LMP-1: P&I article on corporate & public pension plans

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grok87
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LMP-1: P&I article on corporate & public pension plans

Post by grok87 » Thu Apr 20, 2017 8:40 pm

LMP-1: P&I article on corporate & public pension plans

LMP = Liability Matching Portfolio

This article from Pensions & Investments magazine discusses the diverging investment strategies of corporate pension plans vs public (ie municipal) pension plans.

http://m.pionline.com/article/20170417/ ... going-up/W

...
"Split on bonds: Corporate plans have increased their bond allocations as more have adopted LDI strategies, while public plans have lowered bond allocations, as the need for returns has led them to riskier asset classes."
...
note: LDI = Liability Driven Investments = LMP

So first of all, why should you care even if you don't have a defined benefit pension?

Well these pension plans have the same aim as us- to figure out how to invest to fund people's retirements. But they are going in different directions:

Corporate plans are choosing to adopt more of a liability matching portfolio (LMP) approach. They are buying more long term bonds, maybe buying inflation protection if those pensions have COLAs etc.
Bonds generally have lower expected returns but corporations are willing to live with that as they don't want the risk of their pension plans showing up at a bad time and messing up their quarterly earnings.

Municipal plans are going the other way, doing less liability matching investing (bonds) and investing more in equities and alternatives.

So what's your retirement investing strategy?

Are you doing more LMP like the corporate pension plans? Or taking more risk like the municipal pension plans? Or staying the course?
"...people always live for ever when there is any annuity to be paid them"- Jane Austen

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Re: LMP-1: P&I article on corporate & public pension plans

Post by Grt2bOutdoors » Thu Apr 20, 2017 8:47 pm

Staying the course. I am not willing to take more risk for questionable returns. There is saying "more money has been lost reaching for yield than at point of a gun" - insert "return" for yield. The public pension funds find themselves between a rock and a hard place, they should have thought about before they signed those contracts.
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Re: LMP-1: P&I article on corporate & public pension plans

Post by Angst » Thu Apr 20, 2017 9:33 pm

Gee... well, bonds are generally for safety, and equity is for risk, and hopefully return. One is safe and conservative, and one is risky and aggressive. Personally, I go for 15% of this, and 85% of that, thank you... but as far as my pension goes, I just want the result, i.e. the guarantee. I'd prefer to see my employer investing in bonds, not equity. But they want to make the math work.

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Re: LMP-1: P&I article on corporate & public pension plans

Post by Doc » Fri Apr 21, 2017 6:37 am

Angst wrote:Gee... well, bonds are generally for safety, and equity is for risk, and hopefully return. One is safe and conservative, and one is risky and aggressive. Personally, I go for 15% of this, and 85% of that, thank you... but as far as my pension goes, I just want the result, i.e. the guarantee. I'd prefer to see my employer investing in bonds, not equity. But they want to make the math work.

If a corporate pension plan needs added contributions the company will put in more money to keep it solvent. The public pension plan is more likely to cut benefits. Employee's morale vs taxpayers rath.
A scientist looks for THE answer to a problem, an engineer looks for AN answer and lawyers ONLY have opinions. Investing is not a science.

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Re: LMP-1: P&I article on corporate & public pension plans

Post by grok87 » Fri Apr 21, 2017 7:17 am

Grt2bOutdoors wrote:Staying the course. I am not willing to take more risk for questionable returns. There is saying "more money has been lost reaching for yield than at point of a gun" - insert "return" for yield. The public pension funds find themselves between a rock and a hard place, they should have thought about before they signed those contracts.


Thanks.
For me it's always a balance between ability, need and willingness to take risk.
I'm aiming to replace 40% of my current income wirh a LMP of social security, long-term tips and i-bonds.
The rest is in a Swensen-like risk portfolio (RP) of 50% equities, 25% real-estate/Alts, 25% intermediate treasuries.
"...people always live for ever when there is any annuity to be paid them"- Jane Austen

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Re: LMP-1: P&I article on corporate & public pension plans

Post by grok87 » Sat Apr 22, 2017 7:25 am

Angst wrote:Gee... well, bonds are generally for safety, and equity is for risk, and hopefully return. One is safe and conservative, and one is risky and aggressive. Personally, I go for 15% of this, and 85% of that, thank you... but as far as my pension goes, I just want the result, i.e. the guarantee. I'd prefer to see my employer investing in bonds, not equity. But they want to make the math work.


You're lucky to have a pension. I'm basically trying to recreate that with my liability matching portfolio strategy (LMP).
"...people always live for ever when there is any annuity to be paid them"- Jane Austen

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Re: LMP-1: P&I article on corporate & public pension plans

Post by Angst » Sat Apr 22, 2017 7:37 am

grok87 wrote:You're lucky to have a pension. I'm basically trying to recreate that with my liability matching portfolio strategy (LMP).

It's small - SS is more significant for me, but I'll take what I can get. And between the two of them, and my small (but still growing) LMP built mostly with 30 year TIPS, my expected minimum expenses will be covered. As such, I'm dedicating most (about 85%) of my portfolio to equity, largely SCV.

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Re: LMP-1: P&I article on corporate & public pension plans

Post by grok87 » Sat Apr 22, 2017 7:52 am

Angst wrote:
grok87 wrote:You're lucky to have a pension. I'm basically trying to recreate that with my liability matching portfolio strategy (LMP).

It's small - SS is more significant for me, but I'll take what I can get. And between the two of them, and my small (but still growing) LMP built mostly with 30 year TIPS, my expected minimum expenses will be covered. As such, I'm dedicating most (about 85%) of my portfolio to equity, largely SCV.

THat makes a lot of sense to me.

Re the SCV, So i used to tilt heavily to Small cap value as well. But William Bernstein's book on "Deep Risk" caused me to rethink that a bit. My belief is that small cap value should do well in times of unexpected inflation but perhaps do poorly in a depression/deflation scenario. (ken french's dataset seems to show this is what happened in the 30s and 70s for example.)

So i decided that with my SCV tilt and TIPS i was well positioned for a stagflation scenario but less well positioned for depression/deflation scenario.
These days my stocks are mostly in Total Stock market and total international stock market. If i had the tax-advantaged space i would tilt more to the vanguard minimum volatility fund (VMNVX) which i believe invests in less leveraged companies that would perhaps do better in a deflation scenario.

cheers,
grok
"...people always live for ever when there is any annuity to be paid them"- Jane Austen

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Re: LMP-1: P&I article on corporate & public pension plans

Post by peppers » Sat Apr 22, 2017 8:25 am

We will have one corporate pension and one public pension. Currently the corporate pension gets a one percent annual increase and the public pension gets a three percent annual increase. Our retirement portfolio is about 45/55 equity to fixed income with contributions going 50/50 into total stock market fund and intermediate investment grade bond fund. We are still working and will claim SS at some point. Our ages are 65 and 63.
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Re: LMP-1: P&I article on corporate & public pension plans

Post by Angst » Sat Apr 22, 2017 8:56 am

^Thank you grok. I appreciate your insight very much as the extent of my SCV tilt is still a work in progress, especially given that I have the luxury of still being in the workforce and adding to savings and steering contributions here or there. I'm trying to settle in on the right balance btw TSM (both US & INTL) and SCV - i.e., something I feel is both rational and something I'm ready to stick with. The best part of it all though is that floor comprised of SS, pension and the TIPS LMP. It's my rock, my foundation. :happy

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Re: LMP-1: P&I article on corporate & public pension plans

Post by grok87 » Sat Apr 22, 2017 6:38 pm

Doc wrote:
Angst wrote:Gee... well, bonds are generally for safety, and equity is for risk, and hopefully return. One is safe and conservative, and one is risky and aggressive. Personally, I go for 15% of this, and 85% of that, thank you... but as far as my pension goes, I just want the result, i.e. the guarantee. I'd prefer to see my employer investing in bonds, not equity. But they want to make the math work.

