DFA Retirement Income Strategies

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bobcat2
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DFA Retirement Income Strategies

Post by bobcat2 » Mon May 22, 2017 12:35 pm

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

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Re: DFA Retirement Income Strategies

Post by matjen » Wed May 24, 2017 7:56 am

Bump! Honestly, I am rather surprised that focusing on the stream of "real" income or LifeCycle investing hasn't caught on with this forum. BobK has done a yeoman's job keeping a drumbeat of great posts on the subject coming. Thank you Bobk. :beer
Last edited by matjen on Thu May 25, 2017 10:28 am, edited 3 times in total.
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Re: DFA Retirement Income Strategies

Post by antiqueman » Wed May 24, 2017 7:58 am

matjen wrote:Bump! Honestly, I am rather surprised that focusing on the stream of income or LifeCycle investing hasn't caught on with this forum. BobK has done yeoman's job keeping a drumbeat of great posts on the subject coming. Thank you Bobk.
Totally agree.

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Re: DFA Retirement Income Strategies

Post by friar1610 » Wed May 24, 2017 9:36 am

If I am reading the table that accompanies the retirement calculator correctly (2nd link in original post by bobcat), DFA is saying that for someone in retirement who wants to maintain a consistent income stream out to the 15 year post-retirement point, a mix of 25% global equities and 75% inflation linked bonds is the preferred allocation. Do I have this right?

If I do, it's interesting that this is very close to Rick Ferri's paper that says the center of gravity for retirees is 30% equities. I don't believe that Rick had a specific recommendation for exactly how the remaining 70% should be deployed (other than fixed income generally). But the DFA recommendation of a modest equity allocation plus a more robust inflation-linked bond component seems to make sense.
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Re: DFA Retirement Income Strategies

Post by edge » Wed May 24, 2017 10:20 am

Not sure what 'income stream' topic is being discussed above. The strategy of creating an income floor has been discussed quite a bit.

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Re: DFA Retirement Income Strategies

Post by Seasonal » Wed May 24, 2017 10:39 am

A major difference between income strategies and more typical approaches is the effect of a price increase.

For example, if bond prices increase (interest rates decrease), a typical approach would be that you have a larger portfolio and could therefore withdraw more. An income approach would be that a lower interest rate means less income over time (the initial higher portfolio would be offset over time by reinvesting at lower rates). Stocks are a bit more complicated - higher prices might be associated with good economic times and higher dividends, or higher multiples and lower dividend yield.

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Re: DFA Retirement Income Strategies

Post by willthrill81 » Wed May 24, 2017 10:45 am

Only 25% (even lower after 10 years in retirement) in equities during retirement is definitely on the conservative side of what's generally recommended. Such a low allocation to equities will result in a lower withdrawal rate, a higher likelihood of running out of money, or both, compared to a more balanced AA (i.e. 50/50). Granted, such a portfolio will very likely have a higher Sharpe ratio (i.e. be more efficient) than others with a higher allocation to equities, but I do not think that efficiency alone is a worthwhile goal. You can't 'eat' portfolio efficiency.

Assuming that the retiree is able to emotionally deal with the volatility, it seems that the 'sweet spot' in terms of maximizing withdrawal rates and success rates is 50-75% in equities throughout retirement.

This table illustrates some of the issues with such a low stock allocation very well.
Image
https://earlyretirementnow.com/2016/12/ ... t-1-intro/
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Re: DFA Retirement Income Strategies

Post by Seasonal » Wed May 24, 2017 10:55 am

willthrill81 wrote:Only 25% (even lower after 10 years in retirement) in equities during retirement is definitely on the conservative side of what's generally recommended. Such a low allocation to equities will result in a lower withdrawal rate, a higher likelihood of running out of money, or both, compared to a more balanced AA (i.e. 50/50). Granted, such a portfolio will very likely have a higher Sharpe ratio (i.e. be more efficient) than others with a higher allocation to equities, but I do not think that efficiency alone is a worthwhile goal. You can't 'eat' portfolio efficiency.

Assuming that the retiree is able to emotionally deal with the volatility, it seems that the 'sweet spot' in terms of maximizing withdrawal rates and success rates is 50-75% in equities throughout retirement.

This table illustrates some of the issues with such a low stock allocation very well.(table omitted)
This implicitly assumes that the past is an accurate guide to the future and that the major risk of stocks is emotionally dealing with volatility. For example, "low allocation to equities will result in a lower withdrawal rate".

It is quite possible that the future will not be as good as the past and that stocks are genuinely risky (economically, not just emotionally) over any given future time period.

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Re: DFA Retirement Income Strategies

Post by willthrill81 » Wed May 24, 2017 11:06 am

Seasonal wrote:
willthrill81 wrote:Only 25% (even lower after 10 years in retirement) in equities during retirement is definitely on the conservative side of what's generally recommended. Such a low allocation to equities will result in a lower withdrawal rate, a higher likelihood of running out of money, or both, compared to a more balanced AA (i.e. 50/50). Granted, such a portfolio will very likely have a higher Sharpe ratio (i.e. be more efficient) than others with a higher allocation to equities, but I do not think that efficiency alone is a worthwhile goal. You can't 'eat' portfolio efficiency.

Assuming that the retiree is able to emotionally deal with the volatility, it seems that the 'sweet spot' in terms of maximizing withdrawal rates and success rates is 50-75% in equities throughout retirement.

