William Bernstein-When you've won the game, why keep playing

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Rajsx
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William Bernstein-When you've won the game, why keep playing

Post by Rajsx » Mon Mar 10, 2014 7:27 pm

" For the middle-aged, they're pretty risky. And for a retired person, they can be nuclear-level toxic ".

- It just dawned on me how sensible and true Bill's statements are ... i.e once you have saved 25 X yearly expenses.

My savings are close to the NUMBER, thanks to regular savings and recent Stock Market highs, and I have started re balancing into bonds.
I am 57 and plan to retire at 60 and had an AA of 50/50, but am thinking of going to 30 Stocks/70 Bonds, to play safe, and at the same time just enough to keep up with inflation.

I am curious to know what other forum members who are in similar situation are doing ? What does YOUR AA looks like/looked like when you are/were close to retirement ?
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Re: William Bernstein-When you've won the game, why keep pla

Post by Leesbro63 » Mon Mar 10, 2014 7:31 pm

I get the gist of what Dr. Bernstein is saying. But he also warns of the risks in any fixed income besides short term bonds. So the question, in my mind, boils down to "what is risk?" Is risk owing 50 or 60 percent equities, that can lose much value very quickly? Or is it owning 70% short term bonds that probably will lose at least small real purchasing power every year, compounded, with a chance (perhaps a big chance) of losing big purchasing power (with no chance of recovery) very quickly? TIPS in tax sheltered accounts can be a good tool. But if you have a large, taxable account, that doesn't work either. Because of the taxflation problem that occurs if the very inflation that TIPS are supposed to hedge ever shows up big or even just shows up moderate.

When you've won the game "reduce risk" sounds great in theory. In reality, "what is risk"?
Last edited by Leesbro63 on Tue Mar 11, 2014 6:23 am, edited 1 time in total.

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Re: William Bernstein-When you've won the game, why keep pla

Post by livesoft » Mon Mar 10, 2014 7:50 pm

I was about 10% fixed income for years, then went to 31% fixed income when I semi-retired with a just barely enough Number. Then when I reached a bigger number, I went to 36% fixed income where I am today at about your age.

I don't think I can have bonds higher because I like the returns of equities too much. Also my number is now more than enough and is no longer near just barely enough. If my equities lost 50% of their value, we would still be in the "enough" range.
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Re: William Bernstein-When you've won the game, why keep pla

Post by nisiprius » Mon Mar 10, 2014 8:00 pm

Leesbro63 wrote:I get the gist of what Dr. Bernstein is saying. But he also warns of the risks in anything but short term bonds. So the question, in my mind, boils down to "what is risk?" Is risk owing 50 or 60 percent equities, that can lose much value very quickly? Or is it owning 70% short term bonds that probably will lose at least small real purchasing power every year, compounded, with a chance (perhaps a big chance) of losing big purchasing power (with no chance of recovery) very quickly? TIPS in tax sheltered accounts can be a good tool. But if you have a large, taxable account, that doesn't work either. Because of the taxflation problem that occurs if the very inflation that TIPS are supposed to hedge ever shows up big or even just shows up moderate.

When you've won the game "reduce risk" sounds great in theory. In reality, "what is risk"?
1) "taxflation" isn't unique to TIPS. It is, alas, common to all taxable investments. During 1966-1982, stocks earned essentially 0% real before taxes, but lost to inflation after taxes.

2) In considering the range of low-risk alternatives, are we allowed to consider CPI-linked single premium immediate annuities (SPIAs)?
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Re: William Bernstein-When you've won the game, why keep pla

Post by Riprap » Mon Mar 10, 2014 8:04 pm

To a certain degree, this seems like a paradox. In Deep Risk, the message I received loud and clear was that inflation posed the biggest risk to me in my particular situation. Warren Buffett and Charles Ellis essentially say the same thing. Dollar denominated assets are not well suited to withstand the ravages of inflation over long time frame. As another poster mentioned, TIPS don't work so well for large taxable accounts and even then they seem to mainly protect against unexpected inflation. So if playing the game is remaining invested in stocks, then I guess in some situations there is a reason to keep playing.

I would be grateful if anyone could recommend any multigenerational investment books. The best piece I have read along those lines is Otar's white paper dealing with perpetual distributions. It may be that a 75% or 80% allocation to low cost index funds are about as good as it gets.

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Re: William Bernstein-When you've won the game, why keep pla

Post by SDBoggled » Mon Mar 10, 2014 8:10 pm

Rajsx wrote: ...

I am 57 and plan to retire at 60 and had an AA of 50/50, but am thinking of going to 30 Stocks/70 Bonds, to play safe, and at the same time just enough to keep up with inflation.
My situation won't be of much help, as I am planning on using rental real estate to form the basis of retirement income. Perhaps there are a couple of short term reasons for you to be more conservative with your current AA:

(1) You are not selling stocks in a crisis. You will be less likely to sell stocks when that crisis comes.
(2) You are improving the worst case of your initial retirement sequence of returns.

Should there be a sizable crisis, over the next 5-10 years you might (or might not) like to change your AA back to 50/50 and benefit over the long term.
Last edited by SDBoggled on Mon Mar 10, 2014 8:15 pm, edited 1 time in total.