If a corporate pension plan needs added contributions the company will put in more money to keep it solvent. The public pension plan is more likely to cut benefits. Employee's morale vs taxpayers rath.

Good point.

the lesson for me is that we as individual investors saving for retirement are more like corporate pension plans. faced with having to make up shortfalls out of future earnings that may or may not be there, the rational thing is to favor liability matching strategies (LMP).
"...people always live for ever when there is any annuity to be paid them"- Jane Austen

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Re: LMP-1: P&I article on corporate & public pension plans

Post by grok87 » Sun Apr 23, 2017 3:51 pm

peppers wrote:We will have one corporate pension and one public pension. Currently the corporate pension gets a one percent annual increase and the public pension gets a three percent annual increase. Our retirement portfolio is about 45/55 equity to fixed income with contributions going 50/50 into total stock market fund and intermediate investment grade bond fund. We are still working and will claim SS at some point. Our ages are 65 and 63.

thanks

you are lucky to have pensions. My liability matching portfolio is aimed at replicating a pension since i don't have one.
"...people always live for ever when there is any annuity to be paid them"- Jane Austen

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Re: LMP-1: P&I article on corporate & public pension plans

Post by bobcat2 » Sun Apr 23, 2017 5:15 pm

grok87 wrote:LMP-1: P&I article on corporate & public pension plans

LMP = Liability Matching Portfolio

Split on bonds: Corporate plans have increased their bond allocations as more have adopted LDI strategies, while public plans have lowered bond allocations, as the need for returns has led them to riskier asset classes.

note: LDI = Liability Driven Investments = LMP


note: LDI LMP
While they have some similarities, LDI and LMP are not the same. Basically, LMP is a limited subset of LDI.

Here are some differences. LDI, as noted in the quote, is an investing strategy, not a portfolio. In an LDI strategy the investor as they approach retirement and during retirement duration matches at least part of the portfolio's assets to the duration of the liabilities in order to hedge interest rate risk. Pensions following an LDI strategy also duration match as do insurance companies when funding life annuities. These days pension funds often hedge interest rate risk not only with duration matching, but also with derivative contracts, often using swaps.

Rarely does someone advocating using an LMP duration match. For instance I have never read anything by William Bernstein, the chief proponent of LMP, where he duration matches assets to liabilities prior to retirement. See the following quote and linked article by Bernstein where he discusses LMP.
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.

Link - https://www.wsj.com/articles/how-to-think-about-risk-in-retirement-1417408070

No one following an LDI strategy would use use short-term bonds to fund a long-term liability, regardless of whether interest rates are currently low or not. The duration mismatch of such an approach negates the safety of the approach.

At best LMP is a crippled limited offspring of general liability driven investing strategies.

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Last edited by bobcat2 on Sun Apr 23, 2017 5:20 pm, edited 1 time in total.
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Re: LMP-1: P&I article on corporate & public pension plans

Post by Doc » Sun Apr 23, 2017 5:20 pm

grok87 wrote:My liability matching portfolio is aimed at replicating a pension since i don't have one

I always wondered why you would want to fund a 30 yr LMP with real yields at rock bottom instead of taking more risk until yields improved. Now I know. :sharebeer
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Re: LMP-1: P&I article on corporate & public pension plans

Post by bobcat2 » Sun Apr 23, 2017 5:35 pm

Goal based retirement investing relies on the funded ratio.

Goal Based Investing focused on what matters most: Income

Investments

Code: Select all

Planning Process                      Conventional Retirement               Goal-Based Retirement                                                        
                                                                     
Investment Goal                      Wealth accumulation                    Retirement Income
                                     (No specified wealth Goal)             (Specified desired income goal)

Risk Measure                         Volatility of portfolio returns        Volatility of funded ratio(FR) 

Success Measure                      Account balance size                   FR relative to income goal

Asset allocation strategy            Generic Fixed or age-only              Dynamic based on age,income & FR-focused                                                                                  on improving FR                 



Links - http://mitsloan.mit.edu/uploadedFiles/Alumni/Content/Events/2014-2015/Reunion_2015/Bob%20Merton%20PPT.pdf
and - https://www.youtube.com/watch?v=v2D6N5hgUkw

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Last edited by bobcat2 on Tue Jun 06, 2017 12:40 am, edited 3 times in total.
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Re: LMP-1: P&I article on corporate & public pension plans

Post by grok87 » Sun Apr 23, 2017 5:49 pm

Doc wrote:
grok87 wrote:My liability matching portfolio is aimed at replicating a pension since i don't have one

I always wondered why you would want to fund a 30 yr LMP with real yields at rock bottom instead of taking more risk until yields improved. Now I know. :sharebeer

thanks
:sharebeer
"...people always live for ever when there is any annuity to be paid them"- Jane Austen

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Re: LMP-1: P&I article on corporate & public pension plans

Post by grok87 » Sun Apr 23, 2017 6:18 pm

bobcat2 wrote:
Rarely does someone advocating using an LMP duration match. For instance I have never read anything by William Bernstein, the chief proponent of LMP, where he duration matches assets to liabilities prior to retirement. See the following quote and linked article by Bernstein where he discusses LMP.
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.

Link - https://www.wsj.com/articles/how-to-think-about-risk-in-retirement-1417408070

No one following an LDI strategy would use use short-term bonds to fund a long-term liability, regardless of whether interest rates are currently low or not. The duration mismatch of such an approach negates the safety of the approach.


Thanks Bob.
I guess this is the quote i focus on from the article
William Bernstein wrote:The key point is that all three choices—an inflation-adjusted annuity, TIPS ladder or short-bond portfolio—or any combination of them would match the retiree’s annual needs well, because they all provide a known stream of income and principal over the years. A portfolio starting at 60% bonds and 40% stocks with a subsequent glide path away from equities most certainly doesn’t provide that assurance.


I think you have a good point. William Bernstein doesn't mention, if one goes with the TIPs ladder approach, over what time frame one might build it. I wonder if we could get him to chime in here somehow?

He does seem to suggest, as you state, that he is not enthusiastic about purchasing either a inflation adjusted annuity or a TIPS ladder right now with interest rates so low (although the article was written in 2014 and rates are fractionally higher now). But i wonder if he might be sympathetic to the approach i follow and advocate- purchasing the TIPS ladder gradually over say a 20 or 30 year period- buying one rung each year as it were?
That way you are mitigating the risk of buying at a bad time.

cheers,
grok
"...people always live for ever when there is any annuity to be paid them"- Jane Austen

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Re: LMP-1: P&I article on corporate & public pension plans

Post by learning_head » Mon Apr 24, 2017 12:58 pm

William Bernstein wrote:The key point is that all three choices—an inflation-adjusted annuity, TIPS ladder or short-bond portfolio—or any combination of them would match the retiree’s annual needs well, because they all provide a known stream of income and principal over the years. A portfolio starting at 60% bonds and 40% stocks with a subsequent glide path away from equities most certainly doesn’t provide that assurance.


Bill Bernstein highlights COLA-d annuity company risk and TIPS ladder reinvestment risk (as well as need for large tax-advantaged space), but I did not know he believes short-bond portfolio of "high-quality municipal and corporate bonds" provides assurance of inflation-protection that is very close to those two, while saying 60/40 portfolio does not.

