William Bernstein: Retirement Investing and Spending in two easy steps

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

Post by willthrill81 » Mon Apr 02, 2018 10:55 am

dbr wrote:
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.
:thumbsup

This saying of Bernstein's makes me think (and I suspect some others as well) that he's referring to playing in a casino, not investing in a broadly diversified portfolio of stocks and bonds. I have no problem with dialing back risk once one is FI, but the idea that it's prudent or even possible to eliminate risk is demonstrably false.

And regarding the TIPS issue, some of the many problems with that route is that (1) we don't know how long we'll live, so building a TIPS ladder for the rest of one's life requires rather extreme conservatism, likely requiring the investor to build up a significantly larger portfolio than would be required with more traditional asset classes and losing the time involved, (2) the real returns of TIPS are very low, and (3) tax-flation.
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Re: William Bernstein: Retirement Investing and Spending in two easy steps

Post by mickeyd » Mon Apr 02, 2018 11:03 am

All you really need to do is follow step one closely and the rest will fall into place with ease.
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Re: William Bernstein: Retirement Investing and Spending in two easy steps

Post by grok87 » Mon Apr 02, 2018 11:25 am

dbr wrote:
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?
agree but i was thinking along the lines of what leesbro had posted. tips in taxable accounts really get killed with high levels of inflation.
"...people always live for ever when there is any annuity to be paid them"- Jane Austen

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

Post by dbr » Mon Apr 02, 2018 1:05 pm

grok87 wrote:
Mon Apr 02, 2018 11:25 am
dbr wrote:
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?
agree but i was thinking along the lines of what leesbro had posted. tips in taxable accounts really get killed with high levels of inflation.
Shouldn't it be that anything that is taxed after its nominal value is inflated would get killed by high levels of inflation?

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

Post by Dandy » Mon Apr 02, 2018 1:34 pm

Dr. Bernstein is a serious investment person and well respected. He wrote a catchy title about stop playing the game if you have enough. Let's assume, given who we are talking about, that he feels investing isn't really a game. I believe he meant that you need to stop participating in the traditional investment practices with assets needed to fund your retirement-- not a particularly attention grabbing title if he chose it. And he didn't say stop investing - excess can be invested in 100% equities.

He suggested for those who have enough 20-25 years worth of drawdown in TIPS ladder or other conservative fixed income. The rest invest anyway you want. I don't recall him defining what enough might be or how much excess would be desirable.

We accept that people going to buy a house in a few years don't put money at much risk. Don't recall that idea being marginalized as mental accounting. Children education expenses are also allowed to be treated differently than an investor's other investment assets as are emergency funds.

I think he is saying if you can afford it -- secure your retirement funding by putting 20-25 years in products that are safer than what is normally suggested. Don't worry too much about growth tilt toward safety for these assets. Not everyone loves that idea that's ok-- but it does have some merit for retirees who usually have no human capital and are withdrawing assets instead of contributing. No plan is without some risk and if you don't like a plan you can always find a good reason why you shouldn't follow it. Maybe those who had a 50/50 allocation in Japan 25 years ago wished they had 25 years safe. :D

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

Post by mickeyd » Mon Apr 02, 2018 1:40 pm

Well done Dandy.
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Re: William Bernstein: Retirement Investing and Spending in two easy steps

Post by jalbert » Mon Apr 02, 2018 1:41 pm

If tax brackets are inflation-indexed using the same inflation measure as used for TIPs, then the real after-tax return of TIPs in a taxable account is unaffected by the tax effects of inflation. The issue is with holding individual TIPs in taxable space as you pay tax annually on nominal income you don't receive until maturity.

The assumption above was true until Jan 1 of the present year. Presently, if I understand the new tax law correctly (which is debatable) tax brackets are indexed to Chained CPI-U but TIPs are indexed to regular CPI-U.
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Re: William Bernstein: Retirement Investing and Spending in two easy steps

Post by dbr » Mon Apr 02, 2018 1:47 pm

If I have enough money to put 25 times my expenses in a TIPS ladder while having in addition perhaps another 15 times spending in stocks, then I have 40 times my spending in a close to 40/60 portfolio with a 2.5% withdrawal rate. It does not seem like there is a problem there that is being solved.

