Grok's LMP-5: Retiree Portfolio ala David Swensen

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grok87
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Grok's LMP-5: Retiree Portfolio ala David Swensen

Post by grok87 » Sat Apr 11, 2020 9:20 am

Grok's LMP-5: Retiree Portfolio ala David Swensen

In the previous post in this series,
viewtopic.php?f=10&t=245377
I argued for a “3-legged stool” approach to retirement investing consisting of:
a) Social Security,
b) Pension/Long-term TIPS,
c) Risk Portfolio of Stocks, Real Estate and Bonds.

Since many of us do not have employer pensions these days, the key takeaway was to buy a portfolio of Long Term TIPS, either by building your own TIPS-ladder or by buying a fund like LTPZ (Pimco 15+ year TIPS ETF).

As I write this however, Long term TIPS yields have collapsed due to the Covid-19 crisis:
5 year TIPS real yield -0.51%
10 year TIPS = -0.52%
30 year TIPS = -0.13%

So here is an alternative, based on ideas presented in David Swensen’s book Unconventional Success.

As many will recall, for those with a long term investment horizon (10+ years) David Swensen advocates the following LT-portfolio:
30% US Stocks
15% Developed International Stocks
10% Emerging Markets
15% Real Estate
15% Treasuries
15% TIPS

(For simplicity I’m going to say this works out to 55% Total World Stock / 15% REITS / 15% Treasuries / 15% TIPS)

For short investment horizons (1-2 years) he advocates staying in T-bills or cash.

What about intermediate investment horizons- say 6 years? In that case he argues you should interpolate. In other words since 6 years is halfway between 2 years and 10 years, you should be half in cash and half in the LT-portfolio above.

What implications does this have for a newly retired investor with say a expected retirement of 30 years? Such a retiree might construct the following table of needed funds:

Year……….Needed-Funds…….Cash…………LT-Portfolio
1…………….$1,000……………….$1,000……………$0
2…………….$1,000……………….$1,000……………$0
3…………….$1,000…………………$875…………….$125
4…………….$1,000………………….$750……………$250
5……………..$1,000…………………$625……………$375
6……………..$1,000………………….$500…………..$500
….
10……………$1,000………………….$0……………$1,000

30……………$1,000………………….$0……………$1,000
Total………$30,000………………..$5,500………$24,500

This implies that the new retiree should hold the following portfolio:

Stocks: 45% (VTWAX)
Real Estate: 12.25% (VGSLX)
Treasuries: 12.25% (VSIGX)
TIPS: 12.25% (VIPSX)
Cash 18.25%

For other posts in the series, see here
https://www.bogleheads.org/wiki/Grok%27s_tips

cheers,
grok
RIP Mr. Bogle.

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Re: Grok's LMP-5: Retiree Portfolio ala David Swensen

Post by LadyGeek » Sat Apr 11, 2020 9:46 am

I added this thread to the wiki: Grok's tips
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Re: Grok's LMP-5: Retiree Portfolio ala David Swensen

Post by vineviz » Sat Apr 11, 2020 9:56 am

grok87 wrote:
Sat Apr 11, 2020 9:20 am
Grok's LMP-5: Retiree Portfolio ala David Swensen

In the previous post in this series,
viewtopic.php?f=10&t=245377
I argued for a “3-legged stool” approach to retirement investing consisting of:
a) Social Security,
b) Pension/Long-term TIPS,
c) Risk Portfolio of Stocks, Real Estate and Bonds.

Since many of us do not have employer pensions these days, the key takeaway was to buy a portfolio of Long Term TIPS, either by building your own TIPS-ladder or by buying a fund like LTPZ (Pimco 15+ year TIPS ETF).
The most direct replacement for a pension income stream would be an income annuity, either a single premium annuity (SPIA) or single premium deferred income annuity (DIA).

In a low-yield environment, income annuities are probably the cheapest way to ensure a life-long income "floor" for retirees.
"Far more money has been lost by investors preparing for corrections than has been lost in corrections themselves." ~~ Peter Lynch

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Re: Grok's LMP-5: Retiree Portfolio ala David Swensen

Post by aj76er » Sat Apr 11, 2020 10:28 am

The “Needed Funds” column of your table needs to be inflation adjusted. You don’t get to treat $1000 of cash purchasing power in year 1 the same as that in year 30. Otherwise cash held for that long would be a free lunch; and it isn’t.

Also, don’t forget about I-bonds. But where you add them in the portfolio (e.g. as a 30yr bond or cash) is an open question.
"Buy-and-hold, long-term, all-market-index strategies, implemented at rock-bottom cost, are the surest of all routes to the accumulation of wealth" - John C. Bogle

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Re: Grok's LMP-5: Retiree Portfolio ala David Swensen

Post by Ben Mathew » Sat Apr 11, 2020 10:41 am

I'm not sure that negative real interest rates should cause you to abandon TIPS in favor of riskier assets. $20,000 today will buy you, in twenty years,

$24,400 @ 1.00%
$19,486 @ -0.13%

That's a painful difference, sure, but I don't think it argues for rejecting TIPS given that there are no comparable options offering better yields anywhere else. It's not like nominal treasury yields are any better. We are living in a time of ultra low interest rates, and the current TIPS yields are a reflection of that. It's unfortunate, but that's what we have to work with. Chasing yield and pushing into risky strategies seems like it wouldn't be the right thing to do for previously conservative investors, unless it's clear that yield spreads have widened, risk-adjusted. Given that there's a lot more risk in the business world now than pre-covid, high yields outside of treasuries might just reflect higher risk.
Last edited by Ben Mathew on Sat Apr 11, 2020 2:01 pm, edited 1 time in total.

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grok87
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Re: Grok's LMP-5: Retiree Portfolio ala David Swensen

Post by grok87 » Sat Apr 11, 2020 11:19 am

aj76er wrote:
Sat Apr 11, 2020 10:28 am
The “Needed Funds” column of your table needs to be inflation adjusted. You don’t get to treat $1000 of cash purchasing power in year 1 the same as that in year 30. Otherwise cash held for that long would be a free lunch; and it isn’t.

Also, don’t forget about I-bonds. But where you add them in the portfolio (e.g. as a 30yr bond or cash) is an open question.
It's a good point. it did cross my mind but i decided to keep things simple for transparency of argument. in addition to the inflation adjustment you mention, perhaps the cashflows should be discounted back to present value. given inflation and interest rates are at such low levels i'm not sure any of this is all that material.
cheers,
grok
RIP Mr. Bogle.

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grok87
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Re: Grok's LMP-5: Retiree Portfolio ala David Swensen

Post by grok87 » Sat Apr 11, 2020 11:25 am

Ben Mathew wrote:
Sat Apr 11, 2020 10:41 am
I'm not sure that negative real interest rates should cause you to abandon TIPS in favor of riskier assets. $10,000 today will buy you, in twenty years,

$24,400 @ 1.00%
$19,486 @ -0.13%

That's a painful difference, sure, but I don't think it argues for rejecting TIPS given that there are no comparable options offering better yields anywhere else. It's not like nominal treasury yields are any better. We are living in a time of ultra low interest rates, and the current TIPS yields are a reflection of that. It's unfortunate, but that's what we have to work with. Chasing yield and pushing into risky strategies seems like it wouldn't be the right thing to do for previously conservative investors, unless it's clear that yield spreads have widened, risk-adjusted. Given that there's a lot more risk in the business world now than pre-covid, high yields outside of treasuries might just reflect higher risk.
i agree. i tried to be careful to present this as an alternative and not as a rejection of using a long-term tips matching strategy. I bought my long term tips a while ago and have not sold them. so logically if i didn't own any i would be a buyer of them even at today's negative real interest rate levels.

and yet i find myself hesitating to buy more tips at these levels. i think Swensen's argument has merit and could be useful for at least part of one's retirement portfolio.

cheers,
grok
RIP Mr. Bogle.

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grok87
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Re: Grok's LMP-5: Retiree Portfolio ala David Swensen

Post by grok87 » Sat Apr 11, 2020 11:27 am

LadyGeek wrote:
Sat Apr 11, 2020 9:46 am
I added this thread to the wiki: Grok's tips
Thanks LadyGeek, much appreciated. Hope you are weathering the virus crisis ok.
best
grok
RIP Mr. Bogle.

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Re: Grok's LMP-5: Retiree Portfolio ala David Swensen

Post by grok87 » Sat Apr 11, 2020 11:31 am

vineviz wrote:
Sat Apr 11, 2020 9:56 am
grok87 wrote:
Sat Apr 11, 2020 9:20 am
Grok's LMP-5: Retiree Portfolio ala David Swensen

In the previous post in this series,
viewtopic.php?f=10&t=245377
I argued for a “3-legged stool” approach to retirement investing consisting of:
a) Social Security,
b) Pension/Long-term TIPS,
c) Risk Portfolio of Stocks, Real Estate and Bonds.

Since many of us do not have employer pensions these days, the key takeaway was to buy a portfolio of Long Term TIPS, either by building your own TIPS-ladder or by buying a fund like LTPZ (Pimco 15+ year TIPS ETF).
The most direct replacement for a pension income stream would be an income annuity, either a single premium annuity (SPIA) or single premium deferred income annuity (DIA).

