Should I follow Vanguard's Financial Plan ?

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Should I follow Vanguard's Financial Plan ?

Postby Bustoff » Wed Jan 23, 2013 1:31 pm

We are recently retired and in our late 50's. I have been struggling with setting my basic stock/bond mix.
This week I received my Vanguard Financial Plan wherein they recommend a 50/50 stock/bond mix using 3 funds as follows:
TSM -35%
T-Intl.- 15%
TBM - 50%
Does this seem reasonable ?

They also show best, average and worst case projected balances over a 38 year period (the balances reflect annual drawdowns).
In the worst case scenario it shows our ending balance (after 38 years of drawdowns) having only been reduced by 25% from our current balance. That seems hard to believe.

Are the any retired Bogleheads who have used Vanguard's Financial Plan service and did you find your portfolio performance to be roughly in-line with their projections ?
Last edited by Bustoff on Wed Jan 23, 2013 1:38 pm, edited 1 time in total.
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Re: Should I follow Vanguard's Financial Plan ?

Postby JamesSFO » Wed Jan 23, 2013 1:34 pm

Did you use the "Ask a CFP" service? Have you had your call with the CFP yet? How did you answer the risk-tolerance questions? How does the plan compare to what you have now?

Overall, that sounds like a reasonable plan.
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Re: Should I follow Vanguard's Financial Plan ?

Postby NYBoglehead » Wed Jan 23, 2013 1:40 pm

That plan seems reasonable given your age. The question is does it match your risk tolerance? I would also suggest that it depends on how large your portfolio is and what you expect to get out of it. If it is so large that you don't need any growth you can afford to take less risk. If you have a pension or other source of retirement income you might be less inclined (or more inclined, if you don't need the portfolio income) to take risk.

Enjoy your retirement!
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Re: Should I follow Vanguard's Financial Plan ?

Postby KyleAAA » Wed Jan 23, 2013 1:40 pm

Well we don't know anything about your specific situation but IN GENERAL I can say a 50/50 stock/bond allocation is perfectly reasonable for a recently retired couple. But without knowing the size of your portfolio and expected expenses, nobody can say for sure. Presumably the Vanguard FP had access to this information. Assuming you don't withdraw more than 3-4% of your portfolio to start with and adjust for inflation from there then yeah, their projections sound reasonable. I would almost definitely want to own a healthy amount of TIPS in your situation, but that's quibbling.
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Re: Should I follow Vanguard's Financial Plan ?

Postby Bustoff » Wed Jan 23, 2013 2:17 pm

Thanks for your replies. Please allow me to answer some of these questions.

My call with the CFP is on Monday. I found a couple of the risk tolerance questions difficult. (For instance, in 2008, I got out of everything in March. However, I don't think I would react that way in the future so I responded that I would hold rather than sell.) My current mix is 10% stocks, 10% bonds, 80% in a variety of CD's, stable value and cash. Our tax adv. and taxable spaces are roughly equal. Our current expenses run around 40K. I get a small non-cola pension of 20k/year.
I should note that my indecision has been going on for some time now despite spending time reading the wiki, recommended books and seeking advice on this forum. I'm not sure if it's fear or just trying to avoid making a mistakes.
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Re: Should I follow Vanguard's Financial Plan ?

Postby livesoft » Wed Jan 23, 2013 2:33 pm

With 50% equities and 50% bonds, suppose bonds stay unchanged, but equities go to ZERO, then would you not have 50% of your assets left?

If equities lose 50%, then would you not have 75% of assets left?
It's all about short-term opportunistic rebalancing due to a short-term change in one's asset allocation, uh, I mean opportunistic rebalancing, uh I mean rebalancing, uh I mean market timing.
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Re: Should I follow Vanguard's Financial Plan ?

Postby bertilak » Wed Jan 23, 2013 3:56 pm

Bustoff wrote:Our current expenses run around 40K. I get a small non-cola pension of 20k/year.

That is the key information right there, along with whatever SS you will be getting.

That means you need to generate $20K per year from your investments plus enough extra to make up for inflation's effect on that return and the ever-decreasing real value of your pension. You might be in a spend-down situation between now and when SS kicks in meaning your portfolio might be less at that time. Perhaps the common advice of delaying SS benefits as long as possible might not apply.

You will need to do the math on all that!
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Re: Should I follow Vanguard's Financial Plan ?

Postby damjam » Wed Jan 23, 2013 4:04 pm

Bustoff wrote: I found a couple of the risk tolerance questions difficult. (For instance, in 2008, I got out of everything in March. However, I don't think I would react that way in the future so I responded that I would hold rather than sell.) My current mix is 10% stocks, 10% bonds, 80% in a variety of CD's, stable value and cash. Our tax adv. and taxable spaces are roughly equal.