But that is not exactly what he said. It is 25 times my baseline or absolutely needed expenses plus a riskier portfolio from which I can draw for discretionary expenses but cut back if the riskier portfolio fails. That just sounds like having 25 times expenses in a 40/60 portfolio at a 4% withdrawal rate but understanding that things may have to be adjusted if risky investments fail. I sure don't see anything special about that to which we could apply alarmist statements like "stop playing the game."

There is another scenario. That would be someone who can support only the absolutely needed expenses and has 25 times those expenses. That is a 4% withdrawal rate. A 30 year ladder of TIPS can support that withdrawal rate only if the real interest rate is over 1%, which it just barely is now, but has not been for some time. In addition the plan absolutely runs out of money at the end of thirty years and allows zero slack for miss-estimating absolutely needed costs.

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

Post by Leesbro63 » Mon Apr 02, 2018 2:12 pm

jalbert wrote:
Mon Apr 02, 2018 1:41 pm
If tax brackets are inflation-indexed using the same inflation measure as used for TIPs, then the real after-tax return of TIPs in a taxable account is unaffected by the tax effects of inflation. The issue is with holding individual TIPs in taxable space as you pay tax annually on nominal income you don't receive until maturity.

The assumption above was true until Jan 1 of the present year. Presently, if I understand the new tax law correctly (which is debatable) tax brackets are indexed to Chained CPI-U but TIPs are indexed to regular CPI-U.
Well, chained is still ALMOST keeping up with "real" inflation, but in a hyper-inflation scenario it could lead to higher taxation of inflated tax sheltered account withdrawals (vs if there had been no inflation).

I still believe there's really no where to hide and something like 50-50 or 40-60 is about the best you can do.

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

Post by Dandy » Mon Apr 02, 2018 2:25 pm

I sure don't see anything special about that to which we could apply alarmist statements like "stop playing the game."
Not sure you understand Dr. Bernstein's idea fully. Stop playing the game seems to alarm you. It is an analogy suggesting those who have enough may have a different strategy. Proof that he isn't telling those who have enough stop investing is that he says any excess over the LMP can be invested 100% in equities.

I'm not sure from the rest of your post if you think he is suggesting 20-25 years worth of expenses be in an LMP. He is not. Only residual expenses i.e. the asset drawdown needed to supplement retirement income from things like pension, Social Security, annuities etc. If a retiree does the math and the LMP would take up too much of his retirement assets then he probably doesn't have enough and therefore should continue his current investment approach.

My unscientific guess is that you need close to a 2% withdrawal rate to make his plan work and have sufficient assets beyond the LMP.

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

Post by willthrill81 » Mon Apr 02, 2018 2:33 pm

Dandy wrote:
Mon Apr 02, 2018 2:25 pm
My unscientific guess is that you need close to a 2% withdrawal rate to make his plan work and have sufficient assets beyond the LMP.
If we're talking about a 2% WR, any halfway reasonable AA will work.

That requires double the portfolio size that the '4% rule' suggests. For most investors, that's around another decade of saving and working. If you like what you do for money and are otherwise able to do so, fine. But I doubt that most would be willing to make the trade-off of a guaranteed decade of saving/working for the additional safety of 'not playing the game'.
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Re: William Bernstein: Retirement Investing and Spending in two easy steps

Post by gilgamesh » Tue Apr 03, 2018 1:45 pm

Dandy has explained a lot of the missing parts to this staregy - most importantly the “side portfolio” exposed heavily to the stock market, and on how this strategy, which guarantees future income, makes it easier to spend through a down market.

It is indeed for a typical retirement age of say 60. TIPS does not constitute the entire floor from age 60 to death. This is how it goes. TIPS constitute 100% of the floor from age 60 to 70. Then social security combined with TIPS from say ages 70 to 80. Then TIPS entirely vanishes as an SPIA ladder with the higher “mortality credit” will be more prudent. By this time, the amount needed to purchase SPIA ladder should be below state guarantee (nullifying institution risk).

So, it’s not TIPS only for life...it’s TIPS with a side portfolio exposed to the market (for contingency, as one cannot exactly predict future expenses), but with SS, SPIA ladder as integral part of the puzzle.

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

Post by Bill Bernstein » Tue Apr 03, 2018 3:50 pm

The “stop playing” meme came from an article I wrote for the WSJ a few years back. They only gave me 800 words, and that doesn’t leave a lot of room for nuance or detail.

