Retirement with zero stock/bond market risk

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Topic Author
Gnomon
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Retirement with zero stock/bond market risk

Post by Gnomon »

In theory, if a person has enough saved at retirement to cover their inflation-adjusted expenses over their estimated lifetime, they would not have to take any stock market risk with their savings, and would have no sequence of returns risk since there is no reliance on market returns.

That zero market risk approach always seemed appealing to me and that's what I have been aiming for. I'd like to be done with worrying about markets, especially in the early retirement years.

In the most basic form (i.e. assume zero social security benefit and zero return on your cash portfolio), if you retire having $40k in annual living expenses, a 40 year retirement timeline, and assume 2.5% inflation, then I think you can use the FV() function in excel to figure out what your starting portfolio size needs to be:
in Excel: =FV(2.5%, 40, -40000)

And that equals $2,696,102, or 67.4x initial expenses. That's not an attainable number for most people. But…if you include beginning a social security benefit at age 67 and say 1.25% return on cash via e.g. 5 year CDs (which is lower than past averages), the final number becomes more attainable (as long as you had a full SS work history and a SS benefit that initially covers a good portion of your living expenses).

Example: if you retire at age 60 and your SS benefit at age 67 is $38,725 annual (~$3225/mo) and is COLA-adjusted 1.4%, and you earn 1.25% APY on your cash portfolio for the duration of retirement, and the starting value of your portfolio is $1M with $40k annual expenses in the 1st year (i.e. 25x expenses), you end up with $197.5k remaining at the end of a 40 year retirement at age 100, without any stock/bond market exposure.

Or, $393.6K left if you die at age 95, or $539.6k left if you die at age 90. And of course even more headroom if your initial cash portfolio is larger.

It even works pretty well if you begin taking your SS benefit at age 62 at $27,276 annual ($2273/mo), otherwise same parameters as above, although you would run out of money at age 98.

Or with a $1.5M portfolio and beginning SS at 67, else same as above, your initial annual expenses could increase to $52k (30% higher than the baseline case) and you’d run out of money right at age 100.

Is there anything fundamentally wrong with this approach of taking zero market risk during retirement, if the numbers work out as described in the scenarios above? (Granted, it’s possible I’ve made a mistake in my spreadsheet calculations.) Not having to worry about market returns, crashes, or recovery time for the duration of a 40 year retirement does have appeal. I’d be interested to hear views on this, or additional factors to consider if taking this approach.
CygX1
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Re: Retirement with zero stock/bond market risk

Post by CygX1 »

Inflation
RoadRat
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Re: Retirement with zero stock/bond market risk

Post by RoadRat »

CygX1 wrote: Sat Oct 09, 2021 5:59 pmInflation
Reread the OPs first sentence
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JoMoney
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Re: Retirement with zero stock/bond market risk

Post by JoMoney »

It's fine, but planning for a 40 year retirement may be a fair bit longer than what most 60 years old will live.
A Single Life Expectancy Table would peg a 60 year old as having a 25.2 year life expectancy.
If one was 60 and thought they would live 40 more years they'd get a very good value out of buying a SPIA versus trying to build a cash/bond savings ladder for 40 years.
For roughly $750,000 a 60yo male could buy $40k of annual income (fixed - not inflation indexed).
https://www.immediateannuities.com/
Add in social security that is inflation indexed, and one might need much less than you suggested for guaranteed retirement income without market risk.
"To achieve satisfactory investment results is easier than most people realize; to achieve superior results is harder than it looks." - Benjamin Graham
CygX1
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Re: Retirement with zero stock/bond market risk

Post by CygX1 »

RoadRat wrote: Sat Oct 09, 2021 6:00 pm
CygX1 wrote: Sat Oct 09, 2021 5:59 pmInflation
Reread the OPs first sentence
He says "assume 2.5% inflation". How does he know that assumption is correct?
RoadRat
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Re: Retirement with zero stock/bond market risk

Post by RoadRat »

CygX1 wrote: Sat Oct 09, 2021 6:07 pm
RoadRat wrote: Sat Oct 09, 2021 6:00 pm
CygX1 wrote: Sat Oct 09, 2021 5:59 pmInflation
Reread the OPs first sentence
He says "assume 2.5% inflation". How does he know that assumption is correct?
"In theory, if a person has enough saved at retirement to cover their inflation-adjusted expenses over their estimated lifetime...."

