Is inflation the greatest risk to retirement portfolios?

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CULater
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Is inflation the greatest risk to retirement portfolios?

Post by CULater » Thu May 24, 2018 10:07 pm

Is the greatest risk to the survival of one's retirement portfolio the risk of inflation? Are there any comparable risks? If inflation is the greatest risk we face as retirees, would that not imply that the choice of investment assets should prioritize inflation risk? That would mean that we should be heavily tilted toward such things as TIPs, I-Bonds, and the like, yes? My understanding is that stocks may protect against inflation to some degree over the long term, but aren't particularly useful in the shorter run (such as 10 years or less). Witness what happened to stocks during the inflationary 1970s. Also, it has been pointed out that gold has not been a particularly good inflation hedge either except maybe over the very long run, in which we are all dead anyway. Why not put it all into TIPs, as some -- such as William Bernstein -- recommend?
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

ResearchMed
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Re: Is inflation the greatest risk to retirement portfolios?

Post by ResearchMed » Thu May 24, 2018 10:14 pm

CULater wrote:
Thu May 24, 2018 10:07 pm
Is the greatest risk to the survival of one's retirement portfolio the risk of inflation? Are there any comparable risks? If inflation is the greatest risk we face as retirees, would that not imply that the choice of investment assets should prioritize inflation risk? That would mean that we should be heavily tilted toward such things as TIPs, I-Bonds, and the like, yes? My understanding is that stocks may protect against inflation to some degree over the long term, but aren't particularly useful in the shorter run (such as 10 years or less). Witness what happened to stocks during the inflationary 1970s. Also, it has been pointed out that gold has not been a particularly good inflation hedge either except maybe over the very long run, in which we are all dead anyway. Why not put it all into TIPs, as some -- such as William Bernstein -- recommend?
There is also the risk of catastrophic medical/care expenses.
The return of bonds, even with inflation adjustment, may not be enough to cover that, depending - obviously - on the amount of money one has as one heads into retirement.

I'm not sure that TIPS/etc., actually would keep up with the actual inflation one would experience in real life, thinking of all categories (housing, food, *medical care*, etc.)

And then there is the risk of extreme longevity.
(MIL is almost 98, sharp as a tack, still looking for better bridge partners, heading out of her Assisted Living Facility to museums, etc., calling DH to remind him of some special TV show she and he had discussed, etc. Yes, I sure hope he has lots of the 'right genes" from her, but we also need enough $$ in case he does!)

"Some of each" investment category seems to make sense for most.

RM
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willthrill81
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Re: Is inflation the greatest risk to retirement portfolios?

Post by willthrill81 » Thu May 24, 2018 10:16 pm

The problem with tilting fixed income heavily toward TIPS is that, by FI standards, they are very volatile. Considering that the most common reason FI is held is for safety (i.e. not being forced to sell at a loss) and reducing portfolio volatility, TIPS may not be appropriate for all of one's FI. I can see an argument being made for placing up to 50% of one's FI in TIPS, with the rest being some mixture of STT, ITT, TBM, etc.

Long-term, I don't think you should expect bonds to have a positive real return. Historically, they've had a 1-2% real return but with some significant drawdowns in real terms as well that are usually overlooked by individual investors.
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Re: Is inflation the greatest risk to retirement portfolios?

Post by AlohaJoe » Thu May 24, 2018 10:27 pm

CULater wrote:
Thu May 24, 2018 10:07 pm
Is the greatest risk to the survival of one's retirement portfolio the risk of inflation? Are there any comparable risks? If inflation is the greatest risk we face as retirees, would that not imply that the choice of investment assets should prioritize inflation risk?
No, the greatest risks are personal, idiosyncratic risks. This is very clear from the copious amounts of data on the finances of real retirees. It is things like divorce, illness & death of spouse, and chronic illness in children and grandchildren.

I remember an interview with one person from a research paper on the subject. Her daughter was diagnosed -- in her 40s -- with a chronic, debilitating condition that eventually left her unable to work. The parents' retirement funds were gradually depleted by: paying for external care, moving to a new home so the daughter could move in, modifications to the new home to accomodate daughter, additional medical expenses for daughter, and so on.

All of the biggest risks are in the category of "gee, I wish we had had more money". If you instead prioritize inflation, you are fighting the wrong battle.

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Re: Is inflation the greatest risk to retirement portfolios?

Post by delamer » Thu May 24, 2018 10:59 pm

AlohaJoe wrote:
Thu May 24, 2018 10:27 pm
CULater wrote:
Thu May 24, 2018 10:07 pm
Is the greatest risk to the survival of one's retirement portfolio the risk of inflation? Are there any comparable risks? If inflation is the greatest risk we face as retirees, would that not imply that the choice of investment assets should prioritize inflation risk?
No, the greatest risks are personal, idiosyncratic risks. This is very clear from the copious amounts of data on the finances of real retirees. It is things like divorce, illness & death of spouse, and chronic illness in children and grandchildren.

I remember an interview with one person from a research paper on the subject. Her daughter was diagnosed -- in her 40s -- with a chronic, debilitating condition that eventually left her unable to work. The parents' retirement funds were gradually depleted by: paying for external care, moving to a new home so the daughter could move in, modifications to the new home to accomodate daughter, additional medical expenses for daughter, and so on.

All of the biggest risks are in the category of "gee, I wish we had had more money". If you instead prioritize inflation, you are fighting the wrong battle.

Agreed.

Plus most retirees get a large portion of their income from Social Security, and those benefits are adjusted for inflation each year. (I don’t want to get into the whole “does the CPI accurately measure inflation?” argument.).

I realize that SS isn’t part of portfolios, but the real issue is total retirement income, right?

Other than personal risk, a sustained bear market — particularly one coinciding with war or political turmoil — concerns me more than inflation.

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Re: Is inflation the greatest risk to retirement portfolios?

