JamesG wrote:"You state the problem very clearly: two goals require two instruments.
You raise an interesting philosophical question in your second paragraph: that is, how should one think about arriving at a value for the "safe" asset proportion in the aspirational portfolio? Without having yet given it much thought, I would have assumed that the aspirational portfolio should have a very high equity orientation. With low-return inflation-protected securities doing so much heavy lifting in the flooring portfolio, I think I will struggle with the idea of allocating much more than about 10% of the aspirational portfolio to bonds (and this only to pick up some rebalancing gains). I guess this question can only be answered by an introspective assessment of one's own risk preferences, and a realistic evaluation of one's likely resources at retirement: perhaps the higher one sets the level of flooring income, the lower should be the bond allocation in the aspirational portfolio; likewise, the higher one's likely assets at retirement, the lower can be the bond allocation in the aspirational portfolio.
Faith20879 wrote:HI JamesG,
Welcome to the forum.
Reading that you are 20+ years from retirement and that you are intrigued by the flooring concept, it reminded me of another option that might also interest you. It is the Treasury savings bonds route. Mel, a well-respected contributor here, once illustrated how one can use EE-Bonds (or I-Bonds) to build a floor for someone who has a 20+ horizon. It works like this, say your floor is 1,000/month * 12, you purchase that amount each year for 20 years. The initial EE-Bonds pay near zero interest but at the 20th year it's value doubles. So you are guaranteed to have that much each year. If you search "Mel EE bond" you'll find a lot of references.
Remember it is never an “all or nothing”. You can do a little bit of all your options.
bertilak wrote:A question re using the cost of an annuity as a benchmark for how much you need in safe assets. (Or is that in any assets that will eventually be converted to safe assets?)
An SPIA pays a bit more than other safe assets because of mortality credits (or because the insurance company keeps what's left of your premium at death, same thing said in another way). If you use the SPIA cost to estimate how much you need to target as your portfolio value might you come up a bit short since none of your non-SPIA investments can be expected to provide quite the level of income as an SPIA? More importantly, those non-SPIA assets are volatile so there is a chance you will not meet your target. I think one might need to aim a bit higher than SPIA costs to a) more likely meet your target and b) have an adequate target.
Of course the overall uncertainties may make my above thoughts below the noise level. Or, maybe that noise is all the more reason to aim a little high.
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