He doesn't. That's why he started the sentence with "In theory...." He wants people to answer his question. Not launch a one word bomb on his hypothetical.
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David Jay
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Re: Retirement with zero stock/bond market risk

Post by David Jay »

CygX1 wrote: Sat Oct 09, 2021 6:07 pm
RoadRat wrote: Sat Oct 09, 2021 6:00 pm
CygX1 wrote: Sat Oct 09, 2021 5:59 pmInflation
Reread the OPs first sentence
He says "assume 2.5% inflation". How does he know that assumption is correct?
I’m old enough to remember 21% inflation.
Prediction is very difficult, especially about the future - Niels Bohr | To get the "risk premium", you really do have to take the risk - nisiprius
RoadRat
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Re: Retirement with zero stock/bond market risk

Post by RoadRat »

Gnomon wrote: Sat Oct 09, 2021 5:41 pm In theory, if a person has enough saved at retirement to cover their inflation-adjusted expenses over their estimated lifetime, they would not have to take any stock market risk with their savings, and would have no sequence of returns risk since there is no reliance on market returns.

That zero market risk approach always seemed appealing to me and that's what I have been aiming for. I'd like to be done with worrying about markets, especially in the early retirement years.

In the most basic form (i.e. assume zero social security benefit and zero return on your cash portfolio), if you retire having $40k in annual living expenses, a 40 year retirement timeline, and assume 2.5% inflation, then I think you can use the FV() function in excel to figure out what your starting portfolio size needs to be:
in Excel: =FV(2.5%, 40, -40000)

And that equals $2,696,102, or 67.4x initial expenses. That's not an attainable number for most people. But…if you include beginning a social security benefit at age 67 and say 1.25% return on cash via e.g. 5 year CDs (which is lower than past averages), the final number becomes more attainable (as long as you had a full SS work history and a SS benefit that initially covers a good portion of your living expenses).

Example: if you retire at age 60 and your SS benefit at age 67 is $38,725 annual (~$3225/mo) and is COLA-adjusted 1.4%, and you earn 1.25% APY on your cash portfolio for the duration of retirement, and the starting value of your portfolio is $1M with $40k annual expenses in the 1st year (i.e. 25x expenses), you end up with $197.5k remaining at the end of a 40 year retirement at age 100, without any stock/bond market exposure.

Or, $393.6K left if you die at age 95, or $539.6k left if you die at age 90. And of course even more headroom if your initial cash portfolio is larger.

It even works pretty well if you begin taking your SS benefit at age 62 at $27,276 annual ($2273/mo), otherwise same parameters as above, although you would run out of money at age 98.

Or with a $1.5M portfolio and beginning SS at 67, else same as above, your initial annual expenses could increase to $52k (30% higher than the baseline case) and you’d run out of money right at age 100.

Is there anything fundamentally wrong with this approach of taking zero market risk during retirement, if the numbers work out as described in the scenarios above? (Granted, it’s possible I’ve made a mistake in my spreadsheet calculations.) Not having to worry about market returns, crashes, or recovery time for the duration of a 40 year retirement does have appeal. I’d be interested to hear views on this, or additional factors to consider if taking this approach.
There is nothing fundamentally wrong with it based on the way you laid out your theory. I'm stating the obvious, of which I am sure you are aware.....there are unknowns. But the unknowns exist on both sides of the equation.

I believe it was Bernstein who asked a similar question.....something to the effect of "If you have what you need, why would you put it at risk?"