If they’d have given me 5,000 words, here’s what I’d have added:

1) All-TIPS is for the part of your portfolio that you need to keep body and soul together for, and the median WSJ reader probably isn’t even going to get there. The median Boglehead, OTOH, will.
2) There are things that might lead you away from all TIPS: rotten yields (hence the “hold your nose” from several years ago), and a predominance of taxable holdings.
3) I would have given some more options for “stop playing,” the broadest interpretation of which would be, “If you’ve just got it made, then for God sakes take some risk off the table.”
4) There are two kinds of folks who can invest 100% in stocks, at least theoretically; those with a zero burn rate (ie, their SS and pension suffices for their living expenses), or with a very low burn rate (say less than 2% pa.)
5) Finally, there’s the Prime Directive of Annuities/SS: don’t even think about an annuity until you’ve spent down your savings to delay SS until 70, the only caveat being if either a) you don’t have a spouse and you’re unhealthy, or b) you do have a spouse, and the both of you are unhealthy.

Yes, by being overly conservative you'll probably leave less for your heirs. But that doesn't compare to the potential consequences of being too aggressive.

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

Post by grok87 » Tue Apr 03, 2018 4:15 pm

Bill Bernstein wrote:
Tue Apr 03, 2018 3:50 pm
The “stop playing” meme came from an article I wrote for the WSJ a few years back. They only gave me 800 words, and that doesn’t leave a lot of room for nuance or detail.

If they’d have given me 5,000 words, here’s what I’d have added:

1) All-TIPS is for the part of your portfolio that you need to keep body and soul together for, and the median WSJ reader probably isn’t even going to get there. The median Boglehead, OTOH, will.
2) There are things that might lead you away from all TIPS: rotten yields (hence the “hold your nose” from several years ago), and a predominance of taxable holdings.
3) I would have given some more options for “stop playing,” the broadest interpretation of which would be, “If you’ve just got it made, then for God sakes take some risk off the table.”
4) There are two kinds of folks who can invest 100% in stocks, at least theoretically; those with a zero burn rate (ie, their SS and pension suffices for their living expenses), or with a very low burn rate (say less than 2% pa.)
5) Finally, there’s the Prime Directive of Annuities/SS: don’t even think about an annuity until you’ve spent down your savings to delay SS until 70, the only caveat being if either a) you don’t have a spouse and you’re unhealthy, or b) you do have a spouse, and the both of you are unhealthy.

Yes, by being overly conservative you'll probably leave less for your heirs. But that doesn't compare to the potential consequences of being too aggressive.
Thanks Bill, very helpful.

Just curious, on point 2), what level of tips yields you would consider as “rotten”. I’m inferring that when 30 year tips yields got down to like 0.3% that would qualify. I’m also inferring that the current level at around 1% is not necessarily rotten. Do I have that right?


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

Post by Artsdoctor » Tue Apr 03, 2018 4:22 pm

Bill Bernstein wrote:
Tue Apr 03, 2018 3:50 pm
The “stop playing” meme came from an article I wrote for the WSJ a few years back. They only gave me 800 words, and that doesn’t leave a lot of room for nuance or detail.

If they’d have given me 5,000 words, here’s what I’d have added:

1) All-TIPS is for the part of your portfolio that you need to keep body and soul together for, and the median WSJ reader probably isn’t even going to get there. The median Boglehead, OTOH, will.
2) There are things that might lead you away from all TIPS: rotten yields (hence the “hold your nose” from several years ago), and a predominance of taxable holdings.
3) I would have given some more options for “stop playing,” the broadest interpretation of which would be, “If you’ve just got it made, then for God sakes take some risk off the table.”
4) There are two kinds of folks who can invest 100% in stocks, at least theoretically; those with a zero burn rate (ie, their SS and pension suffices for their living expenses), or with a very low burn rate (say less than 2% pa.)
5) Finally, there’s the Prime Directive of Annuities/SS: don’t even think about an annuity until you’ve spent down your savings to delay SS until 70, the only caveat being if either a) you don’t have a spouse and you’re unhealthy, or b) you do have a spouse, and the both of you are unhealthy.