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Re: William Bernstein-When you've won the game, why keep pla

Post by freddie » Mon Mar 10, 2014 8:14 pm

The question is have you won the game with 25x of yearly expenses? If you invest in safe investments and get a 1% real return, you run out of money in 29 years. For a person retiring at 60 your cutting it pretty close. These uber safe things work best for people that are retiring late (70).

And as always there is a tradeoff. If you take on risk and expect to earn 3% real returns in retirement, maybe you retire with 23x of yearly expenses (i.e. lets call it 3 years early) and run about the same risk of running out of money when your 90.

It is easy to run simulations and figure out what the odds of you being low on money. There is no way of simulating the fact that at 78 you no longer feel up to taking that trip to Africa that could have done a 62. A lot depends on how much you are willing to cut out if things don't break your way. There is a big difference when failure means eating Alpo versus eating at outback instead of Ruth Chris.

Those 30/70 (or even 0/100) portfolios have a lot more risk than a riskless (tips) portfolio. I would consider 30/70 to be a pretty sane way of going. Your odds of running out of money in 30 years is also very low and your odds of having cash for years 30-40 is also very good.
Rajsx wrote: " For the middle-aged, they're pretty risky. And for a retired person, they can be nuclear-level toxic ".

- It just dawned on me how sensible and true Bill's statements are ... i.e once you have saved 25 X yearly expenses.

My savings are close to the NUMBER, thanks to regular savings and recent Stock Market highs, and I have started re balancing into bonds.
I am 57 and plan to retire at 60 and had an AA of 50/50, but am thinking of going to 30 Stocks/70 Bonds, to play safe, and at the same time just enough to keep up with inflation.

I am curious to know what other forum members who are in similar situation are doing ? What does YOUR AA looks like/looked like when you are/were close to retirement ?

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Re: William Bernstein-When you've won the game, why keep pla

Post by freebeer » Mon Mar 10, 2014 8:18 pm

Rajsx wrote:... once you have saved 25 X yearly expenses...
I am 57 and plan to retire at 60
The issue I see is that 25 X yearly expenses is not quite having "won the game". That implies a withdrawal rate of 4% of the starting balance, which many (most?) feel is no longer safe given current environment of low real returns. Particularly not for early retirement starting at age 60, maybe not for 65. And, that withdrawal rate was never safe with only 30% equities.

So you are trading off one risk (fluctuation of equity market) for another (running out of money because you just didn't have quite enough and invested it in low-returning assets).

If you've saved well over 35 X annual expenses then ... I would say you've definitely won and could choose to be more cautious. But then in that case you can also choose invest more aggressively because you will still have enough even if the market tanks. And if things go well, you can always up spending... we are just fine with 3 star hotels but that doesn't mean we can't appreciate 5 star hotels! And, your heirs would likely request that you choose this path. That's why we are sticking with 60/40.

So to me the time to be conservative is maybe if you have 28 X to 32 X yearly expenses saved - you have enough to be comfortable, don't need to take risk, but at the same time not so much that you are definitely investing for your heirs as well as yourselves.

And as nisiprius mentions SPIA elsewhere on this thread, I view that as an orthogonal issue, kind of as a "safety net". If one didn't care at all about the possibility of leaving an inheritance one would *definitely* at least partially annuitize. But it becomes downside protection to know that you can still annuitize if things go sour. Another reason to keep the more aggressive allocation: in case of market tanking you annuitize and heirs get nothing, but in expected case you leave large inheritance. But if you go with conservative allocation your chances of leaving large inheritance are significantly reduced, almost as if you had annuitized but with less spendable income.

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Re: William Bernstein-When you've won the game, why keep pla

Post by Karamatsu » Mon Mar 10, 2014 8:27 pm

Thanks to some discussion in another thread (Wade Pfau: Lifecycle Finance), I too have been re-evaluating my equity allocation, and thinking of dialling back the risk, which to my mind is simply the likelihood of not being able to meet future needs. So you enter into a kind of analysis, looking at your expenses now, trying to project future needs in the face of inflation, longevity, rising health care costs, taxes, exchange rate fluctuations, etc, partially offset by things like expected social-security and/or pension benefits.

For starters I've been using Zvi Bodie's spreadsheet, but with adjustments for exchange rates and cross-border taxation, to see whether we're in the ballpark or not under a range of future scenarios. Unfortunately with two flaky governments and a volatile currency nothing is ever certain. But if it turns out that we no longer need to take risk with equities then I'll start scaling them back appropriately. Ultimately I suppose my goal would be about 20% while the rest goes to inflation-indexed government bonds, or maybe annuities, but I have much to learn there.

Anyway you might want to check out the thread and the spreadsheet. I certainly agree that there is no need to take risk if there is no need to take risk!

As for TIPS in taxable accounts, you can eliminate the phantom income taxation problem by using a fund that distributes the principal adjustments as part of the TIPS allocation.

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Re: William Bernstein-When you've won the game, why keep pla

Post by Peter Foley » Mon Mar 10, 2014 8:32 pm

Livesoft wrote:
by livesoft » Mon Mar 10, 2014 8:50 pm

I was about 10% fixed income for years, then went to 31% fixed income when I semi-retired with a just barely enough Number. Then when I reached a bigger number, I went to 36% fixed income where I am today at about your age.