Edit: Here it is (note, he's addressing equities in particular): "When you've won the game, why keep playing it?" https://www.whitecoatinvestor.com/berns ... -the-game/
RoadRat
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Re: Retirement with zero stock/bond market risk

Post by RoadRat »

David Jay wrote: Sat Oct 09, 2021 6:25 pm
CygX1 wrote: Sat Oct 09, 2021 6:07 pm
RoadRat wrote: Sat Oct 09, 2021 6:00 pm
CygX1 wrote: Sat Oct 09, 2021 5:59 pmInflation
Reread the OPs first sentence
He says "assume 2.5% inflation". How does he know that assumption is correct?
I’m old enough to remember 21% inflation.
Exactly. Isn't the rule of 25 (4% rule) predicated on an assumed 3% inflation? All plans have assumptions and risks on both sides of the equation.
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nedsaid
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Re: Retirement with zero stock/bond market risk

Post by nedsaid »

Problem is that inflation is heating up and this might not be as transitory as we have been told. If we see inflation at sustained rates of 4% to 5% instead of 1% to 2% for years to come, this changes everything. You would just get killed by inflation. You are going to need to take some risk in the financial markets to stay ahead of inflation. The key word is "some", I don't think you have to take big portfolio risks.
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joverby
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Re: Retirement with zero stock/bond market risk

Post by joverby »

If you really want no market risk then SPIA is the way to go.
Age 60 buy 10 year SPIA for 460k, income of 48k / year
Age 70 start drawing SS, income of 48k / year
Mike Scott
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Re: Retirement with zero stock/bond market risk

Post by Mike Scott »

In theory, yes. In real life, people don't usually have that much money. All the room in between is for deciding what to do with what you actually have in hand. It's not the same take, but everyone who retires on their social securty check alone with a little bit (or none) in savings is taking zero stock/bond risk.
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JoMoney
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Re: Retirement with zero stock/bond market risk

Post by JoMoney »

joverby wrote: Sat Oct 09, 2021 6:43 pm If you really want no market risk then SPIA is the way to go.
Age 60 buy 10 year SPIA for 460k, income of 48k / year
Age 70 start drawing SS, income of 48k / year
In 2021 at age 70 maximum SS benefit would be $3,895/mo or $46,740 a year.
https://faq.ssa.gov/en-US/Topic/article/KA-01897

... and someone who managed an income level to achieve the maximum benefit, might find it a bit tight to live on that, or perhaps they were saving a bunch of money while living on that level of income (and hopefully have other resources to draw on)
"To achieve satisfactory investment results is easier than most people realize; to achieve superior results is harder than it looks." - Benjamin Graham
joverby
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Re: Retirement with zero stock/bond market risk

Post by joverby »

JoMoney wrote: Sat Oct 09, 2021 7:09 pm
In 2021 at age 70 maximum SS benefit would be $3,895/mo or $46,740 a year.
https://faq.ssa.gov/en-US/Topic/article/KA-01897

... and someone who managed an income level to achieve the maximum benefit, might find it a bit tight to live on that, or perhaps they were saving a bunch of money while living on that level of income (and hopefully have other resources to draw on)
I don’t think he is using 2021 as his example as the SS numbers he provided are over the limits for this year.

I do agree that the spending seams unreasonably low for someone with maxed out SS and 1 mil+.
DoTheMath
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Re: Retirement with zero stock/bond market risk

Post by DoTheMath »

RoadRat wrote: Sat Oct 09, 2021 6:36 pm
David Jay wrote: Sat Oct 09, 2021 6:25 pm
CygX1 wrote: Sat Oct 09, 2021 6:07 pm
RoadRat wrote: Sat Oct 09, 2021 6:00 pm
CygX1 wrote: Sat Oct 09, 2021 5:59 pmInflation
Reread the OPs first sentence
He says "assume 2.5% inflation". How does he know that assumption is correct?
I’m old enough to remember 21% inflation.
Exactly. Isn't the rule of 25 (4% rule) predicated on an assumed 3% inflation? All plans have assumptions and risks on both sides of the equation.
It is based on historical returns in the US during the 20th century which includes David Jay's period of relatively high inflation. The assumption is that what happened in the US in the 20th century includes the range of plausible outcomes for the future.
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Eagle33
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Re: Retirement with zero stock/bond market risk