In a low-yield environment, income annuities are probably the cheapest way to ensure a life-long income "floor" for retirees.
the goal of eventually buying an annuity is what had motivated me to embark on a liability matching strategy using long term tips to begin with. In theory the annuities should be priced at a level that reflects long term interest rates. if if long term interest rates go down the price of the annuity goes up. the price of long term tips go up as well as interest rates drop- i.e. they provide a nice hedge of the cost of the annuity.

the only thing in your post i'm not sure about is whether income annuities are "the cheapest way" right now. i would think ibonds would be cheaper as aj76er points out.

cheers
grok
RIP Mr. Bogle.

dbr
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Re: Grok's LMP-5: Retiree Portfolio ala David Swensen

Post by dbr » Sat Apr 11, 2020 11:38 am

grok87 wrote:
Sat Apr 11, 2020 11:31 am


the only thing in your post i'm not sure about is whether income annuities are "the cheapest way" right now. i would think ibonds would be cheaper as aj76er points out.

cheers
grok
For a couple to have say $500k in I bonds would have taken them 25 years of planning ahead. I bonds were first issued in 1998. The purchase limit has bounced around from $30k per individual to $5k and back to $10k. There has also been the tax refund option.

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Re: Grok's LMP-5: Retiree Portfolio ala David Swensen

Post by bigskyguy » Sat Apr 11, 2020 11:55 am

grok87 wrote:
Sat Apr 11, 2020 9:20 am
Grok's LMP-5: Retiree Portfolio ala David Swensen

In the previous post in this series,
viewtopic.php?f=10&t=245377
I argued for a “3-legged stool” approach to retirement investing consisting of:
a) Social Security,
b) Pension/Long-term TIPS,
c) Risk Portfolio of Stocks, Real Estate and Bonds.

Since many of us do not have employer pensions these days, the key takeaway was to buy a portfolio of Long Term TIPS, either by building your own TIPS-ladder or by buying a fund like LTPZ (Pimco 15+ year TIPS ETF).

As I write this however, Long term TIPS yields have collapsed due to the Covid-19 crisis:
5 year TIPS real yield -0.51%
10 year TIPS = -0.52%
30 year TIPS = -0.13%

So here is an alternative, based on ideas presented in David Swensen’s book Unconventional Success.

As many will recall, for those with a long term investment horizon (10+ years) David Swensen advocates the following LT-portfolio:
30% US Stocks
15% Developed International Stocks
10% Emerging Markets
15% Real Estate
15% Treasuries
15% TIPS

(For simplicity I’m going to say this works out to 55% Total World Stock / 15% REITS / 15% Treasuries / 15% TIPS)

For short investment horizons (1-2 years) he advocates staying in T-bills or cash.

What about intermediate investment horizons- say 6 years? In that case he argues you should interpolate. In other words since 6 years is halfway between 2 years and 10 years, you should be half in cash and half in the LT-portfolio above.

What implications does this have for a newly retired investor with say a expected retirement of 30 years? Such a retiree might construct the following table of needed funds:

Year……….Needed-Funds…….Cash…………LT-Portfolio
1…………….$1,000……………….$1,000……………$0
2…………….$1,000……………….$1,000……………$0
3…………….$1,000…………………$875…………….$125
4…………….$1,000………………….$750……………$250
5……………..$1,000…………………$625……………$375
6……………..$1,000………………….$500…………..$500
….
10……………$1,000………………….$0……………$1,000

30……………$1,000………………….$0……………$1,000
Total………$30,000………………..$5,500………$24,500

This implies that the new retiree should hold the following portfolio:

Stocks: 45% (VTWAX)
Real Estate: 12.25% (VGSLX)
Treasuries: 12.25% (VSIGX)
TIPS: 12.25% (VIPSX)
Cash 18.25%

For other posts in the series, see here
https://www.bogleheads.org/wiki/Grok%27s_tips

cheers,
grok
We are now in a world of globally low returns. Nominal bonds and inflation indexed bonds both reflect short and long term low return expectations. The extraordinary yet necessary Monetary interventions by the Fed and fiscal interventions of the Congress and Treasury are directly and indirectly supporting the prices of equities in virtually all developed economies. And at least for the near future commodities will be depressed by the economic slowdown. Given the world scene, I would pose it that TIPS remain a very viable basis for any LMP, not only short term but also long term.

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Re: Grok's LMP-5: Retiree Portfolio ala David Swensen

Post by bigskyguy » Sat Apr 11, 2020 11:57 am

bigskyguy wrote:
Sat Apr 11, 2020 11:55 am
grok87 wrote:
Sat Apr 11, 2020 9:20 am
Grok's LMP-5: Retiree Portfolio ala David Swensen

In the previous post in this series,
viewtopic.php?f=10&t=245377
I argued for a “3-legged stool” approach to retirement investing consisting of:
a) Social Security,
b) Pension/Long-term TIPS,
c) Risk Portfolio of Stocks, Real Estate and Bonds.

Since many of us do not have employer pensions these days, the key takeaway was to buy a portfolio of Long Term TIPS, either by building your own TIPS-ladder or by buying a fund like LTPZ (Pimco 15+ year TIPS ETF).

As I write this however, Long term TIPS yields have collapsed due to the Covid-19 crisis:
5 year TIPS real yield -0.51%
10 year TIPS = -0.52%
30 year TIPS = -0.13%

So here is an alternative, based on ideas presented in David Swensen’s book Unconventional Success.

As many will recall, for those with a long term investment horizon (10+ years) David Swensen advocates the following LT-portfolio:
30% US Stocks
15% Developed International Stocks
10% Emerging Markets
15% Real Estate
15% Treasuries
15% TIPS

(For simplicity I’m going to say this works out to 55% Total World Stock / 15% REITS / 15% Treasuries / 15% TIPS)

For short investment horizons (1-2 years) he advocates staying in T-bills or cash.

What about intermediate investment horizons- say 6 years? In that case he argues you should interpolate. In other words since 6 years is halfway between 2 years and 10 years, you should be half in cash and half in the LT-portfolio above.

What implications does this have for a newly retired investor with say a expected retirement of 30 years? Such a retiree might construct the following table of needed funds:

Year……….Needed-Funds…….Cash…………LT-Portfolio
1…………….$1,000……………….$1,000……………$0
2…………….$1,000……………….$1,000……………$0
3…………….$1,000…………………$875…………….$125
4…………….$1,000………………….$750……………$250
5……………..$1,000…………………$625……………$375
6……………..$1,000………………….$500…………..$500
….
10……………$1,000………………….$0……………$1,000

30……………$1,000………………….$0……………$1,000
Total………$30,000………………..$5,500………$24,500

This implies that the new retiree should hold the following portfolio:

Stocks: 45% (VTWAX)
Real Estate: 12.25% (VGSLX)
Treasuries: 12.25% (VSIGX)
TIPS: 12.25% (VIPSX)
Cash 18.25%

For other posts in the series, see here
https://www.bogleheads.org/wiki/Grok%27s_tips

cheers,
grok
We are now in a world of globally low returns. Nominal bonds and inflation indexed bonds both reflect short and long term low return expectations. The extraordinary yet necessary Monetary interventions by the Fed and fiscal interventions of the Congress and Treasury are directly and indirectly supporting the prices of equities in virtually all developed economies. And at least for the near future commodities will be depressed by the economic slowdown. Given the world scene, I would pose it that TIPS remain a very viable basis for any LMP, not only short term but also long term.
And I would Very much appreciate anyone’s suggestion of a truly better alternative, given where we are.

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grok87
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Re: Grok's LMP-5: Retiree Portfolio ala David Swensen

Post by grok87 » Sat Apr 11, 2020 11:59 am

dbr wrote:
Sat Apr 11, 2020 11:38 am
grok87 wrote:
Sat Apr 11, 2020 11:31 am


the only thing in your post i'm not sure about is whether income annuities are "the cheapest way" right now. i would think ibonds would be cheaper as aj76er points out.

cheers
grok
For a couple to have say $500k in I bonds would have taken them 25 years of planning ahead. I bonds were first issued in 1998. The purchase limit has bounced around from $30k per individual to $5k and back to $10k. There has also been the tax refund option.
agree, the purchase limits are definitely an issue. i've heard some people expand the $20k a year to $30k a year by using some sort of trust. i've always tried to keep things simple so am stuck at $20k a year. i've been buying for a number of years though so have a reasonably substantial amount.

i was trying to be responsive to vineviz's comment that income annuities were the cheapest way to ensure a lifetime income floor. As interest rates stand now, there is no way i would cash in my hoard of ibonds to buy an income annuity.
RIP Mr. Bogle.

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Re: Grok's LMP-5: Retiree Portfolio ala David Swensen

Post by vineviz » Sat Apr 11, 2020 12:12 pm

grok87 wrote:
Sat Apr 11, 2020 11:31 am
the only thing in your post i'm not sure about is whether income annuities are "the cheapest way" right now. i would think ibonds would be cheaper as aj76er points out.
As I know you know, funding a lifetime of income using bonds effectively over-funding your retirement (i.e. a single household cannot prudently plan for life expectancy, because they have a 50% chance of outliving the bond ladder). This is the role of the final leg in your approach, I'm sure, which is to self-insure for the longevity risk. An income annuity is typically cheaper because the over-funding risk and under-funding risk are balanced in the insurance pool.

A 30-year TIPS ladder set up to provide $1,200/month of real income would cost about $340,000 $450,000 to fund by my [fixed by #cruncher] calculation. That would provide almost a lifetime income for a 65-year old male retiree (they'd be exposed to longevity risk of living past age 95).