This table illustrates some of the issues with such a low stock allocation very well.(table omitted)
This implicitly assumes that the past is an accurate guide to the future and that the major risk of stocks is emotionally dealing with volatility. For example, "low allocation to equities will result in a lower withdrawal rate".

It is quite possible that the future will not be as good as the past and that stocks are genuinely risky (economically, not just emotionally) over any given future time period.
I usually preface such statements with "historically." What you say is true, though the historical record is fairly robust in this regard.

It is certain, though, that DFA is using the past as a strong indicator of the future.
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Re: DFA Retirement Income Strategies

Post by bigred77 » Wed May 24, 2017 12:09 pm

I agree investors would benefit from thinking about their retirement savings in terms of "how can I securely generate an inflation protected income stream to meet my goals" instead of "how can I maximize my portfolio balance" or "how can I reach my number".

I just don't know that I agree with DFA's strategy of doing so (using a really drastic glide path - from 95% equities to 25% equities in 25 years).

I don't think it gives investors enough exposure to equities throughout their investing lifetime. Yes, 95% equities is high but that's in the beginning when investors are building their portfolio mainly through sheer savings rate. When they finally have a sufficiently large portfolio when they retire, a 25% allocation to equities is just too low IMO. I understand it's designed to protect an inflation adjusted income stream via safer assets but the investor never really gets large nominal dollars exposed to equities throughout their lifetime. This approach is also extremely detrimental to secondary issues (I understand financial security via an inflation protected income stream throughout retirement is goal #1) like legacy considerations or ability to generate large, lumpy amounts of cash if needed (like for a nursing home or big medical bill).

I think a better strategy is a retirement portfolio with a larger equity allocation (like 50/50 or 60/40) combined with using a SPIA, laddered SPIAs, or even inflation adjusted immediate annuities (hopefully options here will improve in the future) using a significant portion of the portfolio.

I also think this is less applicable to Bogleheads who frequently aim for withdrawal rates at 4% or less. Those people already have a secure inflation protected income stream. This kind of strategy is more useful (IMO) for investors who are more borderline, looking to implement a 5% +/- withdrawal rate.

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Re: DFA Retirement Income Strategies

Post by Grt2bOutdoors » Wed May 24, 2017 12:37 pm

Biggest issue I have with this is buying TIPs in taxable. Taxation of principal increases upfront kind of defeats the purpose of "retirement" planning when it takes away from present consumption even more than what is being currently saved. Employee retirement plans may not offer an inflation linked component and frankly, IRA space is quite limited. I-bonds are limited in size and offer little in way of real return with a zero fixed rate component. TIPS are ideal, again, it's the tax part that is vexing.
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Re: DFA Retirement Income Strategies

Post by Grt2bOutdoors » Wed May 24, 2017 12:42 pm

edge wrote:Not sure what 'income stream' topic is being discussed above. The strategy of creating an income floor has been discussed quite a bit.
Yes, but this is about creating an income floor that is "real" as opposed to the normally discussed income floor that is "nominal". Pensions are usually nominal, in high inflationary times the value can be cut in half or thirds depending on how long it's been since actual date of retirement. Perhaps some governmental/non profit pensions retain a COLA component but the trend in government is to do away with such provisions as they are costly to maintain. Private pensions as noted above rarely contain a COLA and these pensions are becoming less and less common as the years go by.
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Re: DFA Retirement Income Strategies

Post by NiceUnparticularMan » Wed May 24, 2017 12:54 pm

Grt2bOutdoors wrote:
edge wrote:Not sure what 'income stream' topic is being discussed above. The strategy of creating an income floor has been discussed quite a bit.
Yes, but this is about creating an income floor that is "real" as opposed to the normally discussed income floor that is "nominal". Pensions are usually nominal, in high inflationary times the value can be cut in half or thirds depending on how long it's been since actual date of retirement. Perhaps some governmental/non profit pensions retain a COLA component but the trend in government is to do away with such provisions as they are costly to maintain. Private pensions as noted above rarely contain a COLA and these pensions are becoming less and less common as the years go by.
The tricky bit is if someone else is doing this for you, are they charging you a reasonable fee for the service?

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Re: DFA Retirement Income Strategies

Post by bobcat2 » Thu May 25, 2017 9:20 am

A couple of comments after reading through the thread.

Target date funds are intended for 401k and 403b plans and other tax advantaged DC plans. It's where middle income people are keeping their retirement portfolios. Worrying about the heavy allocation to TIPS and other bonds and frequent re-balancing being tax inefficient is not relevant.
To put it another way, it is not very reasonable to put a target date fund in your taxable account. These all in one funds are designed for tax advantaged retirement accounts.

DFA does put about 3/4s of the fund in bonds beginning from near retirement and continues that ratio thru the rest of the investor's life-cycle. Most of these bonds are a combination of ST & LT TIPS bond funds whose combined average duration is matched dynamically thru time with the duration of the investor's remaining life span. This is one of the many ways that the DFA TDFs are consistent with the principles of life-cycle economics.

In order to keep the fund safe for relatively long-lived investors, I believe DFA assumes the investor will live to about age 91.

