Investing FOR Retirement vs Investing IN Retirement

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Peter Foley
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Investing FOR Retirement vs Investing IN Retirement

Post by Peter Foley » Sun May 21, 2017 11:09 am

At the next MN Bogleheads meeting (August) we are planning to have two small group Q&A sessions. One session will be titled Investing FOR Retirement and the other Investing IN Retirement.

It would be helpful to the moderators of these discussions to have broad BH community insight in advance.
Do you see the two topics as different? If so how?
Do you see the two topics as essentially the same? If so, why?
Also appreciated would be any insight as to where you think the discussions of the two topics might lead.

Thanks in advance for your insight.

livesoft
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Re: Investing FOR Retirement vs Investing IN Retirement

Post by livesoft » Sun May 21, 2017 11:17 am

One could make the distinction that while IN Retirement that one would no longer be able to contribute to IRA, Roth, 401(k), 403(b), etc.

But I consider myself retired. My spouse still works. I do a little consulting and teaching for a few weeks a year and get paid for that. My income is not significant, but I put all of it in my individual 401(k) plan.

Nevertheless, we must make withdrawals from our investments in order to meet expenses.

Another couple of distinctions:

1. Is one receiving SS and/or Pension income? We are not.
2. Is one taking RMDs from investments? We have inherited IRAs that we must take RMDs from, but they are so small that they barely pay for a nice dinner.

So for us, I don't think there is any true distinction between FOR and IN Retirement, but maybe that's because we are in a transition period.

I think perhaps divide into two Q & A sessions:
Accumulation Phase: Lots of questions about asset allocation, tax-loss harvesting, traditional vs Roth, ....

Decumulation / Withdrawal Phase: Lots of questions on the forum about order of withdrawal, reinvesting distributions, taxes, conversions, ....
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bengal22
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Re: Investing FOR Retirement vs Investing IN Retirement

Post by bengal22 » Sun May 21, 2017 11:22 am

No real difference for me. I have made my AA a little more conservative(55-45 stocks). So far my portfolio has still been growing due to appreciation. My biggest strategy is how to minimize taxes by deciding where to pull assets needed beyond pension, wife's SS, and dividends.
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Re: Investing FOR Retirement vs Investing IN Retirement

Post by bayview » Sun May 21, 2017 11:32 am

Perhaps address how to (or whether to) maintain retirement AA when converting Roths and taking RMDs. It took me a long time to stop thinking of RMDs as money that will be completely lost and instead think of whether the post-tax amount should go right back into the same AA or into some other critter (iBonds for self-insuring LTHC and so forth.) Anything not spent still has to go somewhere, and that's an investment, even if it's only CDs.
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dbr
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Re: Investing FOR Retirement vs Investing IN Retirement

Post by dbr » Sun May 21, 2017 11:40 am

I think they are separate excepting that investing for retirement does have to consider where you end up as you enter retirement, which is then what you need to deal with from that point on.

I am pretty sure the participants in the discussion will have very different needs for advice between those who are saving for retirement and those who are managing money in retirement. In the spirit of the sentence above people accumulating might find the concerns of those already there to be enlightening. Even so, I would run separate fora.

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Svensk Anga
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Re: Investing FOR Retirement vs Investing IN Retirement

Post by Svensk Anga » Sun May 21, 2017 12:58 pm

If you follow the prescription of Dr. Bernstein in 'Ages of the Investor', the two are wholly different. One year into retirement, I can say that they feel different to me too. Bernstein's prescription in retirement is very much risk off, whereas in accumulation, one can reasonably go as far as their risk tolerance allows.

The risk changes substantially. I have heard it said that they day you retire is the riskiest day in your life (certain occupations excepted). In the accumulation phase, if things go badly, you may have to work a couple years longer, but portfolio declines do not otherwise impact one's lifestyle. In retirement, going back to work, especially for professional wages, may not be an option. I think in retirement, you have to be very cognizant of how you would handle a worst case scenario. This risk sensitivity should start some years before retirement (5?, 10?) when the nest egg is getting large, human capital is dwindling, and age discrimination may be becoming a factor. Deep in accumulation phase, I just piled funds into the 401k month after month, 90-95% equities, and hardly even noticed the tech bubble deflating. Late forties in 2008 and anticipating an early retirement, I was extremely aware of market volatility. I had neglected to start transitioning to fixed-income. Turned out okay, but only because equities bounced back quickly.....this time.

