be well off relatively.
Or we could have a slow downward spiral. I don't know. Smart people like Buffett are holding cash but from my circumstances I just hold a variety of things and am ready to live cheap and work a bit if I have to. I just hesitate to head more towards cash because of concerns about inflation.

 

[HnE]

Yakers said "If it is a major negative (deflation) event and I lose say 50% of my assets but others lose even higher percentages of theirs then I may still be well off relatively. "

I agree with that. The value of money is all relative.

But what do I know. I figure a group people with all that dough (pizza) on their heads must know something.
That's why I came. (for the pizza of course)

HnE

 

[Dreamer]

Donner,

Thank you so much for your very thoughtful reply to my question. I can't believe how much thought and time you took replying to me! Today is my birthday and after reading your message to me, I felt like you have given me a wonderful birthday present.

I have been drifting along for quite some time now, keeping my TSP allocations the same. I currently do not have any going into the G fund. I have it divided between the other 4 funds. Our Roth IRA's go into Vanguard's 500 Index Fund. I am under CSRS and have a small amount deducted weekly from our checking account for Voluntary Contributions.

I had a difficult time trying to figure out what to do when we were given the chance to change over to FERS. I have always wanted to be able to retire at 55 and so I decided to stay with CSRS. We have since had retirement planning seminars, where a person that works in our agency, has given us different pointers on retirement planning and I think that I did make a mistake in not switching over to FERS. The government match on the TSP would have been so nice all of these years and of course they never gave me a cent since I stayed under the old plan. Also, I will never be eligible for any of my spouse's social security, due to Government Pension Offset. So, if I were to outlive my spouse, I really will only have my own pension to live on plus any TSP or 401K left at that time.

I believe that I am taking too much risk. I am going to put the amount going into the C and F fund right now into the G fund and keep the small percent going into the S and I fund. I am not sure what I will do about the money that is already in my funds or what to do with Roth IRA money. I feel that I can probably tolerate a little more risk than you can. I am not planning on withdrawing any of my TSP for at least 9 years and hopefully a little longer. Also, if family history on my side of the family continues, I will not have to worry about making my money last as long as someone does who has great genes. Who knows though, I could get lucky and live alot longer than alot of my relatives, and then I would not want to run out of money in our old age. We do have our house paid off and my spouse and I do have LTC through our government plan. I have worked for the government for 31 1/2 years, but my spouse has only been with his company since 1991 and the company prior to that for 9 years. He worked for the government for a short while many years ago, but he withdrew his retirement money when we moved and he quit his job. I was able to transfer to a new office. Unfortunately, he does not have much in the way of a pension.

I have no problem living below our means, which we do on an ongoing basis. I am not a very materialistic person, but I do love the traveling memories and hope to do even more traveling after I retire. My spouse does enjoy spending money on his baby, an old sports car that he has. We do try to save, but don't do near as good a job as it sounds like alot of people on this board do. However, I really hate the sound of the work longer part of your message. I do need to take your advice and see what it is that we need and go back from there to see what I must do. If push comes to shove, then I will definitely keep working. I am in great health at this time. I do not want to have to go back to work after I retire and I think that I would have a hard time finding another job that paid as well where I am living. I say that knowing that my salary is probably far far less than most people on this board have earned.

I talk to people on a daily basis and I am truly amazed at how little savings they have and what small pensions they have when they retire. I would not be able to sleep at night if I were in their shoes.

I will probably read your reply to me 10 more times, trying to have everything sink in. I wish I was as knowledgeable as you regarding the affairs of the world and of finances. I try, but I am sure I will never be as smart as most of the members on here.

Again, I thank you so much for taking your time and replying in such a wonderful way.

I wish you and Mrs. Donner a wonderful retirement when it does happen. She is very lucky to have someone who has planned in such a meticulous manner and that has the bases covered.

I look forward to reading more of your posts in the future.