In a recent DFA report their approach to how they use TIPS funds in their TDFs was discussed.
The Application of LDI* Techniques to the DC Framework

With the focus of most retirement planning being limited to savings accumulation and growth, individuals may be more prone to the risk of unstable income in retirement. Most individual retirement funds do not take into account the liabilities of retirees, which are ongoing withdrawals from retirement assets that an individual needs to make to meet their living expenses. Focusing on savings accumulation and growth without a framework to manage the uncertainty of affordable in-retirement income may affect the approach to building the asset allocation. For instance, one of the lowest-risk assets in real-dollar terms for a portfolio that focuses on managing the uncertainty of retirement income is a portfolio of Treasury Inflation Protected Securities (TIPS) that are duration matched to the stream of income that is anticipated to be needed in retirement; not three-month treasury bills, as is the convention when managing the volatility of accumulated savings.
LDI* - liability driven investing

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Re: DFA Retirement Income Strategies

Post by NiceUnparticularMan » Thu May 25, 2017 9:48 am

bobcat2 wrote:To put it another way, it is not very reasonable to put a target date fund in your taxable account. These all in one funds designed for tax advantaged retirement accounts.
As a bit of an aside, I quite disagree with this premise. There is a some tax-inefficiency to not breaking it up and doing it yourself, but in practice it is smaller than I think a lot of people imagine.

Meanwhile, the emotional and behavioral risks to a DIY approach can be very large. Indeed, these can be so large that people will give up lots of long-term expected return in their asset allocation just to help them "sleep at night" . . . and then they still might fail to rebalance, or otherwise depart from plan, when their fortitude is finally tested. The consequences of all that can be far worse than losing a little bit of tax inefficiency. That's the most fundamental justification for these single-fund solutions--to reduce the stress and behavioral risk DIY investors face, which has proven harmful to many investors on many occasions.

So, I personally think for most investors, using only self-rebalancing funds, with appropriate asset allocations in light of objective factors like age, is actually the smart thing to do in any sort of account. Only if you are dead sure you can be a hyperrational investor should you consider a DIY approach--and as soon as you even think about, say, a more conservative asset allocation than a Target fund would use given your age, you should probably revert to that single-fund approach and end you experiment with a DIY approach.

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Re: DFA Retirement Income Strategies

Post by matjen » Thu May 25, 2017 9:51 am

NiceUnparticularMan wrote: The tricky bit is if someone else is doing this for you, are they charging you a reasonable fee for the service?
25 bps or so is more than reasonable for this type of TDF IMO. I just wish that DFA would incorporate more of a SCV tilt into the solution. Perhaps have two versions for each fund. My uninformed guess is that they would have marketing difficulties trying to sell two different concepts. The liability matching/life cycle part is hard enough for now. If you look at the deck in BobK's original post you can see that they are even dumbing down their typical portfolio for Oregon. Just using Large Cap US and Large Cap International for equities rather than those combined with their core funds and Emerging Markets.

http://beta.morningstar.com/funds/XNAS/DRIUX/quote.html
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Re: DFA Retirement Income Strategies

Post by hirlaw » Thu May 25, 2017 10:20 am

A bit off topic, but does anyone share my concern that TIPS may not actually keep up with actual inflation from a retiree's viewpoint? Currently, actual health care cost inflation exceeds the govt. inflation rate. Health care costs, especially in later retirement, may make up a significant portion of a later retiree's budget. Can we rely on TIPS to accurately keep up with these rising costs in retirement?

I like TIPS, and invest in some TIPS funds. But I might be nervous about them actually serving the purpose for which they are intended --fully keeping up with inflation (in retirement).

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Re: DFA Retirement Income Strategies

Post by bobcat2 » Thu May 25, 2017 10:52 am

hirlaw wrote:A bit off topic, but does anyone share my concern that TIPS may not actually keep up with actual inflation from a retiree's viewpoint? Currently, actual health care cost inflation exceeds the govt. inflation rate. Health care costs, especially in later retirement, may make up a significant portion of a later retiree's budget. Can we rely on TIPS to accurately keep up with these rising costs in retirement?

I like TIPS, and invest in some TIPS funds. But I might be nervous about them actually serving the purpose for which they are intended --fully keeping up with inflation (in retirement).
Healthy retirees on average face lower inflation than the population as a whole. That's mainly because most retirees own their abode rather than rent, and they don't have college costs.

Old people sooner or later do get sick and die, but those are specific costs that should be met by Medicare, Medigap insurance, LTCi, and specific resources such as reserve fund assets and assets out of home equity such as a reverse mortgage. Think of TIPS and SS as your retirement replacement paycheck for your salary when you were working. TIPS, SS, pensions, and vanilla life annuities are not designed to address particularly large expense items such as big medical expenses, ramming the school bus with your car, or replacing your house after it burns down. For all such contingencies you need insurance above your normal 'paycheck'.

The important point DFA is making about TIPS is that the holdings need to be duration matched to the stream of income you are anticipating withdrawing from the portfolio in retirement. Just holding some TIPS doesn't accomplish much. You are attempting to protect your retirement income stream, not some portion of your portfolio. These are not remotely the same thing.

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Re: DFA Retirement Income Strategies

Post by NiceUnparticularMan » Thu May 25, 2017 11:16 am

hirlaw wrote:A bit off topic, but does anyone share my concern that TIPS may not actually keep up with actual inflation from a retiree's viewpoint? Currently, actual health care cost inflation exceeds the govt. inflation rate. Health care costs, especially in later retirement, may make up a significant portion of a later retiree's budget. Can we rely on TIPS to accurately keep up with these rising costs in retirement?
So I would start by distinguishing inflation from rising household costs. Conceptually inflation is about the prices you pay for the same things over time. That is hard enough to define and measure, since the things we buy change over time, and there is considerable controversy over how to deal with that.