Yes, by being overly conservative you'll probably leave less for your heirs. But that doesn't compare to the potential consequences of being too aggressive.
Always a pleasure reading your posts. Thank you for the above.

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

Post by goodenyou » Tue Apr 03, 2018 4:25 pm

Bill Bernstein wrote:
Tue Apr 03, 2018 3:50 pm
The “stop playing” meme came from an article I wrote for the WSJ a few years back. They only gave me 800 words, and that doesn’t leave a lot of room for nuance or detail.

If they’d have given me 5,000 words, here’s what I’d have added:

1) All-TIPS is for the part of your portfolio that you need to keep body and soul together for, and the median WSJ reader probably isn’t even going to get there. The median Boglehead, OTOH, will.
2) There are things that might lead you away from all TIPS: rotten yields (hence the “hold your nose” from several years ago), and a predominance of taxable holdings.
3) I would have given some more options for “stop playing,” the broadest interpretation of which would be, “If you’ve just got it made, then for God sakes take some risk off the table.”
4) There are two kinds of folks who can invest 100% in stocks, at least theoretically; those with a zero burn rate (ie, their SS and pension suffices for their living expenses), or with a very low burn rate (say less than 2% pa.)
5) Finally, there’s the Prime Directive of Annuities/SS: don’t even think about an annuity until you’ve spent down your savings to delay SS until 70, the only caveat being if either a) you don’t have a spouse and you’re unhealthy, or b) you do have a spouse, and the both of you are unhealthy.

Yes, by being overly conservative you'll probably leave less for your heirs. But that doesn't compare to the potential consequences of being too aggressive.
After reading all the posts of guessing what you meant by your statement of "stop playing the game", that really puts it into context now. Thanks.
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Re: William Bernstein: Retirement Investing and Spending in two easy steps

Post by Dandy » Tue Apr 03, 2018 4:27 pm

That requires double the portfolio size that the '4% rule' suggests. For most investors, that's around another decade of saving and working. If you like what you do for money and are otherwise able to do so, fine. But I doubt that most would be willing to make the trade-off of a guaranteed decade of saving/working for the additional safety of 'not playing the game'.
All you have said is probably true but let me try to explain a bit -- and I am no expert on this I just happen to be lucky to have enough and like his approach.

1. Requires double the size of the 4% rule --
a.I believe the 4% rule is geared to a 30 year period then in theory it goes to zero. 30 years should be enough for most but it does depend on a decent equity allocation which poses different risks.
b. Keep in mind this is not an investment strategy for the masses it is for those who have enough - which, unfortunately, is a much smaller group.
2. For most investors that's around another decade of work...
This is not for most investors or investors who hope to have enough. Again, this is geared to retirees who have already ample assets and are trying to decide on a retirement investment strategy. The idea for them is not to put the assets they need at risk (or very limited risk). Bernstein suggests put the excess assets at risk if you choose and use those gains to splurge.

Note: my idea is use the excess or "risk" gains to make sure the LMP assets are adequate and also splurge. All allocation and withdrawal strategies have risks. This set aside of 20-25 years "safe" (aka low return) assets is subject to expense and inflation creep. I also think a person who uses this strategy needs a decent size excess with at least a moderate allocation to equities.

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

Post by junior » Tue Apr 03, 2018 6:03 pm

Bill Bernstein wrote:
Tue Apr 03, 2018 3:50 pm
or with a very low burn rate (say less than 2% pa.).
What does "pa." stand for?

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

Post by grok87 » Tue Apr 03, 2018 6:06 pm

junior wrote:
Tue Apr 03, 2018 6:03 pm
Bill Bernstein wrote:
Tue Apr 03, 2018 3:50 pm
or with a very low burn rate (say less than 2% pa.).
What does "pa." stand for?
per annum or per year
"...people always live for ever when there is any annuity to be paid them"- Jane Austen

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

Post by Bill Bernstein » Tue Apr 03, 2018 6:25 pm

Right, when I wrote the original piece TIPS yields at 5 years were negative, and only about .35% at 30 years; rotten indeed.

Much less rotten now, and I feel better about buying TIPS, particularly at the short end; there's the annual primary 5-year auction in a few weeks.

Today, the median retiree has on the order of 100k of retirement savings, so for that person, the above thread might as well be written in Klingon.