I don't think I can have bonds higher because I like the returns of equities too much. Also my number is now more than enough and is no longer near just barely enough. If my equities lost 50% of their value, we would still be in the "enough" range.
Peter Foley paraphrases:

I was about 10% fixed income for years, then went to 31% fixed income [a few years before retirement] with a just barely enough Number. Then when I reached a bigger number, I went to [45%] fixed income where I am today.

I don't think I can have bonds higher because I like the returns of equities too much. Also my number is now more than enough and is no longer near just barely enough. If my equities lost 50% of their value, we would still be in the "enough" range.
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Re: William Bernstein-When you've won the game, why keep pla

Post by bhsince87 » Mon Mar 10, 2014 8:34 pm

I struggle with this. How do I know when I’ve “won”?

My wife and I hit 25X a few years ago. Now we’re more than 30X. We’ll be age 49 and 47 in a few months.

Not that I’m complaining!

I’m planning on retiring at 55, but might ratchet that down a few years. We have no kids or other family that we would desire leaving an inheritance.

I guess TIPS make sense, and I have been buying more lately. But just matching inflation seems “too safe” considering out long time frame.

Stuff like potential health expenses loom in my mind. What if some life saving technology becomes available that I need, but it’s got a price tag of $1 million? Or $5 million? If I only have $3 million in my nest egg, will I regret that I put it all in TIPS 20 years earlier?
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Re: William Bernstein-When you've won the game, why keep pla

Post by Rajsx » Mon Mar 10, 2014 8:36 pm

-" When you've won the game "reduce risk" sounds great in theory. In reality, "what is risk"?"

A good question, it depends ...........on the stage of life one is at, we all start out investing at 90 to 100% stocks and it makes sense to be at around 30% stocks, if one has accumulated "enough" or the number or when one is completing their accumulation phase and about to start the withdrawal phase, as we do not have much time to recover from the stock losses.
- Investing in Bonds risk is inflation + interest rate movements, still MUCH LESS risk than investing in Stocks. At my age one would rather take smaller risks by staying around 30/70 rather than ...say 70/30. I think it also depends on the NEED to take risk...i.e if one is not there yet at the time of retirement.

-Well, risk is what our savings lived through just a few years back in 2008 recession , when we saw people needed to come out of retirement to work. Dr Bernstein makes a mention in that interview with Money magazine, of risk in those years -
" A lot of people had won the game before the crisis happened: They had pretty much saved enough for retirement, and they were continuing to take risk by investing in equities. Afterward, many of them sold either at or near the bottom and never bought back into it. And those people have irretrievably damaged themselves."
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Re: William Bernstein-When you've won the game, why keep pla

Post by RetiredinKaty » Mon Mar 10, 2014 8:42 pm

I was in a similar situation to you when I was 56. I reduced my stock allocation to 50% after reading Richard Ferri's book All About Asset Allocation. This was in late 2007, just before the financial crisis. I more or less maintained 50% into retirement two years ago, planning to keep 50% through active retirement. But after 2 years of experience living in retirement as well as the bull market, I have concluded that I am very well funded for my needs. I recently reduced stock to 30% and plan to use a rising equity glide path through the first half of retirement.

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Re: William Bernstein-When you've won the game, why keep pla

Post by packer16 » Mon Mar 10, 2014 8:45 pm

I like to invert the question and ask how much cash do I need to live on between inevitable declines in the stock market/real estate markets. I would probably include both stocks and equity in my risk basket. In a perfect world, you would invest in the stock market and real estate (I think of these as the real work horses - real assets generating real returns) and they would go up 7 to 10% per year and you would live off the increase in value per year. However, in reality these asset classes are volatile so you need bonds to cover the shortfall when these assets decline in price or fail to appreciate that much. Once you figure the amount of expenses (in some of my work using value mutual funds have found 3 years to be sufficient) you can add a year or two to provide for the world ends scenario. I think if you focus on expenses it something you can control in contrast to market returns and for me is more real.

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Re: William Bernstein-When you've won the game, why keep pla

Post by SDBoggled » Mon Mar 10, 2014 8:49 pm

Rajsx wrote:-
.... " A lot of people had won the game before the crisis happened: They had pretty much saved enough for retirement, and they were continuing to take risk by investing in equities. Afterward, many of them sold either at or near the bottom and never bought back into it. And those people have irretrievably damaged themselves."
(added bold to the quote)
I think this is perhaps one of the key issues for you... would you sell at or near the bottom??? What asset allocation will keep you from selling near the bottom.

As we know, if they hadn't sold, they would have been seeing new highs... and we also know that was a very quick recovery, next time might not be so quick.

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Re: William Bernstein-When you've won the game, why keep pla

Post by Kevin M » Mon Mar 10, 2014 8:50 pm

It's a tough call. I'm pretty conservative, so I think I'd probably go something like 30/70 in your case. If still unsure, you could split the difference and go 40/60.

I think you're in the gray zone where annuitizing is worth considering, but personally I'd wait for higher interest rates. With inflation currently very low, waiting doesn't have a high cost. Of course WB prefers TIPS ladders to annuities, but he also recommends waiting for higher rates.

