DFA Retirement Income Strategies

Discuss all general (i.e. non-personal) investing questions and issues, investing news, and theory.
User avatar
nedsaid
Posts: 10644
Joined: Fri Nov 23, 2012 12:33 pm

Re: DFA Retirement Income Strategies

Post by nedsaid » Sun May 28, 2017 9:41 am

bobcat2 wrote:
AndrewXnn wrote:Consider current yields:

July 2027 TIPS are currently yielding 0.439%.
Feb 2040 TIPS are currently yielding 0.868%.

http://online.wsj.com/mdc/public/page/2 ... _bnd_pglnk

While equities will surely have more volatility, it's difficult to conceive that they would return less over the next 10 to 23 years.

Ten year real return on US total stock market from March 1, 2000 to March 1, 2010
cumulative -22.2%
annual avg real return -2.5%


It's not only conceivable; it's been much worse than that recently.
Link to stock return calculator - http://dqydj.com/wilshire-5000-return-calculator/

BobK
Bob, I have read your posts over the years and I get the strong feeling that you just don't like the Stock Market. How did you get portfolio growth over the years? I suppose you could have gotten big returns if you loaded up on Long Treasuries in the early 1980's. My guess is that you had an amazing savings rate.
A fool and his money are good for business.

Dottie57
Posts: 4784
Joined: Thu May 19, 2016 5:43 pm

Re: DFA Retirement Income Strategies

Post by Dottie57 » Sun May 28, 2017 12:15 pm

bobcat2 wrote:Slides from DFA presentation earlier this year that discusses their investment strategy for helping individuals to achieve their retirement income goals.
Link - https://www.oregon.gov/treasury/ORSP/Do ... terial.pdf

Below is the link to the DFA retirement income calculator.
https://us.dimensional.com/defined-cont ... calculator

White paper by Massi De Santis of DFA on retirement planning, "The Value of Aligning Investments and Risk Management to Your Goals".
Link - https://www.google.com/#q=+Massi+De+San ... g%E2%80%9D

BobK
Hi Bobcat,

The 1st presentation and and calculator are interesting. However, it is hard to find out more about DFA since they only sell through advisors. I would like to know more but the advisors around me have high minimums. All advisors are associated with Wealth management firms which I believe mean AUM fees.

It is really too bad DFA doesn't have a different business model which is more accesible to less wealthy individuals.

User avatar
nedsaid
Posts: 10644
Joined: Fri Nov 23, 2012 12:33 pm

Re: DFA Retirement Income Strategies

Post by nedsaid » Sun May 28, 2017 1:38 pm

Dottie:

You can look at the DFA Target Date Retirement funds as a model and then "bake your own" fund. A good fund group like Vanguard or Fidelity could provide the proxy funds in lieu of DFA funds to build your own portfolio. These funds offered by DFA reflect the current thinking of academia and cutting edge research, just looking at their Target Date funds should give you great insight into their thinking. Pretty much, you can get much of the "secret sauce" for free.

Best wishes,

Ned
A fool and his money are good for business.

User avatar
willthrill81
Posts: 6444
Joined: Thu Jan 26, 2017 3:17 pm
Location: USA

Re: DFA Retirement Income Strategies

Post by willthrill81 » Sun May 28, 2017 1:57 pm

nedsaid wrote:You can look at the DFA Target Date Retirement funds as a model and then "bake your own" fund. A good fund group like Vanguard or Fidelity could provide the proxy funds in lieu of DFA funds to build your own portfolio.
Basically, they are advocating a modified Larry Portfolio for retirees with a relatively short retirement horizon.
“It's a dangerous business, Frodo, going out your door. You step onto the road, and if you don't keep your feet, there's no knowing where you might be swept off to.” J.R.R. Tolkien,The Lord of the Rings

User avatar
nedsaid
Posts: 10644
Joined: Fri Nov 23, 2012 12:33 pm

Re: DFA Retirement Income Strategies

Post by nedsaid » Sun May 28, 2017 2:09 pm

willthrill81 wrote:
nedsaid wrote:You can look at the DFA Target Date Retirement funds as a model and then "bake your own" fund. A good fund group like Vanguard or Fidelity could provide the proxy funds in lieu of DFA funds to build your own portfolio.
Basically, they are advocating a modified Larry Portfolio for retirees with a relatively short retirement horizon.
Shouldn't be too surprising as Larry and DFA look at the very same research. Larry's firm does use, though not exclusively, DFA funds.

Also want to point out that Larry Swedroe will still respond to personal messages for people like Dottie who might have questions.
A fool and his money are good for business.

Dottie57
Posts: 4784
Joined: Thu May 19, 2016 5:43 pm

Re: DFA Retirement Income Strategies

Post by Dottie57 » Sun May 28, 2017 2:25 pm

nedsaid wrote:Dottie:

You can look at the DFA Target Date Retirement funds as a model and then "bake your own" fund. A good fund group like Vanguard or Fidelity could provide the proxy funds in lieu of DFA funds to build your own portfolio. These funds offered by DFA reflect the current thinking of academia and cutting edge research, just looking at their Target Date funds should give you great insight into their thinking. Pretty much, you can get much of the "secret sauce" for free.