Bill

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

Post by grok87 » Tue Apr 03, 2018 6:31 pm

Bill Bernstein wrote:
Tue Apr 03, 2018 6:25 pm
Right, when I wrote the original piece TIPS yields at 5 years were negative, and only about .35% at 30 years; rotten indeed.

Much less rotten now, and I feel better about buying TIPS, particularly at the short end; there's the annual primary 5-year auction in a few weeks.

Today, the median retiree has on the order of 100k of retirement savings, so for that person, the above thread might as well be written in Klingon.

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

Post by willthrill81 » Tue Apr 03, 2018 10:40 pm

Dandy wrote:
Tue Apr 03, 2018 4:27 pm
That requires double the portfolio size that the '4% rule' suggests. For most investors, that's around another decade of saving and working. If you like what you do for money and are otherwise able to do so, fine. But I doubt that most would be willing to make the trade-off of a guaranteed decade of saving/working for the additional safety of 'not playing the game'.
All you have said is probably true but let me try to explain a bit -- and I am no expert on this I just happen to be lucky to have enough and like his approach.

1. Requires double the size of the 4% rule --
a.I believe the 4% rule is geared to a 30 year period then in theory it goes to zero. 30 years should be enough for most but it does depend on a decent equity allocation which poses different risks.
b. Keep in mind this is not an investment strategy for the masses it is for those who have enough - which, unfortunately, is a much smaller group.
2. For most investors that's around another decade of work...
This is not for most investors or investors who hope to have enough. Again, this is geared to retirees who have already ample assets and are trying to decide on a retirement investment strategy. The idea for them is not to put the assets they need at risk (or very limited risk). Bernstein suggests put the excess assets at risk if you choose and use those gains to splurge.

Note: my idea is use the excess or "risk" gains to make sure the LMP assets are adequate and also splurge. All allocation and withdrawal strategies have risks. This set aside of 20-25 years "safe" (aka low return) assets is subject to expense and inflation creep. I also think a person who uses this strategy needs a decent size excess with at least a moderate allocation to equities.
1. In the lion's share of historic cases, implementation of the '4% rule' would not leave a retiree penniless at the 30 year mark. Further, I've not met anyone who has ever strictly implemented the '4% rule'; when the market nosedives, everyone I've ever spoken with or heard rumor of reduces their withdrawals, almost irrespective of their prior withdrawal rate.

2. One could argue that those who have 25-30X their annual expenses already have 'enough' and don't need to keep padding their portfolio to avoid 'playing the game'. As Homer has said here, those with 25X expenses are already carrying an umbrella in the event that it rains on their retirement; why do they need another umbrella?

3. You state that you think that those implementing this approach still need "at least a moderate allocation to equities." If that's the case, aren't they still 'playing the game', albeit with discretionary money and not with non-discretionary money? If that's the case, then how is this any different from the retiree whose necessary expenses represent a 2% of their portfolio annually, and their discretionary expenses represent another 2%, for instance (which is what we're roughly planning on), or from an income-flooring-plus approach, like that recommended by Wade Pfau?

I'm not saying that this strategy isn't appropriate for anyone, but I don't think it's appropriate even for the majority of the BHs, who are, by and large, a well prepared group. Yes, there are some here with 50X their expenses or even more, and I think such a strategy is fine for them, though with a 2% withdrawal rate, virtually any retirement strategy will work. For most folks, I think that the sacrifice of certainly giving up a significant chunk of time in order to build their portfolio to the point that they can avoid the risk of the market seems like a very bad bet. For most of us, a decade of our lives is a very precious thing. I'd try to hunt down a SPIA with a COLA long before creating a 30 year TIPS ladder. YMMV.

Those who can afford to implement this strategy may have enough resources to not really need and, consequently, not benefit much from it.
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Re: William Bernstein: Retirement Investing and Spending in two easy steps

Post by stirus » Tue Apr 03, 2018 11:26 pm

When you refer to "...retiree whose necessary expenses represent a 2% of their portfolio annually,... " does this mean their necessary expenses after applying social security payments should be 2%, or without considering soc sec?

Thanks,
A new retiree trying to figure this out...