Post by randomguy » Thu May 24, 2018 11:51 pm

CULater wrote:
Thu May 24, 2018 10:07 pm
Is the greatest risk to the survival of one's retirement portfolio the risk of inflation? Are there any comparable risks? If inflation is the greatest risk we face as retirees, would that not imply that the choice of investment assets should prioritize inflation risk? That would mean that we should be heavily tilted toward such things as TIPs, I-Bonds, and the like, yes? My understanding is that stocks may protect against inflation to some degree over the long term, but aren't particularly useful in the shorter run (such as 10 years or less). Witness what happened to stocks during the inflationary 1970s. Also, it has been pointed out that gold has not been a particularly good inflation hedge either except maybe over the very long run, in which we are all dead anyway. Why not put it all into TIPs, as some -- such as William Bernstein -- recommend?
There have been 2 really bad retirement periods. 1966 and 1929. One had high inflation. One had high deflation. Holding Tips/ibonds would have helped in 1966. Not so much in 1929. You would you would have done slightly better with nominals.

The whole liability stuff makes sense if you are really risk adverse. But the opportunity cost is really high.

balbrec2
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Re: Is inflation the greatest risk to retirement portfolios?

Post by balbrec2 » Fri May 25, 2018 3:54 am

Another great risk is a nervous retiree!

msk
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Re: Is inflation the greatest risk to retirement portfolios?

Post by msk » Fri May 25, 2018 4:23 am

Tips would protect what you have already earned. But it's HARD to earn through labor! All other investments are targeted at generating earnings over and beyond what you can earn in a daily-grind job. My personal target in my youth had been that my job income during my 40s should be smaller than my "other" income (from stocks and RE) and that by my 50s my job income should be almost irrelevant. Luckily for me, it all worked out and I retired 18 years ago at age 55. I did have a great career, but all you youngsters: do not under-estimate the power of compounding. Invest early! To generate income. Saving and parking your hard earned job income in "safe" stuff like bonds will not get you far.

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Re: Is inflation the greatest risk to retirement portfolios?

Post by dbr » Fri May 25, 2018 7:23 am

I agree with those pointing out that adverse life events are the biggest risk. After that longevity is a risk. In general bonds are the worst asset for anything but very low withdrawal rates. I think one can argue that the bonds one does have might be TIPS, but it would be a tough case to suggest no stocks and all TIPS. I guess if one were all bonds, then all TIPS would be the right answer. It is also most helpful from the get go to have a diversity across SS, pensions and other annuities, and a diversified portfolio. I like owning the home I live in as well, but that doesn't have to be for everyone.

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Re: Is inflation the greatest risk to retirement portfolios?

Post by Snowjob » Fri May 25, 2018 7:34 am

Health issues I think are the biggest risk BY FAR, followed by perhaps expensive divorce or other black swan law suit.

The portfolio we have a range of expected outcomes and we plan for. Even in the disaster scenario most of us will be OK unless social security collapses. But medical issues, loss of psychical and mental faculties, requiring full time care? that's prohibitively expensive for almost everyone to plan for and you hope you have family that can help you. that is the big wild card.

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Re: Is inflation the greatest risk to retirement portfolios?

Post by dbr » Fri May 25, 2018 7:49 am

Among my circle of friends and acquaintances are a significant representation of people living less optimum retirements than they expected or hoped for due to mental disability, divorce, death of spouse, and if not counted as mental disability, drug or gambling addiction. There is no one I know of suffering from bad investment decisions, adverse market outcomes, etc.

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Re: Is inflation the greatest risk to retirement portfolios?

Post by Top99% » Fri May 25, 2018 8:02 am

Snowjob wrote:
Fri May 25, 2018 7:34 am
Health issues I think are the biggest risk BY FAR, followed by perhaps expensive divorce or other black swan law suit.

The portfolio we have a range of expected outcomes and we plan for. Even in the disaster scenario most of us will be OK unless social security collapses. But medical issues, loss of psychical and mental faculties, requiring full time care? that's prohibitively expensive for almost everyone to plan for and you hope you have family that can help you. that is the big wild card.
I completely agree that health issues and health care costs are a huge risk. And the inflation in health care cost certainly hasn't been tracking inflation as measured by the CPI over recent decades which means TIPS won't really help much. Rather than just throw in the towel until I have a 50x expenses nest egg:
1) Low fixed expenses relative to nest egg size
2) Portfolio that will hopefully provide positive real returns while minimizing sequence of returns risk.
3) View that at some point health care costs have to moderate. If they continue to grow at the current rate it won't be long before 99% of people are priced out. That obviously won't be allowed to happen and robotics, AI and other technologies could help bring costs down. So, as long as I keep our portfolio income in the top 25% of retirees or higher we should be able to afford health care. Maybe my logic is flawed here but the alternative is working until I have >50x expenses which carries its own risks.
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Re: Is inflation the greatest risk to retirement portfolios?

Post by Snowjob » Fri May 25, 2018 8:56 am

Top99% wrote:
Fri May 25, 2018 8:02 am
Snowjob wrote:
Fri May 25, 2018 7:34 am
Health issues I think are the biggest risk BY FAR, followed by perhaps expensive divorce or other black swan law suit.

The portfolio we have a range of expected outcomes and we plan for. Even in the disaster scenario most of us will be OK unless social security collapses. But medical issues, loss of psychical and mental faculties, requiring full time care? that's prohibitively expensive for almost everyone to plan for and you hope you have family that can help you. that is the big wild card.
I completely agree that health issues and health care costs are a huge risk. And the inflation in health care cost certainly hasn't been tracking inflation as measured by the CPI over recent decades which means TIPS won't really help much. Rather than just throw in the towel until I have a 50x expenses nest egg:
1) Low fixed expenses relative to nest egg size
2) Portfolio that will hopefully provide positive real returns while minimizing sequence of returns risk.
3) View that at some point health care costs have to moderate. If they continue to grow at the current rate it won't be long before 99% of people are priced out. That obviously won't be allowed to happen and robotics, AI and other technologies could help bring costs down. So, as long as I keep our portfolio income in the top 25% of retirees or higher we should be able to afford health care. Maybe my logic is flawed here but the alternative is working until I have >50x expenses which carries its own risks.
Completely agree, one such forum member maybe 5-10 years ago posted about how she retired early w/o health insurance (pre obama mandate) and that was her risk but it was worth it for her. that was her price of freedom. While I woudn't necessarily avoid some sort of heath coverage between now and medicare, I think there are certain risks we will have to just face like the majority of Americans. Keeping that portfolio as you say, in the top 25% should allow us the flexibility to decide which coverage to get, the solution is not ours to self fund -- at least not at my income level, I just wouldn't have the means for 100% safety.