Best wishes,

Ned
Thanks nedsaid. Sometimes I would just like to get more info from an advisor just to see what they say. But as I said all DFA advisors seem to be part of the wealth management scene which makes DFA unappealing.

My experience with wealth mgmt groups is bad. I went to a group used by friends of my parents. They were delighted with the groups assessment. I went for an asessment of my situation. I met with a CFA and told him what I wanted : quality index funds with good allocation for my point in life. We agreed on what he was to deliver and I paid $500 for a plan. He delivered an AUM plan using their own Funds made up of other funds. High ER. I left the office in a huff. Never gong to a wealth mgmt group again.

P.S. I am doing well with my plan as is. I just like learning about new ideas. Not necessarily implement them.

User avatar
nedsaid
Posts: 10644
Joined: Fri Nov 23, 2012 12:33 pm

Re: DFA Retirement Income Strategies

Post by nedsaid » Sun May 28, 2017 2:36 pm

Dottie57 wrote:
nedsaid wrote:Dottie:

You can look at the DFA Target Date Retirement funds as a model and then "bake your own" fund. A good fund group like Vanguard or Fidelity could provide the proxy funds in lieu of DFA funds to build your own portfolio. These funds offered by DFA reflect the current thinking of academia and cutting edge research, just looking at their Target Date funds should give you great insight into their thinking. Pretty much, you can get much of the "secret sauce" for free.

Best wishes,

Ned
Thanks nedsaid. Sometimes I would just like to get more info from an advisor just to see what they say. But as I said all DFA advisors seem to be part of the wealth management scene which makes DFA unappealing.

My experience with wealth mgmt groups is bad. I went to a group used by friends of my parents. They were delighted with the groups assessment. I went for an asessment of my situation. I met with a CFA and told him what I wanted : quality index funds with good allocation for my point in life. We agreed on what he was to deliver and I paid $500 for a plan. He delivered an AUM plan using their own Funds made up of other funds. High ER. I left the office in a huff. Never gong to a wealth mgmt group again.

P.S. I am doing well with my plan as is. I just like learning about new ideas. Not necessarily implement them.
Sorry you had a bad experience, some of the wealth management firms provide a better experience than others. It sounds like what you had was a mismatch of expectations, you wanted a good model portfolio of index funds customized to your situation and what you got was an investment proposal as if you were a prospective client.

I have always balked at the fees. One percent a year Assets Under Management fee is just too high. I would be more open to something like 0.50% a year AUM plus whatever expense ratios in the low-cost factor funds and index funds. My investment expenses run probably about 0.50% and that is not bad seeing that I still have some active funds in my portfolio. I have utilized broker #4 who works with about 30% of my retirement and whatever advice I can get from my other providers. Has worked for me so far.

The issue is that I have thought about turning all of this over to someone else. The hurdles are finding somebody truly trustworthy and at a reasonable fee structure. I will probably also have to simplify my financial life too.
A fool and his money are good for business.

Dottie57
Posts: 4784
Joined: Thu May 19, 2016 5:43 pm

Re: DFA Retirement Income Strategies

Post by Dottie57 » Sun May 28, 2017 2:48 pm

nedsaid wrote:
The issue is that I have thought about turning all of this over to someone else. The hurdles are finding somebody truly trustworthy and at a reasonable fee structure. I will probably also have to simplify my financial life too.

I am working at simplifying too. I've eliminated Similar funds from my 401k. Have moved to 50% fixed income with much in cds maturing sequentially. Not quire a ladder but close. Tira and roth are all very simple 2 and 3 funds.

Maybe some day I will move to a single fund, but not now.

grok87
Posts: 8504
Joined: Tue Feb 27, 2007 9:00 pm

Re: DFA Retirement Income Strategies

Post by grok87 » Sun May 28, 2017 3:16 pm

willthrill81 wrote:
nedsaid wrote:You can look at the DFA Target Date Retirement funds as a model and then "bake your own" fund. A good fund group like Vanguard or Fidelity could provide the proxy funds in lieu of DFA funds to build your own portfolio.
Basically, they are advocating a modified Larry Portfolio for retirees with a relatively short retirement horizon.
I think the equities are more core equity funds, not small value.
Keep calm and Boglehead on. KCBO.