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

Post by Dandy » Tue Apr 03, 2018 11:47 pm

1. In the lion's share of historic cases, implementation of the '4% rule' would not leave a retiree penniless at the 30 year mark. Further, I've not met anyone who has ever strictly implemented the '4% rule'; when the market nosedives, everyone I've ever spoken with or heard rumor of reduces their withdrawals.
I agree that people will do whatever it takes not to run out of money. But the strategy was designed for 30 years. Bernstein's idea was to protect 20-25 years of assets. Those who follow that strategy are also do whatever they have to not to run out of money.
2. One could argue that those who has 25-30X their annual expenses already have 'enough' and don't need to keep padding their portfolio to avoid 'playing the game'.
First it isn't 25-30 times their annual expenses -- it is their annual need to draw down money to support their lifestyle. And while retirees who have enough can usually do fine with a "normal" equity/fixed income allocation -- some may wish to employ a different strategy. Bernstein uses the term playing the game which gets some serious investors upset. What he was trying to recommend is that for those who have enough - keep that 20-25 years worth of drawdown in low risk assets. He also encourages those who have assets in excess of that - to invest 100% in equities if they choose.
3. You state that you think that those implementing this approach still need "at least a moderate allocation to equities." If that's the case, aren't they still 'playing the game', albeit with discretionary money and not with non-discretionary money? If that's the case, then how is this any different from the retiree whose necessary expenses represent a 2% of their portfolio annually, and their discretionary expenses represent another 2%, for instance (which is what we're roughly planning on)?
You seem to be hung up on the "playing the game" quote. Bernstein never said that people shouldn't invest in equities. In fact after keeping money they "can't afford to lose" in "safe" products he said they could invest the rest in 100% equities. So
they are not "playing the traditional investment game" with money they can't afford to lose. So, you can end up with a "safe' portfolio with enough assets to equal 20-25 years of annual drawdown dollars needed to supplement their income floor e.g. pension, social security etc. And a "risk" portfolio invested anyway you want and can be used anyway you want.

I'm not saying that this strategy isn't appropriate for anyone, but I don't think it's appropriate even for the majority of the BHs, who are, by and large, a well prepared group. Yes, there are some here with 50X their expenses or even more, and I think such a strategy is fine for them, though with a 2% withdrawal rate, virtually any retirement strategy will work. For most folks, I think that the sacrifice of certainly giving up a significant chunk of time in order to avoid the risk of the market seems is a very bad bet. I'd try to hunt down a SPIA with a COLA long before creating a 30 year TIPS ladder. YMMV.
Agree there this strategy is best suited for a limited group -- those who have enough are who are more focused on asset preservation vs a more traditional investment strategy and objective. Again, this is not geared to a multiple of the investor's expenses only those expenses that wouldn't be covered by say pensions or social security. That is a much lower asset level than 50X their total expenses. A TIPS ladder was not the only investments suggested, short term bonds and other lower risk fixed income and even an immediate annuity at a proper age was also included - really any low risk product. I don't think this strategy requires "giving up a significant chunk of time..." what it does do is trade potential growth for improved safety. I implemented this strategy by moving some intermediate fixed income into short term bond funds and FDIC products like a CD ladder. Not hard, time consuming or difficult to implement or track.


Those who can afford to implement this strategy may have enough resources to not really need and, consequently, not benefit much from it.
Agree that people who have enough may not need to implement this strategy. People have different levels of risk tolerance, are investing for heirs, have a very high income floor so they can easily cut expenses, etc. For me it gave a rational way to implement a retirement investment and withdrawal strategy. Keep the assets you can't afford to lose in low risk products and invest the excess somewhat aggressively. When the "risk" portfolio does well withdraw some or all from it when it does poorly withdraw from the "safe" portfolio. Have a simple yet "safe" investment approach for a non investment savvy spouse/heirs.

b4real
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Re: William Bernstein: Retirement Investing and Spending in two easy steps

Post by b4real » Wed Apr 04, 2018 8:44 am

Dandy wrote:
Tue Apr 03, 2018 11:47 pm

Agree there this strategy is best suited for a limited group -- those who have enough are who are more focused on asset preservation vs a more traditional investment strategy and objective. Again, this is not geared to a multiple of the investor's expenses only those expenses that wouldn't be covered by say pensions or social security. That is a much lower asset level than 50X their total expenses. A TIPS ladder was not the only investments suggested, short term bonds and other lower risk fixed income and even an immediate annuity at a proper age was also included - really any low risk product. I don't think this strategy requires "giving up a significant chunk of time..." what it does do is trade potential growth for improved safety. I implemented this strategy by moving some intermediate fixed income into short term bond funds and FDIC products like a CD ladder. Not hard, time consuming or difficult to implement or track.