For example, households may buy more or less of things over time. So even assuming you can figure how to, say, define a unit of healthcare, and measure the price of units of healthcare over time, households might also be buying more units of healthcare over time. If everyone (at least on average) is buying more units of something, or better units of something, or so on, would you want to measure how much $X could buy in terms of what people used to buy, or what they are buying now?

And of course what MY household is buying over time could change in ways quite different from what households on average are buying over time.

So TIPS are indexed to CPI-U, and again there is controversy over whether CPI-U really gets inflation "right" even for a generic/average household. And there is certainly no guarantee that my actual household costs will track CPI-U.

So am I worried income from TIPS might not keep up with my actual household costs? Absolutely! Because they are not guaranteed to do that, not even in theory.

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Re: DFA Retirement Income Strategies

Post by garlandwhizzer » Thu May 25, 2017 7:54 pm

Just my 2 cents worth. I believe this portfolio to be excessively conservative (a person at retirement should have 80% of assets in TIPS plus LMP) for most because given the size of the portfolios of most retirees, a TIPS plus LMP will not provide them with sufficient income to cover retirement expenses long term. A balanced duration TIPS portfolio yields less than 1% real. Annuities are great for those who sell and market them but IMO they are a financial device marketed to the fearful elderly, offering the appearance of safety but not safety itself. They are as the article in Forbes Magazine wrote "designed to be sold, not bought." Those who generate profits for them, be it the sellers (commissions) or those who create and market them (cash cow for large financial firms) are understandably very enthusiastic about these products.

Annuities tend to offer non-inflation adjusted income which is subject to inflation risk. TIPS at current rates keep up with inflation but do not give any meaningful positive real return above that. So a combo of TIPS/LMP in the face of persistent and increasing inflation will leave most except those with massive levels of these assets in trouble.

The other source of risk is that the TIPS plus LMP portfolio assumes a fixed annual expenses going forward based on current levels. What happens if there is an emergency or unforeseen financial event in the retiree or his/her loved ones that requires a sudden and rather significant infusion of cash well in excess of your planned income stream. There are surrender penalties for annuities so at that point you may take a big hit to your asset base.

If you want to buy an annuity for longevity insurance I suggest that you defer it as long as possible, 75 is a good target age, and do a SPIA which has lower sales commissions and lower profit margins than other types. It's all depending on the individual and his goals and circumstances but I can say honestly that 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

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Re: DFA Retirement Income Strategies

Post by bobcat2 » 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/

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Re: DFA Retirement Income Strategies

Post by tomd37 » Thu May 25, 2017 8:41 pm

FriarJohn,
If you have access to the Rick Ferri paper you cite I would be interested in reading it. Regards,
Tom D.

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Re: DFA Retirement Income Strategies

Post by nedsaid » Thu May 25, 2017 9:04 pm

bobcat2 wrote:
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
Bob, sadly we are not in that environment today. Today TIPS have real yields of less than one percent, and I am being generous, probably more like a fraction of one percent. I think TIPS ladders are still a good idea but 3.5% - 4.25% real returns from TIPS are now a distant memory.

My recollection was that we had another buying opportunity in the aftermath of the financial crisis but it didn't take too long for that to close.
A fool and his money are good for business.

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Re: DFA Retirement Income Strategies

Post by friar1610 » Fri May 26, 2017 12:18 pm

tomd37 wrote:FriarJohn,
If you have access to the Rick Ferri paper you cite I would be interested in reading it. Regards,
Tom,

Here it is:

https://portfoliosolutions.com/latest-l ... y-retirees
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Re: DFA Retirement Income Strategies

Post by tomd37 » Fri May 26, 2017 9:24 pm

Thanks very much.
Tom D.

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Re: DFA Retirement Income Strategies

Post by edge » Fri May 26, 2017 10:03 pm

SPIA w/ adjustment or Buy more SPIA as you age. Hold TIPs.
Grt2bOutdoors wrote:
edge wrote:Not sure what 'income stream' topic is being discussed above. The strategy of creating an income floor has been discussed quite a bit.
Yes, but this is about creating an income floor that is "real" as opposed to the normally discussed income floor that is "nominal". Pensions are usually nominal, in high inflationary times the value can be cut in half or thirds depending on how long it's been since actual date of retirement. Perhaps some governmental/non profit pensions retain a COLA component but the trend in government is to do away with such provisions as they are costly to maintain. Private pensions as noted above rarely contain a COLA and these pensions are becoming less and less common as the years go by.

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Re: DFA Retirement Income Strategies

Post by AlohaJoe » Fri May 26, 2017 10:45 pm

willthrill81 wrote:Only 25% (even lower after 10 years in retirement) in equities during retirement is definitely on the conservative side of what's generally recommended.
The chart you posted is for 30, 40, 50, or even 60 year drawdowns. The DFA presentation shows a 15-year retirement. For a 15-year retirement 25% bonds is perfectly fine. I haven't checked but I wouldn't be at all surprised it is much better than higher equity allocations.

Of course, that just changes the question to why DFA is talking about 15 year retirements. It is hard to tell just from a presentation what they really intend or mean or why.