User avatar
willthrill81
Posts: 6444
Joined: Thu Jan 26, 2017 3:17 pm
Location: USA

Re: DFA Retirement Income Strategies

Post by willthrill81 » Sun May 28, 2017 3:22 pm

grok87 wrote:
willthrill81 wrote:
nedsaid wrote:You can look at the DFA Target Date Retirement funds as a model and then "bake your own" fund. A good fund group like Vanguard or Fidelity could provide the proxy funds in lieu of DFA funds to build your own portfolio.
Basically, they are advocating a modified Larry Portfolio for retirees with a relatively short retirement horizon.
I think the equities are more core equity funds, not small value.
Hence the modification.
“It's a dangerous business, Frodo, going out your door. You step onto the road, and if you don't keep your feet, there's no knowing where you might be swept off to.” J.R.R. Tolkien,The Lord of the Rings

User avatar
Kevin M
Posts: 10287
Joined: Mon Jun 29, 2009 3:24 pm
Contact:

Re: DFA Retirement Income Strategies

Post by Kevin M » Sun May 28, 2017 4:53 pm

willthrill81 wrote:
grok87 wrote:
willthrill81 wrote:
nedsaid wrote:You can look at the DFA Target Date Retirement funds as a model and then "bake your own" fund. A good fund group like Vanguard or Fidelity could provide the proxy funds in lieu of DFA funds to build your own portfolio.
Basically, they are advocating a modified Larry Portfolio for retirees with a relatively short retirement horizon.
I think the equities are more core equity funds, not small value.
Hence the modification.
Not even close to a Larry Portfolio. The essence of the LP is a very heavy tilt to small value in the equity portion, allowing a smaller overall equity allocation to get the same portfolio expected return with less risk and less left-tail risk due to lower stock-market beta exposure. Also, there is little to no emphasis on using TIPS in the LP--as I recall, he uses 5-year (nominal) Treasuries in the examples in his avoiding black swans book.

A low equity allocation in itself does not comprise a Larry Portfolio. I have a 30% stock allocation, but I don't have an LP; I have a moderate tilt to small value, but not the extreme tilt Larry suggest for an LP.

Kevin
Wiki ||.......|| Suggested format for Asking Portfolio Questions (edit original post)

grok87
Posts: 8504
Joined: Tue Feb 27, 2007 9:00 pm

Re: DFA Retirement Income Strategies

Post by grok87 » Sun May 28, 2017 6:56 pm

Kevin M wrote:
willthrill81 wrote:
grok87 wrote:
willthrill81 wrote:
nedsaid wrote:You can look at the DFA Target Date Retirement funds as a model and then "bake your own" fund. A good fund group like Vanguard or Fidelity could provide the proxy funds in lieu of DFA funds to build your own portfolio.
Basically, they are advocating a modified Larry Portfolio for retirees with a relatively short retirement horizon.
I think the equities are more core equity funds, not small value.
Hence the modification.
Not even close to a Larry Portfolio. The essence of the LP is a very heavy tilt to small value in the equity portion, allowing a smaller overall equity allocation to get the same portfolio expected return with less risk and less left-tail risk due to lower stock-market beta exposure. Also, there is little to no emphasis on using TIPS in the LP--as I recall, he uses 5-year (nominal) Treasuries in the examples in his avoiding black swans book.

A low equity allocation in itself does not comprise a Larry Portfolio. I have a 30% stock allocation, but I don't have an LP; I have a moderate tilt to small value, but not the extreme tilt Larry suggest for an LP.

Kevin
I think dfa are wise not to tilt to small value in these target date funds. Small value should (if past patterns repeat) do well in periods of unexpected inflation. Bit of course the funds tips holdings will do well then also. The main scenario to worry about is deflation. Small value typically does poorly in deflation.
Keep calm and Boglehead on. KCBO.

User avatar
bobcat2
Posts: 5246
Joined: Tue Feb 20, 2007 3:27 pm
Location: just barely Outside the Beltway

Re: DFA Retirement Income Strategies

Post by bobcat2 » Sun May 28, 2017 7:02 pm

Kevin M wrote:Not even close to a Larry Portfolio.
:thumbsup :thumbsup
The heart of the strategy driving this portfolio asset allocation is the dynamic duration matching of the two TIPS funds to the duration of the targeted 25 year retirement income stream. I haven't seen all of the Larry portfolios, but I suspect the next Larry portfolio that duration matches will be the first Larry portfolio that duration matches. :wink:

Robert Merton designed these TDFs. Here is a link to a pamphlet Merton wrote explaining how he thinks portfolios should be designed for middle income people.
Link - http://www.nestpensions.org.uk/schemewe ... cs,PDF.pdf

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.

User avatar
Kevin M
Posts: 10287
Joined: Mon Jun 29, 2009 3:24 pm
Contact:

Re: DFA Retirement Income Strategies

Post by Kevin M » Sun May 28, 2017 9:16 pm

Here is a quote from Larry about the Larry Portfolio:
The "LP" is the technical term for a portfolio that basically limits its stock holdings to the highest returning equity asset classes available to individual investors in low cost, passively managed investment vehicles - U.S. small value stocks, developed markets small value stocks, and emerging market value stocks.

Limiting the stock holdings to the highest expected returning asset classes allows an investor to have a lower overall allocation to stocks and achieve the same expected return. The bond portion is limited to bonds of the highest investment quality. For the taxable account, it includes municipal bonds that are AAA/AA-rated and are also either general obligation bonds or essential services bonds. For the tax-advantaged accounts, it holds both FDIC insured CDs and DFA's Short-Term Extended Quality Fund (DFEQX), though ideally, it would hold all TIPS, which is what it did before real rates collapsed (and the cost of inflation protection relative to FDIC insured CDs rose to relatively high levels). If there are real yields again in the area of 2 percent, holdings could move back to TIPS.
Source: Larry Swedroe Positions For 2014: Risky Equities Always Trump Chasing Yield | Seeking Alpha (turn off cookies to read the entire article).