Snowjob
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Re: Is inflation the greatest risk to retirement portfolios?

Post by Snowjob » Fri May 25, 2018 8:58 am

dbr wrote:
Fri May 25, 2018 7:49 am
Among my circle of friends and acquaintances are a significant representation of people living less optimum retirements than they expected or hoped for due to mental disability, divorce, death of spouse, and if not counted as mental disability, drug or gambling addiction. There is no one I know of suffering from bad investment decisions, adverse market outcomes, etc.
Agreed, those are the real risks and concerns once you have your investing and career sorted out and more or less on autopilot its far more valuable to invest in your self and your network, your family and friends than in trying to hedge a few extra points vs a black swan in the financial markets.

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Re: Is inflation the greatest risk to retirement portfolios?

Post by tomd37 » Fri May 25, 2018 9:12 am

I would dare to say one of the biggest risks is the "investors themselves". Many too many investors make investment mistakes (e.g. changes at the wrong time) that have a huge effect on their portfolio down the road.
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CULater
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Re: Is inflation the greatest risk to retirement portfolios?

Post by CULater » Fri May 25, 2018 11:14 am

I know that "adverse life events" are the greatest risk to well-being, but I can't do much more to mitigate unpredictable life events except hope that they don't happen or try to own insurance products that are available for some of those events if they do occur, such as healthcare, LTCi.

My question focused on my retirement nestegg and what the greatest risks are to my spending power and what I can do to mitigate those risks as much as possible. Seems to me that one of the major risks is high inflation and there is something I can do to help mitigate that risk because there is an asset called inflation-protected bonds that I can own. What other income risks are there that compare or exceed to the risk of inflation that I can try to mitigate with any degree of certainty?
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: Is inflation the greatest risk to retirement portfolios?

Post by beardsworth » Fri May 25, 2018 12:33 pm

willthrill81 wrote:
Thu May 24, 2018 10:16 pm
The problem with tilting fixed income heavily toward TIPS is that, by FI standards, they are very volatile. Considering that the most common reason FI is held is for safety (i.e. not being forced to sell at a loss) and reducing portfolio volatility, TIPS may not be appropriate for all of one's FI. I can see an argument being made for placing up to 50% of one's FI in TIPS, with the rest being some mixture of STT, ITT, TBM, etc.
It seems to me that most of those concerns would be eliminated if one's inflation-linked bonds were I Bonds instead of TIPS. They're not marketable and therefore have no share price to fluctuate; they pay interest for 30 years (or until redemption, whichever comes first); and their previously accrued value never declines, even during periods of deflation.

The drawbacks, of course, are that they can't be held in retirement accounts, and there's a dollar limit on how much of them can be purchased each year. So they're probably still not workable, or advisable, for "all" of a person's fixed income.

These comments ignore the issue of whether the "inflation"-based increases to I Bond values match one's personal household "inflation"--but that's also an issue with TIPS, and everything else.

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Re: Is inflation the greatest risk to retirement portfolios?

Post by willthrill81 » Fri May 25, 2018 12:45 pm

beardsworth wrote:
Fri May 25, 2018 12:33 pm
willthrill81 wrote:
Thu May 24, 2018 10:16 pm
The problem with tilting fixed income heavily toward TIPS is that, by FI standards, they are very volatile. Considering that the most common reason FI is held is for safety (i.e. not being forced to sell at a loss) and reducing portfolio volatility, TIPS may not be appropriate for all of one's FI. I can see an argument being made for placing up to 50% of one's FI in TIPS, with the rest being some mixture of STT, ITT, TBM, etc.
It seems to me that most of those concerns would be eliminated if one's inflation-linked bonds were I Bonds instead of TIPS. They're not marketable and therefore have no share price to fluctuate; they pay interest for 30 years (or until redemption, whichever comes first); and their previously accrued value never declines, even during periods of deflation.

The drawbacks, of course, are that they can't be held in retirement accounts, and there's a dollar limit on how much of them can be purchased each year. So they're probably still not workable, or advisable, for "all" of a person's fixed income.

These comments ignore the issue of whether the "inflation"-based increases to I Bond values match one's personal household "inflation"--but that's also an issue with TIPS, and everything else.
Those who are truly concerned with inflation shouldn't ignore T-bills and short-term Treasuries. Both are guaranteed, liquid, not subject to any maximum amount, and can be held anywhere. While there is obviously no direct link to inflation, they have both kept close pace with inflation. From 1977-1981, when intermediate-term Treasuries had an annualized real return of -5.58%, STT returned -2.42% and T-bills returned -.34%.
“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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Re: Is inflation the greatest risk to retirement portfolios?

Post by beardsworth » Fri May 25, 2018 12:59 pm

willthrill81 wrote:
Fri May 25, 2018 12:45 pm
beardsworth wrote:
Fri May 25, 2018 12:33 pm
willthrill81 wrote:
Thu May 24, 2018 10:16 pm
The problem with tilting fixed income heavily toward TIPS is that, by FI standards, they are very volatile. Considering that the most common reason FI is held is for safety (i.e. not being forced to sell at a loss) and reducing portfolio volatility, TIPS may not be appropriate for all of one's FI. I can see an argument being made for placing up to 50% of one's FI in TIPS, with the rest being some mixture of STT, ITT, TBM, etc.
It seems to me that most of those concerns would be eliminated if one's inflation-linked bonds were I Bonds instead of TIPS. They're not marketable and therefore have no share price to fluctuate; they pay interest for 30 years (or until redemption, whichever comes first); and their previously accrued value never declines, even during periods of deflation.

The drawbacks, of course, are that they can't be held in retirement accounts, and there's a dollar limit on how much of them can be purchased each year. So they're probably still not workable, or advisable, for "all" of a person's fixed income.