Dreamer

 

[laurence]

Donner,

My degree is in Economics, after reading your posts, I feel like I went back to school! Very thoughtful, well worth the time spent reading. I particularly identify with your comment about identifying the goal and working backward. I am a target investor, always have been. If x amount is enough to reach your goal, while shoulder additional risk to try and surpass it? As I am in my early accumulator phase, I wouldn't mind the market trading sideways for a while. Lots of stuff to ponder there, I think I'll read your posts again...

.....man, this board rules......

 

[Helen]

Re: 5. Worldwide Capital SurplRe: Will Boomers Cas

The result is that ALL asset classes are bid up and expensive right now.  We have asset bubble pricing virtually everywhere you look and the Fed knows it.  It is in the stock market, the bond market (big time), the real estate market, and the commodities markets.  This is where the inflation really is, not in the consumer price of manufactured goods.  

Donner, I really agree with you here. There is no good place to park money right now, everything with risk seems way over valued. Too many dollars chasing too few investments.

I'm thinking of parking all my 401k money into the G fund for the next three years or until the bubble bursts. I really hate to try and time the market, but this almost feels like a no brainer.

Great posts, thank you !!!!

-helen

 

[yakers]

Donner, Dreamer, Helen and others are you essentially changing your asset allocation because some or most asset classes are over valued? I really agree that just about everything (including local Southern California real estate!) is over valued. But I am not clear about what I want to do with this understanding. I have a paid off house in Southern California but I am not selling it, I need somewhere to live and I have no reason to move and plenty to stay. But if I really believed there was an immenant real estate crash I should sell it and rent.
Buffett and many smart people are hoarding cash but it is not clear whether this is of over valued assets or being ready to buy something when it emerges. In 2004 Buffett admitted he/BK paid a performance price for holding cash. If you have cash or any other asset what can you better do with your money?
What concerns me is where are your considerations about future inflation? One way "out" of the huge Govt/corporate/personal debt burden is inflation. It may not happen, but it sure looks possible and I want my asset allocation to mitigate this possibility.
Several people, like myself, have the Govt TSP system available. Do you believe that moving to the G (short term Treasuries) fund will protect against decreasing asset values and possible inflation?

 

[Helen]

Donner, Dreamer, Helen and others are you essentially changing your asset allocation because some or most asset classes are over valued? I really agree that just about everything (including local Southern California real estate!) is over valued. But I am not clear about what I want to do with this understanding. I have a paid off house in Southern California but I am not selling it, I need somewhere to live and I have no reason to move and plenty to stay. But if I really believed there was an immenant real estate crash I should sell it and rent.
Buffett and many smart people are hoarding cash but it is not clear whether this is of over valued assets or being ready to buy something when it emerges. In 2004 Buffett admitted he/BK paid a performance price for holding cash. If you have cash or any other asset what can you better do with your money?
What concerns me is where are your considerations about future inflation? One way "out" of the huge Govt/corporate/personal debt burden is inflation. It may not happen, but it sure looks possible and I want my asset allocation to mitigate this possibility.
Several people, like myself, have the Govt TSP system available. Do you believe that moving to the G (short term Treasuries) fund will protect against decreasing asset values and possible inflation?

Yakers,

Good questions. I have decided to pay off the mortgage this year instead of putting anymore new money into my after tax account.

Just for a point of reference, I am 8 years away from ER, I am 47 years old.

I was in the process of rebalancing all my accounts because I was 100% invested in US equities. I moved a lot of money out of the US stock market and into International stocks and US bond/short term securities. I am considering moving all tax sheltered money into short term holdings for the next few years and see what happens. I know this is market timing and I am fighting the urge, but I just might do it anyway.

It seems as though we have very high valuations due (IMO) to really low interest rates, we also know that the Feds are continuing to increase the interest rates. It just seems to me that the party is about to end. I am thinking is that we are going to see valuations plummet, and that would be a nice time to implement my asset allocation plan.