So although Larry would ideally prefer to hold TIPS in the bond portion, he has not done so for some years now.

At any rate, Larry does not talk about the LP in terms of a liability driven or liability matching strategy, which is the foundation of the DFA target date funds.

Kevin
Wiki ||.......|| Suggested format for Asking Portfolio Questions (edit original post)

grok87
Posts: 8504
Joined: Tue Feb 27, 2007 9:00 pm

Re: DFA Retirement Income Strategies

Post by grok87 » Mon May 29, 2017 3:48 pm

Kevin M wrote:Here is a quote from Larry about the Larry Portfolio:
The "LP" is the technical term for a portfolio that basically limits its stock holdings to the highest returning equity asset classes available to individual investors in low cost, passively managed investment vehicles - U.S. small value stocks, developed markets small value stocks, and emerging market value stocks.

Limiting the stock holdings to the highest expected returning asset classes allows an investor to have a lower overall allocation to stocks and achieve the same expected return. The bond portion is limited to bonds of the highest investment quality. For the taxable account, it includes municipal bonds that are AAA/AA-rated and are also either general obligation bonds or essential services bonds. For the tax-advantaged accounts, it holds both FDIC insured CDs and DFA's Short-Term Extended Quality Fund (DFEQX), though ideally, it would hold all TIPS, which is what it did before real rates collapsed (and the cost of inflation protection relative to FDIC insured CDs rose to relatively high levels). If there are real yields again in the area of 2 percent, holdings could move back to TIPS.
Source: Larry Swedroe Positions For 2014: Risky Equities Always Trump Chasing Yield | Seeking Alpha (turn off cookies to read the entire article).

So although Larry would ideally prefer to hold TIPS in the bond portion, he has not done so for some years now.

At any rate, Larry does not talk about the LP in terms of a liability driven or liability matching strategy, which is the foundation of the DFA target date funds.

Kevin
Thanks. It's an interesting point about the CDs. My sense is that a few years ago one could perhaps make the argument that FDIC insured CDs were attractive relative to TIPS. But i think it is a different story now.
10 year CDs seem to be earning about 2.20% less than treasuries. Plus there are all those early withdrawal penalties which seem to have gotten a lot nastier over the years.
Keep calm and Boglehead on. KCBO.

User avatar
Kevin M
Posts: 10287
Joined: Mon Jun 29, 2009 3:24 pm
Contact:

Re: DFA Retirement Income Strategies

Post by Kevin M » Mon May 29, 2017 5:18 pm

grok87 wrote: Thanks. It's an interesting point about the CDs. My sense is that a few years ago one could perhaps make the argument that FDIC insured CDs were attractive relative to TIPS. But i think it is a different story now.
10 year CDs seem to be earning about 2.20% less than treasuries. Plus there are all those early withdrawal penalties which seem to have gotten a lot nastier over the years.
Interestingly, my yield premium over (nominal) Treasuries of same maturity (mostly 5-year and 7-year) for CDs bought within the last 1.5 years or so is more than 150 basis points, compared to about 115 basis points for CDs bought over last 6.5 years or so. And that's with early withdrawal penalties (EWPs) of six months! You do have to wait for the deals, though.

It's true that EWPs have been generally creeping up. CDs that used to have EWPs of six months of interest now have EWPs of 12 months of interest, and some are even worse, like PenFed CDs. Ally Bank EWP on 5-year CDs was two months of interest a few years ago, and now is five months of interest, but Ally CDs typically aren't the most competitive. But good deals with high rates and low EWPs still pop up now and then.

10-year direct CDs usually don't have much if any yield premium over 5-year or 7-year CDs, so I've never bought one with maturity longer than seven years.

Kevin
Wiki ||.......|| Suggested format for Asking Portfolio Questions (edit original post)

grok87
Posts: 8504
Joined: Tue Feb 27, 2007 9:00 pm

Re: DFA Retirement Income Strategies

Post by grok87 » Mon May 29, 2017 6:10 pm

Kevin M wrote:
grok87 wrote: Thanks. It's an interesting point about the CDs. My sense is that a few years ago one could perhaps make the argument that FDIC insured CDs were attractive relative to TIPS. But i think it is a different story now.
10 year CDs seem to be earning about 2.20% less than treasuries. Plus there are all those early withdrawal penalties which seem to have gotten a lot nastier over the years.
Interestingly, my yield premium over (nominal) Treasuries of same maturity (mostly 5-year and 7-year) for CDs bought within the last 1.5 years or so is more than 150 basis points, compared to about 115 basis points for CDs bought over last 6.5 years or so. And that's with early withdrawal penalties (EWPs) of six months! You do have to wait for the deals, though.

