William Bernstein: Retirement Investing and Spending in two easy steps

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CULater
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William Bernstein: Retirement Investing and Spending in two easy steps

Post by CULater » Sat Mar 31, 2018 11:25 am

Dr. Bernstein boils it down. Is there anything else we need to know?

Step1:
Save diligently, diversify broadly, buy index funds, think long-term—and pay careful attention to risk.
Step2
“If you’ve won the game, stop playing,” Bernstein argues. “And to me, stop playing is buying a TIPS ladder.”
http://www.humbledollar.com/2018/03/fou ... investing/
May you have the hindsight to know where you've been, The foresight to know where you're going, And the insight to know when you've gone too far. ~ Irish Blessing

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Re: William Bernstein: Retirement Investing and Spending in two easy steps

Post by munemaker » Sat Mar 31, 2018 11:29 am

CULater wrote:
Sat Mar 31, 2018 11:25 am
Dr. Bernstein boils it down. Is there anything else we need to know?

Step1:
Save diligently, diversify broadly, buy index funds, think long-term—and pay careful attention to risk.
Step2
“If you’ve won the game, stop playing,” Bernstein argues. “And to me, stop playing is buying a TIPS ladder.”
http://www.humbledollar.com/2018/03/fou ... investing/
As they say "The devil is in the delails," and this is incredibly short on details. So yes, there is a lot more you need to know.

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Re: William Bernstein: Retirement Investing and Spending in two easy steps

Post by permport » Sat Mar 31, 2018 11:34 am

Very nice post. Although I disagree with Dr. Bernstein in regard to simply buying a TIPS ladder once one has reached FIRE. So at that point we are supposed to have no stock exposure at all? I understand where he’s coming from, but I think that having even a modest exposure (say, 20%) to a simple total stock market fund would serve one well in regards to having a bit of growth and having more to pass on to heirs and such.
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Re: William Bernstein: Retirement Investing and Spending in two easy steps

Post by dbr » Sat Mar 31, 2018 11:57 am

I agree that there are details and a lot more to know. In particular the "quit the game and buy TIPS" thing is arguable. My quip to that is "It isn't a game and you can't quit." I also advise against investing by aphorism and sound bites.

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Re: William Bernstein: Retirement Investing and Spending in two easy steps

Post by BolderBoy » Sat Mar 31, 2018 12:02 pm

permport wrote:
Sat Mar 31, 2018 11:34 am
Very nice post. Although I disagree with Dr. Bernstein in regard to simply buying a TIPS ladder once one has reached FIRE. So at that point we are supposed to have no stock exposure at all?
I suspect that his argument is that all one needs to do is keep up with inflation and TIPS do that. If the goal is to bow out of life with near -0- financial assets there would otherwise not be much need to take the risks of stocks, right?

I wonder how many people (him included) actually go this particular route?
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Re: William Bernstein: Retirement Investing and Spending in two easy steps

Post by CyberBob » Sat Mar 31, 2018 12:18 pm

permport wrote:
Sat Mar 31, 2018 11:34 am
...So at that point we are supposed to have no stock exposure at all?
For the Liability Matching Portfolio only.
Bernstein talks about two portfolios: a Liability Matching Portfolio and a Risk Portfolio.
Liability Matching Portfolio usually being described as: Residual *basic* living expenses (after SS + pensions) for 20 years.
Anything above that would be in the Risk Portfolio and could be in stocks.

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Clements on Bernstein: Four Pillars of Investing

Post by iceport » Sat Mar 31, 2018 12:20 pm

Well, I don't think the OP does a very good job of characterizing the article. The title gives a better indication:

Four Pillars of Investing
What science? Bernstein, whom I’ve known for more than two decades, says it has four elements: investment theory, history, psychology, and the business of investing. Those four elements form the core of one of Bernstein’s best books, The Four Pillars of Investing. “The most important of those four pillars is investment theory—and the most important concept is that risk and reward are inextricably linked.”
I don't see two simple steps, but more like five. The more controversial "stop playing" is arguably a sixth step.
What’s the solution? Save diligently, diversify broadly, buy index funds, think long-term—and pay careful attention to risk.
"Discipline matters more than allocation.” ─William Bernstein

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Re: William Bernstein: Retirement Investing and Spending in two easy steps

Post by dbr » Sat Mar 31, 2018 12:22 pm

CyberBob wrote:
Sat Mar 31, 2018 12:18 pm
permport wrote:
Sat Mar 31, 2018 11:34 am
...So at that point we are supposed to have no stock exposure at all?
For the Liability Matching Portfolio only.
Bernstein talks about two portfolios: a Liability Matching Portfolio and a Risk Portfolio.
Liability Matching Portfolio usually being described as: Residual *basic* living expenses (after SS + pensions) for 20 years.
Anything above that would be in the Risk Portfolio and could be in stocks.
And that approach should (does) consider not a portfolio but annuities. In that case the annuity should be inflation indexed. SS already exists as such an annuity, whatever its limitations.

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Re: William Bernstein: Retirement Investing and Spending in two easy steps

Post by Leesbro63 » Sat Mar 31, 2018 1:41 pm

TIPS won’t work for large taxable accounts. Because if we ever get a big dose of the inflation that TIPS are bought to hedge against, tax-flatiron will eat away at real values.