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Re: DFA Retirement Income Strategies

Post by willthrill81 » Fri May 26, 2017 10:59 pm

AlohaJoe wrote:
willthrill81 wrote:Only 25% (even lower after 10 years in retirement) in equities during retirement is definitely on the conservative side of what's generally recommended.
The chart you posted is for 30, 40, 50, or even 60 year drawdowns. The DFA presentation shows a 15-year retirement. For a 15-year retirement 25% bonds is perfectly fine. I haven't checked but I wouldn't be at all surprised it is much better than higher equity allocations.

Of course, that just changes the question to why DFA is talking about 15 year retirements. It is hard to tell just from a presentation what they really intend or mean or why.
For a 15 year retirement, you could just go 100% TIPS and use a 6.67% WR.
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Re: DFA Retirement Income Strategies

Post by packer16 » Fri May 26, 2017 11:26 pm

I think this strategy is nuts. If you have accumulated assets over the years in equities to think all of sudden you are going to 70% inflation adjusted bonds in retirement is a little extreme. If you have been in equities most of the time you can deal some volatility and if you are worried about the "downturn" happening right after you retire then do this for a few years then go back to a more balanced equity/bond combination. If any meaningful portion of the population does this bonds rates will stay lower for longer for sure.

There are also other stable return products you can add to the safe mix like the NNN REIT is referenced above & get 6.2% yield plus 5% NAV growth. To tell the truth I think some of these guys come up with these scenarios to justify you needing multi-millions of dollars before you retire managed by them so they can get more fees. Just my 2 cents.

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Re: DFA Retirement Income Strategies

Post by bobcat2 » Sat May 27, 2017 12:51 am

AlohaJoe wrote:Of course, that just changes the question to why DFA is talking about 15 year retirements. It is hard to tell just from a presentation what they really intend or mean or why.
The DFA TDFs asssume retirement at age 65 and a roughly 25 year retirement to age 90-91. This is depicted on pages 8 and 22 of the presentation. See page 8 titled "A Building Block to Support Retirement Consumption" where the chart shows expected end of life is after 25 years of retirement. See page 22 titled "My Retirement Income Calculator" where the chart shows retirement starting at age 65 and a withdrawal period of 25 years. The retirement age 65 and 25 years of retirement are also shown on page 12 titled, "Enabling Meaningful Engagement".

I'm guessing people are mistakenly looking at the chart on page 9 that shows asset allocations from 40 years before retirement thru 14 years into retirement. DFA on that chart is not showing more than 40 years before retirement or more than 14 years into retirement because the asset allocation between equities and bonds is the same 41 years or more before retirement as it is 40 years before retirement, and the AA is the same 15-25 years into retirement between equities and bonds as it is 14 years into retirement.

Edit - While the AA between equities and bonds remains the same 14-25 years into retirement, the AA among the three bond funds (ultra-short nominal, and ST & LT TIPS funds) is frequently being rebalanced to keep the bond assets duration matched over time, as the duration of the liability changes and interest rates change.

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Re: DFA Retirement Income Strategies

Post by bobcat2 » Sat May 27, 2017 11:30 am

Excerpt from an article by Wade Pfau on duration matching with bond funds. - The Hunt For Duration-Matched Bond Funds
In practice, duration matching for a retired household will be highly complex and not necessarily practical, making immunization from interest rate risk an insurmountable obstacle for a household to accomplish on their own.

It requires constant monitoring and rebalancing of the bonds to match the desired duration as interest rates change and bonds mature. As it is, these concepts have not fully penetrated the wealth management world, and decisions about holding bond funds are still typically made on an assets-only basis.

That being said, at least two companies have created mutual funds to provide duration matching with bonds. First, Dimensional Fund Advisor’s Target-Date Retirement Income Funds define the retirement liability specifically as a goal to support inflation-adjusted spending for twenty-five years after the target date.

Using TIPS to support the inflation-adjustment goal, they can create a portfolio with a duration that matches their defined liability from a given target date and hedges inflation and interest rate risk.
Link to article - https://www.forbes.com/sites/wadepfau/2 ... 9d95007b93

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Re: DFA Retirement Income Strategies

Post by nedsaid » Sat May 27, 2017 12:36 pm

packer16 wrote:I think this strategy is nuts. If you have accumulated assets over the years in equities to think all of sudden you are going to 70% inflation adjusted bonds in retirement is a little extreme. If you have been in equities most of the time you can deal some volatility and if you are worried about the "downturn" happening right after you retire then do this for a few years then go back to a more balanced equity/bond combination. If any meaningful portion of the population does this bonds rates will stay lower for longer for sure.

There are also other stable return products you can add to the safe mix like the NNN REIT is referenced above & get 6.2% yield plus 5% NAV growth. To tell the truth I think some of these guys come up with these scenarios to justify you needing multi-millions of dollars before you retire managed by them so they can get more fees. Just my 2 cents.

Packer
I don't think it is nuts but I think these matching strategies are more for people who have "won the game." As for me, I need portfolio growth before retirement and probably will need portfolio growth in retirement. Locking a portfolio into a mostly TIPS portfolio will ensure low real returns. If TIPS offered 3-4% real returns, I would be more interested, but now they are less than 1%.