I would be concerned that a change from 10% stock/90% fixed income to 50% stock/50% fixed income is too big a change.
What was your reason for selling everything in March 2008?
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Re: Should I follow Vanguard's Financial Plan ?

Postby Peter Foley » Wed Jan 23, 2013 5:15 pm

I too would be concerned about the change to 50/50 based on your reaction to the recession in 2008. A risk assessment tends to be abstract until you have to deal with the emotions of implementing/staying with your plan during a difficult period. I did a risk assessment for our local Bogleheads group in 2009 and for those who had previous scores, almost everyone had moved to the next more conservative category. I went from moderately aggressive to moderate - that was probably the average for the 25 member group.
If you have sufficient assets so that your bond AA by itself can carry you for 20 years, that might provide you with enough emotional stability to be able to stay the course at a higher level than you are at currently.
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The Three Fund Portfolio

Postby Taylor Larimore » Wed Jan 23, 2013 5:35 pm

Bustoff:
This week I received my Vanguard Financial Plan wherein they recommend a 50/50 stock/bond mix using 3 funds as follows:
TSM -35%
T-Intl.- 15%
TBM - 50%
Does this seem reasonable ?


I will not comment on the percentages (which do not need to be precise), but I can agree with the three total market index funds that Vanguard recommended. You can read the advantages here:

The Three Fund Portfolio

Best wishes.
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Re: Should I follow Vanguard's Financial Plan ?

Postby BolderBoy » Wed Jan 23, 2013 5:43 pm

Bustoff wrote:They also show best, average and worst case projected balances over a 38 year period (the balances reflect annual drawdowns). In the worst case scenario it shows our ending balance (after 38 years of drawdowns) having only been reduced by 25% from our current balance. That seems hard to believe.


Quite believable depending upon your assumptions. An excellent calculator to test your assumptions is found at:

<http://www.firecalc.com/>

The three fund portfolio that VG recommends is quite sound. It is what I'm using.

I'm 60/40 bonds/stocks as my risk tolerance going forward was tested in 2008-9. Sounds like you got out in 2008 before the bottom fell out. How did you know to do that? Did you get back in in February 2009 before the runup began?
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Re: Should I follow Vanguard's Financial Plan ?

Postby dbr » Wed Jan 23, 2013 6:01 pm

I agree that the asset allocation is perfectly reasonable.

The question of what your fate will be 20, 30, 40 years out is determined by how fast you spend the money and the luck of history more than by your asset allocation, within limits. We have no information regarding the amount of withdrawal you are attempting as a fraction of your assets. For a modest withdrawal rate of 3% or something like that, increased annually by inflation, the "worst" case quoted to you is probably not crazy. For a significantly higher rate of withdrawal it might be crazy.

You can test the interplay of portfolio, pension, and SS in planners like FireCalc, I-ORP, Otar's planner and book etc., keeping in mind that estimates are just estimates. I would urge attention to contingency on the expense side, as it is easy to underestimate one's possible need and want to spend.

http://www.retirementoptimizer.com/
etc.
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Re: Should I follow Vanguard's Financial Plan ?

Postby Bustoff » Wed Jan 23, 2013 6:20 pm

Peter Foley wrote:If you have sufficient assets so that your bond AA by itself can carry you for 20 years, that might provide you with enough emotional stability to be able to stay the course at a higher level than you are at currently.

Thanks Peter, but I'm not sure I understand what you mean by the above thought. Could you elaborate a bit more ? :?
Taylor Larimore wrote:... I can agree with the three total market index funds that Vanguard recommended. You can read the advantages here:
The Three Fund Portfolio

Thank you Taylor.
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Re: Should I follow Vanguard's Financial Plan ?

Postby Dale_G » Wed Jan 23, 2013 6:41 pm

The suggested portfolio allocation is reasonable, and very similar to my own. However, I stuck with it - and rebalanced into equities during the big dip of 2008/2009.

Bustoff, if you really believe you can stick with a 50/50 portfolio in the face of a market meltdown, then go for it.
If there is any doubt however, "fess up to the advisor and dial back the risk. A 40% stock and 60% bond portfolio may help you to cope - and the returns should only be slightly less than with 50% equities.

Whatever you decide, recognize that you have to stick with it. There is no sense in cashing out when the market is getting kicked around, and then buying back in after the market has doubled (depending on when you left).

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Re: Should I follow Vanguard's Financial Plan ?

Postby 555 » Wed Jan 23, 2013 6:59 pm

What does
current assets
divide by
annual expenses
equal?