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Re: William Bernstein: Retirement Investing and Spending in two easy steps

Post by dbr » Sat Mar 31, 2018 2:00 pm

Leesbro63 wrote:
Sat Mar 31, 2018 1:41 pm
TIPS won’t work for large taxable accounts. Because if we ever get a big dose of the inflation that TIPS are bought to hedge against, tax-flatiron will eat away at real values.
It is good to point out the tax issue if indeed proportional tax costs do go up after tax brackets and deductions might also go up. However to say won't work when that is an instance of how it might not work under certain conditions seems excessively negative. I am also not a fan of the whole thought process.

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Re: William Bernstein: Retirement Investing and Spending in two easy steps

Post by Leesbro63 » Sat Mar 31, 2018 2:53 pm

I’m not sure what you mean by not being a fan of the whole thought process. It is what it is. If we get the big inflation that TIPS are bought to protect against, all taxes paid on the inflation gain reduces the “real” value preserved by the amount of tax paid. That’s taxflation. If we get small or even medium inflation, nominal bonds will probably keep up. But with big inflation, nominal bonds do poorly and TIPS (in a taxable account) do less poorly but still fail to give the very after-tax, after-inflation protection that the “won the game/quit playing” person retired to.

In my own humble opinion, for people with large taxable accounts, a 50/50 (maybe 40/50) portfolio makes more sense to me than all TIPS because of the rarely discussed and perhaps poorly understood taxflation risk.

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Re: William Bernstein: Retirement Investing and Spending in two easy steps

Post by dbr » Sat Mar 31, 2018 3:02 pm

Leesbro63 wrote:
Sat Mar 31, 2018 2:53 pm
I’m not sure what you mean by not being a fan of the whole thought process. It is what it is. If we get the big inflation that TIPS are bought to protect against, all taxes paid on the inflation gain reduces the “real” value preserved by the amount of tax paid. That’s taxflation. If we get small or even medium inflation, nominal bonds will probably keep up. But with big inflation, nominal bonds do poorly and TIPS (in a taxable account) do less poorly but still fail to give the very after-tax, after-inflation protection that the “won the game/quit playing” person retired to.

In my own humble opinion, for people with large taxable accounts, a 50/50 (maybe 40/50) portfolio makes more sense to me than all TIPS because of the rarely discussed and perhaps poorly understood taxflation risk.
I'm talking about the whole LMP thought process and the "won the game" aphorism. Taxes on TIPS would be a piece of being concerned about the idea.

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Re: William Bernstein: Retirement Investing and Spending in two easy steps

Post by Leesbro63 » Sat Mar 31, 2018 3:08 pm

Ah! I agree the the idea of liability matching has issues. For one thing, if you “only” have 25x what you annually spend, then you need all TIPS. But in return for that 30 year certainty, you and give up all upside potential. And as we agree, if that TIPS portfolio isn’t tax sheltered, there’s the taxflation problem (for all but the smallest portfolios).

For a stereotypical upper meddle class retiree with $2M in an IRA, a house and a Honda, this might work. Anyone with more and with that in taxable...it’s a whole nuther animal.
Last edited by Leesbro63 on Sat Mar 31, 2018 3:10 pm, edited 1 time in total.

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Re: William Bernstein: Retirement Investing and Spending in two easy steps

Post by pascalwager » Sat Mar 31, 2018 3:10 pm

Leesbro63 wrote:
Sat Mar 31, 2018 1:41 pm
TIPS won’t work for large taxable accounts. Because if we ever get a big dose of the inflation that TIPS are bought to hedge against, tax-flatiron will eat away at real values.
Yes, he recommends short-term bonds for taxable instead of TIPS.

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Re: William Bernstein: Retirement Investing and Spending in two easy steps

Post by Leesbro63 » Sat Mar 31, 2018 3:11 pm

pascalwager wrote:
Sat Mar 31, 2018 3:10 pm
Leesbro63 wrote:
Sat Mar 31, 2018 1:41 pm
TIPS won’t work for large taxable accounts. Because if we ever get a big dose of the inflation that TIPS are bought to hedge against, tax-flatiron will eat away at real values.
Yes, he recommends short-term bonds for taxable instead of TIPS.
Then you don’t really have a liability matching portfolio and are “back in the game” of hoping and praying.

People with large taxable portfolios can’t really quit playing the game. Because there’s nowhere to hide. The best they can do is reduce overall risk by balancing the risks of underlying investment options. But the fantasy of being able to “quit playing the game” is exactly that, a fantasy.

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Re: William Bernstein: Retirement Investing and Spending in two easy steps

Post by Dottie57 » Sat Mar 31, 2018 3:19 pm

With SS I have enough if I experience no complications. I do have LTCi, but if more than 3 years, I could run out of money.

So I don't want just a TIPS ladder, but the possibility of higher returns.

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Re: William Bernstein: Retirement Investing and Spending in two easy steps

Post by dbr » Sat Mar 31, 2018 3:21 pm

Dottie57 wrote:
Sat Mar 31, 2018 3:19 pm
With SS I have enough if I experience no complications. I do have LTCi, but if more than 3 years, I could run out of money.

