Bernstein RLE question

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PoemMan
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Bernstein RLE question

Post by PoemMan »

I have been following various threads here that refer to Bernstein’s “RLE” (residual living expenses) recommendation/calculation [all income sources less expenses, including taxes] and have the following question(s) related to determining the amount to place in “safe” investments (bonds, CDs, others).

Do the RLE multiplier(s) of 25x and 20x for retirement at 60 or 65 respectively account for inflation? For example, with an RLE of $15k, 25x = $375k and 20x = $300k; becoming the amount to place in the “safe” investments. However, if the $15k RLE calculation was also escalated for 3% annual inflation, these values increase to $785k and $542k (by 109% and 81% respectively). These are significant differences, and can have a big impact on an AA. Hence I want to make sure the calculation(s) are done correctly.

Other posts here have suggested that the equity portion of a portfolio would provide a cushion against inflation, if minimally at ~30% of the overall AA, therefore not requiring that the RLE be inflation adjusted.

Thank you!
Prudence
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Re: Bernstein RLE question

Post by Prudence »

I would say the answer is no. Bernstein recommends that the RLE (say $300K) amount (in today's dollars) is placed in an inflation protected investment like a TIPS ladder. The remainder of the portfolio can be invested as desired, say 50/50 stock/fixed portfolio.
dbr
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Re: Bernstein RLE question

Post by dbr »

Of course the "safe" investment has to remain safe in real dollars. The ideal way to do that is to invest in an inflation indexed annuity that meets the expense. That sort of annuity is hard to impossible to find, but a backdoor to it is to delay Social Security to age 70 and gain a little there.

Another possibility is a TIPS ladder. Today a thirty year TIPS ladder at a real yield of -0.5% give an inflation indexed withdrawal rate of about 3%, so you would need 33x expenses to do this today. To get a 4% withdrawal rate you need real yield at around 1.3%.
Topic Author
PoemMan
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Re: Bernstein RLE question

Post by PoemMan »

Thank you Prudence and dbr. I had seen numerous references to TIPS and ladders, including a posting originated by Prudence and that dbr responded to. Becoming more knowledgeable on the subject is now on the “to do list”, particularly since the funds would be from tax deferred. Are there any specific recommended resources?

dbr, I am a bit unclear how you used and arrived at the values you mentioned. Could you either explain or direct me to a resource?

Thank you,
PoemMan
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One Ping
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Re: Bernstein RLE question

Post by One Ping »

I think this is intimately related to Bernstein's concept of a Liability Matched Portfolio. If you put your RLE into an inflation adjusting investment (the Liability Portfolio, LP), then your income streams plus your LP cover your total living expenses. The the remainder of your portfolio (the Risk Portfolio) can be invested however you want because, by definition, you don't need it ... 100% stock could (should?) be the default, for example.
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dbr
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Re: Bernstein RLE question

Post by dbr »

PoemMan wrote: Thu Jul 02, 2020 8:00 pm Thank you Prudence and dbr. I had seen numerous references to TIPS and ladders, including a posting originated by Prudence and that dbr responded to. Becoming more knowledgeable on the subject is now on the “to do list”, particularly since the funds would be from tax deferred. Are there any specific recommended resources?

dbr, I am a bit unclear how you used and arrived at the values you mentioned. Could you either explain or direct me to a resource?

Thank you,
PoemMan
I did those TIPS numbers in a spreadsheet once a long time ago. Other people have done a similar calculation.

One data point that is a test for correctness is that at 0% real yield a thirty year ladder of TIPS redeemed at maturity exhausted evenly each year for thirty years produces 1/30 or 3.33% of the investment as income each year.

I've done enough calculating of things in my lifetime that I would never, ever guarantee not having made an error. It is possible some complication is out there that should have been taken more into account. A complication in real ladders is that TIPS of the needed maturity are not always available. I did take that roughly into account. There are some threads out there showing exactly how to do this using current available TIPS issues.
AlohaJoe
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Re: Bernstein RLE question

Post by AlohaJoe »

Prudence wrote: Wed Jul 01, 2020 12:23 pm I would say the answer is no. Bernstein recommends that the RLE (say $300K) amount (in today's dollars) is placed in an inflation protected investment like a TIPS ladder.
No he doesn't. He actively recommends against using TIPS. This is what he wrote on November 30, 2014, in the Wall Street Journal
A more prudent course of action might be to hold standard Treasury securities and high-quality municipal and corporate bonds of short maturity in lieu of purchasing either an annuity or TIPS
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