That number is pretty crucial to informing a plan.
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Re: Should I follow Vanguard's Financial Plan ?

Postby ourbrooks » Wed Jan 23, 2013 7:14 pm

Here's another retirement estimator to check things with: http://www.flexibleretirementplanner.com/wp/. The developer (not me) also posts to this forum.

If you use this calculator or Firecalc, you'll notice something astonishing: You get about the same results with asset allocations ranging from 30/70 to 70/30 stocks/bonds.
The more stocks you have, the better protected you are against inflations; the more bonds you have, the better you are protected from market crashes so there's not much difference in the likelihood of running out of money.

Where there is a difference is in the size of the estate you leave; on average, the more stocks the bigger the estate. At least as far as these calculators go, the choice is between seeing less portfolio fluctuation and leaving a bigger estate; it's a personal decision.

Another factor to consider is the likely direction of interest rates. Right now, they're one third of their historical average and they don't appear to be rising fast. You might want to read the articles by Wade Pfau in which he looks at the impact of lower interest rates on retirement withdrawal. If he's at all correct, 50% bonds is probably less safe than 30% bonds, in terms of running out of money within 30 years. On the other hand, if you're inclined to bail out in market meltdowns, maybe you are better off
with more bonds and dialing back your spending accordingly.

I suspect that Vanguard is using historical averages and a 4% withdrawal rate; using Flexible Retirement Planner, cut the return on bonds in half and see what get.
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Re: Should I follow Vanguard's Financial Plan ?

Postby Bustoff » Wed Jan 23, 2013 7:41 pm

ourbrooks wrote:Another factor to consider is the likely direction of interest rates. Right now, they're one third of their historical average and they don't appear to be rising fast. You might want to read the articles by Wade Pfau in which he looks at the impact of lower interest rates on retirement withdrawal. If he's at all correct, 50% bonds is probably less safe than 30% bonds, in terms of running out of money within 30 years.


ourbrooks - that makes sense to me.
I'm pretty much clueless compared to Vanguard or for that matter most Bogleheads, but it just runs against all common sense to me when Vanguard recommends putting half of my life saving into the TBF. The experts say just keep bond duration within horizons and reinvest your dividends and you'll break-even by the end of the duration. How does that work for retired folks ? If we keep durations short then theres no income. Whats more, how realistic is it to suggest that retired investors reinvest all their bond returns when we need the income ?
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Re: Should I follow Vanguard's Financial Plan ?

Postby dbr » Wed Jan 23, 2013 8:07 pm

Bustoff wrote:I'm pretty much clueless compared to Vanguard or for that matter most Bogleheads, but it just runs against all common sense to me when Vanguard recommends putting half of my life saving into the TBF. The experts say just keep bond duration within horizons and reinvest your dividends and you'll break-even by the end of the duration. How does that work for retired folks ? If we keep durations short then theres no income. Whats more, how realistic is it to suggest that retired investors reinvest all their bond returns when we need the income ?


Certainly if you want to withdraw and spend money from any investment you would have to expect that the investment will not grow or not grow as fast as it would otherwise, wouldn't you?
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Re: Should I follow Vanguard's Financial Plan ?

Postby Bustoff » Wed Jan 23, 2013 9:42 pm

dbr wrote:
Bustoff wrote:I'm pretty much clueless compared to Vanguard or for that matter most Bogleheads, but it just runs against all common sense to me when Vanguard recommends putting half of my life saving into the TBF. The experts say just keep bond duration within horizons and reinvest your dividends and you'll break-even by the end of the duration. How does that work for retired folks ? If we keep durations short then theres no income. Whats more, how realistic is it to suggest that retired investors reinvest all their bond returns when we need the income ?


Certainly if you want to withdraw and spend money from any investment you would have to expect that the investment will not grow or not grow as fast as it would otherwise, wouldn't you?


OK I'll bite. But dbr, my concern is not the growth aspect. Rather, it's the very real likelihood of a secular bear market in bonds thereby making it impossible to ever recover the disproportionate loss in NAV . . . because dividends are not being reinvested.
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Re: Should I follow Vanguard's Financial Plan ?

Postby grabiner » Wed Jan 23, 2013 10:37 pm

Bustoff wrote:I get a small non-cola pension of 20k/year.


Given the non-COLA pension, you are more vulnerable to inflation risk than other retirees; the pension will cover less of your retirement income in the future if inflation is high. Therefore, you probably want to hold inflation-protected bonds for a large part of your bond allocation, either I-Bonds in your taxable account or TIPS in your IRA.
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Re: Should I follow Vanguard's Financial Plan ?