So I don't want just a TIPS ladder, but the 8-) :o
In general an inflation indexed annuity and insurance is the better approach. If there is such a thing as not playing the game it is to insure the risk rather than try to engineer a portfolio.

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Re: William Bernstein: Retirement Investing and Spending in two easy steps

Post by Leesbro63 » Sat Mar 31, 2018 3:40 pm

dbr wrote:
Sat Mar 31, 2018 3:21 pm
Dottie57 wrote:
Sat Mar 31, 2018 3:19 pm
With SS I have enough if I experience no complications. I do have LTCi, but if more than 3 years, I could run out of money.

So I don't want just a TIPS ladder, but the 8-) :o
In general an inflation indexed annuity and insurance is the better approach. If there is such a thing as not playing the game it is to insure the risk rather than try to engineer a portfolio.
Two perbltms with THAT:

1. Inflation adjusted annuities are extremely expensive, requiring an accumulation period that is probably longer than for approaches with similar risk.

2. Inflation-adjusted annuities are ALSO subject to taxflation if we ever get that big inflation that you paid so very much to protect against.

Again, no where to really hide. LMP only works for the small subset of Bogleheads who are affluent, but not mega-rich, with their entire nest egg that’s tax sheltered.

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Re: William Bernstein: Retirement Investing and Spending in two easy steps

Post by snackdog » Sat Mar 31, 2018 4:09 pm

How about a ladder of non-inflation adjusted annuities? I guess as with any ladder, the money waiting for the next rung needs to be somewhere.

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Re: William Bernstein: Retirement Investing and Spending in two easy steps

Post by Dandy » Sat Mar 31, 2018 4:11 pm

A broader point is if you have enough you probably need to consider securing your retirement funding for double digit years by allocating to "safe" products vs continuing to take the same level of risk. e.g. a tilt toward asset preservation vs growth for growth sake.

Because most who have enough have a diminished need for risk and most have lost almost all human capital so large losses combined with withdrawals make it difficult to recover. A real question is what is enough? Less than 2% withdrawal at age 65?? 70??

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Re: William Bernstein: Retirement Investing and Spending in two easy steps

Post by Leesbro63 » Sat Mar 31, 2018 5:00 pm

Dandy wrote:
Sat Mar 31, 2018 4:11 pm
A broader point is if you have enough you probably need to consider securing your retirement funding for double digit years by allocating to "safe" products vs continuing to take the same level of risk. e.g. a tilt toward asset preservation vs growth for growth sake.

Because most who have enough have a diminished need for risk and most have lost almost all human capital so large losses combined with withdrawals make it difficult to recover. A real question is what is enough? Less than 2% withdrawal at age 65?? 70??
The problem is that over longer periods, “safe” fixed income has a greater risk of becoming “unsafe” inflated-away fixed income. While “unsafe equity” has a greater chance of providing the horsepower to “safely” mitigate “unsafe” inflation. Hence how I arrived at 50/50 or 40/60.

Pick your poison.

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Re: William Bernstein: Retirement Investing and Spending in two easy steps

Post by Dandy » Sun Apr 01, 2018 7:20 am

The problem is that over longer periods, “safe” fixed income has a greater risk of becoming “unsafe” inflated-away fixed income. While “unsafe equity” has a greater chance of providing the horsepower to “safely” mitigate “unsafe” inflation. Hence how I arrived at 50/50 or 40/60.

Pick your poison.
True that no approach is fail safe or set it and forget it. That gets to the final point I made which is how do you define enough? Is it a percent of drawdown at a certain age? or some other measure? Also, too many withdrawal approaches seem to suggest that participants stick to the initial approach in lock-step. Most people will adapt their withdrawals and their expenses in reaction to their portfolio and economic conditions.

Finally, if a person who has enough sets up a "safe" and a "risk" portfolio and withdraws all or most from the "risk" portfolio when it does well - it will enable them to extend the length of the "safe" portfolio coverage or top off the "safe" portfolio to account for modest expense or inflation growth.

My overall allocation is 43/57 is based on "securing" my retirement funding for 20 years. I didn't guess or assume what overall allocation might be reasonable for me. So, I arrived at a similar place as you did. If it resulted in a much lower equity allocation I probably would have tried to "secure" my retirement for a bit shorter than 20 years and used my withdrawal from "risk" when it does well to extend coverage.

Best of luck with whatever approach you start with.

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Re: William Bernstein: Retirement Investing and Spending in two easy steps

Post by Call_Me_Op » Sun Apr 01, 2018 7:34 am

I think Dr. Bernstein means put your living expenses (your spending floor) into a TIPS ladder and you can do what you want with the rest - but he should say that explicitly if that's what he means.
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Re: William Bernstein: Retirement Investing and Spending in two easy steps

Post by CWRadio » Sun Apr 01, 2018 8:08 am

Call_Me_Op wrote:
Sun Apr 01, 2018 7:34 am
I think Dr. Bernstein means put your living expenses (your spending floor) into a TIPS ladder and you can do what you want with the rest - but he should say that explicitly if that's what he means.
What about buying a SPIA or a ladder of SPIA (single premium immediate lifetime annuity) in place of TIPS? Paul

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Re: William Bernstein: Retirement Investing and Spending in two easy steps

Post by Dandy » Sun Apr 01, 2018 8:24 am

I think Dr. Bernstein means put your living expenses (your spending floor) into a TIPS ladder and you can do what you want with the rest - but he should say that explicitly if that's what he means.
I believe Dr. Bernstein suggests the TIPS ladder as a preferred option since it should take most if not all of the inflation risk off the table. But, I believe he also recognized that other products e.g. short term treasuries, short term bonds, FDIC products could also be used. I believe he has said you might have to "hold your nose" because of the low returns on these investments. By the way I believe it isn't the "spending floor" it is the "residual expenses" i.e. the amount you need to withdraw to supplement any pension, social security or annuity to support your living expenses that needs to be "safe".