I've calculated that I can still pull the plug in 8 years with zero gains on my investments other than adding to the principal. However, for the long term inflation is a big concern of mine so at some point I need to come to grips with my asset allocation plan, implement it and stick with it. I'm just not sure now is the time.

One more thing; as you pointed out, the difference between your primary residence and other assets is that you have to live somewhere. Your house is more than just an investment and no I would not move either based on asset valuations.

-helen

 

[Donner]

Dreamer's Plan Part 1

Dreeamer--

First, let me say Happy Birthday! My birthday (57) is coming up at the end of the month and is one reason I am hanging around this Board. Mrs. Donner and I are both thinking longer and harder about all the tradeoffs to be considered by anyone at the point of retirement. And I must admit with Grandchild No.1 on the way in July the GO option is beginning to look more and more attractive versus the NO GO option. We will see how it goes but I think our time horizon to pulling the trigger is shrinking fast.

From your posts I get the feeling that you and I have very similar temperaments when it comes to investing and planning for the future. I think we both want to be sure we have our bases covered as you so succinctly put it. And I think you and your spouse are probably in a lot better shape than you give yourselves credit for.

You have a paid for home. What a wonderful asset. I wish I could say the same but I am planning to carry a hefty mortgage into retirement. You have a cola'ed CSRS annuity. Your spouse apparently plans to continue working for awhile and will be eligible for SS. You have access to the Federal Health Benefit Program. You have LTC insurance. And you have amassed some savings in the TSP and Roth IRA's. And you have your health. Think of it, you have your health! You have a lot friend Dreamer! Not to worry!

Your plan is to not touch your tax deferred savings for nine years. I am going to infer that is because you are worried about a tax penalty from pulling funds out of the TSP before 59 1/2. But that will not be a problem if you retire on an immediate annuity. No penalty on withdrawals just income tax - penalty enough.

If you are planning on retiring in 3 years or less ( just about my timeframe as well( then you really do need to do some number crunching. Start with a projected retirement budget. It's not as hard as you think. I separate my projected expenses into three categories: A) Must haves; B) Nice to haves; and C) Life's Little Luxuries. Look at your current monthly expenses and list everything you can think of down to the smallest detail. Then annualize them to get at your annual cash flow requirement. Be sure to build in plenty of travel money for yourself and car fixer upper money for your husband in Category C. If you can't have some fun in retirement why bother? One big issue you are going to have to wrestle with is the support and education expenses for that 16 year-old. You need to have some family discussions about how you are going to finance that. I have two words for you and your child: Student Loans. If your child understands that he/she is going to carry a part of the cost of higher education it might help to focus attention a bit on the merits of mastering Sophomore English. Puts a little skin in the game. You need to project those expenses out into the future at some reasonable inflation rate which may vary depending on the type of expense. Health and education costs will carry a higher inflation rate than most of your other expenses. Try using 3% for most things and maybe 7or 8% for the health and education. The bottom line of that process is the "Where I Need To Be" part of the equation. (Sigh), you should push those expenses out 30 years to get a peek at what expenses at the end of the retirement rainbow might look like. But don't panic at the sight! It will be gruesome, trust me. If you focus on that horrible sight of projected expenses 30 years from now you will conclude that you will never be able to retire. Have a good laugh and forget about it.

 

[Donner]

Dreamer's Plan Part II

Next, you need to make another list to evaluate your sources of income in retirement. Make an educated guess about your CSRS annuity, your husband's earning potential, his future SS payments and then the fun part -- the taxable income that your savings stash is going to throw off. You have some income flow timing issues between you and your husband so your projected cash inflows over the next decade or so are likely to bounce around a little. Be sure to project those numbers out 30 years at some COLA like 3% . That’s more like it!.