These comments ignore the issue of whether the "inflation"-based increases to I Bond values match one's personal household "inflation"--but that's also an issue with TIPS, and everything else.
Those who are truly concerned with inflation shouldn't ignore T-bills and short-term Treasuries. Both are guaranteed, liquid, not subject to any maximum amount, and can be held anywhere. While there is obviously no direct link to inflation, they have both kept close pace with inflation. From 1977-1981, when intermediate-term Treasuries had an annualized real return of -5.58%, STT returned -2.42% and T-bills returned -.34%.
Will, I don't know why your new comment begins by quoting mine, as if in opposition to it. I was responding to your previous comments on the drawbacks of TIPS by observing some positive features of I Bonds. I never said, or even implied, that anyone should ignore T-bills or short-term Treasuries, and I actually agree with you on that point.

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Re: Is inflation the greatest risk to retirement portfolios?

Post by Bob » Fri May 25, 2018 1:05 pm

CULater wrote:
Thu May 24, 2018 10:07 pm
... If inflation is the greatest risk we face as retirees, would that not imply that the choice of investment assets should prioritize inflation risk? That would mean that we should be heavily tilted toward such things as TIPs, I-Bonds, and the like, yes? My understanding is that stocks may protect against inflation to some degree over the long term, but aren't particularly useful in the shorter run (such as 10 years or less). ....
From all that I have read relative to trying to protect one's ability to pay expenses from social security plus one's nest egg and the income it produces, I think CULater has things characterized correctly. However, nothing I have seen or read about gives me much confidence that any investment strategy -- by itself -- has a high probability of keeping up with inflation over the longer term.

So my own strategy when we were a couple years from retirement was to adjust downward our annual expenses (like housing, income tax burden on investment and social security income, etc.) so that our required nest egg withdrawals are below 3% for the next several years. That way if we run into a sequence of returns problem or our returns from our modest allocation to equities does not provide sufficient nest egg growth to compensate for inflation in expenses over the next 5-7 year we are not in big hole where our expenses are quickly draining our nest egg.

Basically, the idea is be conservative, not to gamble on the market and not to live beyond our means, so to speak.

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Re: Is inflation the greatest risk to retirement portfolios?

Post by willthrill81 » Fri May 25, 2018 4:23 pm

beardsworth wrote:
Fri May 25, 2018 12:59 pm
willthrill81 wrote:
Fri May 25, 2018 12:45 pm
beardsworth wrote:
Fri May 25, 2018 12:33 pm
willthrill81 wrote:
Thu May 24, 2018 10:16 pm
The problem with tilting fixed income heavily toward TIPS is that, by FI standards, they are very volatile. Considering that the most common reason FI is held is for safety (i.e. not being forced to sell at a loss) and reducing portfolio volatility, TIPS may not be appropriate for all of one's FI. I can see an argument being made for placing up to 50% of one's FI in TIPS, with the rest being some mixture of STT, ITT, TBM, etc.
It seems to me that most of those concerns would be eliminated if one's inflation-linked bonds were I Bonds instead of TIPS. They're not marketable and therefore have no share price to fluctuate; they pay interest for 30 years (or until redemption, whichever comes first); and their previously accrued value never declines, even during periods of deflation.

The drawbacks, of course, are that they can't be held in retirement accounts, and there's a dollar limit on how much of them can be purchased each year. So they're probably still not workable, or advisable, for "all" of a person's fixed income.

These comments ignore the issue of whether the "inflation"-based increases to I Bond values match one's personal household "inflation"--but that's also an issue with TIPS, and everything else.
Those who are truly concerned with inflation shouldn't ignore T-bills and short-term Treasuries. Both are guaranteed, liquid, not subject to any maximum amount, and can be held anywhere. While there is obviously no direct link to inflation, they have both kept close pace with inflation. From 1977-1981, when intermediate-term Treasuries had an annualized real return of -5.58%, STT returned -2.42% and T-bills returned -.34%.
Will, I don't know why your new comment begins by quoting mine, as if in opposition to it. I was responding to your previous comments on the drawbacks of TIPS by observing some positive features of I Bonds. I never said, or even implied, that anyone should ignore T-bills or short-term Treasuries, and I actually agree with you on that point.
It was merely meant to be in addition to what you said and not in contradiction of it. I apologize for not making that clear.
“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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Re: Is inflation the greatest risk to retirement portfolios?

Post by heyyou » Fri May 25, 2018 4:28 pm

Basically, the idea is be conservative, not to gamble on the market and not to live beyond our means, so to speak.
That is wise for many less favorable situations. Often the next market problem is just enough different, that whatever would have done best last time, does not fit the new conditions. Thus the willingness and ability to reduce spending is an alternative to complex, untested inflation buffers which only buffer the dollars that are invested in them.

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Re: Is inflation the greatest risk to retirement portfolios?

Post by gmaynardkrebs » Fri May 25, 2018 9:46 pm

heyyou wrote:
Fri May 25, 2018 4:28 pm
Basically, the idea is be conservative, not to gamble on the market and not to live beyond our means, so to speak.
That is wise for many less favorable situations. Often the next market problem is just enough different, that whatever would have done best last time, does not fit the new conditions. Thus the willingness and ability to reduce spending is an alternative to complex, untested inflation buffers which only buffer the dollars that are invested in them.
If one thinks that the greatest threat to retirement wealth (that you can control ie. not early death of a spouse, grave illness) is inflation, TIPS held to maturity (typically via a ladder) have to be the choice, as they are explicitly linked to inflation. However, they are not tax favored, so you really would need to keep them primarily in a tax deferred account. Short term bills are not bad, but you lose the term premium, for no obvious benefit. If TIPS were paying 3% real as they did some years back, they would be almost perfect, At 1% or less, most people simply can't put enough away to fund retirement. So, they are forced into equities or riskier assets.

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Re: Is inflation the greatest risk to retirement portfolios?

Post by AlohaJoe » Fri May 25, 2018 10:18 pm

CULater wrote:
Fri May 25, 2018 11:14 am
I know that "adverse life events" are the greatest risk to well-being, but I can't do much more to mitigate unpredictable life events except hope that they don't happen or try to own insurance products that are available for some of those events if they do occur, such as healthcare, LTCi.