Of course you must realize that your expense growth may not match up well with the TIPS inflation calculation. Medical expenses, home ownership expense, etc. might be higher and there are some retirees that spend less as they age. Lump sum expenses are typically not addressed e.g. new car, roof, etc. For those that don't go the individual TIPS ladder approach they might consider allocating a portion of their "risk" portfolio to one of the TIPS funds.

What it does strongly suggest to me is that whatever approach you take you need to periodically look at your health, expenses, portfolio size and the viability of your starting approach and make adjustments. If I am 85 I might need to
take different actions with my portfolio and withdrawal approach compared to when I am 70. If your approach is not keeping up with inflation you need to take some action.

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Re: William Bernstein: Retirement Investing and Spending in two easy steps

Post by Leesbro63 » Sun Apr 01, 2018 8:36 am

CWRadio wrote:
Sun Apr 01, 2018 8:08 am
Call_Me_Op wrote:
Sun Apr 01, 2018 7:34 am
I think Dr. Bernstein means put your living expenses (your spending floor) into a TIPS ladder and you can do what you want with the rest - but he should say that explicitly if that's what he means.
What about buying a SPIA or a ladder of SPIA (single premium immediate lifetime annuity) in place of TIPS? Paul
Then you have insurance company risk. And if you want an inflation adjusted annuity, you’ll pay quite a lot for that inflation rider. Perhaps too much

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Re: William Bernstein: Retirement Investing and Spending in two easy steps

Post by thx1138 » Sun Apr 01, 2018 12:25 pm

On the LMP side the other thing it overlooks is the risk that you have unexpected uninsured expenses. As a specific implementation TIPS also does nothing to insure against longevity making the problem worse.

What matters is the combined probability that your portfolio won’t match expected spending (e.g. you are in stocks and they crash, you have a pension that fails) or that your spending will be much higher than expected (LTC, medical expenses) even if the portfolio does return as expected.

The TIPS ladder has very low probability of failing to return as expected. Unfortunately it also has zero probability of returning more to potentially cover excess expenses. For the same “cost” of a TIPS ladder you can have a “risk” portfolio with around a 1% chance of failing to meet expected expenses. Meanwhile the risk portfolio has something like a 70% chance of meeting more than double expected expenses. Thus if there is say just a 2% chance you might need more than say 50% more than your expected expenses the “risk” portfolio is actually safer than the “safe” TIPS ladder.

When you put the two probabilities together it isn’t clear at all the TIPS ladder is safer because it is usually evaluated on a false premise that all future expenses are known and all future large expenses are fully insured. That just isn’t true over the length of time of a retirement. The TIPS ladder and similarly the annuity can be a false sense of security because the analysis that favors them is based on an assumption of zero chance of unexpected expenses.

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Re: William Bernstein: Retirement Investing and Spending in two easy steps

Post by 2015 » Sun Apr 01, 2018 12:29 pm

CyberBob wrote:
Sat Mar 31, 2018 12:18 pm
permport wrote:
Sat Mar 31, 2018 11:34 am
...So at that point we are supposed to have no stock exposure at all?
For the Liability Matching Portfolio only.
Bernstein talks about two portfolios: a Liability Matching Portfolio and a Risk Portfolio.
Liability Matching Portfolio usually being described as: Residual *basic* living expenses (after SS + pensions) for 20 years.
Anything above that would be in the Risk Portfolio and could be in stocks.


What I'm doing, only Residual covers both basic and discretionary expenses due to desire for simplicity in all things. Laziness bordering on sloth when it comes to investing prevents me from having any interest in building a TIPS ladder. Using VPW for Risk Portfolio to cover those times when I might want to spend more...which really don't see happening, but one never knows.

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Re: William Bernstein: Retirement Investing and Spending in two easy steps

Post by dbr » Sun Apr 01, 2018 12:35 pm

thx1138 wrote:
Sun Apr 01, 2018 12:25 pm
On the LMP side the other thing it overlooks is the risk that you have unexpected uninsured expenses. As a specific implementation TIPS also does nothing to insure against longevity making the problem worse.

What matters is the combined probability that your portfolio won’t match expected spending (e.g. you are in stocks and they crash, you have a pension that fails) or that your spending will be much higher than expected (LTC, medical expenses) even if the portfolio does return as expected.

The TIPS ladder has very low probability of failing to return as expected. Unfortunately it also has zero probability of returning more to potentially cover excess expenses. For the same “cost” of a TIPS ladder you can have a “risk” portfolio with around a 1% chance of failing to meet expected expenses. Meanwhile the risk portfolio has something like a 70% chance of meeting more than double expected expenses. Thus if there is say just a 2% chance you might need more than say 50% more than your expected expenses the “risk” portfolio is actually safer than the “safe” TIPS ladder.