Postby Bustoff » Wed Jan 23, 2013 11:42 pm

Is there a guideline for determining how much of inflation protected bonds to hold ?
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Re: Should I follow Vanguard's Financial Plan ?

Postby rickmerrill » Thu Jan 24, 2013 12:13 am

No real rule of thumb but a up to 50% seems to be quoted most frequently. I think they might be a good fit.
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Re: Should I follow Vanguard's Financial Plan ?

Postby rickmerrill » Thu Jan 24, 2013 12:32 am

Bustoff wrote:
dbr wrote:
Bustoff wrote:I'm pretty much clueless compared to Vanguard or for that matter most Bogleheads, but it just runs against all common sense to me when Vanguard recommends putting half of my life saving into the TBF. The experts say just keep bond duration within horizons and reinvest your dividends and you'll break-even by the end of the duration. How does that work for retired folks ? If we keep durations short then theres no income. Whats more, how realistic is it to suggest that retired investors reinvest all their bond returns when we need the income ?


Good point but you do not have to get your income only from your bonds https://personal.vanguard.com/pdf/s557.pdf. Sorry if I am misinterpreting. You might consider adding some shorter duration, stable value and or Tips.

Certainly if you want to withdraw and spend money from any investment you would have to expect that the investment will not grow or not grow as fast as it would otherwise, wouldn't you?


OK I'll bite. But dbr, my concern is not the growth aspect. Rather, it's the very real likelihood of a secular bear market in bonds thereby making it impossible to ever recover the disproportionate loss in NAV . . . because dividends are not being reinvested.


I can't agree that there is a very real likelihood of ... because I don't know the future - but I would agree if you said a secular bear market in stocks.
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Re: Should I follow Vanguard's Financial Plan ?

Postby KyleAAA » Thu Jan 24, 2013 12:36 am

Bustoff wrote:
dbr wrote:
Bustoff wrote:I'm pretty much clueless compared to Vanguard or for that matter most Bogleheads, but it just runs against all common sense to me when Vanguard recommends putting half of my life saving into the TBF. The experts say just keep bond duration within horizons and reinvest your dividends and you'll break-even by the end of the duration. How does that work for retired folks ? If we keep durations short then theres no income. Whats more, how realistic is it to suggest that retired investors reinvest all their bond returns when we need the income ?


Certainly if you want to withdraw and spend money from any investment you would have to expect that the investment will not grow or not grow as fast as it would otherwise, wouldn't you?


OK I'll bite. But dbr, my concern is not the growth aspect. Rather, it's the very real likelihood of a secular bear market in bonds thereby making it impossible to ever recover the disproportionate loss in NAV . . . because dividends are not being reinvested.


You should be rebalancing periodically. It doesn't matter whether your reinvest dividends or not because you'll also get capital appreciation on the equity side over longer periods of time.
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Re: Should I follow Vanguard's Financial Plan ?

Postby dbr » Thu Jan 24, 2013 1:02 am

KyleAAA wrote:
You should be rebalancing periodically. It doesn't matter whether your reinvest dividends or not because you'll also get capital appreciation on the equity side over longer periods of time.


Right. If you invest in a balanced portfolio of stocks and bonds, then it is a question of the race between total return of the portfolio and the rate of withdrawal. Whether or not those withdrawals are exactly the interest on the bonds or dividends on the stocks is neither here nor there.

Sometimes withdrawal will gain and sometimes return, but on average if withdrawal is low enough and return is high enough the portfolio will grow in the end. If withdrawal outraces return, the portfolio will eventually shrink, but may last long enough to outlive the investor. During all of this sometimes bonds will lag or rise and sometimes stocks will lag or rise, producing the net effect. On the whole stocks will rise and fall by greater degrees than bonds will.

In the case of a secular bear market in bonds it figures that the overall ability of the portfolio to sustain income will be a little less than if bonds were producing greater return. Since return but also volatility is much greater for stocks than for bonds, problems in bond returns are not as important as problems in stock returns. It isn't very important exactly what bonds one invests in, at least within the range of short to intermediate bonds. In case of a secular bear market in stocks, the investor also faces a difficult result, but more severe than a down market in bonds. That is why a high stock portfolio will be less likely to fail but will fail sooner and more severely when it fails. The outcome depends on the luck of history. The safety factor is in not withdrawing too much, especially if it is evident that returns are not materializing. Also, because of the same fact that stock returns are greater than bond returns, a portfolio too high in bonds cannot sustain as much withdrawal as one with more stocks.

If the investor wants to avoid the issue, an alternative is to annuitize enough of the assets to provide all the needed income and take no withdrawals from the remaining assets.
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Re: Should I follow Vanguard's Financial Plan ?