Currently a SPIA that provides $1,200/month of income with a 2% COLA would cost about $260,000 according to ImmediateAnnuities.com. Principal Life Insurance was providing quotes for CPI-linked annuities until recently but seems to no longer be doing so, which means the fixed-COLA SPIA does retain some inflation risk. But with the Social Security benefit in the mix, it seems to me the risk of inflation exceeding 2% is less than the risk of the retiree living past age 95? YMMV.

I didn't run the numbers on Series I bonds, but they may well be a cheaper alternative than TIPS. Whether they are cheaper than the SPIA would be a question worth exploring.
Last edited by vineviz on Sat Apr 11, 2020 2:08 pm, edited 1 time in total.
"Far more money has been lost by investors preparing for corrections than has been lost in corrections themselves." ~~ Peter Lynch

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vineviz
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Re: Grok's LMP-5: Retiree Portfolio ala David Swensen

Post by vineviz » Sat Apr 11, 2020 12:20 pm

grok87 wrote:
Sat Apr 11, 2020 11:59 am
i was trying to be responsive to vineviz's comment that income annuities were the cheapest way to ensure a lifetime income floor. As interest rates stand now, there is no way i would cash in my hoard of ibonds to buy an income annuity.
I'm not entirely sure I would either, necessarily. Assuming I had a hoard of Series I bonds, which I don't.

I would suggest an investor who is finding it prohibitively expensive to fully fund the "second leg" of their 3-legged stool using TIPS or Series I savings bonds has options, whether it is allocating some of their wealth to a deferred income annuity (in order to shorten the length of the bond ladder) or to a SPIA (in order to reduce the required size of the ladder).

Although I'd like to imagine that most Bogleheads have accumulated enough wealth by retirement to get through just fine, those who are near the edge of having "enough" might be better suited with a strategy that includes SOME allocation to income annuities rather than a strategy that reaches for yield in risky assets (a la Swensen).
"Far more money has been lost by investors preparing for corrections than has been lost in corrections themselves." ~~ Peter Lynch

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grok87
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Re: Grok's LMP-5: Retiree Portfolio ala David Swensen

Post by grok87 » Sat Apr 11, 2020 12:21 pm

vineviz wrote:
Sat Apr 11, 2020 12:12 pm
grok87 wrote:
Sat Apr 11, 2020 11:31 am
the only thing in your post i'm not sure about is whether income annuities are "the cheapest way" right now. i would think ibonds would be cheaper as aj76er points out.
As I know you know, funding a lifetime of income using bonds effectively over-funding your retirement (i.e. a single household cannot prudently plan for life expectancy, because they have a 50% chance of outliving the bond ladder). This is the role of the final leg in your approach, I'm sure, which is to self-insure for the longevity risk. An income annuity is typically cheaper because the over-funding risk and under-funding risk are balanced in the insurance pool.

A 30-year TIPS ladder set up to provide $1,200/month of real income would cost about $340,000 to fund by my calculation. That would provide almost a lifetime income for a 65-year old male retiree (they'd be exposed to longevity risk of living past age 95).

Currently a SPIA that provides $1,200/month of income with a 2% COLA would cost about $260,000 according to ImmediateAnnuities.com. Principal Life Insurance was providing quotes for CPI-linked annuities until recently but seems to no longer be doing so, which means the fixed-COLA SPIA does retain some inflation risk. But with the Social Security benefit in the mix, it seems to me the risk of inflation exceeding 2% is less than the risk of the retiree living past age 95? YMMV.

I didn't run the numbers on Series I bonds, but they may well be a cheaper alternative than TIPS. Whether they are cheaper than the SPIA would be a question worth exploring.
thanks for doing the math on that. very interesting.

in addition to the 2% cola issue you raise, the other reason the 30 year tips ladder and the SPIA are not as directly comparable is mortality risk. if the 65 year old male dies at 66, the 30 year tips ladder is still around for his heirs. the $260k spent on the SPIA however is gone.

one way to adjust for this would be to discount the tips ladder using the mortality rate for each age. that would reduce the $340k down to a lower amount.
RIP Mr. Bogle.

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Re: Grok's LMP-5: Retiree Portfolio ala David Swensen

Post by LiveSimple » Sat Apr 11, 2020 12:31 pm

vineviz wrote:
Sat Apr 11, 2020 12:12 pm
A 30-year TIPS ladder set up to provide $1,200/month of real income would cost about $340,000 to fund by my calculation. That would provide almost a lifetime income for a 65-year old male retiree (they'd be exposed to longevity risk of living past age 95).
Please how to do the TIPS ladder, please can you explain.

Looking for which funds / etfs, the duration and how to spilt the $340,000 as mentioned above.

Overall how to get the $1200 from this ladder, is this interest alone or capital as well ?

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Re: Grok's LMP-5: Retiree Portfolio ala David Swensen

Post by bigskyguy » Sat Apr 11, 2020 12:40 pm

bigskyguy wrote:
Sat Apr 11, 2020 11:57 am
bigskyguy wrote:
Sat Apr 11, 2020 11:55 am
grok87 wrote:
Sat Apr 11, 2020 9:20 am
Grok's LMP-5: Retiree Portfolio ala David Swensen

In the previous post in this series,
viewtopic.php?f=10&t=245377
I argued for a “3-legged stool” approach to retirement investing consisting of:
a) Social Security,
b) Pension/Long-term TIPS,
c) Risk Portfolio of Stocks, Real Estate and Bonds.

Since many of us do not have employer pensions these days, the key takeaway was to buy a portfolio of Long Term TIPS, either by building your own TIPS-ladder or by buying a fund like LTPZ (Pimco 15+ year TIPS ETF).

As I write this however, Long term TIPS yields have collapsed due to the Covid-19 crisis:
5 year TIPS real yield -0.51%
10 year TIPS = -0.52%
30 year TIPS = -0.13%

So here is an alternative, based on ideas presented in David Swensen’s book Unconventional Success.

As many will recall, for those with a long term investment horizon (10+ years) David Swensen advocates the following LT-portfolio:
30% US Stocks
15% Developed International Stocks
10% Emerging Markets
15% Real Estate
15% Treasuries
15% TIPS

(For simplicity I’m going to say this works out to 55% Total World Stock / 15% REITS / 15% Treasuries / 15% TIPS)

For short investment horizons (1-2 years) he advocates staying in T-bills or cash.

What about intermediate investment horizons- say 6 years? In that case he argues you should interpolate. In other words since 6 years is halfway between 2 years and 10 years, you should be half in cash and half in the LT-portfolio above.

What implications does this have for a newly retired investor with say a expected retirement of 30 years? Such a retiree might construct the following table of needed funds:

Year……….Needed-Funds…….Cash…………LT-Portfolio
1…………….$1,000……………….$1,000……………$0
2…………….$1,000……………….$1,000……………$0
3…………….$1,000…………………$875…………….$125
4…………….$1,000………………….$750……………$250
5……………..$1,000…………………$625……………$375
6……………..$1,000………………….$500…………..$500
….
10……………$1,000………………….$0……………$1,000

30……………$1,000………………….$0……………$1,000
Total………$30,000………………..$5,500………$24,500

This implies that the new retiree should hold the following portfolio:

Stocks: 45% (VTWAX)
Real Estate: 12.25% (VGSLX)
Treasuries: 12.25% (VSIGX)
TIPS: 12.25% (VIPSX)
Cash 18.25%

For other posts in the series, see here
https://www.bogleheads.org/wiki/Grok%27s_tips

cheers,
grok
We are now in a world of globally low returns. Nominal bonds and inflation indexed bonds both reflect short and long term low return expectations. The extraordinary yet necessary Monetary interventions by the Fed and fiscal interventions of the Congress and Treasury are directly and indirectly supporting the prices of equities in virtually all developed economies. And at least for the near future commodities will be depressed by the economic slowdown. Given the world scene, I would pose it that TIPS remain a very viable basis for any LMP, not only short term but also long term.
And I would Very much appreciate anyone’s suggestion of a truly better alternative, given where we are.
Let's think about this a little differently. TIPS are presently returning -0.3% real at 20 years. Shiller's PE10 predicts a future real return for the S&P of 2.6%. That suggests a real return advantage for stocks of 2.9% going forward.
For comparison sake, the real return for the S&P for the last 50 years has averaged 5%. So, if one would have been content building a TIPS ladder between 2000 and 2015, when long term TIPS yielded a real return 1.5 and 2.5% (with a 2.5-3.5% real return disadvantage to stocks), why would one not be willing to do so today? The stock-TIPS real return spread has not substantively changed.

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Re: Grok's LMP-5: Retiree Portfolio ala David Swensen

Post by grok87 » Sat Apr 11, 2020 1:15 pm

bigskyguy wrote:
Sat Apr 11, 2020 12:40 pm


Let's think about this a little differently. TIPS are presently returning -0.3% real at 20 years. Shiller's PE10 predicts a future real return for the S&P of 2.6%. That suggests a real return advantage for stocks of 2.9% going forward.
For comparison sake, the real return for the S&P for the last 50 years has averaged 5%. So, if one would have been content building a TIPS ladder between 2000 and 2015, when long term TIPS yielded a real return 1.5 and 2.5% (with a 2.5-3.5% real return disadvantage to stocks), why would one not be willing to do so today? The stock-TIPS real return spread has not substantively changed.
I see your argument. My post was saying, "hey i've been a big advocate in the past of buying long term tips to match future retirement spending needs. but now that tips prices are so high and real yields are so low, i think its worth considering an alternative approach."

your point is that the S&P also looks pricey, implying low future stock returns.