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Re: Investing FOR Retirement vs Investing IN Retirement

Post by carolinaman » Sun May 21, 2017 1:14 pm

The FOR is in the accumulation phase and has human capital which can help makeup for losses. The IN is in the decumulation phase and no longer has human capital, meaning that they must make up for investment losses through investment gains or a reduction of their living expenses, i.e. reduce their standard of living, or go back to work if they can. There are some variations of this but generally I think these are the major differences.

Their is a mindset difference which I did not realize until I retired. Once you realize that your human capital is not there to help you recover losses, it makes one appreciate the risks of the market greater than before.

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Re: Investing FOR Retirement vs Investing IN Retirement

Post by The Wizard » Sun May 21, 2017 1:32 pm

Definitely a difference between the two.
I'm four years retired and maintaining a 50/50 AA roughly.
My retirement income, largely from tax deferred accounts, exceeds my expenses most months, so I reinvest a portion of it the only way I can, into my taxable investment account, a stock index fund.
This is similar to what some folks who take RMDs do with the proceeds, though I'm a few years away from that.

It should be noted that some retirees prefer to maintain a large cash balance, but I do not. Everything beyond around $10K cash gets invested, in VTSAX presently...
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Re: Investing FOR Retirement vs Investing IN Retirement

Post by heyyou » Sun May 21, 2017 3:05 pm

Michael McClung's Living Off your Money suggests some retirement spending paths that are noticeably different than when working and saving. Spending only from bonds is a big one, selling stocks only when they are above 110 or 120% real from retirement day value. Choosing to spend a calculated percentage of the recent portfolio value is different than Bengen's 4% annually of the retirement day asset amount.

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Re: Investing FOR Retirement vs Investing IN Retirement

Post by John Z » Sun May 21, 2017 3:30 pm

heyyou wrote:Michael McClung's Living Off your Money suggests some retirement spending paths that are noticeably different than when working and saving. Spending only from bonds is a big one, selling stocks only when they are above 110 or 120% real from retirement day value. Choosing to spend a calculated percentage of the recent portfolio value is different than Bengen's 4% annually of the retirement day asset amount.
+1
You can download the first 3 chapters free (chapter 3 is one of the best ones regarding income harvesting).

http://livingoffyourmoney.com/

Dottie57
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Re: Investing FOR Retirement vs Investing IN Retirement

Post by Dottie57 » Sun May 21, 2017 4:01 pm

I'll be attending the August meeting. There is also a third category...of pre-retirement. Considerations during the 5 year or less period before retirement..

Setting oneself up for roth conversions
considerations for deciding when to tak SS.
Taxation of SS.
Re-investing rmds.
Preparing for black swan.

dbr
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Re: Investing FOR Retirement vs Investing IN Retirement

Post by dbr » Sun May 21, 2017 4:10 pm

Dottie57 wrote:I'll be attending the August meeting. There is also a third category...of pre-retirement. Considerations during the 5 year or less period before retirement..

Setting oneself up for roth conversions
considerations for deciding when to tak SS.
Taxation of SS.
Re-investing rmds.
Preparing for black swan.
That is a good observation. Maybe one forum should be approaching and in retirement and the other accumulating for retirement.

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Peter Foley
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Re: Investing FOR Retirement vs Investing IN Retirement

Post by Peter Foley » Sun May 21, 2017 5:21 pm

Dottie 57 and dbr

I certainly agree with your opinion that there is a pre-retirement category as well. At a quarterly meeting about a year ago we had a panel discussion about the topic - we called it Retirement Red Zone. It was a discussion and Q&A about the time period immediately preceding retirement and immediately following retirement.

I posted on the forum with regard to that topic as well.

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Re: Investing FOR Retirement vs Investing IN Retirement

Post by livesoft » Sun May 21, 2017 5:27 pm

For another look at the McClung Prime Harvesting there is this recent analysis:
https://earlyretirementnow.com/2017/04/ ... arvesting/
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Re: Investing FOR Retirement vs Investing IN Retirement

Post by itstoomuch » Sun May 21, 2017 5:28 pm

'bout time. A good portion of us Boomers are already in retirement voluntary and involuntary.
I discovered that there are worlds and words of differences between Investing for retirement and "investing" in retirement.
possible discussion: Is there a difference bw investing for retirement vs investing for retirement Income?

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Re: Investing FOR Retirement vs Investing IN Retirement

Post by Chip » Mon May 22, 2017 7:04 am

Peter,

Do you plan on discussing investing for (and spending from) total return vs. income? We've seen quite a few discussions here where retirees want high current income from their investments because they don't want to sell anything.