Post by Eagle33 »

Will fall short of financial needs if gets dementia at 80 and lives to 100.
Rocket science is not “rocket science” to a rocket scientist, just as personal finance is not “rocket science” to a Boglehead.
marcopolo
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Re: Retirement with zero stock/bond market risk

Post by marcopolo »

RoadRat wrote: Sat Oct 09, 2021 6:36 pm
David Jay wrote: Sat Oct 09, 2021 6:25 pm
CygX1 wrote: Sat Oct 09, 2021 6:07 pm
RoadRat wrote: Sat Oct 09, 2021 6:00 pm
CygX1 wrote: Sat Oct 09, 2021 5:59 pmInflation
Reread the OPs first sentence
He says "assume 2.5% inflation". How does he know that assumption is correct?
I’m old enough to remember 21% inflation.
Exactly. Isn't the rule of 25 (4% rule) predicated on an assumed 3% inflation? All plans have assumptions and risks on both sides of the equation.
Nope. "4% rule" analysed actual returns and inflation, including the high inflation of the 70s.
Once in a while you get shown the light, in the strangest of places if you look at it right.
babystep
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Re: Retirement with zero stock/bond market risk

Post by babystep »

I would add two more options to the approach.

You can buy EE bonds which are guaranteed to double in 20 years so provide 3.54%. There is a 10-15k per year limit but as an example if you do this from year 1 to 20 then you are guaranteed to get 3.54% return for years 21 to 40 which is better than your expectation of 2.5% inflation.

You can buy TIPS, which are US government bonds whose face value rises with inflation so you don't need to accumulate additional money to compensate for inflation.
smectym
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Re: Retirement with zero stock/bond market risk

Post by smectym »

babystep wrote: Sat Oct 09, 2021 8:47 pm I would add two more options to the approach.

You can buy EE bonds which are guaranteed to double in 20 years so provide 3.54%. There is a 10-15k per year limit but as an example if you do this from year 1 to 20 then you are guaranteed to get 3.54% return for years 21 to 40 which is better than your expectation of 2.5% inflation.

You can buy TIPS, which are US government bonds whose face value rises with inflation so you don't need to accumulate additional money to compensate for inflation.
A sound approach. Our goal is to have enough stashed in I and EE to survive a “nuclear winter” for equities, which gives us more confidence on the equity/(tradeable) bond side of the portfolio—which is, even so, perhaps a bit “too” conservative
Topic Author
Gnomon
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Re: Retirement with zero stock/bond market risk

Post by Gnomon »

joverby wrote: Sat Oct 09, 2021 7:22 pm I don’t think he is using 2021 as his example as the SS numbers he provided are over the limits for this year.

I do agree that the spending seams unreasonably low for someone with maxed out SS and 1 mil+.
On your 1st point, that's correct. For the SS numbers, I used numbers I got from the AnyPIA tool based on my earnings history. But the portfolio numbers I used in the examples are well below my current actual portfolio since I was thinking those lower numbers would show this approach is viable even for lower portfolio numbers so my higher numbers would be gravy.

On the second point, that may be where I'm out of touch in thinking this zero market risk scenario could apply to a fair number of people. I can't say I've ever had a detailed discussion about annual living expenses with anyone, except to say that few people I know keep track of such things even though it seems to me that it's one of the most important numbers to know for retirement readiness purposes.

My average expenses over the past 5 years have been under $40k each of those years (including annualized numbers for large and irregular expenses like cars, flooring replacement etc.). I've exceeded the SS max earnings for each of the past 30 years or so. Maybe this is strange or very atypical spending vs earnings whereas I was thinking it might be common, at least on this forum.