I've been 30/70 since retiring at age 55, but my withdrawal rate is much less than 4%, and i haven't even started collecting Social Security yet (although I do get a SS survivor benefit). Even at 30/70, 2008/2009 was very stressful, so I definitely learned that my AA probably is appropriate based on my willingness to take risk.

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Re: William Bernstein-When you've won the game, why keep pla

Post by jeffyscott » Mon Mar 10, 2014 8:52 pm

I'm also planning to work 3 more years. Once my wife and I are both 62, pension plus SS would most likely be enough to meet our expenses, if the pension keeps up with inflation (which is not guaranteed). We are keeping the money needed to fill in until then in safe, cash-like, investments, that represents about 25% of assets. In case the pension does not keep up with inflation, we would need to use about 35% of assets to make up that shortfall, assuming 3% inflation and 1% real return. That 35% can go in bonds and based on this, the most we would want in stocks at this time is remainder of 40%.
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Re: William Bernstein-When you've won the game, why keep pla

Post by freebeer » Mon Mar 10, 2014 8:55 pm

Rajsx wrote:... Dr Bernstein makes a mention in that interview with Money magazine, of risk in those years -
" A lot of people had won the game before the crisis happened: They had pretty much saved enough for retirement, and they were continuing to take risk by investing in equities. Afterward, many of them sold either at or near the bottom and never bought back into it. And those people have irretrievably damaged themselves."
Right, of course if these people had stayed the course with a balanced allocation, whether it was 50/50 or 90/10, they'd now be well ahead of where they were before the crisis. So to me - again in scenario of someone who's only saved 25 X annual spending - only speaks to the question of whether one is willing to accept a higher *objective* risk of running out of money late in retirement (due to low-returning allocation choice) in exchange for a lower *subjective* risk of running out of money due to panic-driven behavior during bear markets. To me this seems crazy since if you are rational enough to evaluate the situation you ought to be rational enough to choose *and stick with* the allocation that would, over all past periods, have been much more likely to yield sufficient spending for life.

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Re: William Bernstein-When you've won the game, why keep pla

Post by Rajsx » Mon Mar 10, 2014 9:13 pm

- Thanks for all the personal insights and opinions, keep them coming, one can only keep learning from the different takes to this enigma.

Here are some of my answers -

- I sold may be about 5% of my stock mutual funds in 2001 market pull back. Although I was not comfortable seeing the Market ravages, I did not sell any in the 2008 down market, .
- Although I mentioned what was quoted in Dr Bernstein 's as 25 X annual expenses as the number, we are at 32 X the annual expenses, not counting the SS.
- I just came down to 45% Stocks/55% Fixed income, but plan to dial it down gradually to 30%/70%.
- Short Term Bonds and CDs do seem to yield approximately the inflation rate of the day.
- All my Bonds are in Total Bond Market Index and not in Short Term Bonds, that is a discussion for another day

Thanks
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Re: William Bernstein-When you've won the game, why keep pla

Post by Streptococcus » Mon Mar 10, 2014 9:19 pm

livesoft wrote: I don't think I can have bonds higher because I like the returns of equities too much.
I love that statement. It cracked me up :D

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Re: William Bernstein-When you've won the game, why keep pla

Post by MnD » Mon Mar 10, 2014 10:22 pm

Rajsx wrote:I am curious to know what other forum members who are in similar situation are doing ? What does YOUR AA looks like/looked like when you are/were close to retirement ?
Age 51 four year out from a mid-50's retirement we are at 75/25 and on a 1% per year reduction in equities glide path until we fix at 60/40 at age 65.
Living until late 90's is typical for women on my wife's side of the family. The prior generations males on my side of the family are historically short-lived but they all smoked.
The one uncle that didn't smoke just turned 90 and is in good health and has the mental capacities of a 50 year old.

So.................
I see the "game" as probably running another 4-5 decades for one of us and possibly for both.
Retirement is not such a massive step-function event - you switch from having a very big pile of money and adding a quite small amount annually to having a big pile of money and withdrawing a small amount.
Before or after the retirement event, what your money earns or doesn't earn is very important on a 4-5 decade horizon.
In retirement we will have two above average claims on Social Security, one modest defined benefit pension, zero debt and the adult kids will be off the parental trough.
So we'll be fine as long as we keep things flexible and don't get too spendy. :beer
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Re: William Bernstein-When you've won the game, why keep pla

Post by pascalwager » Tue Mar 11, 2014 3:17 am

I've been considering Jack Bogle's recommendation to include SS and pensions in a portfolio. So I added the present value of my pension to my spreadsheet "bonds" column and went from 1% bonds (I bonds) and 13% "bonds" (I bonds and cash) to 47% "bonds" (I bonds, cash, and PV pension). I may go on to exchange some stocks for bonds to reach 50% "bonds".

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Re: William Bernstein-When you've won the game, why keep pla

Post by grayfox » Tue Mar 11, 2014 3:51 am

Rajsx wrote: " For the middle-aged, they're pretty risky. And for a retired person, they can be nuclear-level toxic ".