When you put the two probabilities together it isn’t clear at all the TIPS ladder is safer because it is usually evaluated on a false premise that all future expenses are known and all future large expenses are fully insured. That just isn’t true over the length of time of a retirement. The TIPS ladder and similarly the annuity can be a false sense of security because the analysis that favors them is based on an assumption of zero chance of unexpected expenses.
As I say about the LMP, there are some things lacking in the thought process. Of course, I think the assumption is that the LMP is not the entirety of the assets. I think the more nuanced explanation is that the TIPS ladder or collection of CDs or whatever it is, only covers the absolutely known minimal spending after all other sources of income are included and before the addition of a "risk" portfolio on top of that. The result does not seem to come down to much more than invest in a portfolio of stocks and bonds and take withdrawals at some sort of safe rate and have some income streams like pensions, annuities, and SS before that.

I admit it could be I don't really appreciate exactly what the argument is and where the benefit actually accrues. A lot of what is spoken about Bernstein's idea may be the condensed version and missing some things. I still think the idea is effectively mental accounting that makes a false appeal to certainty and security that is not really there.

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Re: William Bernstein: Retirement Investing and Spending in two easy steps

Post by Call_Me_Op » Sun Apr 01, 2018 3:32 pm

CWRadio wrote:
Sun Apr 01, 2018 8:08 am
Call_Me_Op wrote:
Sun Apr 01, 2018 7:34 am
I think Dr. Bernstein means put your living expenses (your spending floor) into a TIPS ladder and you can do what you want with the rest - but he should say that explicitly if that's what he means.
What about buying a SPIA or a ladder of SPIA (single premium immediate lifetime annuity) in place of TIPS? Paul
Good to see another ham out there. :) Those ideas are fine by me.

73's
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Re: William Bernstein: Retirement Investing and Spending in two easy steps

Post by Dandy » Sun Apr 01, 2018 5:34 pm

I still think the idea is effectively mental accounting that makes a false appeal to certainty and security that is not really there.
What is metal accounting about changing a good portion of your fixed income to a TIPS ladder or other "safe" fixed income products based upon your expected drawdown for X years?? That is actual change not mental accounting --And while no plan for 20 or 30 years is totally secure why is this one any less certain than guessing that 60/40 will be ok? or maybe 50/50? Oh maybe because it has done pretty good based on backtesting? Or maybe 4% should be used --oh no maybe not since bonds have had a 30 year bull market and stocks have had an 8+bull market.

No claim has been made that any approach would work with certainty I don't think you can attribute that to Dr. Bernstein idea.

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Re: William Bernstein: Retirement Investing and Spending in two easy steps

Post by Leesbro63 » Sun Apr 01, 2018 5:45 pm

Dandy wrote:
Sun Apr 01, 2018 5:34 pm
I still think the idea is effectively mental accounting that makes a false appeal to certainty and security that is not really there.
What is metal accounting about changing a good portion of your fixed income to a TIPS ladder or other "safe" fixed income products based upon your expected drawdown for X years?? That is actual change not mental accounting --And while no plan for 20 or 30 years is totally secure why is this one any less certain than guessing that 60/40 will be ok? or maybe 50/50? Oh maybe because it has done pretty good based on backtesting? Or maybe 4% should be used --oh no maybe not since bonds have had a 30 year bull market and stocks have had an 8+bull market.

No claim has been made that any approach would work with certainty I don't think you can attribute that to Dr. Bernstein idea.
I agree with almost all of this. The only part I disagree with, and it’s just my opinion, is that I believe 50/50 entails less overall risk than 100% TIPS, in a large taxable account, meant to provide for a 30+ year retirement.

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Re: William Bernstein: Retirement Investing and Spending in two easy steps

Post by Dandy » Sun Apr 01, 2018 7:35 pm

The only part I disagree with, and it’s just my opinion, is that I believe 50/50 entails less overall risk than 100% TIPS, in a large taxable account, meant to provide for a 30+ year retirement.
If you are talking about Dr. Bernstein's idea you first have to have enough. By that he most likely means that all your nest egg isn't tied up in the TIPS ladder. He says the rest you can invest anyway you want even 100% equities.

So, let's say a person has a nest egg of 1.5 million and need 40k per year to supplement other income. 40k x 20 + 800k. So, Dr. Bernstein suggests putting the 800k in a TIPS ladder or other "safe" products and invest the rest as you wish. So you could have 47/53 allocation if you put all the excess in equities. If you only had 800k I don't think anyone would suggest you put it all in a TIPS ladder.

My personal opinion is that you want to end up with at least 30% in equities and have some fixed income not dedicated to the liability matching assets.

50/50 is a reasonable allocation. Just remember in retirement most people have little human capital, are withdrawing instead of contributing and will be withdrawing even when the 50% equities takes say a 50% drop. Which is likely to happen a time or two in a 30 year retirement. Are you still going to rebalance all the way down? It is a lot different situation than when you were working and contributing and getting a company match and maybe even a bonus.