It's true that EWPs have been generally creeping up. CDs that used to have EWPs of six months of interest now have EWPs of 12 months of interest, and some are even worse, like PenFed CDs. Ally Bank EWP on 5-year CDs was two months of interest a few years ago, and now is five months of interest, but Ally CDs typically aren't the most competitive. But good deals with high rates and low EWPs still pop up now and then.

10-year direct CDs usually don't have much if any yield premium over 5-year or 7-year CDs, so I've never bought one with maturity longer than seven years.

Kevin
Fair enough.

Looks like there is some decent spread at the 5 year level, say 5 year CD at 2.40% vs 5 year treasury at 1.79%
Keep calm and Boglehead on. KCBO.

User avatar
Kevin M
Posts: 10287
Joined: Mon Jun 29, 2009 3:24 pm
Contact:

Re: DFA Retirement Income Strategies

Post by Kevin M » Tue May 30, 2017 12:03 pm

grok87 wrote: Looks like there is some decent spread at the 5 year level, say 5 year CD at 2.40% vs 5 year treasury at 1.79%
Yeah, 5-year CD at Mountain America CU at 2.5% with EWP of one year of interest. Until very recently, I had access to a 5-year at 2.75% with EWP of six months of interest, but that CU has limited membership, and the rate now has dropped to 2%.

Kevin
Wiki ||.......|| Suggested format for Asking Portfolio Questions (edit original post)

User avatar
patriciamgr2
Posts: 789
Joined: Mon Nov 19, 2007 3:06 pm

Re: DFA Retirement Income Strategies

Post by patriciamgr2 » Mon Jun 05, 2017 2:00 am

Thanks very much for posting the DFA and Merton materials, Bobcat2. I always look for your posts because you take the time to share informative publications & presentations. It's very much appreciated.

User avatar
bobcat2
Posts: 5246
Joined: Tue Feb 20, 2007 3:27 pm
Location: just barely Outside the Beltway

Re: DFA Retirement Income Strategies

Post by bobcat2 » Mon Jun 05, 2017 10:00 pm

patriciamgr2 wrote:Thanks very much for posting the DFA and Merton materials, Bobcat2. I always look for your posts because you take the time to share informative publications & presentations. It's very much appreciated.
Hi patriciamgr2,

Thanks for the kind words. You might be interested in my three recent posts about the funded ratio. I think they have more good information than I have provided in this thread.

Part 1 - Using Funded Ratio to drive retirement investment plan
Link - viewtopic.php?f=10&t=219878&newpost=3391987

Part 2 - Using the Funded Ratio to determine your asset allocation
Link - viewtopic.php?f=10&t=220261&p=3392084&h ... k#p3392084

Part 3 - The Funded Ratio over the Life-Cycle
Link - viewtopic.php?f=10&t=220489&newpost=3396421

Best,
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.

User avatar
patriciamgr2
Posts: 789
Joined: Mon Nov 19, 2007 3:06 pm

Re: DFA Retirement Income Strategies

Post by patriciamgr2 » Tue Jun 06, 2017 3:02 am

Thanks for the links; extremely helpful information. As Grok would say, Cheers!

grok87
Posts: 8504
Joined: Tue Feb 27, 2007 9:00 pm

Re: DFA Retirement Income Strategies

Post by grok87 » Tue Jun 06, 2017 7:08 am

patriciamgr2 wrote:Thanks for the links; extremely helpful information. As Grok would say, Cheers!
:happy
Keep calm and Boglehead on. KCBO.

User avatar
bobcat2
Posts: 5246
Joined: Tue Feb 20, 2007 3:27 pm
Location: just barely Outside the Beltway

Re: DFA Retirement Income Strategies

Post by bobcat2 » Mon Jun 12, 2017 4:51 pm

Here's an article by Wade Pfau on the DFA TDFs. I apologize if somebody has already brought this up earlier in the thread.
Excerpt from beginning of article.
Dimensional Fund Advisors (DFA) takes a more direct approach to immunizing retirement liabilities through their target-date retirement income funds. These funds provide a useful case study for understanding the role bond funds play in meeting retirement expenses.

One of the defining distinctions for retirement income planning as opposed to traditional wealth management is that the focus shifts to meeting an ongoing spending objective. Traditional target-date funds (TDFs) are designed to increase nominal account balances while managing account balance volatility—they are not built to meet a spending objective.

They provide an assets-only investing framework. However, a stable account balance does not necessarily translate to stable income thanks to daily fluctuations in interest rates. DFA bridges this divide by providing a target-date fund with a more complete risk management framework that manages volatility of expected affordable retirement spending.

The essential point to understanding how target-date retirement income funds differ dramatically from traditional target date funds is to realize that controlling account balance volatility and spending volatility are two entirely different matters.
Link to article -https://retirementresearcher.com/using- ... etirement/

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.

