Building the LMP--When and How, While Also Keeping It Simple [Liability Matching Portfolio]

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FriedOkra
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Building the LMP--When and How, While Also Keeping It Simple [Liability Matching Portfolio]

Post by FriedOkra »

For the purposes of this discussion, I am going to provide some basic information about our situation, but this will not include a full portfolio analysis due to a variety of complications in our situation that will only distract from the purpose of this post. My purpose here is to address strategies for building an LMP, when and how to do it, and how to keep it simple. DW has pleaded with me to set up our retirement so that things will occur as "automatically" as possible, as she has almost zero interest or confidence in managing anything remotely complicated after I am gone.

Basic Info:

EF: 8 months of expenses
Debt: None, other than mortgage that will be paid off in 2032 (4%) and cc bill that is paid in full monthly
Taxes: MFJ, 22% Fed, 5% State
Age: Me: 57/DW: 48
Current Portfolio: Approx $2.5 MM, or about 25X current expenses, or 30X anticipated expenses in retirement w/o Soc Sec offset; tax-deferred and tax-exempt presently about 17% of total portfolio, 83% taxable. WAG is that this will be a 25/75 split by 2036, so still heavily weighted toward taxable.
House Equity Not Included: Approx $0.6 MM
Additional Land Investment Not Included: Approx $0.15 MM
Annual contributions: Roths & HSAs maxed each year; DW T401K maxed each year; DH Solo 401K gets about $10K each year. These will continue through 2032 at minimum for me, 2036 at minimum for DW

LMP Specifics:

In the last few years, I began building a pseudo-LMP consisting of $20k contributions each year to I-Bonds (presently valued at $60k--$30k each--plus accrued interest), plus a $377k taxable account built from VTIP (short-term TIPS fund, 40%), VGIT (interm Treasuries index fund, 30%), VWIUX (interm tax-exempt muni fund, selected with 2026 expiry of 2017 tax cuts and possible jump in tax bracket from earnings on taxable accounts in mind, 25%), and VUSXX (money market, 5%). The plan is that between the I-Bonds (incl those added between now and 2032) and the existing assets in the taxable account, this bucket will serve as an expense bridge between me taking Soc Sec in 2036 (age 69) and DW taking Soc Sec in 2046 (age 70), as recommended by OpenSocialSecurity. Beginning in 2032, I would gradually convert the intermediate holdings of the LMP brokerage acct to a four-year rolling ladder of individual Treasuries, with the first maturing in 2036 and a new rung added each year until the ladder's last rung is added in 2041 (maturing in 2045), while VTIP would remain in place and be drawn down proportionately each year. The plan had also been to continue funding I-Bonds annually from the risk portfolio until 2055 to cover the remaining gap between expected expenses and our combined Soc Sec from 2046 thru 2070 (age 95 for DW). [Edited for clarity.]

I now see that there are several flaws in this strategy. First, DW had to go through cashing in I-Bonds her mother owned after her mother died recently, and the TD experience was very frustrating for her. She has asked that the I-Bonds "be done" by the time I am 80. I have also explained to DW how a TIPS ladder would work, but she has also expressed that she has no interest in dealing with that after my mind goes or I am dead (not to mention that the LMP being held in taxable by necessity makes a TIPS ladder very unattractive taxwise). Finally, I am worried that there is still some performance risk with VTIP, VGIT, and VWIUX--less risk than equities, obviously, but not as risk-reduced as Bill Bernstein would probably prefer in an LMP.

Questions:
1) I have thought about converting the current investments in the LMP brokerage acct to an individual Treasury Bond ladder for the period from 2036-2045 to fund those bridge years, particularly while rates are still somewhat attractive; this ladder would essentially expire before I reach 80, thus satisfying DW's request. What are the upsides/downsides to this approach as compared to the current LMP brokerage account configuration/plan, which kind of pushes off the ladder building until I am closer to actually needing it?

2) Continuing to buy I-Bonds for redemption in years beyond 2046 is a nonstarter for DW, so I need a different strategy to cover that gap. Is the solution to just fund a second bridge of something relatively safe--maybe a short ladder of nominal Treasuries that will auto-mature?--for the four years from 2046 to 2049, then rely on DW's RMDs from her 401k thereafter to cover the gap?