Postby Bustoff » Thu Jan 24, 2013 7:57 am

dbr wrote:
The safety factor is in not withdrawing too much, especially if it is evident that returns are not materializing. Also, because of the same fact that stock returns are greater than bond returns, a portfolio too high in bonds cannot sustain as much withdrawal as one with more stocks.

If the investor wants to avoid the issue, an alternative is to annuitize enough of the assets to provide all the needed income and take no withdrawals from the remaining assets.


Would it be silly to keep perhaps 5 years worth of living expenses in CD's. That would allow you to keep a 50% TBM / 50% TSM portfolio unmolested. You would take nothing from the portfolio. That would allow you to reinvest all the dividends, interest and cap gains in the stock/bond portfolio. (I chose 5 years of living expenses because the avg. duration of TBM is 5years.)
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Re: Should I follow Vanguard's Financial Plan ?

Postby livesoft » Thu Jan 24, 2013 8:08 am

Bustoff wrote:Would it be silly to keep perhaps 5 years worth of living expenses in CD's. That would allow you to keep a 50% TBM / 50% TSM portfolio unmolested. You would take nothing from the portfolio. That would allow you to reinvest all the dividends, interest and cap gains in the stock/bond portfolio. (I chose 5 years of living expenses because the avg. duration of TBM is 5years.)

I would count CDs and bond funds as part of my fixed income allocation and not keep it mentally separated. If one assumes that a year's worth of living expenses is 4% of the retirement portfolio, than 5 year's worth is like have 20% cash, 50% TBM and 50% TSM or renormalized: 58% fixed income/ 42% equities.

That is, 5 years in CDs and 50/50 is the same as 58% bonds / 42% TSM. Nothing wrong with that for some folks.
It's all about short-term opportunistic rebalancing due to a short-term change in one's asset allocation, uh, I mean opportunistic rebalancing, uh I mean rebalancing, uh I mean market timing.
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Re: Should I follow Vanguard's Financial Plan ?

Postby johnep » Thu Jan 24, 2013 9:22 am

Bustoff,
You sound more risk averse than the AA Vanguard recommended for you. You should discuss your concerns with the Vanguard CFP when you meet with him/her. Many people do a bonds in age AA which would adjust as you get older. I think the idea of having your near term income needs in a CD ladder is excellent.

One other factor to consider is the loss of your human capital. When I was working my thought process was that if I have major investment losses, I will just have to work longer and/or save more. Once you retire, you no longer have that option. Of course, you are young enough to go back to work but perhaps not at the same level of income. Nonetheless, the realization that you no longer have that human capital to accumulate more retirement funds can cause some people to be more cautious and conservative. That may or may not affect your AA strategy but just wanted you to be aware of it. Best wishes.
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Re: Should I follow Vanguard's Financial Plan ?

Postby Bustoff » Thu Jan 24, 2013 9:28 am

livesoft wrote:I would count CDs and bond funds as part of my fixed income allocation and not keep it mentally separated.


Interesting point livesoft.
I must say, I really value the opinions and insight that you Bogleheads share with us. You provide a range of perspectives that, for some reason, I failed to perceive on my own.

Now if I could just mentally separate the "fear".
I admit it, the markets scare me. They're spooky. And I don't respond well to spooky behavior.
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Re: Should I follow Vanguard's Financial Plan ?

Postby dbr » Thu Jan 24, 2013 11:03 am

Bustoff wrote:
dbr wrote:
The safety factor is in not withdrawing too much, especially if it is evident that returns are not materializing. Also, because of the same fact that stock returns are greater than bond returns, a portfolio too high in bonds cannot sustain as much withdrawal as one with more stocks.

If the investor wants to avoid the issue, an alternative is to annuitize enough of the assets to provide all the needed income and take no withdrawals from the remaining assets.


Would it be silly to keep perhaps 5 years worth of living expenses in CD's. That would allow you to keep a 50% TBM / 50% TSM portfolio unmolested. You would take nothing from the portfolio. That would allow you to reinvest all the dividends, interest and cap gains in the stock/bond portfolio. (I chose 5 years of living expenses because the avg. duration of TBM is 5years.)


It wouldn't be silly, but it doesn't accomplish anything either. You are still running a race between how fast you withdraw money and how fast returns accumulate. CD's do indeed offer a potential advantage that for a period of time they may return more than bonds will, but the return on CD's is also at historical lows while for now the portfolio will have to depend on stock returns to gain headway. That does not mean that a person should take more risk in stocks than they can tolerate and hold the course on.