- It just dawned on me how sensible and true Bill's statements are ... i.e once you have saved 25 X yearly expenses.
I think this is wrong. Having 25x your income doesn't necessarily mean you have won the game. You are focusing on the wrong thing, portfolio balance. You must focus on what you actually need, which is annual income.

You have won the game when you have your required inflation-adjusted annual income guaranteed for life. E.g. if you require $50,000 per year in 2014-dollars and you have some source of inflation-adjusted $50,000, then you've won. 8-) This could be social security plus an inflation-adjusted pension or annuity. [Note: social security is basically an inflation-adjusted annuity.] It could be a ladder of default-free TIPS. It could be something else.

The actual portfolio balance is kind of irrelevant. Depending on real interest rates and stock valuations, the income stream could cost 25x, 33x, 40x, 20x, 10x, 100x or even 0x to buy your required income stream. Yes, even 0x. If your social security and pensions cover your required income, you don't need any money in your portfolio.

Go to http://www.immediateannuities.com to get a feel for how much it would cost someone to buy a certain income stream. [Note: annuity rates include mortality credits, so it is probably a lower bound on the cost of an income stream. If you DIY, it will usually cost more.]
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Re: William Bernstein-When you've won the game, why keep pla

Post by DualIncomeNoDebt » Tue Mar 11, 2014 4:40 am

I dislike this phrase, "won the game." First, it's overused. Second, and more problematic, it doesn't work. And it makes me cringe.

"Winning" denotes victory in a contest against others -- competition is explicit in the words and the phrase. The phrase doesn't work in the investing or retirement context, because it invites unnecessary comparisons and value judgements. I hope retirement and financial independence isn't a contest or a victory-seeking exercise (yet, upon deeper reflection, in a world of finite resources, perhaps it is).

Let's not sugarcoat. Assume some retiree has a mil in the bank and thinks s/he can retire. Did they "win the game"? Well, not when compared with someone who's got assets valued at eight or nine figures, has part ownership of a profitable business, owns multiple properties, stock options, etc. The measly two-comma retiree is a pauper compared with the latter -- a "loser" when measured against this yardstick.

I don't like looking at it this way. And it's totally unnecessary. Yet invoking the phrase "won the game" invites precisely this type of analysis and the comparative judgment it entails. For example, when I see someone (here or elsewhere) say, "hey, I'm 63 years old, have $500k in assets and am retiring, have I 'won the game'"? I just hate the question and the phrasing. I cannot help but think to myself, damn, that age and that resource number, it is abject failure -- how can anyone possibly consider it any type of "win." Ridiculous. I hasten to add, if I posed a similar question, asking if I too had "won the game," a billionaire would look at me and similarly conclude: abject failure.

Do any of you feel the same way? Do you feel this "won the game" phraseology necessarily invites competitive or comparative judgments where none is warranted?

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Re: William Bernstein-When you've won the game, why keep pla

Post by Levett » Tue Mar 11, 2014 6:27 am

It all depends on whether you are deeply influenced by other people's ideas of who you are (or should be) and where you should be in your financial life before you consider retirement.

In my run-up to retirement I certainly consulted with professionals (several) with respect to where I stood financially. I knew my budget, I knew my resources, I knew my aspirations, and yet I was continually reminded by these professionals about what disasters could do, especially in the early years of retirement (and boy were they right!). It appeared I was "eligible" to play the game but no one (including me) was prepared to say I had "won" anything. Too many miles to go before I slept. ;-)

You really do want a safe margin for error--whatever number you come up with. What constitutes "safe" varies with the individual.

And, frankly, I think one is better off coming to terms with the fact that you are going "to lose the game" in the end. When your health turns south, your money and hopefully your insurance will pay the bills, but that will be small consolation when you come to realize that your best laid plans are basically kaput.

Maybe those who consider themselves "winners" will place the word on their headstone to remind passersby of their conviction (or is it delusion?).

Retirement, like life, is a risky business.

"So teach us to number our days, that we may apply our hearts unto wisdom."

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Re: William Bernstein-When you've won the game, why keep pla

Post by Leesbro63 » Tue Mar 11, 2014 6:33 am

Karamatsu wrote:
As for TIPS in taxable accounts, you can eliminate the phantom income taxation problem by using a fund that distributes the principal adjustments as part of the TIPS allocation.
Phantom income taxation isn't the main problem, that's just a cash flow issue. The real issue is higher and higher taxation as inflation rises. Nibbling, then eating, then devouring the very asset, as inflation rises, that was purchased to protect against getting eaten.
Last edited by Leesbro63 on Tue Mar 11, 2014 6:50 am, edited 1 time in total.

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Re: William Bernstein-When you've won the game, why keep pla

Post by livesoft » Tue Mar 11, 2014 6:38 am

DualIncomeNoDebt wrote:I dislike this phrase, "won the game." First, it's overused. Second, and more problematic, it doesn't work. And it makes me cringe.
[…]
Do any of you feel the same way? Do you feel this "won the game" phraseology necessarily invites competitive or comparative judgments where none is warranted?
I feel the same way. "play the game" and "get into the game"' make me cringe, too. It's not a game.
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Re: William Bernstein-When you've won the game, why keep pla

Post by Leesbro63 » Tue Mar 11, 2014 6:42 am

nisiprius wrote:1) "taxflation" isn't unique to TIPS. It is, alas, common to all taxable investments. During 1966-1982, stocks earned essentially 0% real before taxes, but lost to inflation after taxes.