It certainly seems much easier to invest in short-term AAA corporate bonds than bother with TIPS ladders or give up annuity premium. Does it really provide nearly as much assurance of the real income stream though?! I would not have thought so. Real income of TIPS is assured by US government. Real income of COLA-d annuities are assured by insurance company + state guarantee association. What assures real income of short term corp bond funds? Are the guarantees of purchasing power protection really similar in this case?

Perhaps what he means is that while risks of company failure + state guarantee failure for annuities and reinvestment risks for TIPS are different, they are comparable in their risks with short term AAA bond investments neither being guaranteed nor keeping up with same level of inflation protection? Further, 60/40 portfolio has much less ability (i.e. much more risk) in providing that level of inflation protection?

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Re: LMP-1: P&I article on corporate & public pension plans

Post by bobcat2 » Mon Apr 24, 2017 2:36 pm

learning_head wrote:
William Bernstein wrote:The key point is that all three choices—an inflation-adjusted annuity, TIPS ladder or short-bond portfolio—or any combination of them would match the retiree’s annual needs well, because they all provide a known stream of income and principal over the years.


It certainly seems much easier to invest in short-term AAA corporate bonds than bother with TIPS ladders or give up annuity premium. Does it really provide nearly as much assurance of the real income stream though?! I would not have thought so. Real income of TIPS is assured by US government. Real income of COLA-d annuities are assured by insurance company + state guarantee association. What assures real income of short term corp bond funds? Are the guarantees of purchasing power protection really similar in this case?


What assures real income of short term corp bond funds?
Nothing.

Are the guarantees of purchasing power protection really similar in this case?
No.

BobK
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Re: LMP-1: P&I article on corporate & public pension plans

Post by grok87 » Mon Apr 24, 2017 5:12 pm

learning_head wrote:
William Bernstein wrote:The key point is that all three choices—an inflation-adjusted annuity, TIPS ladder or short-bond portfolio—or any combination of them would match the retiree’s annual needs well, because they all provide a known stream of income and principal over the years. A portfolio starting at 60% bonds and 40% stocks with a subsequent glide path away from equities most certainly doesn’t provide that assurance.


Bill Bernstein highlights COLA-d annuity company risk and TIPS ladder reinvestment risk (as well as need for large tax-advantaged space), but I did not know he believes short-bond portfolio of "high-quality municipal and corporate bonds" provides assurance of inflation-protection that is very close to those two, while saying 60/40 portfolio does not.

It certainly seems much easier to invest in short-term AAA corporate bonds than bother with TIPS ladders or give up annuity premium. Does it really provide nearly as much assurance of the real income stream though?! I would not have thought so. Real income of TIPS is assured by US government. Real income of COLA-d annuities are assured by insurance company + state guarantee association. What assures real income of short term corp bond funds? Are the guarantees of purchasing power protection really similar in this case?

Perhaps what he means is that while risks of company failure + state guarantee failure for annuities and reinvestment risks for TIPS are different, they are comparable in their risks with short term AAA bond investments neither being guaranteed nor keeping up with same level of inflation protection? Further, 60/40 portfolio has much less ability (i.e. much more risk) in providing that level of inflation protection?

I'm not sure i understand why a tips ladder has reinvestment riSk?

I don't there is any in the distribution phase. I guess there is some in the building phase. But with real yields so low i think the risk is pretty minimal.
"...people always live for ever when there is any annuity to be paid them"- Jane Austen

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Re: LMP-1: P&I article on corporate & public pension plans

Post by learning_head » Mon Apr 24, 2017 7:18 pm

grok87 wrote:I'm not sure i understand why a tips ladder has reinvestment riSk?


I imagine it means this for someone who needs to assure real income for over 30 years:

(a) it's not clear what TIPS products will exist in 30 years when you may need to reinvest proceeds for years beyond; i.e.
--- at what maturities will they be sold, and more importantly,
--- at which rates? Nothing stops TIPS going to negative real rates. Especially if are in the middle of an inflation spike just as you need to reinvest.

(b) It's never clear how long you are going to live; so if you are planning for 40-50 or even 60 year time horizons (yes, if retiring in early 40s), how much TIPS do you buy? One option is to buy say 20x required income for years beyond 70+ and then buy an SPIA, or better yet, COLA-d SPIA, with those TIPS maturing in 30 years for the rest of life. However, what annuity type products will exist in 30 years (e.g. today we have only 1 COLA SPIA provider) and at which prices (again, pricier than 20x implicitly assumes?)? I suppose you could buy 30x required income for another TIPS ladder then (or build it gradually again over time), but that quickly becomes too expensive as you are over-insuring and not getting any benefit of mortality credits had you pooled longevity risk.

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Re: LMP-1: P&I article on corporate & public pension plans

Post by Dottie57 » Mon Apr 24, 2017 8:16 pm

I have a very bare minimum of cds and cash set up for age 65 to 70. I figure I can take 10k per year out of deferred accounts even if the market is down. In roth and taxable I have about the same in bonds and stocks(50/50) for 5 years before 65. So I think this comes close to matching my needs for the first 1/3 of retirement. Not a great life but survivable if the financial system doesn't collapse. ((Portfolio today is about 1.25m).

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Re: LMP-1: P&I article on corporate & public pension plans

Post by grok87 » Mon Apr 24, 2017 9:34 pm

learning_head wrote:
grok87 wrote:I'm not sure i understand why a tips ladder has reinvestment riSk?


I imagine it means this for someone who needs to assure real income for over 30 years:

(a) it's not clear what TIPS products will exist in 30 years when you may need to reinvest proceeds for years beyond; i.e.
--- at what maturities will they be sold, and more importantly,
--- at which rates? Nothing stops TIPS going to negative real rates. Especially if are in the middle of an inflation spike just as you need to reinvest.

(b) It's never clear how long you are going to live; so if you are planning for 40-50 or even 60 year time horizons (yes, if retiring in early 40s), how much TIPS do you buy? One option is to buy say 20x required income for years beyond 70+ and then buy an SPIA, or better yet, COLA-d SPIA, with those TIPS maturing in 30 years for the rest of life. However, what annuity type products will exist in 30 years (e.g. today we have only 1 COLA SPIA provider) and at which prices (again, pricier than 20x implicitly assumes?)? I suppose you could buy 30x required income for another TIPS ladder then (or build it gradually again over time), but that quickly becomes too expensive as you are over-insuring and not getting any benefit of mortality credits had you pooled longevity risk.

i agree that if you have a longer than 30 year time horizon then reinvestment risk is an issue. I guess the mental picture i had was that most people would keep building their tips ladder up until age 65 or so and then live off the tips ladder for 30 years until age 95.

as you say though "its never clear how long you are going to live." somewhere in your 80s i guess is probably the time to start buying a deferred annuity that kicks in at age 95.
"...people always live for ever when there is any annuity to be paid them"- Jane Austen

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Re: LMP-1: P&I article on corporate & public pension plans

Post by AlohaJoe » Mon Apr 24, 2017 9:43 pm

grok87 wrote:I'm not sure i understand why a tips ladder has reinvestment riSk?

I don't there is any in the distribution phase. I guess there is some in the building phase. But with real yields so low i think the risk is pretty minimal.


I'm not sure what the original person who said this meant. Beyond the previous suggestions but to elaborate on your "some in the building phase comment" here are two possibilities:

You can't actually buy a 30-year TIPS ladder. There are missing years.

Go to http://eyebonds.info/downloads/pages/TIPSLadder.html

There is nothing maturing in 2023, 2024, 2031, 2032, 2033, 2034, 2035, 2036, 2037, 2038, and 2039.

So you need to buy a shorter TIPS now and then buy another shorter one ladder. Hence: reinvestment risk.