An additional factor I still need to account for in my numbers is that I will be relocating to a higher CoL area in the first 1-2 years of retirement (including sell current and buy new house), but that's a topic for another day since it makes my current portfolio number a bit fuzzy.
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Gnomon
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Re: Retirement with zero stock/bond market risk

Post by Gnomon »

babystep wrote: Sat Oct 09, 2021 8:47 pm I would add two more options to the approach.

You can buy EE bonds which are guaranteed to double in 20 years so provide 3.54%. There is a 10-15k per year limit but as an example if you do this from year 1 to 20 then you are guaranteed to get 3.54% return for years 21 to 40 which is better than your expectation of 2.5% inflation.

You can buy TIPS, which are US government bonds whose face value rises with inflation so you don't need to accumulate additional money to compensate for inflation.
Thanks for that. I’ll look into them. In the limited amount I’ve read on TIPS, it seems like a challenging topic to understand how to choose and use them. I see from a quick search that there are TIPS funds and ETFs, but maybe that wouldn’t have the same effect as buying them individually? Also, if it's an easy question to answer, how come the annual limit on EE bonds is so low?
cbeck
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Re: Retirement with zero stock/bond market risk

Post by cbeck »

David Jay wrote: Sat Oct 09, 2021 6:25 pm
CygX1 wrote: Sat Oct 09, 2021 6:07 pm
RoadRat wrote: Sat Oct 09, 2021 6:00 pm
CygX1 wrote: Sat Oct 09, 2021 5:59 pmInflation
Reread the OPs first sentence
He says "assume 2.5% inflation". How does he know that assumption is correct?
I’m old enough to remember 21% inflation.
So am I. Neither stocks nor bonds would have saved you then.
Topic Author
Gnomon
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Re: Retirement with zero stock/bond market risk

Post by Gnomon »

nedsaid wrote: Sat Oct 09, 2021 6:40 pm Problem is that inflation is heating up and this might not be as transitory as we have been told. If we see inflation at sustained rates of 4% to 5% instead of 1% to 2% for years to come, this changes everything. You would just get killed by inflation. You are going to need to take some risk in the financial markets to stay ahead of inflation. The key word is "some", I don't think you have to take big portfolio risks.
I can easily bump my inflation number up from 2.5% in my spreadsheet. Given the planning horizon I'm using of 40 years, out to age 100, as JoMoney noted that's about 15 years of cushion for the average or whatever statistic the life expectancy tables are based on.

Wouldn't that greatly reduce the need for the 2.5% inflation number to be right? And if inflation is higher for some extended period, wouldn't the actual SS COLA compensate (at least for the portion of my expenses due to SS)? I proposed using 1.4% for the SS COLA in my spreadsheet and that is lower than the average of the last 5, 10, and 20 year periods. Still, it's certainly possible, but only in hindsight, to say that was too low.

I'm not 100% opposed to some low level of market risk, but I wonder if that's something where periodic portfolio status checks could lead me to take some market risk if I'm getting behind, x years into retirement, as opposed to having market risk from the get-go. Any thoughts on that?
KlangFool
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Re: Retirement with zero stock/bond market risk

Post by KlangFool »

OP,

If you have 50X or bigger with a 60/40 portfolio, why would you care about the stock/bond market risk? After the first few years, the portfolio will grew bigger even with withdrawal. After the first 10 years, the portfolio would be so big that nothing matters.

As for inflation, why should you care? It is your own personal inflation rate that matters. If you own your house, you had shielded yourself from the housing portion of the inflation.

In summary, I have no idea what are you protecting against.

The only thing that could break everything is hyperinflation. But, in that case, CASH does not help you. You need previous metal and you probably need to move to some other country.

KlangFool
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KlangFool
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Re: Retirement with zero stock/bond market risk

Post by KlangFool »

OP,

The fundamental idea is wrong. There are RISK in CASH too. In an uncertain time, diversification is the ONLY suitable strategy. Making concentrated bet on any single asset class increases your RISK.