Lets use the example above using a 50/50 allocation a 50% equity drop and the end of year 1 would put the portfolio at 375k equities and 710k fixed income or 1,085,000. approx 35/65. Now it is time to consider rebalancing and taking 40k out for next year. That is pretty much a worst case scenario. It will likely feel different in retirement. No need to panic. But being down almost 1/3 of your nest egg can cause some sleeplessness. If you had 19 years worth of drawdown or 760k left in TIPS or other "safe" products you might get a bit more restful sleep.

The key question is if you really have enough why not secure your retirement funding first and then determine the overall allocation instead of "guessing" that the top down allocation will do fine. For most that have enough it will likely mean changing the nature of a good portion of their fixed income. Not a big deal if fixed income was targeted for stability.

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Re: William Bernstein: Retirement Investing and Spending in two easy steps

Post by Leesbro63 » Sun Apr 01, 2018 7:40 pm

Really great question (about rebalancing) that I’ve pondered since 2008-9. My own answer is that I would not have the guts to rebalance from bonds to equites after a stock crash. And am fairly resigned, at age 58, to never rebalancing from bonds to stocks. The risk of a grinding, decades-long Japan-like bear market is fairly low, I hope, but the consequences are very high.

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Re: William Bernstein: Retirement Investing and Spending in two easy steps

Post by Dandy » Sun Apr 01, 2018 8:22 pm

My own answer is that I would not have the guts to rebalance from bonds to equites after a stock crash.
Neither do I. I didn't do it in 2008-09 when I was just retired. I rebalanced a bit early but then said I need to preserve assets for a possible 30 year retirement and want to collect SS at 70. So, I waited until the market rebounded at bit and brought my asset level up to an acceptable level and then moved money from fixed to equities. I said at the time to my wife I am giving up potential gains to assure our assets don't go below a certain level.

I think you rebalance up to the point where your asset level is about 10 or 20% above your minimum acceptable level. Then wait for rising equities to get you back in the rebalancing mode.

It does take guts to continue to rebalance but more than that it takes a level of trust/faith in markets and historical performance that I don't have. I have some level of trust but not that I'm going to risk my retirement. That is why Bernstein's idea appealed to me. I don't need to rely on equity markets rebounding from a crash or crashing I can let them ride and withdraw from them when they do well.

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Re: William Bernstein: Retirement Investing and Spending in two easy steps

Post by AlohaJoe » Sun Apr 01, 2018 8:42 pm

With a LMP approach, someone who is early retiring and needs $40,000 a year in income needs to have over $3,000,000 million just to build the TIPS ladder. Since "enough" appears to mean you need to have even more than that, are we saying that to use a LMP an early retiree needs $4,000,000 to $6,000,000 in order to meet their $40,000 expenses?

Because that seems....like an extraordinary amount.

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Re: William Bernstein: Retirement Investing and Spending in two easy steps

Post by Leesbro63 » Sun Apr 01, 2018 9:14 pm

AlohaJoe wrote:
Sun Apr 01, 2018 8:42 pm
With a LMP approach, someone who is early retiring and needs $40,000 a year in income needs to have over $3,000,000 million just to build the TIPS ladder. Since "enough" appears to mean you need to have even more than that, are we saying that to use a LMP an early retiree needs $4,000,000 to $6,000,000 in order to meet their $40,000 expenses?

Because that seems....like an extraordinary amount.
I don’t get the math here. $40,000 per year’s for 30 years requires “only” $1,200,000 invested in TIPS.

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Re: William Bernstein: Retirement Investing and Spending in two easy steps

Post by Sandtrap » Sun Apr 01, 2018 9:25 pm

CyberBob wrote:
Sat Mar 31, 2018 12:18 pm
permport wrote:
Sat Mar 31, 2018 11:34 am
...So at that point we are supposed to have no stock exposure at all?
For the Liability Matching Portfolio only.
Bernstein talks about two portfolios: a Liability Matching Portfolio and a Risk Portfolio.
Liability Matching Portfolio usually being described as: Residual *basic* living expenses (after SS + pensions) for 20 years.
Anything above that would be in the Risk Portfolio and could be in stocks.
That LMP could be up to 2 Mil$$$ based on minimal SS and no pension and living expenses of 100k/year. . . . .for 20 years.
20X in fixed alone. :shock:
But still shorter than the proverbial 25 year period often quoted here as 25X.

wow.
j :D
Last edited by Sandtrap on Sun Apr 01, 2018 9:27 pm, edited 1 time in total.

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Re: William Bernstein: Retirement Investing and Spending in two easy steps

Post by Sandtrap » Sun Apr 01, 2018 9:26 pm

AlohaJoe wrote:
Sun Apr 01, 2018 8:42 pm
With a LMP approach, someone who is early retiring and needs $40,000 a year in income needs to have over $3,000,000 million just to build the TIPS ladder. Since "enough" appears to mean you need to have even more than that, are we saying that to use a LMP an early retiree needs $4,000,000 to $6,000,000 in order to meet their $40,000 expenses?