Next, you need to do a pro-forma tax assessment. Pull out last year's tax form. Take a look at your projected income in the year you plan to retire and compute the taxes you would owe on that income. Take an initial pass at it using a 4 % withdrawal rate from your TSP as part of your income stream. Take your projected deductions and exemptions to get to a projected taxable income. Hopefully you will be in a lower bracket the year you retire. The bottom line, the after tax income, is what you are going to work with to cover your projected retirement budget.

Guess what? Your after tax income won’t be the same as your total projected first year retirement expenses. It's either going to be less than those expenses or more than those expenses. Here's where your planning comes in. You most likely are going to have to do some combination of paring down those projected expenses and boosting that after tax income to make them meet. This is the "What I Need To Do To Get There" part of the equation. Start paring from the Life's Little Luxuries categories. That will be hard because those are the things that really make life worth living - wasting the morning reading the Sunday papers at Starbucks for example. Scrub it as hard as you think is reasonable. Next, see how much additional after tax income you are going to need to cover that nut. You will find that most of your income is from pretty fixed sources and the one real variable you have is income from savings which is going to have to make up the gap between your projected expenses and your fixed retirement income sources. You have a couple of options there. You can work longer to build a bigger stash to throw off more income from less risky assets or you can take higher risks in return for greater rewards on a smaller stash. It's stomach lining check time.

 

[Donner]

Dreamer's Plan Part III

When you see what kind of income gap you have to make up with your retirement savings portfolio your management philosophy should begin to come into sharper focus. You may not have to build as big of a stash as you thought to make it all work. You may be closer than you or your husband ever thought to being able to pull the trigger on retirement. I think if you try to go through the process I have outlined it will take a lot of the worry out of things for you. You will find that, with some tinkering with the expenses and prudent management of the savings, you can get there ok. It helps if you can work an Excel worksheet to project all this out for 30 years. But if not, just try it for the year you expect to retire.

Couple of other thoughts for you, Dreamer. The paid off house is one of your biggest assets in life, next to your health, and you really need to protect it well. REVIEW THE INSURANCE ON YOUR HOUSE AND YOUR POSSESSIONS. Don't skrimp here. Get all the coverage you need to put yourself back whole in the event of a calamity. Get an agent to do a walk around with you and be sure to document all the stuff inside your house with pictures and receipts. Tell that agent you want enough coverage to make it look just exactly like it does now, including the couch, the TV, the closet full of clothes, etc. and you want an automatic inflation provision in the policy. And store the proof in a safe deposit box. If your house should burn down you will find out that your insurance company is not your friend. You and your husband should review your life insurance needs at the same time. When you die your husband will get about half your annuity. Will that be enough to maintain his standard of living? You will lose his SS at his death (thank you Govt pension offset provision!). Will that put a crimp in your lifestyle? How much insurance do you need to cover those contingencies? Insurance planning is an important and expensive part of the process which people don't want to think about. If you stick with this Board long enough you will be amazed at the number of posters who are flying naked through retirement without insurance. If you have FEGLI coverage be aware that the cost shoots through the roof after you hit age 60. You may want to consider a private term policy while your health is good. Carrying FEGLI into retirement after age 60 is god-awful expensive, almost impossible. Educate yourself on this. Finally, make sure you have a will in order with a power of attorney and an advance health care directive. Depending on the value of your estate you might want to consider a trust arrangement in order to get your assets intact down to that 16 year old of yours after you and your husband bid the final adieu to your happy retirement. Spend a few bucks and go see a lawyer who specializes in trust and estate planning.

That's about it, Dreamer. I got a feeling you can handle this and you will be very surprised and happy with what you discover. Enjoy your retirement!

Donner

 

[charlie]

Donner, have you read "The Coming Generational
Storm" ? The authors make a very powerful case
for coming inflation, IMHO.

I would value your critique.

Cheers,

Charlie

 

[Donner]

Yakers--Part I

Yakers--

Your questions all strike at the heart of the problem all investors are facing right now. Where do we put our assets so that they will work hard for us and give us a "fair" rate of return with minimal risk? This question is dogging every professional asset manager from here to Timbucktoo. Don’t feel bad, you have a lot of company.