My question focused on my retirement nestegg and what the greatest risks are to my spending power and what I can do to mitigate those risks as much as possible. Seems to me that one of the major risks is high inflation and there is something I can do to help mitigate that risk because there is an asset called inflation-protected bonds that I can own. What other income risks are there that compare or exceed to the risk of inflation that I can try to mitigate with any degree of certainty?
I feel like you read my post and then ignored everything it said because it went agains the answer you wanted to hear.

You think you can't do much to mitigate unpredictable life events? I already told you that you can. You think there are only two answers: throw up your hands and hope or buy insurance. That's not the case. The things that usually ruin retirement don't have insurance products for them. But you can self-insure. By having more money. But that requires not locking your wealth up in under-performing inflation-protected products.

Sure, inflation is a major risk. So is deflation. So is war. So is your grand daughter being paralysed by an accident that is her own fault (i.e. no big settlement coming her way) and requiring expensive care for life. I read a story in the news the other day: A French family's adult son was visiting Southeast Asia for a few weeks. He had bought travel insurance for his trip, done all the right things. Then he liked the area so much he decided to extend his vacation a few more weeks. But he forgot to extend the travel insurance. He was in a traffic accident. He was in a coma in a 3rd world country hospital. The family spent $10,000 on plane tickets to fly out immediately, naturally. It was going to cost another $50,000-75,000 for medical evacuation back to France. These things happen and they are much more likely to happen than inflation.

Those are all income risks, not "risk to well-being". You can't protect against every risk because the solution to one risk might mean increasing another risk. But the most likely risks in retirement -- based on actual data from real retirees -- are about needing more money for things you couldn't insure against. And putting large amounts of your portfolio in TIPS means you are picking the wrong risk to worry about and increasing your exposure to the likelier risks.

randomguy
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Re: Is inflation the greatest risk to retirement portfolios?

Post by randomguy » Fri May 25, 2018 11:40 pm

Snowjob wrote:
Fri May 25, 2018 7:34 am
Health issues I think are the biggest risk BY FAR, followed by perhaps expensive divorce or other black swan law suit.
Nah. Most of those health issues will result in lower lifespans so you really only need a 10 year retirement:) Black swan type law suits pretty much don't happen. Seriously how many people do you know that have been sued for a nonAuto/nonProfessional activity for a large sum of money?

Divorces is a decent risk but you will cut your expenses also. And if you are a guy, you can plan on a shorter retirement:)

gmaynardkrebs
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Re: Is inflation the greatest risk to retirement portfolios?

Post by gmaynardkrebs » Sat May 26, 2018 7:38 am

I personally believe that the greatest threat to the retirement of most people is the stock market not doing nearly as well as it has in the past. I'm sort of amazed that only a few people have raised that in this thread.

SGM
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Re: Is inflation the greatest risk to retirement portfolios?

Post by SGM » Sat May 26, 2018 7:51 am

Among the bigger losses I have seen to those in late retirement and in the early to later stages of dementia is fraud.

randomguy
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Re: Is inflation the greatest risk to retirement portfolios?

Post by randomguy » Sat May 26, 2018 11:57 am

gmaynardkrebs wrote:
Sat May 26, 2018 7:38 am
I personally believe that the greatest threat to the retirement of most people is the stock market not doing nearly as well as it has in the past. I'm sort of amazed that only a few people have raised that in this thread.
It isn't a big risk since we are all planning on it having the worst possible historical results. Even if the market doesn't return its historical numbers (say 7% instead of 10%) there is still a big gap down to the worst cases (i.e. 1929 where stocks fell like 70% over 3 years) that we are planning for 4% type SWRs.

gmaynardkrebs
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Re: Is inflation the greatest risk to retirement portfolios?

Post by gmaynardkrebs » Sat May 26, 2018 12:55 pm

randomguy wrote:
Sat May 26, 2018 11:57 am
gmaynardkrebs wrote:
Sat May 26, 2018 7:38 am
I personally believe that the greatest threat to the retirement of most people is the stock market not doing nearly as well as it has in the past. I'm sort of amazed that only a few people have raised that in this thread.
It isn't a big risk since we are all planning on it having the worst possible historical results. Even if the market doesn't return its historical numbers (say 7% instead of 10%) there is still a big gap down to the worst cases (i.e. 1929 where stocks fell like 70% over 3 years) that we are planning for 4% type SWRs.
I think the key words in your reply are "worst possible historical results." To paraphrase Woody Allen, not only do I think the worst will happen again, I believe records are made to be broken. The last 100 years, which is roughly the data set used in most MC simulations, were extremely favorable for America in every way, which is why I am way more conservative than most people. My equity allocation is down to about 25% (age 67), and I don't think it was ever above 50%.
Last edited by gmaynardkrebs on Sat May 26, 2018 1:00 pm, edited 1 time in total.

dbr
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Re: Is inflation the greatest risk to retirement portfolios?

Post by dbr » Sat May 26, 2018 12:57 pm

gmaynardkrebs wrote:
Sat May 26, 2018 12:55 pm
randomguy wrote:
Sat May 26, 2018 11:57 am
gmaynardkrebs wrote:
Sat May 26, 2018 7:38 am
I personally believe that the greatest threat to the retirement of most people is the stock market not doing nearly as well as it has in the past. I'm sort of amazed that only a few people have raised that in this thread.
It isn't a big risk since we are all planning on it having the worst possible historical results. Even if the market doesn't return its historical numbers (say 7% instead of 10%) there is still a big gap down to the worst cases (i.e. 1929 where stocks fell like 70% over 3 years) that we are planning for 4% type SWRs.
I think the key words in your reply are "worst possible historical results." To paraphrase Woody Allen, not only do I think the worst will happen again, I believe records are made to be broken. The last 100 years, were extremely favorable for America in every way, which is why I am way more conservative than most people. My equity allocation is down to about 30% (age 67).
I don't know about 30%, but it is certainly conclusive in my mind that very high stocks in retirement is not prudent. Of course the argument can be turned the other way around to argue that very high not stocks in retirement is also not prudent.