User avatar
matjen
Posts: 1979
Joined: Sun Nov 20, 2011 11:30 pm

Re: DFA Retirement Income Strategies

Post by matjen » Tue Jun 13, 2017 9:21 am

bobcat2 wrote:Here's an article by Wade Pfau on the DFA TDFs. I apologize if somebody has already brought this up earlier in the thread.
Excerpt from beginning of article.
Dimensional Fund Advisors (DFA) takes a more direct approach to immunizing retirement liabilities through their target-date retirement income funds. These funds provide a useful case study for understanding the role bond funds play in meeting retirement expenses.

One of the defining distinctions for retirement income planning as opposed to traditional wealth management is that the focus shifts to meeting an ongoing spending objective. Traditional target-date funds (TDFs) are designed to increase nominal account balances while managing account balance volatility—they are not built to meet a spending objective.

They provide an assets-only investing framework. However, a stable account balance does not necessarily translate to stable income thanks to daily fluctuations in interest rates. DFA bridges this divide by providing a target-date fund with a more complete risk management framework that manages volatility of expected affordable retirement spending.

The essential point to understanding how target-date retirement income funds differ dramatically from traditional target date funds is to realize that controlling account balance volatility and spending volatility are two entirely different matters.
Link to article -https://retirementresearcher.com/using- ... etirement/

BobK
I think that is a great summary of the issues at play.
A man is rich in proportion to the number of things he can afford to let alone.

User avatar
CWRadio
Posts: 343
Joined: Sat Feb 02, 2008 10:04 am
Location: In the Michigan ionosphere

Re: DFA Retirement Income Strategies

Post by CWRadio » Tue Jun 13, 2017 11:36 am

How does one purchase a DFA Target-Date Retirement Income Fund. A DFA advisor charge a fee. If I do not require the advice of the advisor but just like the fund how do I purchase? Thanks Paul

User avatar
matjen
Posts: 1979
Joined: Sun Nov 20, 2011 11:30 pm

Re: DFA Retirement Income Strategies

Post by matjen » Tue Jun 13, 2017 1:35 pm

These funds seem to be marketed to 401(K) admins, various plans, etc. The irony here is that these types of products really minimize the need for an advisor in my opinion. At least an advisor who is merely handling investments rather than a full suite of services. I mean what is the difference between any TDF and a roboadvisor?

Having said that, if you search around you can find inexpensive access to DFA depending on size of your portfolio. $1k to $2k a year.
A man is rich in proportion to the number of things he can afford to let alone.

antiqueman
Posts: 464
Joined: Thu Mar 12, 2009 5:22 pm

Re: DFA Retirement Income Strategies

Post by antiqueman » Wed Jun 21, 2017 7:58 pm

I used the DFA Income Calculator Bobcat 2 linked to. I received three ranges of payouts. for "X" amount invested in the DFA retirement Income Fund, Assume that the withdrawn amounts for 2017 could be any of the following

$10,000.00 a year, $8500 a year and $7500.00.

The person decides he wants to with draw $7500.00 the first year. The fund is suppose to allow monies to be withdrawn for about 25 years. Do the funds anticipate that the initial withdrawn amount ( in the example its $ 7500.00 for 2017) can be increased each year for inflation? Or is anticipated that the initial withdrawn amount of $7500.00 will remain $7500.00 in nominal dollars throughout the projected 25 years?

If the answer is that the amount will increase each year with inflation, what metric is used to determine how much one can increase their $7500.00 each year?

I have read DFA prospectus but cant locate the answer.

Thanks

User avatar
bobcat2
Posts: 5246
Joined: Tue Feb 20, 2007 3:27 pm
Location: just barely Outside the Beltway

Re: DFA Retirement Income Strategies

Post by bobcat2 » Thu Jun 22, 2017 7:20 pm

antiqueman wrote:I used the DFA Income Calculator Bobcat 2 linked to. I received three ranges of payouts. for "X" amount invested in the DFA retirement Income Fund, Assume that the withdrawn amounts for 2017 could be any of the following

$10,000.00 a year, $8500 a year and $7500.00.

The person decides he wants to with draw $7500.00 the first year. The fund is suppose to allow monies to be withdrawn for about 25 years. Do the funds anticipate that the initial withdrawn amount ( in the example its $ 7500.00 for 2017) can be increased each year for inflation? Or is anticipated that the initial withdrawn amount of $7500.00 will remain $7500.00 in nominal dollars throughout the projected 25 years?
DFA's retirement income calculator in Table 1 assumes an asset allocation of 75% - 80% TIPS in retirement. This would leave one to suspect that the income is real, not nominal.

Looking thru the key assumptions of DFA's retirement income calculator I see the following.
Estimated future wealth is divided by the estimated cost of $1 of inflation-adjusted income for the length of the withdrawal period. The cost of $1 of annual inflation-adjusted income during retirement is estimated using current interest rates on TIPS.
Also this.
The estimate is presented in today's dollars.
That means real (inflation-adjusted) dollars with the base expressed in today's dollars.

These quotes confirm my initial conjecture. DFA is estimating the real (inflation-adjusted) income that can be withdrawn each year. They are not promising these amounts, but they are giving income estimates in real dollars for the 75th percentile, median, and 10th percentile of the estimated retirement income distribution of the investor.