Another possibility is that you can't start building a ladder until you are exactly 30 years away from retirement. (If your retirement date changes at all over those 30 years then you are also subject to reinvestment risk.)

That means (as an example) that you can't start building the ladder until you are 37 years old. You can buy a shorter TIPS and then reinvest it once you are 37 or older. That means, for most people, you have 17 years of reinvestment risk. Of your entire 47 year investment life, 36% of it you are subject to reinvestment risk.

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Re: LMP-1: P&I article on corporate & public pension plans

Post by grok87 » Tue Apr 25, 2017 7:06 am

AlohaJoe wrote:
grok87 wrote:I'm not sure i understand why a tips ladder has reinvestment riSk?

I don't there is any in the distribution phase. I guess there is some in the building phase. But with real yields so low i think the risk is pretty minimal.


I'm not sure what the original person who said this meant. Beyond the previous suggestions but to elaborate on your "some in the building phase comment" here are two possibilities:

You can't actually buy a 30-year TIPS ladder. There are missing years.

Go to http://eyebonds.info/downloads/pages/TIPSLadder.html

There is nothing maturing in 2023, 2024, 2031, 2032, 2033, 2034, 2035, 2036, 2037, 2038, and 2039.

So you need to buy a shorter TIPS now and then buy another shorter one ladder. Hence: reinvestment risk.

Another possibility is that you can't start building a ladder until you are exactly 30 years away from retirement. (If your retirement date changes at all over those 30 years then you are also subject to reinvestment risk.)

That means (as an example) that you can't start building the ladder until you are 37 years old. You can buy a shorter TIPS and then reinvest it once you are 37 or older. That means, for most people, you have 17 years of reinvestment risk. Of your entire 47 year investment life, 36% of it you are subject to reinvestment risk.

Thanks.

So i have some good news. Tips maturing in 2023, 2024 and 2032 are available.

It sure would be nice to have 2033-2039 available. Maybe someone will strip the 2040s tips issues some day?
"...people always live for ever when there is any annuity to be paid them"- Jane Austen

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Re: LMP-1: P&I article on corporate & public pension plans

Post by learning_head » Tue Apr 25, 2017 11:04 am

grok87 wrote:... as you say though "its never clear how long you are going to live." somewhere in your 80s i guess is probably the time to start buying a deferred annuity that kicks in at age 95.


(As you also noted in the past) today at least, deferred annuities provide no meaningful inflation protection unfortunately, so one would have have no idea how much of real future income they are buying. :(

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Re: LMP-1: P&I article on corporate & public pension plans

Post by grok87 » Wed May 03, 2017 6:08 pm

LMP-2: "Should you take the lump sum?" is out.
viewtopic.php?f=10&t=218067
cheers,
grok
"...people always live for ever when there is any annuity to be paid them"- Jane Austen

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Re: LMP-1: P&I article on corporate & public pension plans

Post by grok87 » Wed May 03, 2017 9:56 pm

Dottie57 wrote:I have a very bare minimum of cds and cash set up for age 65 to 70. I figure I can take 10k per year out of deferred accounts even if the market is down. In roth and taxable I have about the same in bonds and stocks(50/50) for 5 years before 65. So I think this comes close to matching my needs for the first 1/3 of retirement. Not a great life but survivable if the financial system doesn't collapse. ((Portfolio today is about 1.25m).

Having a guaranteed income floor is a good idea.
"...people always live for ever when there is any annuity to be paid them"- Jane Austen

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Re: LMP-1: P&I article on corporate & public pension plans

Post by LadyGeek » Wed May 10, 2017 9:09 pm

grok87's Liability matching portfolio series is now in the wiki: Grok's tips
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Re: LMP-1: P&I article on corporate & public pension plans

Post by chinto » Wed May 10, 2017 10:58 pm

Doc wrote:If a corporate pension plan needs added contributions the company will put in more money to keep it solvent. The public pension plan is more likely to cut benefits. Employee's morale vs taxpayers rath.

:P
Clearly you have not heard of Illinois - LOL. Just sayin'.

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Re: LMP-1: P&I article on corporate & public pension plans

Post by chinto » Wed May 10, 2017 11:39 pm

learning_head wrote:
grok87 wrote: (e.g. today we have only 1 COLA SPIA provider)


For the uninitiated would you mind naming that provider?

Thank you.

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Re: LMP-1: P&I article on corporate & public pension plans

Post by itstoomuch » Thu May 11, 2017 1:02 am

So what's your retirement investing strategy?
See notes below: We Are Retired. I don't particularly like the "retirement investing strategy" because I am really not risking our retirement funds in investing but rather than managing retirement income. Best description, Barbell: At left end are GLWB Annuities, Small Pension and SS. At the right end are Discretionary Accts. The rental falls somewhere inbetween and this is a new "bucket" of income from an unexpected inheritance.
Are you doing more LMP like the corporate pension plans? Or taking more risk like the municipal pension plans? Or staying the course?
We bought the variable d-annuities to be like a PERS Tier 1, all equity, no bonds. We know what our minimum income will be be from the left side of the bar bell, up to 10 years from first purchase. Later purchases of deferred annuities (fixed-index) is more like a ~40/60 balanced and has pushed our known minimum income out another 10 years. We have started to call the var annuities' income feature and is more than first projected.
Discretionary accounts are trading accounts and far exceed SPY. The Discretionary is not so much as an "investment" account but a "risk management tool." However, beginning 2017, I have a new ISP that prescribes a more careful "investment"-risk posture. Now about 60% cash, down from 85% cash since March.


Our safe FR and LMP > 1.1
Rev90517; 4 Incm stream buckets: SS+pension; dfr'd GLWB VA & FI anntys, by time & $$ laddered; Discretionary; Rentals. LTCi. Own, not asset. Tax 25%. Early SS. FundRatio (FR) >1.1 67/70yo

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Re: LMP-1: P&I article on corporate & public pension plans

Post by grok87 » Thu May 11, 2017 4:15 pm

learning_head wrote:
grok87 wrote:I'm not sure i understand why a tips ladder has reinvestment riSk?


I imagine it means this for someone who needs to assure real income for over 30 years:

(a) it's not clear what TIPS products will exist in 30 years when you may need to reinvest proceeds for years beyond; i.e.
--- at what maturities will they be sold, and more importantly,
--- at which rates? Nothing stops TIPS going to negative real rates. Especially if are in the middle of an inflation spike just as you need to reinvest.

(b) It's never clear how long you are going to live; so if you are planning for 40-50 or even 60 year time horizons (yes, if retiring in early 40s), how much TIPS do you buy? One option is to buy say 20x required income for years beyond 70+ and then buy an SPIA, or better yet, COLA-d SPIA, with those TIPS maturing in 30 years for the rest of life. However, what annuity type products will exist in 30 years (e.g. today we have only 1 COLA SPIA provider) and at which prices (again, pricier than 20x implicitly assumes?)? I suppose you could buy 30x required income for another TIPS ladder then (or build it gradually again over time), but that quickly becomes too expensive as you are over-insuring and not getting any benefit of mortality credits had you pooled longevity risk.

See question below on the cola spia provider
"...people always live for ever when there is any annuity to be paid them"- Jane Austen

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Re: LMP-1: P&I article on corporate & public pension plans

Post by grok87 » Thu May 11, 2017 4:16 pm

chinto wrote:
learning_head wrote:
grok87 wrote: (e.g. today we have only 1 COLA SPIA provider)


For the uninitiated would you mind naming that provider?

Thank you.