What really happens in retirements is that at some points in history people retire into a future where returns of stocks and bonds combined do not follow a path that allows the portfolio to end up growing large in the presence of withdrawals while at other times the future history of returns will result in sustaining withdrawals and leaving the retiree with great wealth. All of this must be gauged allowing for inflation. People that retired in the mid-sixties had very unfavorable retirements due to a secular bear market in stocks and then eventually getting whammied by inflation. Retirees starting in the mid-seventies had to endure early-eighties inflation but benefited from the all time greatest bull market in US stock history beginning in 1982. It is extraordinarily difficult to predict what will actually happen to a person retiring today over the next thirty or forty years. It would hardly be possible to make such a prediction based simply on knowing the yield on bonds in 2012. In any case the outcome is far more sensitive to the rate of spending than it is to the asset allocation. In fact, between history and spending, there is little game left to play with asset allocation except at the extremes. Probably the lessons are that too much in bonds is almost always risky and that SPIA's fundamentally make sense. Even those lessons might have historical exceptions.
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Re: Should I follow Vanguard's Financial Plan ?

Postby pkcrafter » Thu Jan 24, 2013 11:27 am

Bustoff, we need two key pieces of information:
My call with the CFP is on Monday. I found a couple of the risk tolerance questions difficult. (For instance, in 2008, I got out of everything in March.

1) What was your asset allocation in 2008 when you got out?
2) what % of assets are you now withdrawing?

Paul
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Re: Should I follow Vanguard's Financial Plan ?

Postby Bustoff » Thu Jan 24, 2013 12:24 pm

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Re: Should I follow Vanguard's Financial Plan ?

Postby EternalOptimist » Thu Jan 24, 2013 5:01 pm

Your AA seems fine. I'm 63 and retired for a couple of years with that AA and things seem to be fine 8-)
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Re: Should I follow Vanguard's Financial Plan ?

Postby pkcrafter » Thu Jan 24, 2013 7:59 pm

Bustoff wrote:
pkcrafter wrote:Bustoff, we need two key pieces of information:
My call with the CFP is on Monday. I found a couple of the risk tolerance questions difficult. (For instance, in 2008, I got out of everything in March.

1) What was your asset allocation in 2008 when you got out?
2) what % of assets are you now withdrawing?


1) In 2008 the stock side was about 20% with balance in money markets . However, in 2001 was 100% S&P 500. I'm guessing that's why I was so gun shy of stock in 2008. So it turns out when I sold my 20% S&P in early 2008 there were much bigger losses ahead. I started to buy back into the S&P with each contribution to my 401k. But then I saw those purchases continuing to plummet and I sold everything I bought on the way down. Whew, your getting me all worked up Paul.
2) Our current expenses are running around 40k and we're not living it up by any means. However, my 20K non-cola pension is helping.
We are already getting a little bored and would like to start enjoying our retirement a little more.


Thank you, we know you are pulling 20k annually, but that does not answer the question, what percent of retirement assets is 20k? That figure is critical in determining if you can get by with very low equity allocation.


Paul
Last edited by pkcrafter on Fri Jan 25, 2013 12:06 pm, edited 1 time in total.
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Re: Should I follow Vanguard's Financial Plan ?

Postby rickmerrill » Thu Jan 24, 2013 11:32 pm

Bustoff,

Pending the answer to the question above, based on what you have said and what you did in response to the last market drop you will need therapy if your AA is 50/50! I'm not saying Vanguard's advice is wrong or that you are wrong. Would you stay-the-course if stocks dropped for a few years and you lost 25% of your portfolio? Now lets turn up the heat - the news is filled with doom and gloom, a war might start, the talking heads are sure the US economy is going the way of Japan's and the market drops five more percent in two weeks!

Risk aversion is a very personal thing and your gut reaction to flee is not likely to change - no matter what you or anyone else tells you. This is not a criticism - it describes many of us! So if you can safely set it low enough that you just don't worry that much about it I think you will be very close to the correct allocation for you. If that works ok for you after a drop or two you might even feel like you can raise it some.

I hope you didn't reply while I was typing this to say you have a huge portfolio...
If I am stupid I will pay.
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Re: Should I follow Vanguard's Financial Plan ?

Postby convert949 » Fri Jan 25, 2013 11:03 am

Bustoff wrote:
Now if I could just mentally separate the "fear".
I admit it, the markets scare me. They're spooky. And I don't respond well to spooky behavior.

Hi Bustoff,

This comment seems pretty consistent with what you did in '08... If I go back to your original post, you admit that you answered the question on whether you would sell or hold based on what you think you would do today. Having also done a Vanguard FP in the past, I believe the question is what you "actually" did at that time.

I was in a similar position when retiring a few years ago (now 63). If you had "stayed the course" in '08 with 20% equities you would have "lost" 10%, but you bailed. Are you sure that losing 25% now would be OK? All here will tell you that you were lucky in your timing last time and not to count on it helping in the future.