Should you sell your paid for house in Southern Cal? No. Helen's got it right. You have to live somewhere. Will there be a real estate crash in Southern Cal? Dont know for sure but probably not. What effect will rising interest rates have on Southern Cal real estate? Higher mortgage rates combined with stagnate income growth will cap off the price rises from year to year. Don't look for 20 percent increases every year. Trees don't grow to the sky. The Fed won't let them.

Inflation? No need to worry about inflation in the future. It's here now. But it is in places that are not being measured adequately in government statistics. Big misconceptions abound about common stocks and inflation. People think common stocks will inoculate them against inflation. They won't. You can check it out. Go back and look at the history of the CPI changes over the years and compare them to price changes in the S&P 500 or the Dow. Stocks do well in periods of very mild 2-3% inflation like we have had for the past 10 or 12 years. They don’t do well at all when inflation heats up hotter than that. And stocks positively recoil in periods of deflation. Think about what inflation can do to a corporation and its earnings. Especially if you have little or no pricing power like most of our big corporate enterprises. So, if inflation heats up in the CPI any hotter than it is right now that will not be good for stocks. But will the CPI heat up? There are a lot of deflationary factors constraining the CPI right now including the China thing, illegal immigration, 13 million unemployed, underemployed and marginally attached workers, anemic wage growth, productivity improvements, surplus manufacturing capacity, and most of all, low levels of aggregate worldwide demand for our goods or anybody else's goods. In fact, one might argue that the Fed's policy or the last 4 years, right up until last June, was a mad scramble to prevent a deflationary fall in CPI measurable prices. No, I am not too concerned about the CPI blasting off on us.
Where is the inflation problem? It isn't in consumer consumption in durables and nondurables. It is in asset prices and I believe in services (health care, education etc) that can't be outsourced overseas. And its been with us for awhile.

 

[laurence]

Hey Donner, nice tag line! That's one party I won't linger at! And yes, I'll pass on the finger foods!

 

[Donner]

Yakers -- PartII

Asset allocation? Ah, there’s the rub! You pays your money and you takes your choice! What is fairly clear, almost a lead pipe cinch, is that Greenspan is going to raise short term interest rates until the economy shows signs of slowing. Not recession mind you. There ain't gonna be no recession anytime soon! The economy is like a racehorse right now but I do believe it is moving easily down the backstretch not the first turn. Greenspan is the jockey and he wants that nag to slow down the pace before it blows itself out. And those long term rates that Greenspan is in such a conundrum about are going to go higher. He inferred as much when he said the current curious situation with LT rates was in his opinion a "short term aberration". He won't rest until those LT rates move significantly higher than where they are right now. You can go to the bank on that. What’' that going to do? Well it just has to crush capital in the bond markets. Rates are going higher and prices are going lower. Somebody is going to absorb a loss. Maybe a big loss. Capital destruction. If you are in the bond market you better get out of the way, my friend. How about the stock market? Well, rising rates are going to make debt relatively more attractive than equity and it will put a lot of pressure on the indexes. Money managers are already nervous and the recent market action suggests this market is churning around with not much upside potential. Everybody’s eyeing that 10 year Treasury at 4.5% (was 3.9% on Ash Wednesday and it isn't even Easter yet!). You see it moving toward 4.75% and higher as Greenspan is remorselessly moving that short term rate up and you will see what it does to the stock market in the short term. Bill Gross says we live in a finance-based economy. GE makes most of its profits not on producing lightbulbs but on lending money. Rising rates will eventually bite into corporate profits, particularly for companies that can't pass along cost increases. The cost of capital, interest rates, is one of the major costs for most companies. Rising rates, slowing economic activity, (doesn't have to be a recession just slowing growth, thanks Sir Alan!), lower year to year earnings growth. What does that translate to? P/E compression that's what. A double whammy in that ratio -- lower E and lower P on that lower E, too. So, you are looking at capital destruction there, too. All because Alan Greenspan isn't smiling anymore.