I think that's a quote from learning-head- maybe he'll respond?
"...people always live for ever when there is any annuity to be paid them"- Jane Austen

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Re: LMP-1: P&I article on corporate & public pension plans

Post by grok87 » Thu May 11, 2017 4:18 pm

itstoomuch wrote:
So what's your retirement investing strategy?
See notes below: We Are Retired. I don't particularly like the "retirement investing strategy" because I am really not risking our retirement funds in investing but rather than managing retirement income. Best description, Barbell: At left end are GLWB Annuities, Small Pension and SS. At the right end are Discretionary Accts. The rental falls somewhere inbetween and this is a new "bucket" of income from an unexpected inheritance.
Are you doing more LMP like the corporate pension plans? Or taking more risk like the municipal pension plans? Or staying the course?
We bought the variable d-annuities to be like a PERS Tier 1, all equity, no bonds. We know what our minimum income will be be from the left side of the bar bell, up to 10 years from first purchase. Later purchases of deferred annuities (fixed-index) is more like a ~40/60 balanced and has pushed our known minimum income out another 10 years. We have started to call the var annuities' income feature and is more than first projected.
Discretionary accounts are trading accounts and far exceed SPY. The Discretionary is not so much as an "investment" account but a "risk management tool." However, beginning 2017, I have a new ISP that prescribes a more careful "investment"-risk posture. Now about 60% cash, down from 85% cash since March.


Our safe FR and LMP > 1.1

Sounds like you bought the first variable annuities pre financial crisis. In retrospect that was probably a smart Move.
"...people always live for ever when there is any annuity to be paid them"- Jane Austen

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Re: LMP-1: P&I article on corporate & public pension plans

Post by itstoomuch » Thu May 11, 2017 11:44 pm

No, we bought in late Nov 2008. The economy and other indicators stuff looked very bleak.
The really good annuities were prior to 2007.
Ymmv
Rev90517; 4 Incm stream buckets: SS+pension; dfr'd GLWB VA & FI anntys, by time & $$ laddered; Discretionary; Rentals. LTCi. Own, not asset. Tax 25%. Early SS. FundRatio (FR) >1.1 67/70yo

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Re: LMP-1: P&I article on corporate & public pension plans

Post by gilgamesh » Sun May 14, 2017 5:31 am

This is my variation of what's being discussed in the LMP series of articles, because of early retirement (pre-SS) and my 'TIPS pension' along with SS having to cover 70-80% of my retirement income. When such large bond allocation is required, the following matters. WARNING: I AM NOT AN EXPERT.

Corporations and municipalities don't have a retirement date, their accumulation phases and distribution phase run concurrently. A person on the other hand experiences a decreasing human capital which approaches zero towards retirement and utility of wealth which diminishes towards retirement as well. Corporations and municipalities don't have these factors to consider. Thus a person IMO, requires a different approach than corporations and municipalities.

When human capital and utility of wealth is high during the early stages of the accumulation phase, one could take on higher risks. Towards the end of the accumulation phase as both human capital and utility of wealth diminishes an individual should reduce their risk. LMP and especially LDI does not vary this risk tolerance over time. A bond tent around retirement age will account for this risk tolerance change as one approaches retirement and mitigate sequence risk in the early stages of retirement. TIPS can be the bond tent or be a part of it.

Therefore, the optimal strategy for a person is not to liability match equally from the start, but rather to take higher risks early on and do an accelerated LMP closer to retirement. Yes, I am not strictly setting up a pension throughout my career, but on the other hand this allows for potentially higher returns for higher risks. A strict pension structure can only be acquired through LDI, which for an individual curtails returns with unnecessary reduction in risk.

This distinction only applies until your chosen bond allocation reaches the required TIPS purchase amount and subsequent yearly TIPS purchases matches the change in your asset allocation towards bonds. As my TIPS (Later TIPS + SS) will account for 70-80% of retirement income, this is not expected to happen until later in the accumulation phase. On the other hand if your TIPS ladder/pension accounts for much less, your AA may allow for doing LMP much earlier without having to change your AA/risk. Especially if retirement coincides with receiving SS, requiring much less in TIPS 'pension'.

This is my TIPS ladder for someone retiring in the year 2030 at age 60. This provides TIPS 'pension' up to age 80. Then SPIA are purchased every 5 years with maturing TIPS until age 95. From age 80 on, the mortality credit should be high enough for an SPIA to be a better option than continuing a TIPS ladder. The three, 5 year SPIA purchase is to minimize inflation risk.

The TIPS amount prior to SS will be higher to compensate for the lack of SS.

In 2023 - 10 yr for 2033 and ( 10 yr for 2043)
In 2024 - 10 yr for 2034 (10 yr for 2044)
In 2025 - 5 yr for 2030 (10 yr for 2040) 10 yr for 2035 (10 yr for 2045)
In 2026 - 5 yr for 2031 (10 yr for 2041) 10 yr for 2036 (10 yr for 2046)
In 2027 - 5 yr for 2032 (10 yr for 2042) 10 yr for 2037 (10 yr for 2047)
In 2028 - 10 yr for 2038 (10 yr for 2048)
In 2029 - 10 yr for 2039 (10 yr for 2049 + money to purchase an SPIA + 5yr TIPS to buy an SPIA in 5 years and 10 yr TIPS to purchase SPIA IN 10 years)

This way the TIPS bond tent starts only 7 years from retirement and gradually decreases during retirement - bond tent.

Also, if TIPS have non zero yield, then those payouts will be higher during the early years of retirement and gradually decline as each rung mature. I will be using this for extra travel expenses, which is also expected to decline through retirement.

There will of course be a side portfolio heavily tilted to equites.

P.S: It should also be possible to start a partial pension track even earlier without changing AA, then as each partial rung of the ladder mature keep beefing it up to keep with the appropriate AA until you get to your required pension amount. That would be interesting.

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Re: LMP-1: P&I article on corporate & public pension plans

Post by grok87 » Sun May 14, 2017 12:19 pm

gilgamesh wrote:
This is my TIPS ladder for someone retiring in the year 2030 at age 60. This provides TIPS 'pension' up to age 80. Then SPIA are purchased every 5 years with maturing TIPS until age 95. From age 80 on, the mortality credit should be high enough for an SPIA to be a better option than continuing a TIPS ladder. The three, 5 year SPIA purchase is to minimize inflation risk.

The TIPS amount prior to SS will be higher to compensate for the lack of SS.

In 2023 - 10 yr for 2033 and ( 10 yr for 2043)
In 2024 - 10 yr for 2034 (10 yr for 2044)
In 2025 - 5 yr for 2030 (10 yr for 2040) 10 yr for 2035 (10 yr for 2045)
In 2026 - 5 yr for 2031 (10 yr for 2041) 10 yr for 2036 (10 yr for 2046)
In 2027 - 5 yr for 2032 (10 yr for 2042) 10 yr for 2037 (10 yr for 2047)
In 2028 - 10 yr for 2038 (10 yr for 2048)
In 2029 - 10 yr for 2039 (10 yr for 2049 + money to purchase an SPIA + 5yr TIPS to buy an SPIA in 5 years and 10 yr TIPS to purchase SPIA IN 10 years)

This way the TIPS bond tent starts only 7 years from retirement and gradually decreases during retirement - bond tent.

Also, if TIPS have non zero yield, then those payouts will be higher during the early years of retirement and gradually decline as each rung mature. I will be using this for extra travel expenses, which is also expected to decline through retirement.

There will of course be a side portfolio heavily tilted to equites.

P.S: It should also be possible to start a partial pension track even earlier without changing AA, then as each partial rung of the ladder mature keep beefing it up to keep with the appropriate AA until you get to your required pension amount. That would be interesting.