Because that seems....like an extraordinary amount.
+1
Beat me to it.
I'm puzzled by the same thing.
j

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Re: William Bernstein: Retirement Investing and Spending in two easy steps

Post by AlohaJoe » Sun Apr 01, 2018 9:31 pm

Leesbro63 wrote:
Sun Apr 01, 2018 9:14 pm
AlohaJoe wrote:
Sun Apr 01, 2018 8:42 pm
With a LMP approach, someone who is early retiring and needs $40,000 a year in income needs to have over $3,000,000 million just to build the TIPS ladder. Since "enough" appears to mean you need to have even more than that, are we saying that to use a LMP an early retiree needs $4,000,000 to $6,000,000 in order to meet their $40,000 expenses?

Because that seems....like an extraordinary amount.
I don’t get the math here. $40,000 per year’s for 30 years requires “only” $1,200,000 invested in TIPS.
I said early retirement :sharebeer Imagine a 30-something whose wife is 5 years younger, still in her late 20s.

Someone in that situation and has $3,000,000 doesn't have "enough"? That's where I don't understand how LMP is supposed to work.

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Re: William Bernstein: Retirement Investing and Spending in two easy steps

Post by Dandy » Sun Apr 01, 2018 10:06 pm

Bernstein's idea was having 20 to 25 years of residual expenses i.e. the amount needed to supplement your retirement income in LMP and invest the rest anyway you want. It did not address early retirement as I recall, more normal retirement e.g. say 65 so 20 years would take you to 85 (near normal life expectancy) and 25 would get you to age 90.

40k x 20 = 800k that would be the minimum LMP assets. How much extra would you feel is enough? Another 800k so you could invest that in equities and be at 50/50 allocation? Not for me. I'd probably shoot for a minimum of 1.8 million. 800k LMP, 200k intermediate bonds funds, 800k in equities. That gives you a 44/56 allocation and a withdrawal rate of 2.2%

Not sure how Bernstein would address retiring at age 50 or 55. He might say stick with the above or say you need to keep working. :happy

Hope this helps

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Re: William Bernstein: Retirement Investing and Spending in two easy steps

Post by Leesbro63 » Mon Apr 02, 2018 4:55 am

Super early retirement (30s, 40s) and even “ordinary” early retirement are totally different things than standard retirement. There’s a lot more time for things to go wrong, for the world to change and even to recover from an early bad result. And there’s the ability to return to the workforce if necessary. And often there is greater risk of unplanned, expensive family drama (raising kids, divorce, elderly parents).

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Re: William Bernstein: Retirement Investing and Spending in two easy steps

Post by thx1138 » Mon Apr 02, 2018 5:57 am

dbr wrote:
Sun Apr 01, 2018 12:35 pm
As I say about the LMP, there are some things lacking in the thought process. Of course, I think the assumption is that the LMP is not the entirety of the assets. I think the more nuanced explanation is that the TIPS ladder or collection of CDs or whatever it is, only covers the absolutely known minimal spending after all other sources of income are included and before the addition of a "risk" portfolio on top of that.
Agree that it is usually presented as "part" of a portfolio and often avoids the longevity part by saying the LMP is only for some period like 10, 20 or 30 years.
The result does not seem to come down to much more than invest in a portfolio of stocks and bonds and take withdrawals at some sort of safe rate and have some income streams like pensions, annuities, and SS before that.
Yes as a practical matter that's where it starts to seem to have little difference between standard AA other than perhaps suggesting a metric for determining the fixed income portion of that (e.g. view as some number of years of "basic" expenses) and perhaps steering the type of fixed income (e.g. ultra-low-risk like TIPS while leaving risk to the rest of the portfolio).
I admit it could be I don't really appreciate exactly what the argument is and where the benefit actually accrues. A lot of what is spoken about Bernstein's idea may be the condensed version and missing some things. I still think the idea is effectively mental accounting that makes a false appeal to certainty and security that is not really there.
100% agree which was what I was driving at. The apparent certainty of TIPS is offset by the very real uncertainty of required expenses. I think you've summarized it really well in a way I hadn't thought of before - it is fundamentally a form of mental accounting. That can be both good and bad.

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Re: William Bernstein: Retirement Investing and Spending in two easy steps

Post by indexonlyplease » Mon Apr 02, 2018 6:01 am

I bought into the idea if you have enough and won the game stop playing. But I would state my stop playing is just a lower risk AA. So, I really keep playing but not risking at much. Why beacuse I have enough. So now perserving some of the capital is important to me. I still want the stock gains but don't need as much gains.

I am happy with my AA now. If the market would make a large correction than I would have to be ready and willing to rebalance. That will take some nerve but it will be keeping with the AA.


The TIPS part I have no idea.

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Re: William Bernstein: Retirement Investing and Spending in two easy steps

Post by grok87 » Mon Apr 02, 2018 6:50 am

This recent thread may be relevant
viewtopic.php?f=10&t=245377
wrote:Grok's LMP-4: The 3-legged stool approach to retirement planning

Long, long ago in an economy far, far away retirement planners once talked of something called the "3-legged stool."
https://www.investopedia.com/ask/answer ... rement.asp
The idea was for retirees to create a balanced approach to retirement income with 1/3 coming from social security, 1/3 coming from employer pensions, and 1/3 coming from savings/investments.
Keep calm and Boglehead on. KCBO.