2) In considering the range of low-risk alternatives, are we allowed to consider CPI-linked single premium immediate annuities (SPIAs)?
1. Taxflation IS somewhat unique to TIPS. Because the tax is due every year, in cash, on inflation gains that are not real gains. During 1966-81, stocks lost big real value, but no tax was due along the way. And if you could just spend the dividend along the way, you made the price-loss back as the 1980s rolled on. TIPS tax never comes back. And the only thing TIPS have going for it, really, is the inflation protection...that gets negated in taxable accounts when inflation heats up. At least stocks have the potential for large gains above and beyond inflation...and the ability to defer tax on those gains perhaps forever...and any tax is at the lower dividend and cap gain rate. TIPS taxflation payments are calculated at regular income tax rates.

2. Inflation adjusted annuities have the same problem in a high inflation situation. Also they are extremely costly at present.

To be honest, I am surprised that Nisiprius didn't consider all this. Generally your analysis covers all the angles.
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Re: William Bernstein-When you've won the game, why keep pla

Post by Leesbro63 » Tue Mar 11, 2014 6:46 am

Unless you are 75 or above...or have very poor health and are younger, I wouldn't say that 25x is winning the game. Although it's probably better than 95% (maybe more) of the population...so you've won in a relative sense. But if you invest that somewhat aggressively, you risk 2008 situations. And if you invest that conservatively, you'll become poorer and poorer in real terms, as you age. Not pretty. I am guessing that at least 35x is required for a 60something aged retiree to have truly "won the game".

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Re: William Bernstein-When you've won the game, why keep pla

Post by midareff » Tue Mar 11, 2014 7:29 am

I'm retired a bit less than 2 years and have taken advantage of the recent multi-year run to dial back to 45/51/3 .. equities, bonds and cash. Have a pension from a very well funded state (Florida) and am taking SS. I'm 66 now. Am at 2.5% SWR, which contributes about 30% of income. Could probably make it on pension, SS and dividends from taxable, if I really had too but travel and frills would be out.

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Re: William Bernstein-When you've won the game, why keep pla

Post by MnD » Tue Mar 11, 2014 10:06 am

I notice in these type of threads that the folks that agree with Bernstein also gravitate towards ~2.5% withdrawal rates.
70/30 AA for life, Global market cap equity. Rebalance if fixed income <25% or >35%. Weighted ER< .10%. 5% of annual portfolio balance SWR, Proportional (to AA) withdrawals.

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Re: William Bernstein-When you've won the game, why keep pla

Post by Leesbro63 » Tue Mar 11, 2014 10:24 am

MnD wrote:I notice in these type of threads that the folks that agree with Bernstein also gravitate towards ~2.5% withdrawal rates.
I would agree with that. Bernstein often focuses on the risk of a worst case scenario. And his conclusion is that something in the 2% range is about as "bulletproof" as you can get. So, yeah, there is a large subgroup of Bogleheads who can or are shooting for the ability to live on less than 4%.

One other factor: Even if the worst never happens, I don't like the idea of getting progressively poorer through retirement. This might not be entirely rational...I should probably be concerned about as living as well as I can for as long as I can and not be concerned if I'm just down to my SS check and a reverse mortgage at age 90. But the same mentality that allowed me to save so much is the same mentality that won't allow me to spend so much later.

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Re: William Bernstein-When you've won the game, why keep pla

Post by dbr » Tue Mar 11, 2014 10:30 am

Shooting to live on 2% is losing the game before it has been played.

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Re: William Bernstein-When you've won the game, why keep pla

Post by marcos123 » Tue Mar 11, 2014 10:34 am

Just to provide some quick input from someone retired in an EM (Brazil). I'm pretty conservative as far as AA goes, having been 30/70, but with the recent market stresses in EM fixed income, including Brazil, I availed of the opportunity to reallocate into local currency denominated Treasuries, locking in yields that had long been on my target shopping list, and cashed out some of the gains in my US equities portfolio. So I am now actually 25/75. i would think that if/when nominal and especially real rates spike in the US, similar reallocations into TIPS and treasuries by near-retirees or retirees in the US would also be considered. In my case, my target for buying 10-year local T's were 14% nominal and the local TIPS equivalent 7% real. I will hold to maturity and view this as part of a Liability Matching Portfolio in local currency, where I have the majority of my local expenses. Inflation for the past few years has run about 6%. As someone who has retired here with no intention of returning on a permanent basis to the US, and as someone who has worked in EM Finance here and is still fairly active in the markets generally, I am comfortable with the particular set of risks here, and in fact believe that this was a risk mitigation move.

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Re: William Bernstein-When you've won the game, why keep pla

Post by protagonist » Tue Mar 11, 2014 10:54 am

Famous bank robber Willie Sutton was incorrectly frequently quoted as responding to the question : "Why do you rob banks?" with the retort "Because that's where the money is".