So where does this leave you and me? I don't know about you, but it leaves me looking for the high ground - maximum safety and you can keep your 4.5% 10 year Treasuries and your 1.7% dividend yield on the S&P 500. Call it market timing or call it what you want but I am not going to buck Mr. Greenspan. He is the man. But there is one nice option for you and me and everybody else in the TSP. The G Fund gives you the average of all outstanding Treasury notes with a maturity of 4 years or longer. But it is on an overnight basis. In other words, those intermediate and long term risk free Treasury rates can keep going up, and unlike our non-government brethren, we get our principal back dollar for dollar. No capital destruction in the G Fund - just rising interest income. It is the sweetest deal I know of right now. There's your inflation protection Yakers. It may be the only real perk we have over the corporate sector and it takes an unsmiling Alan Greenspan to make it work for us. It's working now.

I believe that to the extent that you stray from cash to chase yield in financial assets you face some risk of capital destruction to one extent or another in the short to intermediate term. The longer the term of your financial asset, the greater the risk. And that risk will persist as long as Sir Alan is raising interest rates. Just my opinion.


Donner

 

[yakers]

I'm going to cut, paste and keep these posts. Dreamer sounds a lot like me, I will be 55 in October and have 32 yrs under CSRS. There are efforts to downsize my organization so I will try to collect a small buyout if I can on the way out in the next year or two. My wife is 57 and will be retiring as a teacher with a very modest partially COLAd pension in June 06. She will also get a small SS pension when she turns 62.I have one son left at home who is 16 and in his second year of high school.
Between my pension and my wife?s we should be able to survive. We also max out her 403b and Roths, our house is paid off and no other debt.
So one big issue is my son?s college costs. I have saved a good bit ($100 a month since he was 5) but we do not know what his probable costs are. In a year or two we will have a much better idea.
The best things on our side are no debt, pensions, decent savings, a willingness to work if necessary and a simple life style. I am blessed that my wife likes living somewhat simply or at least below our means. What she hates are budgets. I swear if I said- hey you have $10K a month to spend, she would not feel empowered but constrained psychologically even though she might spend half that.
We are expecting our first grandchild in a couple months and that is going to be a factor in where we live and travel. Older boy & wife are about 300 miles away.
I have a job I like but I am ready to go. I had a small mental shift when I noticed a growth on my head and could not figure it out, everything went through my head from just getting older to Oh God, I?m dying of cancer. When I finally got it sorted out it wasn?t all that serious. But it changed my outlook a little. There were some things I want to do like write more and I want to rent and maybe live on a canal boat in England. I did this twice in my life but I want to do it again with my wife and the kids, if they want. And maybe we?ll go live in Central or South America for a while and I?ll actually learn Spanish. Back in paragraph 3 I said the resources we have, I left out maybe the most important one, we have our health and we want to have that to travel and keep up with family. The job, though a good one, is not worth that.
This boomer plans to cash in.

 

[Donner]

Charlie-- Haven't read it but it's on my list. Still struggling to get through Bernstein.

Donner

 

[laurence]

Donner, what's the best way to invest in a G fund(company, fund name)? I have about 30k sitting on the sidelines that I think I'd like to move all/part into. Keep posting!

 

[Donner]

Laurencewill-- Yeah, if all else fails just pick a body part and pass the salt!

 

[Nords]

Boomers will NOT retire in the masses forecast. Mostly because of the lack of savings and desire for a higher lifestyle.

I'm with you, Cut-Throat. Boomers won't be cashing in until their descendants finish probating the estates.

And those SS payroll taxes will continue to be paid by immigrants.

And those American stocks will continue to be bought... maybe not by the British, French, & Japanese, but by the Indians, Chinese, and Malays.