In fooling around with the Vanguard online AA tool, the two questions that affect the "auto-recommendation" the most are what you actually did last time and how long you tend to hold a long term investment. Answered honestly, you may get a more conservative answer.

Good Luck,

Bob
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Re: Should I follow Vanguard's Financial Plan ?

Postby Bustoff » Fri Jan 25, 2013 7:04 pm

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Re: Should I follow Vanguard's Financial Plan ?

Postby Peter Foley » Fri Jan 25, 2013 9:41 pm

Bustoff wrote:

Peter Foley wrote:If you have sufficient assets so that your bond AA by itself can carry you for 20 years, that might provide you with enough emotional stability to be able to stay the course at a higher level than you are at currently.

Thanks Peter, but I'm not sure I understand what you mean by the above thought. Could you elaborate a bit more ?


I was thinking that it is hard to stay the course when the market is heading down sharply - as it was in 2008. At that point in time it might have meant having to work a few years longer if the market did not recover in a timely fashion. That was certainly my thinking at the time and, while I did not always sleep well at night, I held tight. Coming out the market slump I ended up in a position where the bond portion of my portfolio would support about 20 years of retirement. Knowing that, I think I have greater risk tolerance now because a market downturn would not impact when I would be able to retire. You might be in a similar situation and be better able to stay the course this time around. If that's the case, then the suggested 50/50 is not a bad way to go.
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Re: Should I follow Vanguard's Financial Plan ?

Postby 555 » Fri Jan 25, 2013 9:55 pm

Bustoff wrote:
pkcrafter wrote:"Thank you, we know you are pulling 20k annually, but that does not answer the question, what percent of retirement assets is 20k? That figure is critical in determining if you can get by with very low equity allocation. Paul"


"Sorry for the delay. The figure I came up with is 1.22%."


Okay, this means you can very safely cover your spending needs with your assets (even if you increased your spending somewhat). This is pretty much the case regardless of how you are invested.

You don't need to take risk, but you can afford to.

Edit: I see you say above "my 20K non-cola pension" meaning you will need more from your portfolio later, so that's a consideration.
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Re: Should I follow Vanguard's Financial Plan ?

Postby pkcrafter » Fri Jan 25, 2013 11:27 pm

Thanks for the key number, and 555 is right--You are in a position where you could go 50/50 and not be hurt by a crash. On the other hand you don't need to take any risk, so which would you choose, Vanguard's recommendation of 50/50 or a recommendation to go with no stock? Actually, the optimal portfolio would be 15-20% stock because the portfolio volatility is no higher than no stock and there's a bit more return, but again, you don't even need that.
Enjoy your retirement.

Paul
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Re: Should I follow Vanguard's Financial Plan ?

Postby Bustoff » Sat Jan 26, 2013 11:03 am

pkcrafter wrote:Thanks for the key number, and 555 is right--You are in a position where you could go 50/50 and not be hurt by a crash. On the other hand you don't need to take any risk, so which would you choose, Vanguard's recommendation of 50/50 or a recommendation to go with no stock? Actually, the optimal portfolio would be 15-20% stock because the portfolio volatility is no higher than no stock and there's a bit more return, but again, you don't even need that.
Enjoy your retirement.
Paul

Thanks Paul and 555 !
Please allow me to ask a follow-up question. Our 40K in expenses is based on a really modest lifesyle thus far (i.e. We really don't do much.)

Can you offer any guidance on how to figure out how much more we can spend if we wanted to start enjoying a few of the activities of retirement that usually increase expenses, such as travel, golf, etc. ?
In other words, if we wanted to spend say an extra $10K a year . . . so we didn't have to stay home all the time ?
Last edited by Bustoff on Sat Jan 26, 2013 3:05 pm, edited 1 time in total.
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Re: Should I follow Vanguard's Financial Plan ?

Postby pkcrafter » Sat Jan 26, 2013 3:04 pm

Bustoff, you might review this study by M* which shows success rates on various withdrawal strategies. Using a constant percentage amount would allow you to spend more in years where assets rise, but since you at such a low withdrawal rate you could go up some with any strategy and still be OK. Certainly a 1.8-2.0% WD is in the safe zone.

http://corporate.morningstar.com/ib/documents/MethodologyDocuments/OptimalWithdrawlStrategyRetirementIncomePortfolios.pdf

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Re: Should I follow Vanguard's Financial Plan ?