Before his death, he admitted that he never said it. This is the reason Willie gave for robbing banks over and over until he got caught, after a long, highly successful bank-robbing career that provided him with way more money than he needed:

"The irony of using a bank robber's maxim as an instrument for teaching medicine is compounded, I will now confess, by the fact that I never said it. The credit belongs to some enterprising reporter who apparently felt a need to fill out his copy...
If anybody had asked me, I'd have probably said it. That's what almost anybody would say...it couldn't be more obvious.
Or could it?
Why did I rob banks? Because I enjoyed it. I loved it. I was more alive when I was inside a bank, robbing it, than at any other time in my life. I enjoyed everything about it so much that one or two weeks later I'd be out looking for the next job. But to me the money was the chips, that's all."

This sentiment was echoed in the final episode of Breaking Bad, when Walt explained to his wife why he continued doing what he did well after it spiraled out of control and cost him his life and family and the lives of family members.

People keep playing the game after it outlives its usefulness or necessity because they like it. And because they think they are good at it. At least that's my guess.

If it makes them feel alive, who am I to disagree? I wonder what Bill Bernstein would say about that. Like myself, he was probably trained misquoting Willie.

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Re: William Bernstein-When you've won the game, why keep pla

Post by jwa » Tue Mar 11, 2014 11:40 am

Maybe everyone is taking this into account but I'm not sure. Dr. Bernstein used the 25 x expenses after other income such as pensions, social security or annuities. This reduces the heavy lifting that needs to be done.

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Re: William Bernstein-When you've won the game, why keep pla

Post by VictoriaF » Tue Mar 11, 2014 11:48 am

protagonist wrote:Famous bank robber Willie Sutton was incorrectly frequently quoted as responding to the question : "Why do you rob banks?" with the retort "Because that's where the money is".
Before Willie Sutton, there was George Mallory who responded to the question "Why do you want to climb Mount Everest?" with "Because it's there."
protagonist wrote:People keep playing the game after it outlives its usefulness or necessity because they like it. And because they think they are good at it. At least that's my guess.
I agree with this. I will also note that people tend to continue playing their games due to the inertia and laziness. They are reluctant to reassess the merits of the old games and explore new ones.
protagonist wrote:"The irony of using a bank robber's maxim as an instrument for teaching medicine..."
Do they teach doctors to cut organs because they are there?

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Re: William Bernstein-When you've won the game, why keep pla

Post by investor1 » Tue Mar 11, 2014 11:59 am

It is difficult to plan 25 years into the future. You don't know what will happen. What if you get ill and have higher medical costs than expected? What if a loved one needs help? What if you decided you want to devote your new found free time to traveling the world or something else that is expensive and unplanned? How do you know you have enough?

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Re: William Bernstein-When you've won the game, why keep pla

Post by feh » Tue Mar 11, 2014 12:06 pm

Rajsx wrote: I am curious to know what other forum members who are in similar situation are doing ? What does YOUR AA looks like/looked like when you are/were close to retirement ?
Two years from retirement here, 47 years old. Currently have 35x expenses.

AA is 70/30. Planning on something between 60-65 equities at retirement.

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Re: William Bernstein-When you've won the game, why keep pla

Post by YDNAL » Tue Mar 11, 2014 12:22 pm

DualIncomeNoDebt wrote:I dislike this phrase, "won the game." First, it's overused. Second, and more problematic, it doesn't work. And it makes me cringe.

"Winning" denotes victory in a contest against others -- competition is explicit in the words and the phrase. The phrase doesn't work in the investing or retirement context, because it invites unnecessary comparisons and value judgements. I hope retirement and financial independence isn't a contest or a victory-seeking exercise (yet, upon deeper reflection, in a world of finite resources, perhaps it is).

Let's not sugarcoat. Assume some retiree has a mil in the bank and thinks s/he can retire. Did they "win the game"? Well, not when compared with someone who's got assets valued at eight or nine figures, has part ownership of a profitable business, owns multiple properties, stock options, etc. The measly two-comma retiree is a pauper compared with the latter -- a "loser" when measured against this yardstick.
livesoft wrote:I feel the same way. "play the game" and "get into the game"' make me cringe, too. It's not a game.
This is way out of context.

I would understand questioning the multiple (25x, 30x, whatever), but to focus on buzz words is hogwash.

There is no "winning, competition, or yardstick" other than with one's personal goal to be able to pay expenses.
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Re: William Bernstein-When you've won the game, why keep pla

Post by protagonist » Tue Mar 11, 2014 12:36 pm

VictoriaF wrote:
protagonist wrote:
protagonist wrote:People keep playing the game after it outlives its usefulness or necessity because they like it. And because they think they are good at it. At least that's my guess.
I agree with this. I will also note that people tend to continue playing their games due to the inertia and laziness. They are reluctant to reassess the merits of the old games and explore new ones.
Very good point. People stay in unfulfilling jobs and marriages for the same reasons. Maybe that is even a more common reason. I don't know. It would be interested to hear the perspectives of the ultra-rich on this topic. I suppose I could better assess this after I make my first billion.

I'm definitely invested much more conservatively than I was when I was working for a living. I'm about 50% in equities and 50% in very conservative fixed income vehicles. But I suppose I could be invested even more conservatively still and do fine. Why aren't I? Not sure actually, to be honest. But I'm ok with that.