 

[Donner]

Laurencewill-- I don't know of any private sector equivalent of the TSP's G Fund. Closest thing would be an intermediate term Govt bond fund or maybe a GNMA fund. But those would be subject to interest rate risk.
I love my little G Fund.

Donner

 

[charlie]

Donner, you think long rates are going up as do I.
But you don't think measurable CPI is going up.
It seems to me that long rates can increase only
by real yields going up or by the market perceiving
an increase in inflation or some combination. The
market is made up of people and countries that
read the CPI reports. How do you reconcile this
apparent discrepancy in your thinking? I think
real rates are a little below the historical norm
and don't really understand what drives real
rates, but it seems unlikely for real rates to go
up drastically ..... that leaves CPI. No?

 

[yakers]

Donner,
Another good post. There is one gal on Vanguard diehard forum (Laura) who is a big fan of the G Fund and she is not a Govt employee. I used to avoid the G Fund but I had a long time to retirement then. I do think I will move more of my AA to it. A lot of my AA is psychological in that having a pension makes me feel I can take more risk. The opposite could be true for others, having enough saved in a conservative fund would mean not having to take any risk. Thanks for your comments and insights. Since it will not cost much to move a bit more into the G Fund that is a reasonable step for me to take.

 

[HnE]

EE bonds may be the closest to the G fund for those without access. (90% 5 year rate) No downside risk for loss of principal and interest rate adjust every 6 months.

Sticking with my asset allocation plan. The more you have, the more you worry.

Again thanks for a interesting discussion.

HnE

 

[Donner]

Charlie--

If you go to www.bls.gov you can get all kinds of info about the CPI. Here is an excerpt from the FAQ:

7. What goods and services does the CPI cover?
The CPI represents all goods and services purchased for consumption by the reference population (U or W) BLS has classified all expenditure items into more than 200 categories, arranged into eight major groups. Major groups and examples of categories in each are as follows:

FOOD AND BEVERAGES (breakfast cereal, milk, coffee, chicken, wine, service meals and snacks)
HOUSING (rent of primary residence, owners' equivalent rent, fuel oil, bedroom furniture)
APPAREL (men's shirts and sweaters, women's dresses, jewelry)
TRANSPORTATION (new vehicles, airline fares, gasoline, motor vehicle insurance)
MEDICAL CARE (prescription drugs and medical supplies, physicians' services, eyeglasses and eye care, hospital services)
RECREATION (televisions, pets and pet products, sports equipment, admissions);
EDUCATION AND COMMUNICATION (college tuition, postage, telephone services, computer software and accessories);
OTHER GOODS AND SERVICES (tobacco and smoking products, haircuts and other personal services, funeral expenses).
Also included within these major groups are various government-charged user fees, such as water and sewerage charges, auto registration fees, and vehicle tolls. In addition, the CPI includes taxes (such as sales and excise taxes) that are directly associated with the prices of specific goods and services. However, the CPI excludes taxes (such as income and Social Security taxes) not directly associated with the purchase of consumer goods and services.

The CPI does not include investment items, such as stocks, bonds, real estate, and life insurance. (These items relate to savings and not to day-to-day consumption expenses.) End of excerpt

I think consumer inflation gtets in there through energy costs and food costs (often ignored in "core inflation" by those with an interest in ignoring them). Also, health and education costs will bump the index up. But there is an awful lot of deflationary bias iin this basket of goods as well.

What goes in to the real rate if you use this CPI as your deflator? Well, over and above inflation you should have some risk premium built into yield for market risk(risk that the whole market goes sour) and credit risk (risk that your company or country goes sour). The market has been ignoring risk of all kinds for some time but I think that is beginning to change and is starting to be dicounted into the market. If CPI were to heat up that would be another adverse factor boosting the nominal yield and hurting capital even more. More than the CPI I think the world markets have there eye on Greenspan. That guy means business. And that is a risk factor to be "premiumed" in all by itself.

Donner