Bob has also written about real annuities, annuities adjusted for inflation, but unfortunately, these are getting harder to find. They are also a lot more expensive than nominal annuities, which have no inflation adjustment. Dr. Wade Pfau has calculated that the break even point where the payments of a real annuity match the payments of a nominal annuity can be 15 years or more. Many retirements don't last 15 years.

Great ideas here, but don't apply to everyone and still not quite ready for prime time.
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Re: DFA Retirement Income Strategies

Post by itstoomuch » Sat May 27, 2017 12:39 pm

hirlaw wrote:A bit off topic, but does anyone share my concern that TIPS may not actually keep up with actual inflation from a retiree's viewpoint? Currently, actual health care cost inflation exceeds the govt. inflation rate. Health care costs, especially in later retirement, may make up a significant portion of a later retiree's budget. Can we rely on TIPS to accurately keep up with these rising costs in retirement?
Yes, concerned; Have met my 2017's high deductible Advantage (F) allowance. Further medical is gonna be at the Ins. co dime :annoyed
...
garlanwhizzer wrote:
Just my 2 cents worth. I believe this portfolio to be excessively conservative (a person at retirement should have 80% of assets in TIPS plus LMP) for most because given the size of the portfolios of most retirees, a TIPS plus LMP will not provide them with sufficient income to cover retirement expenses long term. A balanced duration TIPS portfolio yields less than 1% real. Annuities are great for those who sell and market them but IMO they are a financial device marketed to the fearful elderly, offering the appearance of safety but not safety itself. They are as the article in Forbes Magazine wrote "designed to be sold, not bought." Those who generate profits for them, be it the sellers (commissions) or those who create and market them (cash cow for large financial firms) are understandably very enthusiastic about these products. some of us are more conservative when it comes to our living expense money.

@bobcat2.
IMO, whether a stock/bond mix, stock/tip/bond/, target-date, etc one still has to deal with the uncertainty of the funds with the "plan. Everyone knows how we are doing the runoff in our retirement. I'd just rather pay upfront for a near term certainty now, than pay later for that certainty. I think I said it right. Anyhow, Anything beyond a fews days in retirement in either direction, gets very fuzzy. :mrgreen: :annoyed :sharebeer
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Re: DFA Retirement Income Strategies

Post by packer16 » Sat May 27, 2017 12:57 pm

I should qualify that it is nuts for me. I just think moving from taking some risk strategy to no risk strategy is a big jump. Most folks I know that like the immunization strategy would take very little equity risk to begin with. I think the persons personality and risk tolerance is also important here and a number of these strategies assume a change in this over time which I think in many cases can be a stretch. For the risk averse crowd this is a possibility but I think using the growth engine of the market, however on a smaller scale, after retirement is an important skill developed in the accumulation phase. IMO a more learnable skill is expenses reduction for the same level of happiness & many folks here use this in retirement.

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Re: DFA Retirement Income Strategies

Post by nedsaid » Sat May 27, 2017 1:23 pm

packer16 wrote:I should qualify that it is nuts for me. I just think moving from taking some risk strategy to no risk strategy is a big jump. Most folks I know that like the immunization strategy would take very little equity risk to begin with. I think the persons personality and risk tolerance is also important here and a number of these strategies assume a change in this over time which I think in many cases can be a stretch. For the risk averse crowd this is a possibility but I think using the growth engine of the market, however on a smaller scale, after retirement is an important skill developed in the accumulation phase. IMO a more learnable skill is expenses reduction for the same level of happiness & many folks here use this in retirement.

Packer
The risk of exhausting a portfolio in retirement exists for low risk tolerance people, unless the investor has won the game. The sequence of returns problem exists for those who have higher risk tolerance. There has to be a happy middle ground in there somewhere. What I am trying to say is that a matching strategy won't bail you out if you don't have enough saved for retirement in the first place!
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Re: DFA Retirement Income Strategies

Post by bobcat2 » Sat May 27, 2017 1:23 pm

nedsaid wrote: I think these matching strategies are more for people who have "won the game." As for me, I need portfolio growth before retirement and probably will need portfolio growth in retirement.
The point of goal based investing based on the funded ratio and an LDI strategy is to have a plan for achieving your retirement income goal and reliable assessments of your progress in meeting your retirement income goal, well before retirement. To put in your vernacular, if your retirement plan requires significant portfolio growth in retirement you have "lost the game" by the time you get to retirement. :(

Such a person needs to save more, retire later, or consider income from home equity. The other alternatives are to lower the income goal, or take more equity risk and live with the consequences of being even worse off if the risk materializes.

BTW, here are the bond and equity allocations of DFA TDFs at different ages.

Code: Select all

		DFA Target Date Funds					
				                                         aproaching 			
                  early career	  mid career		  retirement		      in retirement	
                  2055 TDF		   2035 TDF		    2020 TDF		        2005 TDF	
                 (late 20s)		 (late 40s)		  (early 60s)		     (late 70s & beyond)	
Total Stocks		  95%		        73%		          33%		              23%	
Nominal bonds		  5%		        19%		           3%		              15%	
TIPS		          -0-		         9%		          65%		              62%	
Total Bonds		    5%		        28%		          68%		              77%			
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Re: DFA Retirement Income Strategies

Post by nedsaid » Sat May 27, 2017 1:37 pm

bobcat2 wrote:
nedsaid wrote: I think these matching strategies are more for people who have "won the game." As for me, I need portfolio growth before retirement and probably will need portfolio growth in retirement.
The point of goal based investing based on the funded ratio and an LDI strategy is to have a plan for achieving your retirement income goal and reliable assessments of your progress in meeting your retirement income goal, well before retirement. To put in your vernacular, if your retirement plan requires significant portfolio growth in retirement you have "lost the game" by the time you get to retirement. :(

Nedsaid: You added the word "significant" and that changes the entire discussion. I have mostly won the game at age 57 but my portfolio still isn't quite large enough. That, and I have faced spotty employment since a lay-off 2 1/2 years ago. So I need to take some risk but I am not buying lottery tickets in desperation. I am somewhere in the middle.