The Catch-22 of investing is that the less secure your future seems financially, the more risk you must take to secure your future, and the more risk you take, the more likely you are to lose.

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Re: William Bernstein-When you've won the game, why keep pla

Post by VictoriaF » Tue Mar 11, 2014 1:14 pm

protagonist wrote:The Catch-22 of investing is that the less secure your future seems financially, the more risk you must take to secure your future, and the more risk you take, the more likely you are to lose.
We need to distinguish a positive statement (an observation) that people who are less financially secure take more risk to make it up, with a normative statement that they "must" take more risk. The "must" usually comes from financial advisers. A customer comes to an adviser with meager assets and the adviser says, "No problem, I will get you into funds earning 12% per year."

A combination of lower assets and higher risk is justified in the early stages of one's career, when the losses in financial assets can be recovered using the human capital. In the later stages of career, one has to focus on the liability matching and not take risks that would affect his basic needs. In retirement, the only reasonable way to compensate for inadequate assets is to get an SPIA and collect mortality credits.

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Re: William Bernstein-When you've won the game, why keep pla

Post by Will do good » Tue Mar 11, 2014 1:17 pm

I believe for those that's aiming for 2% -2.5% SWR you might have already lost?

“Man. Because he sacrifices his health in order to make money. Then he sacrifices money to recuperate his health.
And then he is so anxious about the future that he does not enjoy the present; the result being that he does not live in the present or the future; he lives as if he is never going to die, and then dies having never really lived.”
- Dalai Lama

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Re: William Bernstein-When you've won the game, why keep pla

Post by Bill Bernstein » Tue Mar 11, 2014 2:55 pm

Excellent thread, nicely lays out the issue surrounding the LMP and current low yields; thanks all.

At present, though, negative real rates only apply below 6 years; beyond that, ie, for 80% of the TIPS ladder, the rates are positive, so even in the aggregate you're not seeing any deterioration in your spending ability.

All you have to be willing to do is buy the ladder now, the risk being that you'll feel foolish *if* and when rates rise.

Thus, it's reasonable to take the TIPS plunge now, and just as reasonable to wait for 2% or better yields.

As to the contradiction between the "deep risk" of bonds and the need for an LMP, the retiree cares less about deep risk than shallow risk, but, contrariwise, I'd be somewhat cautious about setting up an LMP much before 55-60, since at horizons longer than 30 years, stocks are likely more risky than bonds. This doesn't apply to TIPS, except that you can't buy them out longer than 30 years.

Bill

PS. *Love* the Dalai Lama quote.

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Re: William Bernstein-When you've won the game, why keep pla

Post by Random Walker » Tue Mar 11, 2014 3:38 pm

I saw the initial question "if you've won the game, why keep playing?" and had to add my thought because I want to hear other's opinions. I didn't read any of the intervening posts, so I'm sorry if I'm going over territory that was already discussed. I'm 51 and am close to the 25X number, yet I have only cooled off to a heavily tilted widely diversified 70/30 portfolio. I worry that our longevity may be greater than ever and I fear terribly corrosive inflation over time. Also, I perhaps somewhat optimistically, view the lifespan of the portfolio as longer than my lifespan. I have young children ages 5&6.

Dave

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Re: William Bernstein-When you've won the game, why keep pla

Post by Random Musings » Tue Mar 11, 2014 3:47 pm

dbr wrote:Shooting to live on 2% is losing the game before it has been played.
For most people with 2-2.5%, that's for sure. However, on this particular board, depending on pensions, SS and other stuff, it still might be a win in terms of lifestyle.

Although my question would be, if you play with 2.5% on the front-end of retirement, by the time you decide to ramp up to higher percentages, one's age may preclude one to do a lot of the fun stuff they could have done earlier in retirement. So you have the opportunity to spend it, but can't because of other constraints.

I guess their benefactors will have a little more fun.

RM
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Re: William Bernstein-When you've won the game, why keep pla

Post by Bill Bernstein » Tue Mar 11, 2014 4:23 pm

Yes. This gets to the essence of estate planning. You can p**s it away, your heirs can p**s it away, or the government can p**s it away.

Your job is the pick the p**ser.

Bill

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Re: William Bernstein-When you've won the game, why keep pla

Post by richard » Tue Mar 11, 2014 4:40 pm

Bill, do you have definitions of "won the game" and how to "stop playing"? Some multiple of expenses? How do you set up a LMP if you might live beyond 30 years and are worried about the credit quality of inflation adjusted annuities?

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Re: William Bernstein-When you've won the game, why keep pla

Post by Levett » Tue Mar 11, 2014 5:09 pm

"You can p**s it away, your heirs can p**s it away, or the government can p**s it away."

Do you recommend Kegel (not Hegel!) ;-)

Lev

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Re: William Bernstein-When you've won the game, why keep pla

Post by Nowizard » Tue Mar 11, 2014 5:16 pm

I cannot speak for others, but I continue to have a difficult time implementing this concept even though we have reached 25 times expenses in invested assets and have significant other income from pension and SS sources. It is a challenge, at least for me, to move from accumulation to preservation and I have not done so. Our portfolio remains at approximately a 60/40 ration while much of conventional wisdom would suggest it be 28/72 or in that ball park.

Tim

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