Some thoughts:
1) PE10 has not been a great predictor of future stock returns. There was a paper by Vanguard that looked at it. they found it did have some usefulness but it was limited. they also found some usefulness from the traditional PE ratio. but the explanatory value was low. i'll try and link the paper when i have a chance or maybe someone else can

2) The portfolio i'm advocating as an alternative is not just us stocks, but international stocks including EM. those stocks do not look overvalued i don't think on a variety of metrics. see page 35 of this paper
https://pressroom.vanguard.com/nonindex ... k_2020.pdf

3) swensen's portfolio also includes REITS. they look somewhat cheap right now. https://www.greenstreetadvisors.com/insights/avgpremnav

4) my portfolio includes a bunch of cash. i would argue cash is cheap. tbill rates probably should be negative but the fed is not going to go there i don't think

cheers,
grok
RIP Mr. Bogle.

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Re: Grok's LMP-5: Retiree Portfolio ala David Swensen

Post by vineviz » Sat Apr 11, 2020 1:41 pm

grok87 wrote:
Sat Apr 11, 2020 12:21 pm
in addition to the 2% cola issue you raise, the other reason the 30 year tips ladder and the SPIA are not as directly comparable is mortality risk. if the 65 year old male dies at 66, the 30 year tips ladder is still around for his heirs. the $260k spent on the SPIA however is gone.
A "period certain" and/or "cash refund" rider is almost always available for income annuities, and for the case I illustrated (single 65-year old male) would add about $25k to the cost of the SPIA.
grok87 wrote:
Sat Apr 11, 2020 12:21 pm
one way to adjust for this would be to discount the tips ladder using the mortality rate for each age. that would reduce the $340k down to a lower amount.
This seems like a less satisfying approach, since it amplifies the longevity risk associated with the TIPS ladder.
"Far more money has been lost by investors preparing for corrections than has been lost in corrections themselves." ~~ Peter Lynch

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Re: Grok's LMP-5: Retiree Portfolio ala David Swensen

Post by grok87 » Sat Apr 11, 2020 1:47 pm

vineviz wrote:
Sat Apr 11, 2020 1:41 pm
grok87 wrote:
Sat Apr 11, 2020 12:21 pm
in addition to the 2% cola issue you raise, the other reason the 30 year tips ladder and the SPIA are not as directly comparable is mortality risk. if the 65 year old male dies at 66, the 30 year tips ladder is still around for his heirs. the $260k spent on the SPIA however is gone.
A "period certain" and/or "cash refund" rider is almost always available for income annuities, and for the case I illustrated (single 65-year old male) would add about $25k to the cost of the SPIA.
grok87 wrote:
Sat Apr 11, 2020 12:21 pm
one way to adjust for this would be to discount the tips ladder using the mortality rate for each age. that would reduce the $340k down to a lower amount.
This seems like a less satisfying approach, since it amplifies the longevity risk associated with the TIPS ladder.
really, a 30 year period certain only adds $25k to the cost?
that sounds like a good deal
RIP Mr. Bogle.

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Re: Grok's LMP-5: Retiree Portfolio ala David Swensen

Post by vineviz » Sat Apr 11, 2020 1:51 pm

LiveSimple wrote:
Sat Apr 11, 2020 12:31 pm
vineviz wrote:
Sat Apr 11, 2020 12:12 pm
A 30-year TIPS ladder set up to provide $1,200/month of real income would cost about $340,000 to fund by my calculation. That would provide almost a lifetime income for a 65-year old male retiree (they'd be exposed to longevity risk of living past age 95).
Please how to do the TIPS ladder, please can you explain.

Looking for which funds / etfs, the duration and how to spilt the $340,000 as mentioned above.

Overall how to get the $1200 from this ladder, is this interest alone or capital as well ?
There are several excellent threads on this process, which ideally involves buying individual TIPS.

Here's one, which contains links to two different spreadsheets which make it easy to calculate the ladder: viewtopic.php?t=93849
"Far more money has been lost by investors preparing for corrections than has been lost in corrections themselves." ~~ Peter Lynch

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Re: Grok's LMP-5: Retiree Portfolio ala David Swensen

Post by vineviz » Sat Apr 11, 2020 1:56 pm

grok87 wrote:
Sat Apr 11, 2020 1:47 pm
vineviz wrote:
Sat Apr 11, 2020 1:41 pm
grok87 wrote:
Sat Apr 11, 2020 12:21 pm
in addition to the 2% cola issue you raise, the other reason the 30 year tips ladder and the SPIA are not as directly comparable is mortality risk. if the 65 year old male dies at 66, the 30 year tips ladder is still around for his heirs. the $260k spent on the SPIA however is gone.
A "period certain" and/or "cash refund" rider is almost always available for income annuities, and for the case I illustrated (single 65-year old male) would add about $25k to the cost of the SPIA.
grok87 wrote:
Sat Apr 11, 2020 12:21 pm
one way to adjust for this would be to discount the tips ladder using the mortality rate for each age. that would reduce the $340k down to a lower amount.
This seems like a less satisfying approach, since it amplifies the longevity risk associated with the TIPS ladder.
really, a 30 year period certain only adds $25k to the cost?
that sounds like a good deal
I looked up a 20-year period certain rider (i.e. "Life & 20 Years Certain"). I'm not sure a 30-year period certain is available, but the "cash refund" rider would be the next best bet I guess.
"Far more money has been lost by investors preparing for corrections than has been lost in corrections themselves." ~~ Peter Lynch

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Re: Grok's LMP-5: Retiree Portfolio ala David Swensen

Post by #Cruncher » Sat Apr 11, 2020 1:58 pm

Ben Mathew wrote:
Sat Apr 11, 2020 10:41 am
$10,000 today will buy you, in twenty years,
$24,400 @ 1.00%
$19,486 @ -0.13%
I think you mean $20,000 today will buy you ...
vineviz wrote:
Sat Apr 11, 2020 12:12 pm
A 30-year TIPS ladder set up to provide $1,200/month of real income would cost about $340,000 to fund by my calculation.
$340,000 is way understated. That would correspond to an annual return of about +1.7%; while the most recent TIPS yields are almost all negative. [*]
1.7% = 12 * RATE(30 * 12, 1200, -340000, 0, 0)

Plugging prices from WSJ TIPS Quotes 4/9/2020 into my TIPS Ladder Builder spreadsheet shows it would cost $451,000 to provide 14,400 of Jan 1, 2020 dollars annually (1,200 per month) for 30 years. That corresponds to a return of about -0.28%.
-0.28% = RATE(30, 14400, -451000, 0, 0)

* Selected yields from WSJ TIPS Quotes 4/9/2020:

Code: Select all

  Matures   Coupon   YiIeld
01/15/2022  0.125%   0.414%                                        |XXXXXXXXXXXXXXXXXXXXXXXXXXXXXXX
01/15/2023  0.125%   0.091%                                        |XXXXXXX
01/15/2024  0.625%  (0.224%)                      XXXXXXXXXXXXXXXXX|
01/15/2025  0.250%  (0.377%)           XXXXXXXXXXXXXXXXXXXXXXXXXXXX|
01/15/2026  0.625%  (0.344%)             XXXXXXXXXXXXXXXXXXXXXXXXXX|
01/15/2027  0.375%  (0.348%)             XXXXXXXXXXXXXXXXXXXXXXXXXX|
01/15/2028  0.500%  (0.356%)            XXXXXXXXXXXXXXXXXXXXXXXXXXX|
01/15/2029  0.875%  (0.440%)      XXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXX|
01/15/2030  0.125%  (0.513%) XXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXX|
02/15/2040  2.125%  (0.153%)                            XXXXXXXXXXX|
02/15/2041  2.125%  (0.094%)                                XXXXXXX|
02/15/2042  0.750%  (0.091%)                                XXXXXXX|
02/15/2043  0.625%  (0.097%)                                XXXXXXX|
02/15/2044  1.375%  (0.108%)                               XXXXXXXX|
02/15/2045  0.750%  (0.116%)                              XXXXXXXXX|
02/15/2046  1.000%  (0.119%)                              XXXXXXXXX|
02/15/2047  0.875%  (0.124%)                              XXXXXXXXX|
02/15/2048  1.000%  (0.116%)                              XXXXXXXXX|
02/15/2049  1.000%  (0.122%)                              XXXXXXXXX|
02/15/2050  0.250%  (0.120%)                              XXXXXXXXX|

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Re: Grok's LMP-5: Retiree Portfolio ala David Swensen

Post by Ben Mathew » Sat Apr 11, 2020 2:02 pm

#Cruncher wrote:
Sat Apr 11, 2020 1:58 pm
Ben Mathew wrote:
Sat Apr 11, 2020 10:41 am
$10,000 today will buy you, in twenty years,
$24,400 @ 1.00%
$19,486 @ -0.13%
I think you mean $20,000 today will buy you ...
Corrected. Thanks!

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Re: Grok's LMP-5: Retiree Portfolio ala David Swensen

Post by vineviz » Sat Apr 11, 2020 2:07 pm

#Cruncher wrote:
Sat Apr 11, 2020 1:58 pm
vineviz wrote:
Sat Apr 11, 2020 12:12 pm
A 30-year TIPS ladder set up to provide $1,200/month of real income would cost about $340,000 to fund by my calculation.
$340,000 is way understated. That would correspond to an annual return of about +1.7%; while the most recent TIPS yields are almost all negative. [*]
1.7% = 12 * RATE(30 * 12, 1200, -340000, 0, 0)

Plugging prices from WSJ TIPS Quotes 4/9/2020 into my TIPS Ladder Builder spreadsheet shows it would cost $451,000 to provide 14,400 of Jan 1, 2020 dollars annually (1,200 per month) for 30 years. That corresponds to a return of about -0.28%.
-0.28% = RATE(30, 14400, -451000, 0, 0)
Thank you for correcting me. I think I'm using your spreadsheet, but I was using stale yields.