It is a rational approach to keep monitoring the amount of income that your portfolio could purchase and to have a target goal. It is also rational to adjust your savings rate higher if you are short of the goal.

The problem is that many people will not be able to save the needed amounts as children are expensive, it costs a lot to put kids through college, and when you hit 50, you become a big target for lay-offs. I think many people will retire with a paid off house, Social Security, and maybe $100-$200K in retirement savings accounts. The sad reality is that many won't even be able to do that. So yes, a lot of people have lost the game and that is a darned shame.


Such a person needs to save more, retire later, or consider income from home equity. The other alternatives are to lower the income goal, or take more equity risk and live with the consequences of being even worse off if the risk materializes.

Nedsaid: Yes, there is that old sequence of returns problem. You have posted extensively on these topics but you haven't really covered the transition from a "growth" portfolio to a "liability matching" portfolio. For example, at what age should someone make this transition? Also, at what multiple of needed income? The DFA chart below gives some guidance.

BTW, here are the bond and equity allocations of DFA TDFs at different ages.

Code: Select all

		DFA Target Date Funds					
				                                         aproaching 			
                  early career	  mid career		  retirement		      in retirement	
                  2055 TDF		   2035 TDF		    2020 TDF		        2005 TDF	
                 (late 20s)		 (late 40s)		  (early 60s)		     (late 70s & beyond)	
Total Stocks		  95%		        73%		          33%		              23%	
Nominal bonds		  5%		        19%		           3%		              15%	
TIPS		          -0-		         9%		          65%		              62%	
Total Bonds		    5%		        28%		          68%		              77%			
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Re: DFA Retirement Income Strategies

Post by AndrewXnn » Sat May 27, 2017 2:37 pm

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.
Equities also tend to move with inflation.

Yes; there was a time long ago when long term TIPS were yielding near to 4%, but will likely be a while before were return to similar market conditions.

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Re: DFA Retirement Income Strategies

Post by bobcat2 » Sat May 27, 2017 2:53 pm

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/

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Re: DFA Retirement Income Strategies

Post by willthrill81 » Sat May 27, 2017 3:26 pm

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
Over 10 years, it's possible, but based on the historical record, it's not likely. Over 20 years, the historical likelihood is very low indeed.
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Re: DFA Retirement Income Strategies

Post by itstoomuch » Sat May 27, 2017 3:52 pm

^that's what I said,
"not likely"

that's what my older bro said.
that's what my BIL said,
that's what my FA said,
that's what you said,

YMMV :sharebeer :sharebeer
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Re: DFA Retirement Income Strategies

Post by willthrill81 » Sat May 27, 2017 4:08 pm

itstoomuch wrote:^that's what I said,
"not likely"

that's what my older bro said.
that's what my BIL said,
that's what my FA said,
that's what you said,

YMMV :sharebeer :sharebeer
And what does that mean? I'm the first to admit that the unlikely can happen, but it's still unlikely. There's a 1/6 chance that a fair dice will roll 6, but there's a 5/6 chance it won't.
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Re: DFA Retirement Income Strategies

Post by itstoomuch » Sat May 27, 2017 4:15 pm

^
unfortunately, 1/6 is still a big number. An huge number if you happen to be caught in the 1/6 scenario.
older bro, professional risk manager at bigbank, previously with FRNY. still working.
BIL, senior officer at life insurance company, actuary, CPA.
FA and myself- only do what we are told. :shock:
statistics will only tell you what you want you want it to tell you :oops:
YMMV
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Re: DFA Retirement Income Strategies

Post by nedsaid » Sat May 27, 2017 6:33 pm

Bob has offered a lot of good ideas worthy of consideration. I am still thinking over my options but there is still some time between now and my eventual retirement date. The world can change a lot between now and then. If TIPS were offering over 3% real return, I would be all over it like polka dots on a bikini. But they aren't and at this time, I can't see putting such large amounts of my portfolio in TIPS. I also have a feeling about not overloading the portfolio with just one asset class.

I suppose what I will do is weigh my options as I get closer and I might even employ a financial planner to help me with my choices. The one thing I have decided though is not to allow my allocation to stocks to creep up again. 2/3 stocks and 1/3 bonds is as risky as I want to go at this time. At some point, I will have to start the process of de-risking.
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Re: DFA Retirement Income Strategies

Post by heyyou » Sat May 27, 2017 6:52 pm

IMO a more learnable skill is expenses reduction for the same level of happiness & many folks here use this in retirement.
That is the winner, and should be what is emphasized for the public. Since there is little money there for the financial institutions, they will fund research that has better benefits for their businesses.