3) Am I worrying about all of this too soon, given that I don't need the first bridge for another 12 years and don't need the second bridge for another 22 years?

4) Is there a comprehensive, trustworthy book on building LMPs that the Boglehead universe would recommend?

5) What am I missing/not asking that I should be?

Thanks in advance for your input.
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Sandtrap
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Re: Building the LMP--When and How, While Also Keeping It Simple

Post by Sandtrap »

to op:
Big question:
1
When do you plan to retire?

Read:
"Ages of the Investor: A Critical Look at Life Cycle Investing" by W. Bernstein.
Amazon.com softcover (better than kindle because of graphs, etc).
https://www.amazon.com/Ages-Investor-Cr ... 140&sr=8-1

Read:
TAYLOR LARIMORE ON “SIMPLICTY”
https://www.bogleheads.org/forum/viewt ... p?t=156505

SEQUENCE OF RETURNS RISK
RETIREMENT RED ZONE
This is an excellent thread that addresses the "Retirement Red Zone".
Sequence of Returns Risk by "DonCamillo".
viewtopic.php?t=159107

Kitces "Retirement Red Zone"
https://www.kitces.com/blog/managing-po ... -red-zone/

RE: "Building a LMP" (your topic).

The LMP structure, not in detail.
Age 57/48, let's say.....50

Scenario: **If you were to FIRE: retire today, what would you need?

if 25x at age 65 then 40x at age 50 (add 15 years)
(as you are not retired, maybe with those lowered expenses, use current expenses, or glidepath it.)
So, in a "basic" LMP, 40x now, in fixed, bond, bond like, etc.
Depending on allocation desired, (you don't say anything about it) whether fixed (set and forget) or glidepath target dated to age 65. that allocation gets calc'ed into the 40x (fixed) as a percentage.
So, if, for example, you wanted an set allocation of 60/40 (for convenience here) that would work out to 60x over your 40x.
60x (equities or equity like)/40x (fixed or fixed like).
As you mention, adjust for income streams, etc.

***These are just "ratio's" per se. Of course, 60x and 40x can be more than needed, ever.

** Be careful how you "lock in money" because unpredictable large lumpy expenses can and do happen. Personal and health care "perfect storms" can make unrecoverable dents in one's wealth. Also, consider SRR (sequence of returns risk), also can be unrecoverable. Life has a way of invalidating a spreadsheet and projections.

To op:
Is this what you had in mind as a starting point?
Adjust for your retirement date. Etc.

This is a very basic LMP structure and somewhat simplistic. There are many ways to do it and this is just one.
I hope this is helpful for you.
j
Dis laimer: for; snipes and sparrows, fax chekx, contrarians, perspectives, and onions. Many ways to do things and so forth this is just one to be helpful.
Last edited by Sandtrap on Tue Jul 09, 2024 8:33 am, edited 1 time in total.
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RyeBourbon
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Re: Building the LMP--When and How, While Also Keeping It Simple

Post by RyeBourbon »

I would be holding your bonds for the LMP (I use a TIPS ladder) in tax deferred if you have enough space for it. Buy index equity funds in taxable. Each year, convert the bond in tax deferred to equity and sell equity in taxable to spend. It could probably be automated, certainly if the bonds were TIPS as they would mature. There's a few more moving parts, but definitely more tax efficient.
Retired June 2023. LMP (TIPS Ladder/SS Bridge) 25%/Risk Portfolio 75%, AA = 60/30/10
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retired@50
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Re: Building the LMP--When and How, While Also Keeping It Simple

Post by retired@50 »

FriedOkra wrote: Mon Jul 08, 2024 10:36 pm ... tax-deferred and tax-exempt presently about 17% of total portfolio, 83% taxable.
This ^^^ is what makes this more challenging.

LMP is typically composed of bonds, but 17% of a portfolio may not be enough to create a LMP that suits your desires. So, now your stuck holding bonds in taxable, or resorting to municipal bonds, which may not be seen as "secure" enough, depending on your perspective.