Those who can afford to implement this strategy may have enough resources to not really need and, consequently, not benefit much from it.
Agree that people who have enough may not need to implement this strategy. People have different levels of risk tolerance, are investing for heirs, have a very high income floor so they can easily cut expenses, etc. For me it gave a rational way to implement a retirement investment and withdrawal strategy. Keep the assets you can't afford to lose in low risk products and invest the excess somewhat aggressively. When the "risk" portfolio does well withdraw some or all from it when it does poorly withdraw from the "safe" portfolio. Have a simple yet "safe" investment approach for a non investment savvy spouse/heirs.
This is why, IMO, one should understand their funded ratio (viewtopic.php?t=219878) and where they stand in Otar's zones (viewtopic.php?t=144663#p2152834) when approaching and planning for retirement.

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

Post by Dandy » Wed Apr 04, 2018 9:29 am

This is why, IMO, one should understand their funded ratio (viewtopic.php?t=219878) and where they stand in Otar's zones (viewtopic.php?t=144663#p2152834) when approaching and planning for retirement.
Interesting way to determine whether your finances are on track to support your retirement income needs. I didn't see an assumption for how assets were invested --just the current balance. Obviously, if you have a very aggressive allocation and run into a bad sequence of returns what was a good funded ratio might not be so good. Also, I'm no math wiz but I might be able to periodically redo this calculation to see if I'm ok but my spouse/heirs -- doubtful. It seems to address adequacy in a snap shot but not so much the longer term funding security/safety.

A weakness in the Bernstein idea is, except if you use a TIPS ladder, accounting for inflation impact over 2 decades plus. My solution is to periodically determine if the original LMP of $800k ($40k X 20) is still adequate. By tracking actual expenses or actual withdrawal needs you can tell if the remaining LMP is adequate. i.e. Gee I've been spending/withdrawing $44k the last 2 years I may need to cut spending or allocate more $$ to the LMP portfolio.

The "risk" portfolio can be used to adjust the adequacy of the LMP portfolio. Meanwhile a bad sequence of equity returns may have little or no affect of the basic retirement funding adequacy. I can further ensure its adequacy by using some of the "risk" portfolio for withdrawals when it does well. That is why I think a decent size and fairly aggressive "risk" portfolio is preferable when using this approach.

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

Post by SGM » Thu Apr 05, 2018 10:01 am

I am leaning toward a ladder of annuities (SPIAs) as opposed to a TIPs ladder for some extra liability matching. I have been delaying SS until 70 which gives me an extra 32% above my primary insurance amount (PIA). We also have farm rental income which helps in our diversification. A small pension and a combined variable and fixed annuity through TIAA-CREF also supply regular deposits to the checking account.

I have been more aggressive in AA throughout my life than most BH authors recommend. Although I now own bond funds I continue to be more aggressive because of other sources of income outside the portfolio. While working I was aggressive because of good income and very good job security. Initially I bought disability insurance, but was able to discontinue it when assets were large enough. I started my own business and set up a 401k and profit sharing plan for the two of us as well as deductible and non-deductible IRAs over the years for both of us. No RMDs as all of the tax deferred plans were later converted to Roth accounts with taxes paid out of a taxable account.

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

Post by gmaynardkrebs » Fri Apr 06, 2018 8:45 am

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.
You are basically saying that, rather than TIPS, which are a 100% safe asset, the safer way to "insure" against unforeseen expenses is to make more money. An admirable goal, but hardly a solution! It reminds me of Steve Martin's comedy shtick, "Two Easy Steps on How to Make $1,000,00 and Not Pay Any Taxes": Step One: Get yourself $1,000,000. Yours step one is essentially the same. As to your unforeseen risks -- most all of these are health related. There are specific and widely available insurance products to cover these, a far better approach than adding risk to your portfolio. As for longevity risk, use your TIPS ladder to buy an inflation indexed annuity, and wait as long as possible to take Social Security. And don't forget to pay the fire insurance on your house. For everything else, equities are wonderful -- but always and everywhere risky.

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