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Re: William Bernstein: Retirement Investing and Spending in two easy steps

Post by grok87 » Mon Apr 02, 2018 6:53 am

Leesbro63 wrote:
Sat Mar 31, 2018 3:40 pm
dbr wrote:
Sat Mar 31, 2018 3:21 pm
Dottie57 wrote:
Sat Mar 31, 2018 3:19 pm
With SS I have enough if I experience no complications. I do have LTCi, but if more than 3 years, I could run out of money.

So I don't want just a TIPS ladder, but the 8-) :o
In general an inflation indexed annuity and insurance is the better approach. If there is such a thing as not playing the game it is to insure the risk rather than try to engineer a portfolio.
Two perbltms with THAT:

1. Inflation adjusted annuities are extremely expensive, requiring an accumulation period that is probably longer than for approaches with similar risk.

2. Inflation-adjusted annuities are ALSO subject to taxflation if we ever get that big inflation that you paid so very much to protect against.

Again, no where to really hide. LMP only works for the small subset of Bogleheads who are affluent, but not mega-rich, with their entire nest egg that’s tax sheltered.
i understand about the taxflation thing if we get to high levels of inflation.

but again i think that mostly applies to taxable accounts not tax-advantaged accounts like IRAs, 401ks etc.
wouldn't the same hold true for the annuity. i.e. if you buy with IRA funds it should not be a problem?
cheers,
grok
Keep calm and Boglehead on. KCBO.

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Re: William Bernstein: Retirement Investing and Spending in two easy steps

Post by Valuethinker » Mon Apr 02, 2018 7:14 am

permport wrote:
Sat Mar 31, 2018 11:34 am
Very nice post. Although I disagree with Dr. Bernstein in regard to simply buying a TIPS ladder once one has reached FIRE. So at that point we are supposed to have no stock exposure at all? I understand where he’s coming from, but I think that having even a modest exposure (say, 20%) to a simple total stock market fund would serve one well in regards to having a bit of growth and having more to pass on to heirs and such.
The argument for 20% stocks instead of 100% bonds (nominal) is an empirical one. Historically that has provided greater portfolio efficiency (risk return spectrum) than 100% bonds- -that kink in the Efficient Frontier.

There's no guarantee that is true in the future. Or if it is true, what the percentage will be.

We don't really have enough TIPS data (since 1998 only, and they were on very high real interest rates) to tell how inflation linked bonds fit into that spectrum.

That's separate from your concerns re growth and re leaving a bequest.

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Re: William Bernstein: Retirement Investing and Spending in two easy steps

Post by Leesbro63 » Mon Apr 02, 2018 7:19 am

indexonlyplease wrote:
Mon Apr 02, 2018 6:01 am
I bought into the idea if you have enough and won the game stop playing. But I would state my stop playing is just a lower risk AA. So, I really keep playing but not risking at much. Why beacuse I have enough. So now perserving some of the capital is important to me. I still want the stock gains but don't need as much gains.

+1. What I've been trying to say but said better!

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Re: William Bernstein: Retirement Investing and Spending in two easy steps

Post by Leesbro63 » Mon Apr 02, 2018 7:23 am

grok87 wrote:
Mon Apr 02, 2018 6:53 am
Leesbro63 wrote:
Sat Mar 31, 2018 3:40 pm
dbr wrote:
Sat Mar 31, 2018 3:21 pm
Dottie57 wrote:
Sat Mar 31, 2018 3:19 pm
With SS I have enough if I experience no complications. I do have LTCi, but if more than 3 years, I could run out of money.

So I don't want just a TIPS ladder, but the 8-) :o
In general an inflation indexed annuity and insurance is the better approach. If there is such a thing as not playing the game it is to insure the risk rather than try to engineer a portfolio.
Two perbltms with THAT:

1. Inflation adjusted annuities are extremely expensive, requiring an accumulation period that is probably longer than for approaches with similar risk.

2. Inflation-adjusted annuities are ALSO subject to taxflation if we ever get that big inflation that you paid so very much to protect against.

Again, no where to really hide. LMP only works for the small subset of Bogleheads who are affluent, but not mega-rich, with their entire nest egg that’s tax sheltered.
i understand about the taxflation thing if we get to high levels of inflation.

but again i think that mostly applies to taxable accounts not tax-advantaged accounts like IRAs, 401ks etc.
wouldn't the same hold true for the annuity. i.e. if you buy with IRA funds it should not be a problem?
cheers,
grok
I think you are correct, that within tax sheltered accounts there would be no taxflation problem. I do wonder though if tax brackets will keep up with inflation...meaning this. You start with $1M and withdraw $40,000. Over 5 years we've had major inflation and you now have $3M and are withdrawing $120,000. Will the taxes on the new $120,000 withdrawal be proportional to the old $40,000 withdrawal? Of course in a Roth this is not an issue.

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Re: William Bernstein: Retirement Investing and Spending in two easy steps

Post by dbr » Mon Apr 02, 2018 8:45 am

grok87 wrote:
Mon Apr 02, 2018 6:53 am


i understand about the taxflation thing if we get to high levels of inflation.

but again i think that mostly applies to taxable accounts not tax-advantaged accounts like IRAs, 401ks etc.
wouldn't the same hold true for the annuity. i.e. if you buy with IRA funds it should not be a problem?
cheers,
grok
Aren't IRA and 401k withdrawals taxed?

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