Regards,
"All of us would be better investors if we just made fewer decisions." - Daniel Kahneman
Topic Author
FriedOkra
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Re: Building the LMP--When and How, While Also Keeping It Simple

Post by FriedOkra »

Thank you for the responses thus far and recommended reading. Perhaps I should have been more clear about what I'm trying to do. My goal was not to build a full, formal LMP covering all expenses EXCLUSIVE of Social Security through end of life for me and DW. Instead, my goal was to build what I'm calling a "pseudo-LMP" to cover the bridge years between me starting Social Security (2036, est. date when we will both stop full-time work, although we will probably both continue to have some part-time work) and beginning of 2046 (date when DW starts Social Security), as well as a second bridge covering the annual gap between combined Social Security and estimated expenses from 2046 (a $20k gap per year in 2024 dollars) through 2070 (age 95 for DW).

I am content to let the other $2 MM+ of the portfolio not wrapped up in this pseudo-LMP continue to work for us fairly aggressively. Overall AA--not particularly relevant to my questions--is presently 60/40 for me and 70/30 for DW, although the pseudo-LMP funds count toward these AAs in our calculations. I recognize that this skews the remaining portfolio toward equities, but I have tolerance for that risk with the pseudo-LMP in place (covering the known, absolute must expenses after Social Security).

I should also add that about 40% of the small amount of our tax-deferred/tax-exempt space is Roth, where I am generally not willing to put fixed income. My tax-deferred space is already maxed out with fixed income to help maintain desired AA for both of us, and there is some fixed income in our regular taxable brokerage account to round out the AAs--essentially unavoidable because DW has literally no suitable fixed income options in her 401k (all have outrageous ERs and are poor performers), and she can't buy individual bonds in her 401k. So, putting this pseudo-LMP over there in tax-deferred is not an option.

Most of my specific questions about building the two bridges I described remain unsettled for me.
AlohaBill
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Re: Building the LMP--When and How, While Also Keeping It Simple

Post by AlohaBill »

Liability matching portfolio! I googled it! [Unnecessary comment removed by admin LadyGeek]
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goodenyou
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Re: Building the LMP--When and How, While Also Keeping It Simple

Post by goodenyou »

FriedOkra wrote: Tue Jul 09, 2024 8:40 am Thank you for the responses thus far and recommended reading. Perhaps I should have been more clear about what I'm trying to do. My goal was not to build a full, formal LMP covering all expenses EXCLUSIVE of Social Security through end of life for me and DW. Instead, my goal was to build what I'm calling a "pseudo-LMP" to cover the bridge years between me starting Social Security (2036, est. date when we will both stop full-time work, although we will probably both continue to have some part-time work) and beginning of 2046 (date when DW starts Social Security), as well as a second bridge covering the annual gap between combined Social Security and estimated expenses from 2046 (a $20k gap per year in 2024 dollars) through 2070 (age 95 for DW).

I am content to let the other $2 MM+ of the portfolio not wrapped up in this pseudo-LMP continue to work for us fairly aggressively. Overall AA--not particularly relevant to my questions--is presently 60/40 for me and 70/30 for DW, although the pseudo-LMP funds count toward these AAs in our calculations. I recognize that this skews the remaining portfolio toward equities, but I have tolerance for that risk with the pseudo-LMP in place (covering the known, absolute must expenses after Social Security).

I should also add that about 40% of the small amount of our tax-deferred/tax-exempt space is Roth, where I am generally not willing to put fixed income. My tax-deferred space is already maxed out with fixed income to help maintain desired AA for both of us, and there is some fixed income in our regular taxable brokerage account to round out the AAs--essentially unavoidable because DW has literally no suitable fixed income options in her 401k (all have outrageous ERs and are poor performers), and she can't buy individual bonds in her 401k. So, putting this pseudo-LMP over there in tax-deferred is not an option.

Most of my specific questions about building the two bridges I described remain unsettled for me.
Is your wife planning on waiting until she is 70 to claim Social Security? It appears so, since it will be in 22 years from now and she is currently 48. You will be 78 years old at that time.

Curious to know your SS claiming strategy.
"Ignorance more frequently begets confidence than does knowledge" | “At 50, everyone has the face he deserves”
Topic Author
FriedOkra
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Re: Building the LMP--When and How, While Also Keeping It Simple

Post by FriedOkra »

goodenyou wrote: Tue Jul 09, 2024 9:49 am
Is your wife planning on waiting until she is 70 to claim Social Security? It appears so, since it will be in 22 years from now and she is currently 48. You will be 78 years old at that time.