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Re: Is inflation the greatest risk to retirement portfolios?

Post by heyyou » Sat May 26, 2018 1:00 pm

For many retired Bogleheads, their spending is not fixed at the maximum safe historical rate so they can cut back when it seems prudent to do so. As with life prior to retirement, new retirees could expect to need to adapt to changes as they occur in retirement. Certainty is still hard to find, these days.

Mentioned previously, the future is often slightly different than the past, showcasing the imperfections of plans that precisely match history. With my fear of inflation when I retired early, my inflation buffer investment did very poorly in the ensuing period of low inflation. I'm grateful that the other 90% of the portfolio, outgrew the losses from the buffer.

gmaynardkrebs
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Re: Is inflation the greatest risk to retirement portfolios?

Post by gmaynardkrebs » Sat May 26, 2018 1:12 pm

heyyou wrote:
Sat May 26, 2018 1:00 pm
For many retired Bogleheads, their spending is not fixed at the maximum safe historical rate so they can cut back when it seems prudent to do so. As with life prior to retirement, new retirees could expect to need to adapt to changes as they occur in retirement. Certainty is still hard to find, these days.

Mentioned previously, the future is often slightly different than the past, showcasing the imperfections of plans that precisely match history. With my fear of inflation when I retired early, my inflation buffer investment did very poorly in the ensuing period of low inflation. I'm grateful that the other 90% of the portfolio, outgrew the losses from the buffer.
What was your inflation buffers? TIPS have not done "very poorly." Not that I bought them for appreciation, but I'd actually have a capital gain on most of mine if I sold them, which I don't plan to do. BTW, no one would worry about equities if the future were as predictable as you seem to think. In fact, I'd be 100% equities if I thought that.

heyyou
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Re: Is inflation the greatest risk to retirement portfolios?

Post by heyyou » Sat May 26, 2018 2:24 pm

It was a collateralized commodities fund (CCF) fund but I didn't do all of the adjustment gymnastics to the rest of the portfolio as suggested by the guru. I can now see that just being patient (expecting to have to wait for the recovery) is better than trying to avoid whatever I fear the most.
BTW, no one would worry about equities if the future were as predictable as you seem to think.
The other 90% was half equities and half bonds, and both did better than the CCF fund. I apologize for writing in a way that could be interpreted in more than one way.

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Re: Is inflation the greatest risk to retirement portfolios?

Post by gmaynardkrebs » Sat May 26, 2018 4:11 pm

Ok, now I see. Thanks for the clarification. :)

TravelforFun
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Re: Is inflation the greatest risk to retirement portfolios?

Post by TravelforFun » Sat May 26, 2018 4:38 pm

Retirement greatest risks:

1) Market decline
2) Inflation
3) Taxation
4) Health-related issues and associated expenses
5) Being scammed (declining mental acutement)
6) Longevity
7) Isolation

TravelforFun

Ron Scott
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Re: Is inflation the greatest risk to retirement portfolios?

Post by Ron Scott » Sun May 27, 2018 5:05 pm

All the comments above notwithstanding, inflation IS a disaster for retirement funds...

We rightly complain about FAs and high-cost investment vehicles which can cost us a percent of our earnings. They're intolerable to most of us.

But inflation takes double that amount.

You cannot plan for unforeseen circumstances, but you certainly can plan for the affects of inflation and lower than historical real returns.

Inflation is the thief who never stops stealing...

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Re: Is inflation the greatest risk to retirement portfolios?

Post by stlutz » Sun May 27, 2018 5:36 pm

I would say that significantly higher than expected inflation is a risk to retirement portfolios. Inflation by itself is not.

If everybody expects 2% inflation and that's what we get, interest rates will reflect that. No special inflation protection is needed. If everyone expects 2% inflation and it averages 6%--well then you have a problem. That's what killed the hypothetical 1966 cohort so much--there were multiple surges of high inflation that persisted over the first half of their retirement.

The problem with macro-economic risks is that they tend not to manifest in the same way each time. They will happen, but the next one will be different from the last one. The problematic retirement years ('29, '66, '99) all suffered from different problems. Seizing on the issue that impacted one group and ignoring the others can lead to a portfolio overly concentrated in addressing one specific risk.

TIPS are a great asset. The problem with them is that they are priced relative to nominal Treasuries. There are other forms of safe income that consistently yield more than Treasuries--most notably CDs. So, for the individual investor, the cost of the inflation protection that TIPS offer is higher than the "inflation breakeven" might suggest.

Whether you're talking annuities or bonds, inflation protection is expensive and is not necessarily worth it.

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Re: Is inflation the greatest risk to retirement portfolios?

Post by gmaynardkrebs » Sun May 27, 2018 5:58 pm

stlutz wrote:
Sun May 27, 2018 5:36 pm
...
Whether you're talking annuities or bonds, inflation protection is expensive and is not necessarily worth it.
Actually, until quite recently you were virtually being paid to buy inflation protection. Even now, the cost is quite low. What I think you are saying is that the opportunity cost is high, but that's true of any insurance product. Assuming the risk yourself always seems like a great, until the risk event occurs. That's why I'm a big fan of TIPS, not as a money maker, but as remarkably cheap insurance.

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Re: Is inflation the greatest risk to retirement portfolios?

Post by Prudence » Sun May 27, 2018 9:10 pm

In general, yes. I like Bernstein's work. Oversimplified, this means build a TIPs ladder to fully fund your residual expenses over your remaining years (LMP). Then feel free to invest the rest of your portfolio as you choose e.g. 100% equities or whatever. For many bogleheads, this strategy could end up in an overall 60/40 equities/fixed allocation or whatever, depending on how much has been accumulated at the time of retirement. I believe it is wishful thinking to assume that a stock/bond portfolio will produce positive returns and cover expected inflation going forward. So, retirees need to be very conservative.

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Re: Is inflation the greatest risk to retirement portfolios?