Link to DFA retirement income calculator page with "Key Assumptions and Material Limitations" section.
https://us.dimensional.com/defined-cont ... calculator

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.

antiqueman
Posts: 464
Joined: Thu Mar 12, 2009 5:22 pm

Re: DFA Retirement Income Strategies

Post by antiqueman » Thu Jun 22, 2017 8:28 pm

[/quote]

DFA's retirement income calculator in Table 1 assumes an asset allocation of 75% - 80% TIPS in retirement. This would leave one to suspect that the income is real, not nominal.

Looking thru the key assumptions of DFA's retirement income calculator I see the following.
[quote]Estimated future wealth is divided by [u]the estimated cost of $1 of inflation-adjusted income for the length of the withdrawal period.[/u] [u]The cost of $1 of annual inflation-adjusted income during retirement[/u] is estimated using current interest rates on TIPS.[/quote]

Also this.
[quote]The estimate is presented in [u]today's dollars[/u].[/quote] That means real (inflation-adjusted) dollars with the base expressed in today's dollars.

These quotes confirm my initial conjecture. DFA is estimating the real (inflation-adjusted) income that can be withdrawn each year. They are not promising these amounts, but they are giving income estimates in real dollars for the 75th percentile, median, and 10th percentile of the estimated retirement income distribution of the investor.

Link to DFA retirement income calculator page with "Key Assumptions and Material Limitations" section.
[url]https://us.dimensional.com/defined-cont ... calculator[/url]

BobK[/quote]



Thank you BobK for your response.

antiqueman
Posts: 464
Joined: Thu Mar 12, 2009 5:22 pm

Re: DFA Retirement Income Strategies

Post by antiqueman » Thu Jul 13, 2017 5:52 pm

Bob,(or others). I calculated the yearly amounts that can be withdrawn using DFA income calculator. I used $250,00 as the invested amount. The estimated payout over 25 years for the "median" yearly withdrawl was $10,500.00.


The question I have is why would the DFA Target retirement fund by better than simply dividing the $25,000.00 investment into 25 years and hold 10k of tips for each of the 25 years. Then when each year arrives the person has the 10k available.( a ladder).

I realize that there are no TIPS for a number of years between 2032 and 2040. But one could work around this problem if they wanted to do the ladder.

I realize that the DFA Retirement Income Strategies has 20 stock which might allow the fund to have money left at end of the 25 year period. but there is no guarantee that it will .

If you hold the fund 25 years, I think the expenses during this time would be about 10k over the 25 year period based on $250,000.00 invested.



Why is this fund better than a ladder of 10k TIPS for 25 years?

User avatar
bobcat2
Posts: 5246
Joined: Tue Feb 20, 2007 3:27 pm
Location: just barely Outside the Beltway

Re: DFA Retirement Income Strategies

Post by bobcat2 » Thu Jul 13, 2017 10:00 pm

antiqueman wrote:Bob,(or others). I calculated the yearly amounts that can be withdrawn using DFA income calculator. I used $250,00 ($250,000) as the invested amount. The estimated payout over 25 years for the "median" yearly withdrawl was $10,500.00.


The question I have is why would the DFA Target retirement fund by better than simply dividing the $25,000.00 ($250,000) investment into 25 years and hold 10k of tips for each of the 25 years. Then when each year arrives the person has the 10k available.( a ladder).

Why is this fund better than a ladder of 10k TIPS for 25 years?
Both the TIPS bonds and the TIPS funds bear interest, albeit currently low. That means that both the TIPS bonds and the TIPS funds will support more than $10,000/year if all the $250,000 is invested in either the funds or the bonds.

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.

antiqueman
Posts: 464
Joined: Thu Mar 12, 2009 5:22 pm

Re: DFA Retirement Income Strategies

Post by antiqueman » Thu Jul 13, 2017 10:34 pm

Thanks Bob K for your response.

I don't think I didn't asked the question well.


Would the DFA fund be preferable to the bond ladder? If so, why? If not, why not? What are the main reasons a person would select the DFA fund over the ladder or vice-vera.

I would not anticipate managing the ladder would be a logistical problem. Buy the Tips and hold to maturity and redeem one each year

I am trying to decide if it would be better for me to buy the fund or the ladder . I am seeking pros and cons for each. Maybe there isn't much difference between the two,

Thanks.

User avatar
bobcat2
Posts: 5246
Joined: Tue Feb 20, 2007 3:27 pm
Location: just barely Outside the Beltway

Re: DFA Retirement Income Strategies

Post by bobcat2 » Fri Jul 14, 2017 12:00 am

antiqueman wrote:Would the DFA fund be preferable to the bond ladder? If so, why? If not, why not? What are the main reasons a person would select the DFA fund over the ladder or vice-vera.

I would not anticipate managing the ladder would be a logistical problem. Buy the Tips and hold to maturity and redeem one each year.

I am trying to decide if it would be better for me to buy the fund or the ladder. I am seeking pros and cons for each. Maybe there isn't much difference between the two.
It doesn’t make much difference. Both the TIPS bond ladder and the DFA combination of TIPS funds within the DFA target date fund are duration matching bond assets to annual income (the liability).