Postby Bustoff » Sat Jan 26, 2013 3:14 pm

pkcrafter wrote:Bustoff, you might review this study by M* which shows success rates on various withdrawal strategies. Using a constant percentage amount would allow you to spend more in years where assets rise, but since you at such a low withdrawal rate you could go up some with any strategy and still be OK. Certainly a 1.8-2.0% WD is in the safe zone.

http://corporate.morningstar.com/ib/documents/MethodologyDocuments/OptimalWithdrawlStrategyRetirementIncomePortfolios.pdf Paul


Thanks Paul ... that's what I was looking for.
Also, having considered the thoughtful replies from you and others, I think I'll go with a 20-30% stock allocation for now. (and change my user name to "wussy")
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Re: Should I follow Vanguard's Financial Plan ?

Postby Dandy » Sat Jan 26, 2013 3:43 pm

Without knowing more specifics the recommendation is reasonable. Total Bond fund is a very good fund. I would not put all my fixed income in Total Bond especially in this interest rate environment. If you still have access to a decent stable value fund I would keep a chunk in that. If not, consider Inflation Protection fund and a short term bond fund as well as CDs.

I like fixed income to be 1/3 Intermediate bond fund(s) (Total bond fund/Inflation Protection bond fund), 1/3 Short Term Bond fund(s) and 1/3 "safe" (stable value, money market, Ibonds, Savings Bonds, CDs/Savings accts.) The percentages aren't the key it is the diversification. I don't consider this market timing. If you want to own the market for fixed income the Total Bond fund's name is misleading. It does not cover Inflation protection bonds nor other fixed income vehicles such as CDs,money markets, stable value funds, municipal bonds, I bonds etc. Each of these other investments has its own risk/reward/tax and impact of interest rate characteristics. I don't think you need to own all or any in proportion to the market but neither should they be ignored without careful consideration.
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Re: Should I follow Vanguard's Financial Plan ?

Postby Bustoff » Sun Jan 27, 2013 1:50 pm

After considering the generous advice from Bogleheads, I decided to reduce my stock allocation from the 50/50 mix recommended by the Vanguard Financial Plan. My teleconference with Vanguard rep is tomorrow.

One big question:

Vanguard is putting me in a Three-fund portfolio of TSM, TI and TBM. Since I'm retired and need to supplement my small pension, from which fund should I withdraw money and should I re-invest dividends and cap-gains ?

(I checked the Wiki and read about tax efficient placement of assets and also about the various withdrawal strategies but those articles didn't seem on point re my question.)
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Re: Should I follow Vanguard's Financial Plan ?

Postby livesoft » Sun Jan 27, 2013 1:55 pm

What are the locations of those funds?

1. Take dividends & distributions in the taxable accounts and spend them. That's a withdrawal.
2. Take any RMDs from tax-advantaged accounts and spend them. That's a withdrawal.
3. If not contributing, withdraw from whichever fund gives the least tax consequences without upsetting your asset allocation.
4. Withdraw from the fund which causes your asset allocation to be too high in that fund.

Does that help?
It's all about short-term opportunistic rebalancing due to a short-term change in one's asset allocation, uh, I mean opportunistic rebalancing, uh I mean rebalancing, uh I mean market timing.
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Re: Should I follow Vanguard's Financial Plan ?

Postby Bustoff » Sun Jan 27, 2013 3:26 pm

livesoft wrote:What are the locations of those funds?

1. Take dividends & distributions in the taxable accounts and spend them. That's a withdrawal.
2. Take any RMDs from tax-advantaged accounts and spend them. That's a withdrawal.
3. If not contributing, withdraw from whichever fund gives the least tax consequences without upsetting your asset allocation.
4. Withdraw from the fund which causes your asset allocation to be too high in that fund.

Does that help?


What are the locations of those funds?
Taxable -TSM & TI
Tax-adv - TBM
We are almost evenly divided 50/50 between taxable and tax-adv. The original Vanguard Plan called for a 50/50 stock/bond mix. (based on my foolish assessment of my risk tolerance)

Since I'm now modifying the mix to 35/65 stock/bond, I guess they will have to put the extra 15 % of TBM in my taxable space. I'm 59 1/2 so I don't have any RMD's yet. Do you recommend reinvesting the bond dividends ?
Thanks livesoft !

P.S. - I'm still working on your thread "how to pay zero taxes in retirement". :beer
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Re: Should I follow Vanguard's Financial Plan ?

Postby livesoft » Sun Jan 27, 2013 3:33 pm

Re-investing bond dividends in tax-advantaged is fine, but probably not in taxable if you end up with a bond fund in taxable.
It's all about short-term opportunistic rebalancing due to a short-term change in one's asset allocation, uh, I mean opportunistic rebalancing, uh I mean rebalancing, uh I mean market timing.
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