Thanks gilgamesh.
I appreciate your detailed post laying out the strategy. First of all i'm not sure i completely understand it (not meant as a criticism of you, i just haven't had my morning coffee yet!)
I think you are saying, to start buying 10 year tips when you are 7 years away from retirement at age 60. Then keep buying 10 year tips and rolling over the ones that mature up until age 70 (year 2039 in your example) the idea being that in your eighties one will be fully converted to an annuity (SPIA) strategy.

Some comments:
1) I think converting everything over to an annuity strategy in your 80s could make a lot of sense.
2) I like your idea of not buying the annuities all at once but buying them in 3 chunks with the purchases staggered out over about 10 years.

my approach is a little different:
3) Start buying 30 year tips at age 35 and keep buying them every year up until age 65 (i.e. standard retirement age)
4) live off the ladder and other investments from age 65 to 70.
5) start taking Social Security at age 70 (to maximize the amount of inflation protected SS income).
60 Somewhere in your ages- say age 85 or so- sell most of your tips and convert to an inflation protected annuity (SPIA),

why do i think this approach make sense?

7) it spreads out your interest rates risk in the accumulation phase over a longer period. I think constructing your TIPS ladder over 7 years could be problematic if interest rates are depressed for a long period. In fact many people would say that is the reality we are living in now since 2008 (i.e. 9 years).

8) it better matches the duration (average maturity) of your retirement spending needs (retirement liabilities) with your tips ladder.For someone retiring at age 60 they have an average life expectancy of 23 years, so age 83.
http://life-span.healthgrove.com/l/61/60

9) so then to me it make sense for that person to have a tips ladder or tent with an average maturity of 23 years to match. That means a lot of long term tips. an even ladder of tips starting with the 10 year tip out to the 30 year tip only gets you to a 20 year average maturity.

10) what about when you go to buy the annuity in your 80s? well the main risk you have is that rates will be low and annuity prices high. having lots of long term TIPS helps hedge that risk, since in that scenario the TIPs will also be at higher prices...

cheers,
grok
"...people always live for ever when there is any annuity to be paid them"- Jane Austen

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Re: LMP-1: P&I article on corporate & public pension plans

Post by gilgamesh » Sun May 14, 2017 3:08 pm

grok87 wrote:
gilgamesh wrote:
This is my TIPS ladder for someone retiring in the year 2030 at age 60. This provides TIPS 'pension' up to age 80. Then SPIA are purchased every 5 years with maturing TIPS until age 95. From age 80 on, the mortality credit should be high enough for an SPIA to be a better option than continuing a TIPS ladder. The three, 5 year SPIA purchase is to minimize inflation risk.

The TIPS amount prior to SS will be higher to compensate for the lack of SS.

In 2023 - 10 yr for 2033 and ( 10 yr for 2043)
In 2024 - 10 yr for 2034 (10 yr for 2044)
In 2025 - 5 yr for 2030 (10 yr for 2040) 10 yr for 2035 (10 yr for 2045)
In 2026 - 5 yr for 2031 (10 yr for 2041) 10 yr for 2036 (10 yr for 2046)
In 2027 - 5 yr for 2032 (10 yr for 2042) 10 yr for 2037 (10 yr for 2047)
In 2028 - 10 yr for 2038 (10 yr for 2048)
In 2029 - 10 yr for 2039 (10 yr for 2049 + money to purchase an SPIA + 5yr TIPS to buy an SPIA in 5 years and 10 yr TIPS to purchase SPIA IN 10 years)

This way the TIPS bond tent starts only 7 years from retirement and gradually decreases during retirement - bond tent.

Also, if TIPS have non zero yield, then those payouts will be higher during the early years of retirement and gradually decline as each rung mature. I will be using this for extra travel expenses, which is also expected to decline through retirement.

There will of course be a side portfolio heavily tilted to equites.

P.S: It should also be possible to start a partial pension track even earlier without changing AA, then as each partial rung of the ladder mature keep beefing it up to keep with the appropriate AA until you get to your required pension amount. That would be interesting.


Thanks gilgamesh.
I appreciate your detailed post laying out the strategy. First of all i'm not sure i completely understand it (not meant as a criticism of you, i just haven't had my morning coffee yet!)
I think you are saying, to start buying 10 year tips when you are 7 years away from retirement at age 60. Then keep buying 10 year tips and rolling over the ones that mature up until age 70 (year 2039 in your example) the idea being that in your eighties one will be fully converted to an annuity (SPIA) strategy.


cheers,
grok


Actually, no, it's not always 10 year TIPS, at times 5 year ones too....sorry for not explaining the table properly. Yes, Retirement at age 60 is in 2030, and I start buying TIPS in 2023, 7 years prior to retirement.

So, the first line is what I will purchase in 2023. I will purchase a 10 year TIPS that will mature in 2033 and provide an income. I will also buy a 10 year TIPS in 2023 for what I need in 2043, This when it matures in 2033 will be reinvested in another 10 year TIPS.

In 2025, I will purchase 5 year TIPS and 10 year TIPS....The 5 year TIPS will have enough to cover both 2030 and 2040, when it matures it will pay for expenses in 2030 and parts of it will be used to buy another 10 year TIPS to cover expenses for 2040...The 10 year TIPS I'm purchasing in 2025 will have enough to cover expenses for 2035 and 2045. So, when it matures in 2035 it will provide income for that year plus enough to purchae another 10 year TIPS to cover expenses for 2045.

So, you read each line like that. All primary TIPS purchases start at age 53 and ends at 60. After that , new purchases are only from maturing TIPS already bought. This covers until age 80, after which maturing TIPS allow for laddered SPIA purchase.
Last edited by gilgamesh on Sun May 14, 2017 5:00 pm, edited 3 times in total.

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Re: LMP-1: P&I article on corporate & public pension plans

Post by gilgamesh » Sun May 14, 2017 3:32 pm

grok87 wrote:my approach is a little different:
3) Start buying 30 year tips at age 35 and keep buying them every year up until age 65 (i.e. standard retirement age)
4) live off the ladder and other investments from age 65 to 70.
5) start taking Social Security at age 70 (to maximize the amount of inflation protected SS income).
60 Somewhere in your ages- say age 85 or so- sell most of your tips and convert to an inflation protected annuity (SPIA),

why do i think this approach make sense?

7) it spreads out your interest rates risk in the accumulation phase over a longer period. I think constructing your TIPS ladder over 7 years could be problematic if interest rates are depressed for a long period. In fact many people would say that is the reality we are living in now since 2008 (i.e. 9 years).

8) it better matches the duration (average maturity) of your retirement spending needs (retirement liabilities) with your tips ladder.For someone retiring at age 60 they have an average life expectancy of 23 years, so age 83.
http://life-span.healthgrove.com/l/61/60

9) so then to me it make sense for that person to have a tips ladder or tent with an average maturity of 23 years to match. That means a lot of long term tips. an even ladder of tips starting with the 10 year tip out to the 30 year tip only gets you to a 20 year average maturity.

10) what about when you go to buy the annuity in your 80s? well the main risk you have is that rates will be low and annuity prices high. having lots of long term TIPS helps hedge that risk, since in that scenario the TIPs will also be at higher prices...

cheers,
grok


Yes! The thread on LDI and interest rate matching started by Bob is what drew me to this forum. This is the thread

viewtopic.php?f=10&t=174991&p=2645226&hilit=LDI+LMP+STRATEGY#p2645226

I have to say I don't fully understand it :D ...However, at least I know enough to say I am open to interest rate risks. I am not even pretending to duration match my SPIA purchase.

That is a problem....however, none of this is written in stone. When it comes time to buying each, if interest rates are low and inflation risks low, I just may wait in a 24 or 36 month CD (assuming inflation crystal balls of 2-3 year duration is allowed :D ) and later purchase TIPS in the secondary market.