SGM
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Re: Investing FOR Retirement vs Investing IN Retirement

Post by SGM » Mon May 22, 2017 7:25 am

Spending dividends is rationally not different than selling assets for income used in retirement, taxes aside. Some don't sell assets and try to live off of dividends and interest. There is rationally no difference between the spending of capital gains vs. dividends, but some only spend the income as a way to limit their spending. It generally works if you don't reach for yield and add too much risk. However, you may have lower returns overall than if you strictly invested for total return.

The rational person is supposed to want his portfolio to grow. The "normal" person may just want to preserve the portfolio. Larry Swedroe and others have written about the irrationality of living off of dividends alone and thinking about them as a free lunch. However many people are happily depositing and spending dividends alone.

Many elderly parents continue to support their children long into retirement which could put a strain on portfolios.

Most are more conservative in their AA when approaching retirement. It is often considered to be wise to continue to have some portion of your portfolio in equity to allow for potential growth. Wade discusses increasing the equity allocation later in retirement. Most continue to have a low equity allocation throughout retirement.

Important issues for me included Roth conversions when income was a little lower and delaying SS until age 70. I am considering SPIAs after age 70 for DW.

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Re: Investing FOR Retirement vs Investing IN Retirement

Post by Chip » Mon May 22, 2017 7:36 am

SGM wrote:Spending dividends is rationally not different than selling assets for income used in retirement, taxes aside. Some don't sell assets and try to live off of dividends and interest. There is rationally no difference between the spending of capital gains vs. dividends, but some only spend the income as a way to limit their spending. It generally works if you don't reach for yield and add too much risk. However, you may have lower returns overall than if you strictly invested for total return.
I wholeheartedly agree with all of this. But I think there are many out there who do reach for yield with the idea that they have to "recreate a paycheck" in retirement. They don't consider the potential loss of growth. I'm specifically thinking of people who put a large portion of their portfolio in utility stocks.

Perhaps since Peter's audience is a group of Bogleheads maybe it doesn't need much discussion.....

Edit: Then again, after reading "The Case for Dividend Stocks...." thread, maybe it does. :shock:

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Re: Investing FOR Retirement vs Investing IN Retirement

Post by AlohaJoe » Mon May 22, 2017 9:02 am

livesoft wrote:For another look at the McClung Prime Harvesting there is this recent analysis:
https://earlyretirementnow.com/2017/04/ ... arvesting/
I've also looked at Prime Harvesting a fair amount.

https://medium.com/@justusjp/income-har ... f8f95724e2

and

https://medium.com/@justusjp/actuarial- ... b48c115640

are two of the things I've written on it. I generally test it against 10 or 12 other strategies and use data from the US 1871-current, UK 1900-current, and Japan 1957-current just to see how things shake out.

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Peter Foley
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Re: Investing FOR Retirement vs Investing IN Retirement

Post by Peter Foley » Mon May 22, 2017 1:50 pm

I appreciate all the replies and leads in terms of discussion possibilities.

Based on replies here I'm fairly certain the related topics of reduced risk, liquidity, and income stream will all come up in the investing in retirement session. If not, I will certainly mention them to keep the discussion rolling. I had not thought about them in terms of diminished portfolio growth and overall return. Over the long term I had thought of them in terms of inflation risk - something not often addressed here. I'm unfamiliar with Prime Harvesting and will read up on that. Spending from bonds and the buckets of money approach are also likely to come up as will which investments to hold in which accounts.

I like the idea of bringing in the concept of human capital. Very true and it is an interesting line of discussion.

I had not thought of Roth conversions being part of this discussion, nor RMD's. I can certainly see where these topics might come up. (More to study in terms of preparation!)

The comments regarding accumulation phase versus decumulation phase also gives me insight into where the discussion might go.

I'm getting a lot of good feedback and ideas here. Thanks to those who have contributed so far.

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Re: Investing FOR Retirement vs Investing IN Retirement

Post by GMT-8 » Mon May 22, 2017 3:14 pm

I'm five years into retirement after 40 years of accumulation. I see these primary differences since retiring:

I have contributed virtually nothing to savings or retirement accounts, contrary to my prior practice of contributing the maximum.
I withdraw each year about 60% of my net pre-retirement income to supplement my wife's pension which is 40% of her former net.
Withdrawals are only 42% of my net investment earnings over the 5 years; thus my net worth is now 20% greater than when I retired.
I have migrated from 75-25% stocks-bonds to 60-40%.
We have about 4 more years before RMD and SSI become a reality.
I still am fixated on frugal living as a habit that developed over the 40 years; I did not expect this habit to be so hard to break!