More catastrophically, I apparently forgot that there are 12 (not 10) months in a year. :0
"Far more money has been lost by investors preparing for corrections than has been lost in corrections themselves." ~~ Peter Lynch

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Re: Grok's LMP-5: Retiree Portfolio ala David Swensen

Post by capjak » Sat Apr 11, 2020 2:07 pm

grok87 wrote:
Sat Apr 11, 2020 12:21 pm
vineviz wrote:
Sat Apr 11, 2020 12:12 pm
grok87 wrote:
Sat Apr 11, 2020 11:31 am
the only thing in your post i'm not sure about is whether income annuities are "the cheapest way" right now. i would think ibonds would be cheaper as aj76er points out.
As I know you know, funding a lifetime of income using bonds effectively over-funding your retirement (i.e. a single household cannot prudently plan for life expectancy, because they have a 50% chance of outliving the bond ladder). This is the role of the final leg in your approach, I'm sure, which is to self-insure for the longevity risk. An income annuity is typically cheaper because the over-funding risk and under-funding risk are balanced in the insurance pool.

A 30-year TIPS ladder set up to provide $1,200/month of real income would cost about $340,000 to fund by my calculation. That would provide almost a lifetime income for a 65-year old male retiree (they'd be exposed to longevity risk of living past age 95).

Currently a SPIA that provides $1,200/month of income with a 2% COLA would cost about $260,000 according to ImmediateAnnuities.com. Principal Life Insurance was providing quotes for CPI-linked annuities until recently but seems to no longer be doing so, which means the fixed-COLA SPIA does retain some inflation risk. But with the Social Security benefit in the mix, it seems to me the risk of inflation exceeding 2% is less than the risk of the retiree living past age 95? YMMV.

I didn't run the numbers on Series I bonds, but they may well be a cheaper alternative than TIPS. Whether they are cheaper than the SPIA would be a question worth exploring.
thanks for doing the math on that. very interesting.

in addition to the 2% cola issue you raise, the other reason the 30 year tips ladder and the SPIA are not as directly comparable is mortality risk. if the 65 year old male dies at 66, the 30 year tips ladder is still around for his heirs. the $260k spent on the SPIA however is gone.

one way to adjust for this would be to discount the tips ladder using the mortality rate for each age. that would reduce the $340k down to a lower amount.
Or purchase the SPIA with return of premium upon death in the form of a cash refund ($329,000) or installments over 20 years ($332,000)

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Re: Grok's LMP-5: Retiree Portfolio ala David Swensen

Post by OffGridder » Sat Apr 11, 2020 2:38 pm

grok87 wrote:
Sat Apr 11, 2020 9:20 am
Grok's LMP-5: Retiree Portfolio ala David Swensen

So here is an alternative, based on ideas presented in David Swensen’s book Unconventional Success.

As many will recall, for those with a long term investment horizon (10+ years) David Swensen advocates the following LT-portfolio:
30% US Stocks
15% Developed International Stocks
10% Emerging Markets
15% Real Estate
15% Treasuries
15% TIPS

(For simplicity I’m going to say this works out to 55% Total World Stock / 15% REITS / 15% Treasuries / 15% TIPS)

For short investment horizons (1-2 years) he advocates staying in T-bills or cash.

What about intermediate investment horizons- say 6 years? In that case he argues you should interpolate. In other words since 6 years is halfway between 2 years and 10 years, you should be half in cash and half in the LT-portfolio above.

What implications does this have for a newly retired investor with say a expected retirement of 30 years? Such a retiree might construct the following table of needed funds:

Year……….Needed-Funds…….Cash…………LT-Portfolio
1…………….$1,000……………….$1,000……………$0
2…………….$1,000……………….$1,000……………$0
3…………….$1,000…………………$875…………….$125
4…………….$1,000………………….$750……………$250
5……………..$1,000…………………$625……………$375
6……………..$1,000………………….$500…………..$500
….
10……………$1,000………………….$0……………$1,000

30……………$1,000………………….$0……………$1,000
Total………$30,000………………..$5,500………$24,500

This implies that the new retiree should hold the following portfolio:

Stocks: 45% (VTWAX)
Real Estate: 12.25% (VGSLX)
Treasuries: 12.25% (VSIGX)
TIPS: 12.25% (VIPSX)
Cash 18.25%

For other posts in the series, see here
https://www.bogleheads.org/wiki/Grok%27s_tips

cheers,
grok
I have seen this approach before. What has not been clear to me is whether this just another method for calculating your total portfolio asset allocation or if it is just another form of "bucketeering". Once you arrive at your asset allocation, do you just rebalance periodically on a percentage basis including the allocation to cash? Or is the intent to burn through the cash, with the expectation to be able replenish the cash bucket from the LT portfolio at some tbd future point in time?
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Re: Grok's LMP-5: Retiree Portfolio ala David Swensen

Post by dbr » Sat Apr 11, 2020 2:53 pm

OffGridder wrote:
Sat Apr 11, 2020 2:38 pm

I have seen this approach before. What has not been clear to me is whether this just another method for calculating your total portfolio asset allocation or if it is just another form of "bucketeering". Once you arrive at your asset allocation, do you just rebalance periodically on a percentage basis including the allocation to cash? Or is the intent to burn through the cash, with the expectation to be able replenish the cash bucket from the LT portfolio at some tbd future point in time?
In my (possibly limited) mind an LMP either is or it isn't. The basic idea was never a portfolio as such. It was/is a plan to deploy assets where they can be drawn on according to a pre-determined plan for income with neither market nor inflation risk, and hopefully little default risk. The inflation indexed annuity takes care of the first two of those and add managing longevity risk, but is subject to agency (default) risk. The TIPS ladder manages the first two, has effectively zero default risk but does not explicitly manage longevity risk beyond the length of the ladder.

It does seem to me that proposing a portfolio that is not explicitly constructed to meet those goals of an LMP is not an LMP. But, as the saying goes, there is nothing wrong with that -- it is just not an LMP. If you rebalance it is just a portfolio, and if you don't have and hold a target, it is buckets. Again, not that there is anything wrong with that. It will do what it does.

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Re: Grok's LMP-5: Retiree Portfolio ala David Swensen

Post by bobcat2 » Sat Apr 11, 2020 2:56 pm

What should the new retiree do in this world of low yields?

It's hard to believe the equity risk premium of stocks over bonds will not be in the range of 2% to 4.5%. So we have bonds with negative yields and stocks returning 1% to 4%. What to do?

Besides delaying Social Security benefits, try to go back to work at least part-time once the economic crisis has passed, and save a lot of that income. Take out a reverse mortgage (RM), IMO preferably a line of credit RM. Interest rates are low, a RM is a loan, and you don't pay income taxes on a loan. Finally, consider a deferred lifetime annuity, aka a longevity annuity.

If you are near retirement save a lot and barring health issues work until at least 68 and delay Social Security.

If you have a DB pension consider yourself very fortunate.

IMO you cannot invest your way out of this mess despite the tortured arguments to the contrary in this thread. :(

BobK
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Re: Grok's LMP-5: Retiree Portfolio ala David Swensen

Post by Dottie57 » Sat Apr 11, 2020 3:20 pm

So what you invest in for FI is dependent on your time horizon. What is the time horizon! Is it retirement date, 5 years from retirement or ....?

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Re: Grok's LMP-5: Retiree Portfolio ala David Swensen

Post by FIREchief » Sat Apr 11, 2020 3:35 pm

Ben Mathew wrote:
Sat Apr 11, 2020 10:41 am
I'm not sure that negative real interest rates should cause you to abandon TIPS in favor of riskier assets. $20,000 today will buy you, in twenty years,

$24,400 @ 1.00%
$19,486 @ -0.13%

That's a painful difference, sure, but I don't think it argues for rejecting TIPS given that there are no comparable options offering better yields anywhere else. It's not like nominal treasury yields are any better. We are living in a time of ultra low interest rates, and the current TIPS yields are a reflection of that. It's unfortunate, but that's what we have to work with. Chasing yield and pushing into risky strategies seems like it wouldn't be the right thing to do for previously conservative investors, unless it's clear that yield spreads have widened, risk-adjusted. Given that there's a lot more risk in the business world now than pre-covid, high yields outside of treasuries might just reflect higher risk.
Excellent post. I utilize a ten year TIPS ladder for my LMP and am currently about half way through funding the final rung. I may incur a negative real yield in the May auction, but that will mean that one half of one of my ten rungs will be purchased at a premium (it will still have a .125% minimum coupon). My long term projections assume zero real yield for all TIPS, so I'll still be ahead for years. Sure, five years from now I may be running an overall negative yield, but if so I'll just shift a bit from my RP back into the LMP. I was already projecting a rising equity glidepath, so it may just not rise as quickly.
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Re: Grok's LMP-5: Retiree Portfolio ala David Swensen

Post by JohnDoh » Sat Apr 11, 2020 3:41 pm

grok87 wrote:
Sat Apr 11, 2020 1:15 pm

3) swensen's portfolio also includes REITS. they look somewhat cheap right now. https://www.greenstreetadvisors.com/insights/avgpremnav
I think this is largely because the NAVs are stale because they lag the stock prices of REITs by a considerable time. This is what allow the TIAA REAL ESTATE ACCOUNT to be market timed.