Aso, if interest rates are even loosely tied to inflation, then my TIPS ladder should somewhat approximate it. The TIPS that mature at age 80, 85 and 90 to purchase the SPIA would have accurately tracked inflation from almost 25-30 years prior to them maturing. So, if inflation is somewhat loosely related to interest rates changes, then I should at least not be out in the ocean. It should provide enough sums to get the proper amount of SPIA , for what ever the interest rate might be. Does this make sense? May be I am wrong with this????

Also, I'd rather stay mostly equity heavy throughout my career, utilizing my human capital, and not invest much in TIPS. Until it's close to retirement. So, I am taking this interest rate risk over being going too conservative too soon. Even though TIPS purchase start 7 years from retirement, funds for which will go into a short term bond fund starting 10 years prior to retirement (so, funds to buy TIPS will go into a short term bond fund 3 years prior to the intended purchase dates).

It is not bullet proof like LDI. I am fine with that. I am giving up certainty for potentially higher reward, by taking higher risks in not purchasing much bonds until a few years prior to retirement.

I guess its not LMP, certainly not LDI, it's conventional investing with TIPS floor, so it somewhat has the appearance of a partial LMP. I hope I have the proper understanding?

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Re: LMP-1: P&I article on corporate & public pension plans

Post by bobcat2 » Wed May 17, 2017 11:05 am

Hi gilgamesh,
gilgamesh wrote:
The thread on LDI and interest rate matching started by Bob is what drew me to this forum. This is the thread

viewtopic.php?f=10&t=174991&p=2645226&hilit=LDI+LMP+STRATEGY#p2645226

I have to say I don't fully understand it :D ...

It is not bullet proof like LDI. I am fine with that. I am giving up certainty for potentially higher reward, by taking higher risks in not purchasing much bonds until a few years prior to retirement.

I guess its not LMP, certainly not LDI, it's conventional investing with TIPS floor, so it somewhat has the appearance of a partial LMP. I hope I have the proper understanding?

Once you are putting in a TIPS floor you have have left the world of conventional or, benchmark-driven, investing strategies and entered the world of LDI or, dedicated portfolio, strategies. Any investment strategy that matches some assets to liabilities is an LDI strategy. That includes LMP, which IMO is a poorly designed LDI strategy.

From Wikipedia on LDI, aka dedicated portfolio, strategies.
One of the shortcomings of Modern Portfolio Theory is that it provides only a general notion of how assets should be allocated among the major asset classes (stocks, bonds, and cash). It focuses on the tradeoff between return and volatility – that is, higher returns can be earned only by investments that fluctuate more rapidly and with greater intensity. Dedicated portfolio theory focuses explicitly on cash flows and time horizons. If done properly, it allocates to fixed income no more than the minimum funds necessary to generate the desired cash flows, and all other funds can be invested elsewhere.


With regard to retirement planning and human capital keep in mind that the relevant human capital for retirement planning is the PV of your future contributions to your retirement, i.e. the PV of future retirement savings. What's important in considering human capital is the ratio of the PV of the future retirement savings to the size of the portfolio. This ratio is very large when you are a young investor and allows for high allocation to equities in the portfolio. But this ratio declines over time and is small once you are on the wrong side of 55. Therefore, once you are over 55 the relatively small amount of relevant human capital compared to the size of your portfolio allows for only a relatively small dedication to equities in the portfolio. In other words, people within 15-10 years of retirement can't use human capital as a rationale for a large allocation to stocks in the retirement portfolio.

BobK
In finance risk is defined as uncertainty that is consequential (nontrivial). | The two main methods of dealing with financial risk are the matching of assets to goals & diversifying.

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Re: LMP-1: P&I article on corporate & public pension plans

Post by Doc » Wed May 17, 2017 4:21 pm

bobcat2 wrote:Once you are putting in a TIPS floor you have have left the world of conventional or, benchmark-driven, investing strategies and entered the world of LDI or, dedicated portfolio, strategies. Any investment strategy that matches some assets to liabilities is an LDI strategy. That includes LMP, which IMO is a poorly designed LDI strategy.

In keeping with bobcat (I think) I used a mixed structure with a 10 yr TIPS (rolling) ladder which would be used in retirement only if the stock market tanked for a long time. Unfortunately most of it got spent in rebalancing in '08. The ladder is almost rebuilt now but given the prior TIPS performance in the (one) flight to quality situation the rebuilt ladder will be a mix of TIPS and nominals.

But I stopped harassing Grok I while back when he began taking me for trips in his Tardis.
A scientist looks for THE answer to a problem, an engineer looks for AN answer and lawyers ONLY have opinions. Investing is not a science.

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Re: LMP-1: P&I article on corporate & public pension plans

Post by gilgamesh » Wed May 17, 2017 6:03 pm

bobcat2 wrote:Hi gilgamesh,
gilgamesh wrote:
The thread on LDI and interest rate matching started by Bob is what drew me to this forum. This is the thread

viewtopic.php?f=10&t=174991&p=2645226&hilit=LDI+LMP+STRATEGY#p2645226

I have to say I don't fully understand it :D ...

It is not bullet proof like LDI. I am fine with that. I am giving up certainty for potentially higher reward, by taking higher risks in not purchasing much bonds until a few years prior to retirement.

I guess its not LMP, certainly not LDI, it's conventional investing with TIPS floor, so it somewhat has the appearance of a partial LMP. I hope I have the proper understanding?

Once you are putting in a TIPS floor you have have left the world of conventional or, benchmark-driven, investing strategies and entered the world of LDI or, dedicated portfolio, strategies. Any investment strategy that matches some assets to liabilities is an LDI strategy. That includes LMP, which IMO is a poorly designed LDI strategy.

From Wikipedia on LDI, aka dedicated portfolio, strategies.
One of the shortcomings of Modern Portfolio Theory is that it provides only a general notion of how assets should be allocated among the major asset classes (stocks, bonds, and cash). It focuses on the tradeoff between return and volatility – that is, higher returns can be earned only by investments that fluctuate more rapidly and with greater intensity. Dedicated portfolio theory focuses explicitly on cash flows and time horizons. If done properly, it allocates to fixed income no more than the minimum funds necessary to generate the desired cash flows, and all other funds can be invested elsewhere.



BobK


Bob

Understood. I wanted to make the distinction, my dedicated portfolio strategy only begins 10 years prior to retirement. So, it's conventional or benchmark driven investing for most of the accumulation phase shifting to dedicated portfolio strategy closer to retirement.

Whereas matching assets to liabilities can be done throughout the accumulation phase.

I am doing this two phase strategy, to use Human capital in the early stages, which gives me the luxury to take on more risks for potentially higher reward than matching assets to liabilities from the get go.

The inspiration for my strategy came from Michael Zwecher's excellent book, "Retirement Portfolios - Theory, Construction, and Management"

P.S: I understand 'all other funds can be invested elsewhere', but with dedicated portfolio theory, if implemented from the get go, you decide your needs first and allocate what ever is needed towards matching assets to liabilities and the rest invested elsewhere. To use human capital, I suggest to only use your desired bond allocation to match assets to liabilities, irrelevant of what your needs might be. But, when it gets closer to retirement implement the matching asets to liabilities to your needs, and then see what's left and invest elsewhere.
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Re: LMP-1: P&I article on corporate & public pension plans

Post by gilgamesh » Wed May 17, 2017 6:25 pm

bobcat2 wrote:Hi gilgamesh,

With regard to retirement planning and human capital keep in mind that the relevant human capital for retirement planning is the PV of your future contributions to your retirement, i.e. the PV of future retirement savings. What's important in considering human capital is the ratio of the PV of the future retirement savings to the size of the portfolio. This ratio is very large when you are a young investor and allows for high allocation to equities in the portfolio. But this ratio declines over time and is small once you are on the wrong side of 55. Therefore, once you are over 55 the relatively small amount of relevant human capital compared to the size of your portfolio allows for only a relatively small dedication to equities in the portfolio. In other words, people within 15-10 years of retirement can't use human capital as a rationale for a large allocation to stocks in the retirement portfolio.