Curious to know your SS claiming strategy.
OpenSocialSecurity.com identifies 69 for me and 70 for DW as the ideal ages. Her PIA is higher than mine.
makeitcount
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Re: Building the LMP--When and How, While Also Keeping It Simple [Liability Matching Portfolio]

Post by makeitcount »

My biggest concern would be that you set all this up and then get hit by a bus the next day as your wife seems to have 0 interest in dealing with either I bonds or laddering of other bonds. Perhaps the simplest method of using a fund or two would be best from the "personal finance" point of view while perhaps not being the best with respect to taxes and/or inflation.
"Yeah, well, you know, that's just like, uh, your opinion, man." - J. Lebowski
BirdFood
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Re: Building the LMP--When and How, While Also Keeping It Simple [Liability Matching Portfolio]

Post by BirdFood »

DISCLAIMER: I have zero expertise.

IRRELEVANT ASIDE: Have you ever had the fried okra at Bollywood Theater in Portland? Ooooooh....
FriedOkra wrote: Mon Jul 08, 2024 10:36 pm DW has pleaded with me to set up our retirement so that things will occur as "automatically" as possible, as she has almost zero interest or confidence in managing anything remotely complicated after I am gone.
Is she OK with no-judgement-required guidelines like "If this account goes above X, put the excess in fund Y"?
FriedOkra wrote: Mon Jul 08, 2024 10:36 pm Beginning in 2032, I would gradually convert the intermediate holdings of the LMP brokerage acct to a four-year rolling ladder of individual Treasuries, with the first maturing in 2036 and a new rung added each year until the ladder's last rung is added in 2041 (maturing in 2045)
If you don't expect to need this money until the rung maturities, could you just buy the bonds now, and skip the rolling part? You could presumably go as far out as 2054. Then it's there, ready to spill out every year, and, if it's too much, that's what "If this account goes above X, put the excess in fund Y" is for.

Oh. That's what you say in (1). :) Yes, if your wife doesn't want to manage this, it seems much better to get a non-rolling ladder all set up now. IMO.
FriedOkra wrote: Mon Jul 08, 2024 10:36 pm 3) Am I worrying about all of this too soon, given that I don't need the first bridge for another 12 years and don't need the second bridge for another 22 years?
Well, if current bond rates are "good enough" now, that seems like a possible reason to just get it done. Sure, they could get better, but they could also get worse.
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FriedOkra
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Re: Building the LMP--When and How, While Also Keeping It Simple [Liability Matching Portfolio]

Post by FriedOkra »

Thank you for this additional feedback. I think my resistance to buying nominal Treasuries for as far out as 2045 (and farther, if so inclined) is psychological—a combination of FOMO (what if rates go higher?) and self-criticism if these bridges don’t play out to be as optimal as possible. I need to counter that with a reminder that the whole purpose of an LMP bucket is certainty, not best possible performance.
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FriedOkra
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Re: Building the LMP--When and How, While Also Keeping It Simple [Liability Matching Portfolio]

Post by FriedOkra »

And the more I think about this further, it would seem to make sense to just buy STRIPS for at least the 2036-2045 need (hedged for inflation at 3%). If I do this:

1) I assume the maturing STRIPS would just dump into the settlement fund at Vanguard as each one matures, yes? To BirdFood's point, I think this would address DW's concerns about not wanting to have to "deal" with anything.
2) I know that I will get an OID each year for the deferred yield, which is taxed as interest, and from what I have read here, Vanguard will make these calculations on the 1099, so I just need to report it, yes?
3) Given that I expect us to move into a higher tax bracket as we get older (based on earnings on other investments and possible expiry of 2017 tax cuts), that would seem to suggest that there might even be an advantage to paying the OID as we go, rather than paying taxes on the gains at the end on a low-coupon nominal Treasury held to maturity--especially considering possible implications in the 2036-2045 retirement window for Medicare costs. Correct?

Please don't critique holding STRIPS in taxable on this thread. As noted previously, we do not have sufficient tax-deferred/Roth space or investment opportunity (STRIPS not available through DW's 401k) to hold them there. And as I understand from Grabiner's previous comments on other threads, the taxable interest on STRIPS is an accounting issue, not a taxation issue; all other things being equal, the tax burden comes out the same whether they are held in tax-deferred or taxable.
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