See this thread over at the M* TIAA forum:
https://community.morningstar.com/t5/TI ... d-p/689772

especially this post by NSkipper:
https://community.morningstar.com/t5/TI ... true#M5810

which includes:
Image

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Re: Grok's LMP-5: Retiree Portfolio ala David Swensen

Post by grok87 » Sat Apr 11, 2020 3:45 pm

OffGridder wrote:
Sat Apr 11, 2020 2:38 pm
grok87 wrote:
Sat Apr 11, 2020 9:20 am
Grok's LMP-5: Retiree Portfolio ala David Swensen

So here is an alternative, based on ideas presented in David Swensen’s book Unconventional Success.

As many will recall, for those with a long term investment horizon (10+ years) David Swensen advocates the following LT-portfolio:
30% US Stocks
15% Developed International Stocks
10% Emerging Markets
15% Real Estate
15% Treasuries
15% TIPS

(For simplicity I’m going to say this works out to 55% Total World Stock / 15% REITS / 15% Treasuries / 15% TIPS)

For short investment horizons (1-2 years) he advocates staying in T-bills or cash.

What about intermediate investment horizons- say 6 years? In that case he argues you should interpolate. In other words since 6 years is halfway between 2 years and 10 years, you should be half in cash and half in the LT-portfolio above.

What implications does this have for a newly retired investor with say a expected retirement of 30 years? Such a retiree might construct the following table of needed funds:

Year……….Needed-Funds…….Cash…………LT-Portfolio
1…………….$1,000……………….$1,000……………$0
2…………….$1,000……………….$1,000……………$0
3…………….$1,000…………………$875…………….$125
4…………….$1,000………………….$750……………$250
5……………..$1,000…………………$625……………$375
6……………..$1,000………………….$500…………..$500
….
10……………$1,000………………….$0……………$1,000

30……………$1,000………………….$0……………$1,000
Total………$30,000………………..$5,500………$24,500

This implies that the new retiree should hold the following portfolio:

Stocks: 45% (VTWAX)
Real Estate: 12.25% (VGSLX)
Treasuries: 12.25% (VSIGX)
TIPS: 12.25% (VIPSX)
Cash 18.25%

For other posts in the series, see here
https://www.bogleheads.org/wiki/Grok%27s_tips

cheers,
grok
I have seen this approach before. What has not been clear to me is whether this just another method for calculating your total portfolio asset allocation or if it is just another form of "bucketeering". Once you arrive at your asset allocation, do you just rebalance periodically on a percentage basis including the allocation to cash? Or is the intent to burn through the cash, with the expectation to be able replenish the cash bucket from the LT portfolio at some tbd future point in time?
It's a good question. Yes i suppose it may be just another form of bucketeering. Swensen doesn't actually give an example of his approach being applied to a 30 year retirement spending plan. But here's how i think applying his method might work (for simplicity i'm assuming inflation and cash return are both 0 and LT-Portfolio grows at a constant 3%)

T=0: $30k portfolio = $5.5k cash and $24.5 k in LT-Portfolio.
T=0.99: $30.735k portfolio = $5.5k cash and $25.235 k in LT Portfolio. Now withdraw $1k, and reset portfolio for 29 years of spending needs
T=1.0: $29.735k portfolio - $5.5k cash and $24.235 k in LT Portfolio.

Now i guess this is the interesting point. At time T=1, you are investing for 29 years of spending needs of $1k each. So only $29k is needed. Since the risk portfolio grew by 3% you have an excess of $0.735 k and the question is where to put it. I think Swensen's method would say to stick it in the LT Portfolio. Again his main idea is that the LT portfolio is for funds with a time horizon of 10+ years. Funds needed in 1 or 2 years should be in cash. For years in-between you interpolate.

hope that helps.
cheers,
grok
RIP Mr. Bogle.

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Re: Grok's LMP-5: Retiree Portfolio ala David Swensen

Post by vineviz » Sat Apr 11, 2020 3:47 pm

Dottie57 wrote:
Sat Apr 11, 2020 3:20 pm
So what you invest in for FI is dependent on your time horizon. What is the time horizon! Is it retirement date, 5 years from retirement or ....?
Mathematically, your investment time horizon is the weighted average time to your future expenses.

A first-order approximation would be a simple 4 step calculation:

1) Use an actuarial table or calculator to estimate out the age by which you have a high (e.g. 95%) probability of being dead: this is something like age 95 for men and 98 for women);
2) Use your best judgment to estimate the age at which you'll retire (or your current age if already retired);
3) Compute the average of the results from step 1 and step 2 (e.g. (98+65)/2).
4) Subtract your current age from the result of step 3.

In the example I used here, the investment time horizon of a 65-year old female would be approximately 16.5 years. The bond portfolio which minimizes interest rate risk for such an investor would have a weighted average duration of 16.5 years (give or take).
"Far more money has been lost by investors preparing for corrections than has been lost in corrections themselves." ~~ Peter Lynch

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grok87
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Re: Grok's LMP-5: Retiree Portfolio ala David Swensen

Post by grok87 » Sat Apr 11, 2020 3:53 pm

dbr wrote:
Sat Apr 11, 2020 2:53 pm
OffGridder wrote:
Sat Apr 11, 2020 2:38 pm

I have seen this approach before. What has not been clear to me is whether this just another method for calculating your total portfolio asset allocation or if it is just another form of "bucketeering". Once you arrive at your asset allocation, do you just rebalance periodically on a percentage basis including the allocation to cash? Or is the intent to burn through the cash, with the expectation to be able replenish the cash bucket from the LT portfolio at some tbd future point in time?
In my (possibly limited) mind an LMP either is or it isn't. The basic idea was never a portfolio as such. It was/is a plan to deploy assets where they can be drawn on according to a pre-determined plan for income with neither market nor inflation risk, and hopefully little default risk. The inflation indexed annuity takes care of the first two of those and add managing longevity risk, but is subject to agency (default) risk. The TIPS ladder manages the first two, has effectively zero default risk but does not explicitly manage longevity risk beyond the length of the ladder.

It does seem to me that proposing a portfolio that is not explicitly constructed to meet those goals of an LMP is not an LMP. But, as the saying goes, there is nothing wrong with that -- it is just not an LMP. If you rebalance it is just a portfolio, and if you don't have and hold a target, it is buckets. Again, not that there is anything wrong with that. It will do what it does.
i think that's fair. In this approach we are not "matching" retirement spending needs in the strictest sense of an inflation-indexed annuity or a TIPS ladder. There is no guarantee that things will turn out well.

But we are however taking into account the time horizon of the future spending needs- the interpolation thing if you will. That's something that most safe withdrawal rate approaches that i have seen fail to do. So perhaps one might call this a Liability "managed" Portfolio or LmP?

cheers,
grok
RIP Mr. Bogle.

Topic Author
grok87
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Re: Grok's LMP-5: Retiree Portfolio ala David Swensen

Post by grok87 » Sat Apr 11, 2020 3:55 pm

Dottie57 wrote:
Sat Apr 11, 2020 3:20 pm
So what you invest in for FI is dependent on your time horizon. What is the time horizon! Is it retirement date, 5 years from retirement or ....?
Hi Dottie,
In this example the person has just retired and is investing for a 30 year retirement spending plan.
cheers,
grok
RIP Mr. Bogle.

dbr
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Re: Grok's LMP-5: Retiree Portfolio ala David Swensen

Post by dbr » Sat Apr 11, 2020 4:00 pm

grok87 wrote:
Sat Apr 11, 2020 3:53 pm
dbr wrote:
Sat Apr 11, 2020 2:53 pm
OffGridder wrote:
Sat Apr 11, 2020 2:38 pm

I have seen this approach before. What has not been clear to me is whether this just another method for calculating your total portfolio asset allocation or if it is just another form of "bucketeering". Once you arrive at your asset allocation, do you just rebalance periodically on a percentage basis including the allocation to cash? Or is the intent to burn through the cash, with the expectation to be able replenish the cash bucket from the LT portfolio at some tbd future point in time?
In my (possibly limited) mind an LMP either is or it isn't. The basic idea was never a portfolio as such. It was/is a plan to deploy assets where they can be drawn on according to a pre-determined plan for income with neither market nor inflation risk, and hopefully little default risk. The inflation indexed annuity takes care of the first two of those and add managing longevity risk, but is subject to agency (default) risk. The TIPS ladder manages the first two, has effectively zero default risk but does not explicitly manage longevity risk beyond the length of the ladder.

It does seem to me that proposing a portfolio that is not explicitly constructed to meet those goals of an LMP is not an LMP. But, as the saying goes, there is nothing wrong with that -- it is just not an LMP. If you rebalance it is just a portfolio, and if you don't have and hold a target, it is buckets. Again, not that there is anything wrong with that. It will do what it does.
i think that's fair. In this approach we are not "matching" retirement spending needs in the strictest sense of an inflation-indexed annuity or a TIPS ladder. There is no guarantee that things will turn out well.

But we are however taking into account the time horizon of the future spending needs- the interpolation thing if you will. That's something that most safe withdrawal rate approaches that i have seen fail to do. So perhaps one might call this a Liability "managed" Portfolio or LmP?

cheers,
grok
Sounds good to me.