BobK


Bob,

Yes! This time frame fits into my plan. My bond tent (term used by Kitces) begins 10 years prior to retirement. The TIPS ladder itself starts 7 years prior to retirement, however 3 years prior to that funds will be transferred into a short term bond fund (possibly of average duration of 3 years). So, I am not advocating using human capital within 10 years of retirement and 15 years is fine too ( for instance, 5 years prior move into an intermediate bond fund of 5 year duration). So, my plan abides by what you say here.

I just don't see the need to embark on an asset-liability matching endeavor from the get go.

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Re: LMP-1: P&I article on corporate & public pension plans

Post by grok87 » Wed May 17, 2017 10:37 pm

Doc wrote:
bobcat2 wrote:Once you are putting in a TIPS floor you have have left the world of conventional or, benchmark-driven, investing strategies and entered the world of LDI or, dedicated portfolio, strategies. Any investment strategy that matches some assets to liabilities is an LDI strategy. That includes LMP, which IMO is a poorly designed LDI strategy.

In keeping with bobcat (I think) I used a mixed structure with a 10 yr TIPS (rolling) ladder which would be used in retirement only if the stock market tanked for a long time. Unfortunately most of it got spent in rebalancing in '08. The ladder is almost rebuilt now but given the prior TIPS performance in the (one) flight to quality situation the rebuilt ladder will be a mix of TIPS and nominals.

But I stopped harassing Grok I while back when he began taking me for trips in his Tardis.

If only its chameleon circuit would stop malfunctioning...
"...people always live for ever when there is any annuity to be paid them"- Jane Austen

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Re: LMP-1: P&I article on corporate & public pension plans

Post by Angst » Wed May 17, 2017 11:24 pm

In this post bobcat2 wrote:Once you are putting in a TIPS floor you have have left the world of conventional or, benchmark-driven, investing strategies and entered the world of LDI or, dedicated portfolio, strategies. Any investment strategy that matches some assets to liabilities is an LDI strategy. That includes LMP, which IMO is a poorly designed LDI strategy.

Argghh! Someone help me out here. Bob? Do I have a LMP as I'd always assumed or really a poorly-designed LDI, or is it a well-designed LDI, or... what the heck do I have? I've been purchasing 30-year TIPS annually at auction for 6 years now and I've filled gaps as I can. And I'm just about at the point, for the first time, where I'll up my annual purchase by one increment, i.e. $1,000. That's the minimum, so it doesn't allow me to smoothly match the growth of inflation over time, but I'm trying to deal with it. Nonetheless, my goal is to match a relatively small percentage of my expected future baseline cost of existing in my house and paying the bills. But what do I call this that I'm doing? Am I building a LMP? Am I building a "poorly designed" LDI? Is this a good LDI? Honestly, I really don't care what we call it. I feel that I have a fairly good grasp of both what I'm trying to do and what these TIPS accomplish for me. But what would you call it? Why is it so important? It seems that I'm trying to match certain future liabilities, or at least a fixed percentage of them. Future "Liability Matching" seems to go a long way towards covering what I think I'm doing... am I wrong?

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Re: LMP-1: P&I article on corporate & public pension plans

Post by bobcat2 » Thu May 18, 2017 12:25 am

Hi Angst,
Liability driven investing (LDI) is an investment strategy - not a portfolio. If you have an investment strategy that is matching at least some assets to some liabilities, then you have some form of an LDI. LDI strategies do not have to match all liabilities to assets. However, you have one portfolio, whether the LDI strategy you are using is matching all liabilities to assets, or only some liabilities to assets.

I am even sure what is meant by a liability matched portfolio, other than something that hasn't been well thought out in a systematic way. Is it a misnamed investment strategy that is more or less synonymous with the more broadly excepted term LDI? Or is it some sort of Rube Goldberg contraption in which there are two investment strategies awkwardly compartmentalizing a large portfolio into two smaller portfolios - one driven by a traditional benchmark driven strategy and the other driven by some sort of LDI matching strategy? If so, that doesn't make much sense. For your portfolio you need a single strategy, not two non-overlapping, non coordinated, sub-strategies.

BobK
In finance risk is defined as uncertainty that is consequential (nontrivial). | The two main methods of dealing with financial risk are the matching of assets to goals & diversifying.

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Re: LMP-1: P&I article on corporate & public pension plans

Post by gilgamesh » Thu May 18, 2017 5:00 am

bobcat2 wrote:Hi Angst,
Liability driven investing (LDI) is an investment strategy - not a portfolio. If you have an investment strategy that is matching at least some assets to some liabilities, then you have some form of an LDI. LDI strategies do not have to match all liabilities to assets. However, you have one portfolio, whether the LDI strategy you are using is matching all liabilities to assets, or only some liabilities to assets.

I am even sure what is meant by a liability matched portfolio, other than something that hasn't been well thought out in a systematic way. Is it a misnamed investment strategy that is more or less synonymous with the more broadly excepted term LDI? Or is it some sort of Rube Goldberg contraption in which there are two investment strategies awkwardly compartmentalizing a large portfolio into two smaller portfolios - one driven by a traditional benchmark driven strategy and the other driven by some sort of LDI matching strategy? If so, that doesn't make much sense. For your portfolio you need a single strategy, not two non-overlapping, non coordinated, sub-strategies.

BobK


Bob, in a LDI, once you start matching liabilities to assets, could those assets be part of the rebalancing and be sold? Or is it a floor, not to be sold?

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Re: LMP-1: P&I article on corporate & public pension plans

Post by bobcat2 » Thu May 18, 2017 8:02 am

A definition of Liability Driven Investing (LDI)

LDI strategies are goal based investment strategies that seek to maximize the probability of reaching a financial goal. Often an LDI strategy is implemented by focusing on duration matching assets to future liabilities.
gilgamesh wrote:Bob, in a LDI, once you start matching liabilities to assets, could those assets be part of the rebalancing and be sold? Or is it a floor, not to be sold?


I believe as you can see from the above an LDI is simply an investment strategy that is goal based, as compared to conventional strategies which focus on trading off returns against risks with little regard for meeting particular goals for the investor. So yes, you could rebalance safe assets out of the floor in an LDI strategy, but it sort of defeats the purpose of the strategy, which is to avoid having to do just that. :)

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Re: LMP-1: P&I article on corporate & public pension plans

Post by Angst » Thu May 18, 2017 9:08 am

Thank you Bob for the follow-up. Maybe the problem is tied up in the word "portfolio"? I use the LMP term to refer to my growing collection of TIPS that is expected to cover a small portion of my anticipated baseline retirement expenses from age 70-100 (might even push that out a little farther). I find it useful to refer to this "portfolio" in context to my expected future SS payments, as well as my expected future pension payments, and as well as in context to both my other tax-deferred and taxable accounts. I find "LMP" useful simply because it makes clear that this isn't just my FI portion of my overall AA or just a ladder of bonds, but it's been strategically designed to match a series of expected future liabilities. I don't think I've yet to hear an alternative name for what I've been calling a LMP, so for the time being I guess I'll just continue to use that! Thank you. :beer

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