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.

antiqueman
Posts: 464
Joined: Thu Mar 12, 2009 5:22 pm

Re: DFA Retirement Income Strategies

Post by antiqueman » Fri Jul 14, 2017 10:17 am

Thanks Bob.

Perhaps the 20 % stock will provide a better chance of the initial investment lasting more than 25 years.

User avatar
CWRadio
Posts: 343
Joined: Sat Feb 02, 2008 10:04 am
Location: In the Michigan ionosphere

Re: DFA Retirement Income Strategies

Post by CWRadio » Sun Oct 28, 2018 12:25 pm

CWRadio wrote:
Tue Jun 13, 2017 11:36 am
How does one purchase a DFA Target-Date Retirement Income Fund. A DFA advisor charge a fee. If I do not require the advice of the advisor but just like the fund how do I purchase?
I ask the same question again after checking the web and calling DFA advisors, how do you buy DFA Retirement income fund?
Thank Paul

User avatar
matjen
Posts: 1979
Joined: Sun Nov 20, 2011 11:30 pm

Re: DFA Retirement Income Strategies

Post by matjen » Sun Oct 28, 2018 12:33 pm

Well you don’t buy it obviously unless your employer offers their funds in your plan. DFA access can be had for as little as 1k a year (what I pay) for your household via FPL. See if they have access to these particular funds. Let us know what you discover.

https://www.fplcapital.com/
A man is rich in proportion to the number of things he can afford to let alone.

indexonlyplease
Posts: 1291
Joined: Thu Apr 30, 2015 12:30 pm
Location: Florida

Re: DFA Retirement Income Strategies

Post by indexonlyplease » Sun Oct 28, 2018 12:55 pm

I think the most important part we are missing is that the Target Dated Fund may be the best choice for most investors. Why because they pick one then the only thing to do after that is just fund it. But there are some bad TDF so one must be careful. Thats why here we like Vangaurd. DFA sound good but the advisor fees could kill the deal, unless you have it in your 401k.

Snowjob
Posts: 1524
Joined: Sun Jun 28, 2009 10:53 pm

Re: DFA Retirement Income Strategies

Post by Snowjob » Sun Oct 28, 2018 2:26 pm

bobcat2 wrote:
Thu May 25, 2017 8:34 pm
garlandwhizzer wrote: .. I have been retired for 20 years already and still have 2/3 equity, 1/3 bonds which has worked quite well for 20 years of drawdowns and can easily withstand another 20 in my view. Had I loaded up on 80% TIPS/LMP when I started I suspect I'd be broke now.

Garland Whizzer
Garland,18-20 years TIPS were yielding 3.5% - 4.25% real. Since December, 1999, the real annual return on the US stock market thru last Friday is just under 3.1%. You would have been much better off loading up on 80% TIPS and some life annuities twenty years ago than the portfolio you picked, whether you like to remember it that way or not. :)

Link to stock market return calculator. - http://dqydj.com/wilshire-5000-return-calculator/

BobK
I think this is the most demoralizing and important point of the post.. 20 years ago (10/28/1999) through today was 2.16 real return for the market.

Not sure why people cant take a balanced approach here -- say 50% of your income you take from one of these DFA style accounts, and the other 50% you take from your normal portfolio. I'll probably be balanced in source of income myself, currently looking at-- 25% soc. sec. // 25% Inflation Adj SPIA // 50% Equity heavy balanced portfolio.

Ron Scott
Posts: 1090
Joined: Tue Apr 05, 2016 5:38 am

Re: DFA Retirement Income Strategies

Post by Ron Scott » Sun Oct 28, 2018 10:42 pm

willthrill81 wrote:
Wed May 24, 2017 10:45 am

This table illustrates some of the issues with such a low stock allocation very well.

Image
https://earlyretirementnow.com/2016/12/ ... t-1-intro/
For those who enjoy a healthy skepticism about the ability to predict market returns for a specific retirement period, forget 60-year retirements and invest between 25%-75% equities the real story told in this chart is less about a low stock allocation and more about the simple eloquence of reduced spending. LEFT SIDE SAFER, RIGHT SIDE RISKIER.

You can’t predict the market but you can control spending—and the results are profound...
Retirement is a game best played by those prepared for more volatility in the future than has been seen in the past. The solution is not to predict investment losses but to prepare for them.

heyyou
Posts: 3196
Joined: Tue Feb 20, 2007 4:58 pm

Re: DFA Retirement Income Strategies

Post by heyyou » Mon Oct 29, 2018 4:37 am

For those who enjoy a healthy skepticism about the ability to predict market returns for a specific retirement period, invest between 25%-75% equities the real story told in this chart is less about a low stock allocation and more about the simple eloquence of reduced spending. LEFT SIDE SAFER, RIGHT SIDE RISKIER.
You can’t predict the market but you can control spending—and the results are profound...
Well said.
Adapt or perish is used elsewhere.

Post Reply