Post by ResearchMed » Sun May 27, 2018 9:24 pm

Prudence wrote:
Sun May 27, 2018 9:10 pm
In general, yes. I like Bernstein's work. Oversimplified, this means build a TIPs ladder to fully fund your residual expenses over your remaining years (LMP). Then feel free to invest the rest of your portfolio as you choose e.g. 100% equities or whatever. For many bogleheads, this strategy could end up in an overall 60/40 equities/fixed allocation or whatever, depending on how much has been accumulated at the time of retirement. I believe it is wishful thinking to assume that a stock/bond portfolio will produce positive returns and cover expected inflation going forward. So, retirees need to be very conservative.
Uh, where do we find out how many "remaining years" we need to cover?

There are also many other ways we could use that information. :wink:

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2015
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Re: Is inflation the greatest risk to retirement portfolios?

Post by 2015 » Mon May 28, 2018 10:53 am

Dirk Cotton has devoted a number of retirement articles to retirement risk and mitigation thereof. In this post, he notes 18 retirement risks:

http://www.theretirementcafe.com/2017/0 ... -list.html
Eighteen Retirement Risks from RICP®

RISK 1: LONGEVITY RISK
RISK 2: INFLATION RISK
RISK 3: EXCESS WITHDRAWAL RISK
RISK 4: HEALTH EXPENSE RISK
RISK 5: LONG-TERM CARE RISK
RISK 6: FRAILTY RISK
RISK 7: FINANCIAL ELDER ABUSE RISK
RISK 8: MARKET RISK
RISK 9: INTEREST RATE RISK
RISK 10: LIQUIDITY RISK
RISK 11: SEQUENCE OF RETURNS RISK
RISK 12: FORCED RETIREMENT RISK
RISK 13: REEMPLOYMENT RISK
RISK 14: EMPLOYER INSOLVENCY RISK
RISK 15: LOSS OF SPOUSE RISK
RISK 16: UNEXPECTED FINANCIAL RESPONSIBILITY
RISK 17: TIMING RISK
RISK 18: PUBLIC POLICY RISK

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rustymutt
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Re: Is inflation the greatest risk to retirement portfolios?

Post by rustymutt » Mon May 28, 2018 11:46 am

Perhaps deflation is really the bad thing we don't want. Long periods were prices keep slipping, edging, backwards, rather than increasing as historical it has in our society. No problem there, at least for the moment. Investing is a balancing act like none other. For the record I'm 10% TIPs.
I'm amazed at the wealth of Knowledge others gather, and share over a lifetime of learning. The mind is truly unique. It's nice when we use it!

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Re: Is inflation the greatest risk to retirement portfolios?

Post by Earl Lemongrab » Mon May 28, 2018 12:33 pm

I started my working like in the early 80s when inflation and interest rates were both high. My first auto loan was 20.9%. 30-year fixed mortgages were over 15%. If you had a job that kept up, it wasn't too bad. But those on fixed pensions were devastated.

Today, the core of my retirement is my non-COLA pension from Megacorp. It pretty much covers my needs currently. So high inflation is not something I'd welcome (bring on that deflation as far as I'm concerned), but I need to be aware of it. I have considered converting some of the current bond index holdings to TIPS. I think the stable-value fund will do okay in a rising interest rate environment.
This week's fortune cookie: "Your financial life will be secure and beneficial." So I got that going for me, which is nice.

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Re: Is inflation the greatest risk to retirement portfolios?

Post by gmaynardkrebs » Mon May 28, 2018 12:42 pm

rustymutt wrote:
Mon May 28, 2018 11:46 am
Perhaps deflation is really the bad thing we don't want. Long periods were prices keep slipping, edging, backwards, rather than increasing as historical it has in our society. No problem there, at least for the moment. Investing is a balancing act like none other. For the record I'm 10% TIPs.
if you are on fixed income, deflation is a blessing. Also, Social security is not reduced for deflation. TIPS do redeem no lower than par, so there is some deflation protection with them too.

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Re: Is inflation the greatest risk to retirement portfolios?

Post by AlohaJoe » Mon May 28, 2018 10:10 pm

There's a newish book called Retirement Fail which lists the 9 reasons retirements go wrong and how to avoid them. I've skimmed it but not read the whole thing. It isn't quite the same thing as the OP was asking about but since it is somewhat related.....

The 9 reasons are based on the author's experience as a financial advisor for 30+ years -- not anything more empirical that I can tell. The 9 reasons are:

1. Excessive retirement spending. Getting carried away with post-retirement passions, habitual overspending, excessive generosity (beyond what the spending plan can handle), and so on.
In my 30-plus years as a financial planner, I have never seen a situation in which a client followed the process we outlined and then ran short because the portfolio didn't perform properly. When clients have accumulated enough in retirement savings during their working years and yet later struggled to maintain their financial independence, it is typically because they've made decisions based on emotion and spent assets in a way that isn't aligned with their plan.
2. Children that fail to become self-sufficient.
A study conducted by the Pew Research Center in 2013 showed that 73% of adults in their 40s and 50s had provided financial support to a grown child in the prior year, and more than half of those parents reported being that child's primary means of support
3. Divorce
The chances of an adult over 50 divorcing doubled between 1990 and 2014, and the jump was even higher for those over 65
4. Buying a second home. Lake house, weekend cottage in the country, winter ski condo, etc.
The median distance between a vacation home and a primary residence is 200 miles. About 34% of vacation homes are more than 500 miles from the owner's primary home
5. "The lure of entrepreneurship". Either because they miss the structure of worklife or because they feel they are stagnating without "contributing to society". Needless to say, not all businesses succeed. This includes "vicarious entrepreneurship", which is where you invest in a friend/relative/close associate's new business.
In 2016, the Kauffman Index of Startup Activity found that roughly 24% of new entrepreneurs were aged 55 to 64, up from 15% in 1997
6. Fraud, under which he includes most annuities :twisted: but also exploitation by friends & family.

7. Health issues

8. Is a bit of a grab bag of "unexpected things". Forced early retirement: layoffs at age 60, disability at age 58, terminal cancer in a partner at age 55. A few horror stories (from insurance agents... :annoyed ) about being sued and not having umbrella insurance. But also family needs. He tells a personal story:
My brother called me to see if I could help a close friend whose daughter has a debilitating disease, a diagnosis she did not receive until she was in her twenties
9. "Underliving your wealth".
As [the author's parents] were telling me about their trip through the great capitals of the continent, my mom set a salad bowl on the table and explained that there were no tomatoes in the salad because tomatoes were too expensive at the store.