Any strategy that limits the risk of losses will also limit the benefit of long term growth. Someone mentioned that the DFA strategy is for those who have already won the asset derby, so it is not a model for the general public. Like many situations, it is not a bad strategy, its limitations just make it too specialized for most retirees. Thus we have posters talking past each other, some saying it will work well, while others are saying it doesn't suit them, with both being accurate.

Consider McClung's suggestions of having necessary expenses mostly covered by somewhat steady income sources, and variable discretionary spending based on the recent portfolio value. The retiree expects to adapt to the income, instead of asking for a fixed real income for 30 years.

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Re: DFA Retirement Income Strategies

Post by willthrill81 » Sat May 27, 2017 7:10 pm

nedsaid wrote:Bob has offered a lot of good ideas worthy of consideration. I am still thinking over my options but there is still some time between now and my eventual retirement date. The world can change a lot between now and then. If TIPS were offering over 3% real return, I would be all over it like polka dots on a bikini. But they aren't and at this time, I can't see putting such large amounts of my portfolio in TIPS. I also have a feeling about not overloading the portfolio with just one asset class.

I suppose what I will do is weigh my options as I get closer and I might even employ a financial planner to help me with my choices. The one thing I have decided though is not to allow my allocation to stocks to creep up again. 2/3 stocks and 1/3 bonds is as risky as I want to go at this time. At some point, I will have to start the process of de-risking.
It sounds like your AA is already in the 'sweet spot' for maximizing the success rate of a reasonable WR.

You don't feel comfortable with either TBM or ITT? Do you have access to a SVF? What about CDs?
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Re: DFA Retirement Income Strategies

Post by nedsaid » Sat May 27, 2017 7:18 pm

willthrill81 wrote:
nedsaid wrote:Bob has offered a lot of good ideas worthy of consideration. I am still thinking over my options but there is still some time between now and my eventual retirement date. The world can change a lot between now and then. If TIPS were offering over 3% real return, I would be all over it like polka dots on a bikini. But they aren't and at this time, I can't see putting such large amounts of my portfolio in TIPS. I also have a feeling about not overloading the portfolio with just one asset class.

I suppose what I will do is weigh my options as I get closer and I might even employ a financial planner to help me with my choices. The one thing I have decided though is not to allow my allocation to stocks to creep up again. 2/3 stocks and 1/3 bonds is as risky as I want to go at this time. At some point, I will have to start the process of de-risking.
It sounds like your AA is already in the 'sweet spot' for maximizing the success rate of a reasonable WR.

You don't feel comfortable with either TBM or ITT? Do you have access to a SVF? What about CDs?
Vanguard Total Bond Market Index in fund and ETF form is one of my biggest holdings. I would also consider FDIC Insured CDs for my portfolio. Don't know what you mean by ITT or SVF.
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Re: DFA Retirement Income Strategies

Post by willthrill81 » Sat May 27, 2017 7:33 pm

nedsaid wrote:
willthrill81 wrote:
nedsaid wrote:Bob has offered a lot of good ideas worthy of consideration. I am still thinking over my options but there is still some time between now and my eventual retirement date. The world can change a lot between now and then. If TIPS were offering over 3% real return, I would be all over it like polka dots on a bikini. But they aren't and at this time, I can't see putting such large amounts of my portfolio in TIPS. I also have a feeling about not overloading the portfolio with just one asset class.

I suppose what I will do is weigh my options as I get closer and I might even employ a financial planner to help me with my choices. The one thing I have decided though is not to allow my allocation to stocks to creep up again. 2/3 stocks and 1/3 bonds is as risky as I want to go at this time. At some point, I will have to start the process of de-risking.
It sounds like your AA is already in the 'sweet spot' for maximizing the success rate of a reasonable WR.

You don't feel comfortable with either TBM or ITT? Do you have access to a SVF? What about CDs?
Vanguard Total Bond Market Index in fund and ETF form is one of my biggest holdings. I would also consider FDIC Insured CDs for my portfolio. Don't know what you mean by ITT or SVF.
Intermediate Term Treasuries and Stable Value Fund.
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Re: DFA Retirement Income Strategies

Post by nedsaid » Sat May 27, 2017 7:39 pm

willthrill81 wrote:
nedsaid wrote:
Vanguard Total Bond Market Index in fund and ETF form is one of my biggest holdings. I would also consider FDIC Insured CDs for my portfolio. Don't know what you mean by ITT or SVF.
Intermediate Term Treasuries and Stable Value Fund.
I am fine with both. I have access to a Stable Value Fund within a small Variable Annuity that I own. Right now, it pays 3%, I have owned it since 1995 so I am grandfathered into a 3% minimum rate which still looks good.
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Re: DFA Retirement Income Strategies

Post by willthrill81 » Sat May 27, 2017 7:48 pm

nedsaid wrote:
willthrill81 wrote:
nedsaid wrote:
Vanguard Total Bond Market Index in fund and ETF form is one of my biggest holdings. I would also consider FDIC Insured CDs for my portfolio. Don't know what you mean by ITT or SVF.
Intermediate Term Treasuries and Stable Value Fund.
I am fine with both. I have access to a Stable Value Fund within a small Variable Annuity that I own. Right now, it pays 3%, I have owned it since 1995 so I am grandfathered into a 3% minimum rate which still looks good.
A lot of people wish they had access to a SVF. 3% is very solid these days. I could get 3.25% in TIAA's supplemental traditional annuity right now (the one that allows withdrawals at any time), but I plan to remain all in equities for the next ~9 years.
“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

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