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grok87
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Re: Grok's LMP-5: Retiree Portfolio ala David Swensen

Post by grok87 » Sat Apr 11, 2020 4:01 pm

vineviz wrote:
Sat Apr 11, 2020 3:47 pm
Dottie57 wrote:
Sat Apr 11, 2020 3:20 pm
So what you invest in for FI is dependent on your time horizon. What is the time horizon! Is it retirement date, 5 years from retirement or ....?
Mathematically, your investment time horizon is the weighted average time to your future expenses.

A first-order approximation would be a simple 4 step calculation:

1) Use an actuarial table or calculator to estimate out the age by which you have a high (e.g. 95%) probability of being dead: this is something like age 95 for men and 98 for women);
2) Use your best judgment to estimate the age at which you'll retire (or your current age if already retired);
3) Compute the average of the results from step 1 and step 2 (e.g. (98+65)/2).
4) Subtract your current age from the result of step 3.

In the example I used here, the investment time horizon of a 65-year old female would be approximately 16.5 years. The bond portfolio which minimizes interest rate risk for such an investor would have a weighted average duration of 16.5 years (give or take).
agree but i would argue for that being a real duration of 16.5 not nominal.

the vanguard tips fund VIPSX has a real duration of 7.7 years and i think the PIMCO long term tips fund LTPZ is at a real duration of about 22 years so a 40/60 mix of those funds would get you roughly to a real duration of 16.5 years..
RIP Mr. Bogle.

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grok87
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Re: Grok's LMP-5: Retiree Portfolio ala David Swensen

Post by grok87 » Sat Apr 11, 2020 4:04 pm

bobcat2 wrote:
Sat Apr 11, 2020 2:56 pm
What should the new retiree do in this world of low yields?

It's hard to believe the equity risk premium of stocks over bonds will not be in the range of 2% to 4.5%. So we have bonds with negative yields and stocks returning 1% to 4%. What to do?

Besides delaying Social Security benefits, try to go back to work at least part-time once the economic crisis has passed, and save a lot of that income. Take out a reverse mortgage (RM), IMO preferably a line of credit RM. Interest rates are low, a RM is a loan, and you don't pay income taxes on a loan. Finally, consider a deferred lifetime annuity, aka a longevity annuity.

If you are near retirement save a lot and barring health issues work until at least 68 and delay Social Security.

If you have a DB pension consider yourself very fortunate.

IMO you cannot invest your way out of this mess despite the tortured arguments to the contrary in this thread. :(

BobK
Thanks BobK. Reverse Mortgages sound interesting. I thought the fees were a problem though. Do you know of any stats as to whether their fees have gotten more reasonable?
cheers
grok
RIP Mr. Bogle.

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Horton
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Re: Grok's LMP-5: Retiree Portfolio ala David Swensen

Post by Horton » Sat Apr 11, 2020 4:08 pm

If I was in or near retirement, I would seriously consider swapping a portion of my fixed income allocation for a Single Premium Immediate Annuity (SPIAs). SPIAs are typically priced using high quality corporate bond yields (AA). Since spreads have widened, corporate bond rates haven't fallen as much as Treasuries.

I would buy a nominal SPIA, hold some TIPS, and periodically (every 5 years perhaps) purchase more annuity income, as needed, to preserve my standard of living.

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grok87
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Re: Grok's LMP-5: Retiree Portfolio ala David Swensen

Post by grok87 » Sat Apr 11, 2020 4:09 pm

JohnDoh wrote:
Sat Apr 11, 2020 3:41 pm
grok87 wrote:
Sat Apr 11, 2020 1:15 pm

3) swensen's portfolio also includes REITS. they look somewhat cheap right now. https://www.greenstreetadvisors.com/insights/avgpremnav
I think this is largely because the NAVs are stale because they lag the stock prices of REITs by a considerable time. This is what allow the TIAA REAL ESTATE ACCOUNT to be market timed.

See this thread over at the M* TIAA forum:
https://community.morningstar.com/t5/TI ... d-p/689772

especially this post by NSkipper:
https://community.morningstar.com/t5/TI ... true#M5810

which includes:
Image
thanks. would be interesting to see that chart extended from 2014 to today!
RIP Mr. Bogle.

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grok87
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Re: Grok's LMP-5: Retiree Portfolio ala David Swensen

Post by grok87 » Sat Apr 11, 2020 4:11 pm

Horton wrote:
Sat Apr 11, 2020 4:08 pm
If I was in or near retirement, I would seriously consider swapping a portion of my fixed income allocation for a Single Premium Immediate Annuity (SPIAs). SPIAs are typically priced using high quality corporate bond yields (AA). Since spreads have widened, corporate bond rates haven't fallen as much as Treasuries.

I would buy a nominal SPIA, hold some TIPS, and periodically (every 5 years perhaps) purchase more annuity income, as needed, to preserve my standard of living.
that's an interesting point about the corporate bond yields. do you have any data on what SPIAs have done recently?
RIP Mr. Bogle.

Dottie57
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Re: Grok's LMP-5: Retiree Portfolio ala David Swensen

Post by Dottie57 » Sat Apr 11, 2020 4:53 pm

vineviz wrote:
Sat Apr 11, 2020 3:47 pm
Dottie57 wrote:
Sat Apr 11, 2020 3:20 pm
So what you invest in for FI is dependent on your time horizon. What is the time horizon! Is it retirement date, 5 years from retirement or ....?
Mathematically, your investment time horizon is the weighted average time to your future expenses.

A first-order approximation would be a simple 4 step calculation:

1) Use an actuarial table or calculator to estimate out the age by which you have a high (e.g. 95%) probability of being dead: this is something like age 95 for men and 98 for women);
2) Use your best judgment to estimate the age at which you'll retire (or your current age if already retired);
3) Compute the average of the results from step 1 and step 2 (e.g. (98+65)/2).
4) Subtract your current age from the result of step 3.

In the example I used here, the investment time horizon of a 65-year old female would be approximately 16.5 years. The bond portfolio which minimizes interest rate risk for such an investor would have a weighted average duration of 16.5 years (give or take).
Thank you for such a clear answer?

OffGridder
Posts: 90
Joined: Thu Jul 23, 2015 8:03 am
Location: Eastern WA.

Re: Grok's LMP-5: Retiree Portfolio ala David Swensen

Post by OffGridder » Sat Apr 11, 2020 5:06 pm

grok87 wrote:
Sat Apr 11, 2020 3:45 pm
OffGridder wrote:
Sat Apr 11, 2020 2:38 pm
grok87 wrote:
Sat Apr 11, 2020 9:20 am
Grok's LMP-5: Retiree Portfolio ala David Swensen

So here is an alternative, based on ideas presented in David Swensen’s book Unconventional Success.

As many will recall, for those with a long term investment horizon (10+ years) David Swensen advocates the following LT-portfolio:
30% US Stocks
15% Developed International Stocks
10% Emerging Markets
15% Real Estate
15% Treasuries
15% TIPS

(For simplicity I’m going to say this works out to 55% Total World Stock / 15% REITS / 15% Treasuries / 15% TIPS)

For short investment horizons (1-2 years) he advocates staying in T-bills or cash.

What about intermediate investment horizons- say 6 years? In that case he argues you should interpolate. In other words since 6 years is halfway between 2 years and 10 years, you should be half in cash and half in the LT-portfolio above.

What implications does this have for a newly retired investor with say a expected retirement of 30 years? Such a retiree might construct the following table of needed funds:

Year……….Needed-Funds…….Cash…………LT-Portfolio
1…………….$1,000……………….$1,000……………$0
2…………….$1,000……………….$1,000……………$0
3…………….$1,000…………………$875…………….$125
4…………….$1,000………………….$750……………$250
5……………..$1,000…………………$625……………$375
6……………..$1,000………………….$500…………..$500
….
10……………$1,000………………….$0……………$1,000

30……………$1,000………………….$0……………$1,000
Total………$30,000………………..$5,500………$24,500

This implies that the new retiree should hold the following portfolio:

Stocks: 45% (VTWAX)
Real Estate: 12.25% (VGSLX)
Treasuries: 12.25% (VSIGX)
TIPS: 12.25% (VIPSX)
Cash 18.25%

For other posts in the series, see here
https://www.bogleheads.org/wiki/Grok%27s_tips

cheers,
grok
I have seen this approach before. What has not been clear to me is whether this just another method for calculating your total portfolio asset allocation or if it is just another form of "bucketeering". Once you arrive at your asset allocation, do you just rebalance periodically on a percentage basis including the allocation to cash? Or is the intent to burn through the cash, with the expectation to be able replenish the cash bucket from the LT portfolio at some tbd future point in time?
It's a good question. Yes i suppose it may be just another form of bucketeering. Swensen doesn't actually give an example of his approach being applied to a 30 year retirement spending plan. But here's how i think applying his method might work (for simplicity i'm assuming inflation and cash return are both 0 and LT-Portfolio grows at a constant 3%)

T=0: $30k portfolio = $5.5k cash and $24.5 k in LT-Portfolio.
T=0.99: $30.735k portfolio = $5.5k cash and $25.235 k in LT Portfolio. Now withdraw $1k, and reset portfolio for 29 years of spending needs
T=1.0: $29.735k portfolio - $5.5k cash and $24.235 k in LT Portfolio.