I love to share that story because it illustrates perfectly people's idiosyncrasies about money. My parents had just taken a very expensive vacation, which they enjoyed tremendously, but a high-priced tomato was just too extravagant

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Re: Is inflation the greatest risk to retirement portfolios?

Post by CurlyDave » Tue May 29, 2018 1:26 am

As someone who has been retired for over 10 years I can guarantee us all that inflation is a huge issue. I haven't experienced many of the other issues, so I can't tell you that inflation is worse than the others, but it is a very big risk.

And, for those who think that TIPS and SS will protect against inflation -- think again.

They are indexed to the CPI, but what really counts is your personal inflation rate. As we age, our spending patterns diverge from the CPI market basket. And in many cases the divergence is in the direction of higher experienced inflation than the CPI would indicate. Think medical costs for instance. Food and energy are not in the CPI because they are volatile, but you can't stop eating. Or stop heating your house.

stlutz
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Re: Is inflation the greatest risk to retirement portfolios?

Post by stlutz » Tue May 29, 2018 1:35 am

Food and energy are part of the CPI.

visualguy
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Re: Is inflation the greatest risk to retirement portfolios?

Post by visualguy » Tue May 29, 2018 1:40 am

Direct real estate holds up nicely with inflation. I like 35% stock, 50% direct RE, and 15% fixed income.

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Re: Is inflation the greatest risk to retirement portfolios?

Post by AlohaJoe » Tue May 29, 2018 1:41 am

CurlyDave wrote:
Tue May 29, 2018 1:26 am
Food and energy are not in the CPI because they are volatile, but you can't stop eating. Or stop heating your house.
(edit: stlutz was faster than me but I'll leave this anyway...)

Food and energy are included in CPI.
The CPIs are based on prices of food, clothing, shelter, fuels, transportation, doctors’ and dentists’ services, drugs, and other goods and services that people buy for day-to-day living
The Federal Reserve prefers to look at "core inflation", which leaves out food & energy, but the Social Security Administration doesn't care what the Federal Reserve does. They aren't even looking at the same index. The Federal Reserve looks at the CTPIPCE index (which is produced by the Bureau of Economic Analysis) and the Social Security Administration uses the CPI-W index (which is produced by the Bureau of Labor Statisitcs).

The Social Security COLA includes food and energy.

But I agree that personal inflation rarely tracks CPI-W. The BLS has had an "elderly inflation index" for a quarter-century now and CPI-E outpaces CPI-W, albeit not by a lot. But little amounts can add up over 20-30 years.

https://www.bls.gov/opub/ted/2012/ted_20120302.htm

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William4u
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Re: Is inflation the greatest risk to retirement portfolios?

Post by William4u » Tue May 29, 2018 2:19 am

Vanguard on the 5 major risks you face in retirement, FYI...

https://investornews.vanguard/the-5-maj ... etirement/
1. Market risk
Unexpected changes in investment returns, inflation, or other market variables.
How to handle it: Think carefully about the asset allocation of your portfolio. The right allocation for you will depend on your intentions for your money—do you want to spend it all, leave something for your kids, or keep growing it for future generations? In any case, you’re likely to need a mix of stocks and bonds that will keep your nest egg protected without depleting it too quickly.

Also, make sure to keep money for your immediate spending needs in a safe, accessible location, like a bank account or money market fund.

Historically, the stock market has had a negative calendar-year return over ¼ of the time. Source: Vanguard.


2. Longevity & mortality risk
Living longer than your savings will support—or for substantially less time than expected.
How to handle it: First, plan as though you’ll live to a ripe old age—like 95 or 100. You may want to consider working longer or taking on a part-time job in retirement, as well.

You can also use an annuity to guard against longevity risk, by annuitizing enough of your portfolio to cover any basic living expenses that are greater than the guaranteed income you might have from Social Security or a pension.

To offset the risk that one spouse or partner will survive the other for a great number of years, consider life insurance.

In the U.S., there’s a 66% chance that at least 1 spouse in a married couple will live to age 90. Source: Society of Actuaries, based on a 55-year-old nonsmoking couple in average health.


3. Health risk
Long-term health issues that drain your savings.
How to handle it: First, you’ll need to think about 3 things: How healthy do you expect to be, based on your current situation and your genetics? What health needs would be covered through your health insurance, whether it’s employer-provided insurance or the Medicare plan you’ll choose? Finally, what level of care is important to have? For instance, would just any nursing home be acceptable to you, or would you prefer private nursing if it’s needed?

After you know the answers to these questions, you’ll be better prepared to decide on your strategy, which could include saving more for health care, buying long-term care insurance, relying on Medicare and Medicaid, or buying a supplemental policy.

On average, a 1-bedroom unit in an assisted-living facility costs $3,750 per month.


4. Event risk
Being hit by an unexpected event with a large financial impact.
How to handle it: Most retirees experience at least 1 unexpected financial shock, so save more than the bare minimum you expect to need. And make sure you have adequate insurance coverage!

You’ll also want to have some flexibility in the amount you plan to withdraw from your savings each year. A strategy like “dynamic spending” can help.

Learn more about dynamic spending

72% of current retirees report dealing with at least 1 financial shock in retirement. Source: Society of Actuaries 2015 Risks and Process of Retirement Survey.


5. Tax & policy risk
Changes to laws that cause you to have higher taxes or fewer resources than expected.
How to handle it: Recent history certainly validates that these types of changes are hard to predict, and there’s not a lot you can do to impact them directly. One way to prepare is to make sure you have a variety of accounts with differing tax treatment (like Roth and traditional IRAs as well as taxable accounts), so you can be flexible with your withdrawal strategy.

To guard against unfavorable changes in things like Medicare coverage and Social Security income, it’s always a good idea to save more than you think you’ll need.

In 2018, the income thresholds at which seniors are subject to Medicare surcharges were lowered by up to 25%. Source: IRS.

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