Actually, I did not project that any of these things would happen... although multiple theoretical analyses indicated we had "enough"

As far as your panel discussion points, you might consider:

impotence felt when having nothing to add to the pot; "investing" means shuffling existing assets, not "saving"
paralysis by analysis of when to take money out (reverse market timing)
astonishment at continual growth (despite assurances that "staying the course" will actually continue to work) and fear that it will stop
adjusting to the reality that neither our best-laid plans or worst fears are likely to be accurately predicted.

I believe flexibility is the best antitode to these surprises, although I know other people who are much more rigorous in their retirement plans.

Cheers,

GMT-8

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Re: Investing FOR Retirement vs Investing IN Retirement

Post by Dottie57 » Mon May 22, 2017 9:50 pm

GMT-8 wrote:I'm five years into retirement after 40 years of accumulation. I see these primary differences since retiring:

I have contributed virtually nothing to savings or retirement accounts, contrary to my prior practice of contributing the maximum.
I withdraw each year about 60% of my net pre-retirement income to supplement my wife's pension which is 40% of her former net.
Withdrawals are only 42% of my net investment earnings over the 5 years; thus my net worth is now 20% greater than when I retired.
I have migrated from 75-25% stocks-bonds to 60-40%.
We have about 4 more years before RMD and SSI become a reality.
I still am fixated on frugal living as a habit that developed over the 40 years; I did not expect this habit to be so hard to break!

Actually, I did not project that any of these things would happen... although multiple theoretical analyses indicated we had "enough"

As far as your panel discussion points, you might consider:

impotence felt when having nothing to add to the pot; "investing" means shuffling existing assets, not "saving"
paralysis by analysis of when to take money out (reverse market timing)
astonishment at continual growth (despite assurances that "staying the course" will actually continue to work) and fear that it will stop
adjusting to the reality that neither our best-laid plans or worst fears are likely to be accurately predicted.

I believe flexibility is the best antitode to these surprises, although I know other people who are much more rigorous in their retirement plans.

Cheers,

GMT-8
Interesting and compelling post. Thank you.

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Peter Foley
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Re: Investing FOR Retirement vs Investing IN Retirement

Post by Peter Foley » Tue May 23, 2017 11:48 pm

Chip wrote:
Peter,

Do you plan on discussing investing for (and spending from) total return vs. income? We've seen quite a few discussions here where retirees want high current income from their investments because they don't want to sell anything.
I'm not sure where the discussion will go. I personally am not invested with a goal of producing any income, so I confess I have not looked at that particular dichotomy. I'm roughly 50/50 (53/47? based on the current rally) with all my non equities in deferred accounts because I have access to stable value funds paying 3% +. I will try to read up on the topic before August.

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Re: Investing FOR Retirement vs Investing IN Retirement

Post by ralph124cf » Wed May 24, 2017 2:56 pm

For me, the biggest difference in investing after retirement is the lack of dollar cost averaging opportunities with monthly 401(k) contributions. Now all investing decisions are about rebalancing between accounts, and considering ROTH transfers.

Ralph

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Re: Investing FOR Retirement vs Investing IN Retirement

Post by Tyler Aspect » Wed May 24, 2017 5:02 pm

There are a few differences, one being that investing in retirement is more defense oriented. Particularly on the fixed income side there is a more preference toward safe investments. Where total bond market is good enough while in the accumulation phase, when we are retired the chance for default needs to be minimized.
  • possible avoidance of long bonds for they do not work well in high inflation regime
  • CDs instead of commercial paper
  • Limiting to GNMA in the mortgage backed area
  • Inclusion of TIPS
  • Expanding cash allocation to one year living expense
One other topic is how to model the role of pensions in our assets. My tentative approach is to model them with their current lump sum value, and a default pension allocation of 40% stock / 60% bond. My other alternative approach is to model them with their current lump sum value, but with 100% bond content. I am not sure which one is the correct way; perhaps there is no correct way.
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Re: Investing FOR Retirement vs Investing IN Retirement

Post by dbr » Wed May 24, 2017 5:11 pm

Tyler Aspect wrote:
One other topic is how to model the role of pensions in our assets. My tentative approach is to model them with their current lump sum value, and a default pension allocation of 40% stock / 60% bond. My other alternative approach is to model them with their current lump sum value, but with 100% bond content. I am not sure which one is the correct way; perhaps there is no correct way.
For purposes of retirement planning it seems more practical to model pensions as income beginning when pension payments begin. That is how the issue is handled in most retirement planning models you would run across.

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