Now i guess this is the interesting point. At time T=1, you are investing for 29 years of spending needs of $1k each. So only $29k is needed. Since the risk portfolio grew by 3% you have an excess of $0.735 k and the question is where to put it. I think Swensen's method would say to stick it in the LT Portfolio. Again his main idea is that the LT portfolio is for funds with a time horizon of 10+ years. Funds needed in 1 or 2 years should be in cash. For years in-between you interpolate.

hope that helps.
cheers,
grok
Thank you. Using your interpretation, Swenson's approach would be just a more aggressive version of Bill Bernstein's LMP / Risk Portfolio. Swensen is shooting for 10 years spend in cash / intermediate treasuries / TIPS and Bernstein's version is 25 years spend in T-Bills and/ or laddered TIPS.

Best Regards,
Dave
"Goodness is the only investment that never fails." | H.D. Thoreau

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Horton
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Re: Grok's LMP-5: Retiree Portfolio ala David Swensen

Post by Horton » Sat Apr 11, 2020 5:07 pm

grok87 wrote:
Sat Apr 11, 2020 4:11 pm
Horton wrote:
Sat Apr 11, 2020 4:08 pm
If I was in or near retirement, I would seriously consider swapping a portion of my fixed income allocation for a Single Premium Immediate Annuity (SPIAs). SPIAs are typically priced using high quality corporate bond yields (AA). Since spreads have widened, corporate bond rates haven't fallen as much as Treasuries.

I would buy a nominal SPIA, hold some TIPS, and periodically (every 5 years perhaps) purchase more annuity income, as needed, to preserve my standard of living.
that's an interesting point about the corporate bond yields. do you have any data on what SPIAs have done recently?
Blueprint Income hosted a good webinar earlier this week and discussed the chart below, which shows annuity payouts rates over time along with the 10 year Treasury.

Image

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Horton
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Re: Grok's LMP-5: Retiree Portfolio ala David Swensen

Post by Horton » Sat Apr 11, 2020 5:08 pm

Dottie57 wrote:
Sat Apr 11, 2020 4:53 pm
vineviz wrote:
Sat Apr 11, 2020 3:47 pm
Dottie57 wrote:
Sat Apr 11, 2020 3:20 pm
So what you invest in for FI is dependent on your time horizon. What is the time horizon! Is it retirement date, 5 years from retirement or ....?
Mathematically, your investment time horizon is the weighted average time to your future expenses.

A first-order approximation would be a simple 4 step calculation:

1) Use an actuarial table or calculator to estimate out the age by which you have a high (e.g. 95%) probability of being dead: this is something like age 95 for men and 98 for women);
2) Use your best judgment to estimate the age at which you'll retire (or your current age if already retired);
3) Compute the average of the results from step 1 and step 2 (e.g. (98+65)/2).
4) Subtract your current age from the result of step 3.

In the example I used here, the investment time horizon of a 65-year old female would be approximately 16.5 years. The bond portfolio which minimizes interest rate risk for such an investor would have a weighted average duration of 16.5 years (give or take).
Thank you for such a clear answer?
In case its helpful, here is a link to the Longevity Illustrator.

Topic Author
grok87
Posts: 9139
Joined: Tue Feb 27, 2007 9:00 pm

Re: Grok's LMP-5: Retiree Portfolio ala David Swensen

Post by grok87 » Sat Apr 11, 2020 5:22 pm

OffGridder wrote:
Sat Apr 11, 2020 5:06 pm
grok87 wrote:
Sat Apr 11, 2020 3:45 pm
OffGridder wrote:
Sat Apr 11, 2020 2:38 pm
grok87 wrote:
Sat Apr 11, 2020 9:20 am
Grok's LMP-5: Retiree Portfolio ala David Swensen

So here is an alternative, based on ideas presented in David Swensen’s book Unconventional Success.

As many will recall, for those with a long term investment horizon (10+ years) David Swensen advocates the following LT-portfolio:
30% US Stocks
15% Developed International Stocks
10% Emerging Markets
15% Real Estate
15% Treasuries
15% TIPS

(For simplicity I’m going to say this works out to 55% Total World Stock / 15% REITS / 15% Treasuries / 15% TIPS)

For short investment horizons (1-2 years) he advocates staying in T-bills or cash.

What about intermediate investment horizons- say 6 years? In that case he argues you should interpolate. In other words since 6 years is halfway between 2 years and 10 years, you should be half in cash and half in the LT-portfolio above.

What implications does this have for a newly retired investor with say a expected retirement of 30 years? Such a retiree might construct the following table of needed funds:

Year……….Needed-Funds…….Cash…………LT-Portfolio
1…………….$1,000……………….$1,000……………$0
2…………….$1,000……………….$1,000……………$0
3…………….$1,000…………………$875…………….$125
4…………….$1,000………………….$750……………$250
5……………..$1,000…………………$625……………$375
6……………..$1,000………………….$500…………..$500
….
10……………$1,000………………….$0……………$1,000

30……………$1,000………………….$0……………$1,000
Total………$30,000………………..$5,500………$24,500

This implies that the new retiree should hold the following portfolio:

Stocks: 45% (VTWAX)
Real Estate: 12.25% (VGSLX)
Treasuries: 12.25% (VSIGX)
TIPS: 12.25% (VIPSX)
Cash 18.25%

For other posts in the series, see here
https://www.bogleheads.org/wiki/Grok%27s_tips

cheers,
grok
I have seen this approach before. What has not been clear to me is whether this just another method for calculating your total portfolio asset allocation or if it is just another form of "bucketeering". Once you arrive at your asset allocation, do you just rebalance periodically on a percentage basis including the allocation to cash? Or is the intent to burn through the cash, with the expectation to be able replenish the cash bucket from the LT portfolio at some tbd future point in time?
It's a good question. Yes i suppose it may be just another form of bucketeering. Swensen doesn't actually give an example of his approach being applied to a 30 year retirement spending plan. But here's how i think applying his method might work (for simplicity i'm assuming inflation and cash return are both 0 and LT-Portfolio grows at a constant 3%)

T=0: $30k portfolio = $5.5k cash and $24.5 k in LT-Portfolio.
T=0.99: $30.735k portfolio = $5.5k cash and $25.235 k in LT Portfolio. Now withdraw $1k, and reset portfolio for 29 years of spending needs
T=1.0: $29.735k portfolio - $5.5k cash and $24.235 k in LT Portfolio.

Now i guess this is the interesting point. At time T=1, you are investing for 29 years of spending needs of $1k each. So only $29k is needed. Since the risk portfolio grew by 3% you have an excess of $0.735 k and the question is where to put it. I think Swensen's method would say to stick it in the LT Portfolio. Again his main idea is that the LT portfolio is for funds with a time horizon of 10+ years. Funds needed in 1 or 2 years should be in cash. For years in-between you interpolate.

hope that helps.
cheers,
grok
Thank you. Using your interpretation, Swenson's approach would be just a more aggressive version of Bill Bernstein's LMP / Risk Portfolio. Swensen is shooting for 10 years spend in cash / intermediate treasuries / TIPS and Bernstein's version is 25 years spend in T-Bills and/ or laddered TIPS.

Best Regards,
Dave
you're welcome. I think it works out to 12.8 years in cash/treasuries/tips
RIP Mr. Bogle.

Topic Author
grok87
Posts: 9139
Joined: Tue Feb 27, 2007 9:00 pm

Re: Grok's LMP-5: Retiree Portfolio ala David Swensen

Post by grok87 » Sat Apr 11, 2020 5:36 pm

Horton wrote:
Sat Apr 11, 2020 5:07 pm
grok87 wrote:
Sat Apr 11, 2020 4:11 pm
Horton wrote:
Sat Apr 11, 2020 4:08 pm
If I was in or near retirement, I would seriously consider swapping a portion of my fixed income allocation for a Single Premium Immediate Annuity (SPIAs). SPIAs are typically priced using high quality corporate bond yields (AA). Since spreads have widened, corporate bond rates haven't fallen as much as Treasuries.

I would buy a nominal SPIA, hold some TIPS, and periodically (every 5 years perhaps) purchase more annuity income, as needed, to preserve my standard of living.
that's an interesting point about the corporate bond yields. do you have any data on what SPIAs have done recently?
Blueprint Income hosted a good webinar earlier this week and discussed the chart below, which shows annuity payouts rates over time along with the 10 year Treasury.

Image
thanks. i watched some of the video. interesting
RIP Mr. Bogle.

JohnDoh
Posts: 138
Joined: Sat Nov 30, 2013 10:28 am

Re: Grok's LMP-5: Retiree Portfolio ala David Swensen

Post by JohnDoh » Sat Apr 11, 2020 5:56 pm

Horton wrote:
Sat Apr 11, 2020 5:07 pm
grok87 wrote:
Sat Apr 11, 2020 4:11 pm
Horton wrote:
Sat Apr 11, 2020 4:08 pm
If I was in or near retirement, I would seriously consider swapping a portion of my fixed income allocation for a Single Premium Immediate Annuity (SPIAs). SPIAs are typically priced using high quality corporate bond yields (AA). Since spreads have widened, corporate bond rates haven't fallen as much as Treasuries.

I would buy a nominal SPIA, hold some TIPS, and periodically (every 5 years perhaps) purchase more annuity income, as needed, to preserve my standard of living.
that's an interesting point about the corporate bond yields. do you have any data on what SPIAs have done recently?
Blueprint Income hosted a good webinar earlier this week and discussed the chart below, which shows annuity payouts rates over time along with the 10 year Treasury.

Image
Thanks for sharing this.

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