KlangFool
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smectym
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Re: Retirement with zero stock/bond market risk

Post by smectym »

Gnomon wrote: Sat Oct 09, 2021 9:41 pm
babystep wrote: Sat Oct 09, 2021 8:47 pm I would add two more options to the approach.

You can buy EE bonds which are guaranteed to double in 20 years so provide 3.54%. There is a 10-15k per year limit but as an example if you do this from year 1 to 20 then you are guaranteed to get 3.54% return for years 21 to 40 which is better than your expectation of 2.5% inflation.

You can buy TIPS, which are US government bonds whose face value rises with inflation so you don't need to accumulate additional money to compensate for inflation.
Thanks for that. I’ll look into them. In the limited amount I’ve read on TIPS, it seems like a challenging topic to understand how to choose and use them. I see from a quick search that there are TIPS funds and ETFs, but maybe that wouldn’t have the same effect as buying them individually? Also, if it's an easy question to answer, how come the annual limit on EE bonds is so low?
Gnomon, the answer to your last question, a good one, isn’t clear. Annual purchase limits of both I and EE used to be much higher. At some point, Treasury seems to have decided that a small corps of affluents were piling in and getting “too good a deal.” The idea being that the savings bond program is really for “the little guy,” and not for big shots snapping up $30,000 a year per SSN in each security. But to my knowledge, Treasury has never spelled out its rationale in depth. Others with better information, please weigh in.
Topic Author
Gnomon
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Re: Retirement with zero stock/bond market risk

Post by Gnomon »

KlangFool wrote: Sat Oct 09, 2021 10:03 pm OP,

If you have 50X or bigger with a 60/40 portfolio, why would you care about the stock/bond market risk?

>>>I've come to realize the markets stress me out too much (even when--or maybe especially when--they go up farther and faster than logic can explain), and I want it out of my life.

After the first few years, the portfolio will grew bigger even with withdrawal. After the first 10 years, the portfolio would be so big that nothing matters.

>>>That's a nice story, but it might not play out that way. I don't have any need or desire to have a portfolio that is so big that nothing matters, so it's not even important to me if that story were to come true.

As for inflation, why should you care? It is your own personal inflation rate that matters. If you own your house, you had shielded yourself from the housing portion of the inflation.

>>>I mentioned in an earlier post that I have relocation and house sale and purchase ahead of me in the first couple years of retirement, and the new location is higher CoL, so there won't be this shielding. More generally though, while I agree with you that population average inflation is not what matters, my individual numbers seem pretty close to population averages. The impact of inflation, whether the long-term average is 1% or 4%, has a big impact over a multi-decade timeframe. The magic of compounding works for inflation too.

KlangFool
Hi, responses in-line above >>>.
KlangFool
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Re: Retirement with zero stock/bond market risk

Post by KlangFool »

Gnomon,

1) My annual expense is 60K per year with mortgage.

2) My annual expense without mortgage is 45K per year.

3) My portfolio was 1.5 million = 25X. My EF is not part of the portfolio. It was 3X.

4) I choose the middle ground. When my portfolio goes by 1X (60K), I harvest 30K (50%) from my portfolio to pay down the mortgage. Then, I reset my threshold to 60K higher.

5) If and when my mortgage is paid off, I may harvest 30K and keep it as CASH.

6) You do not have to go to the extreme. You may choose a middle ground system. Aka, harvest 50% of the growth as CASH.

KlangFool
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chem6022
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Re: Retirement with zero stock/bond market risk

Post by chem6022 »

Historically, you actually increase your risk by going below 25-30% equities over moderate to long time frames. Unexpected inflation is one of the risk factors that a little equities helps mitigate. Ultimately its your money, and its fine if you want to do 0% equities even if it's not actually safer historically.
RoadRat
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Re: Retirement with zero stock/bond market risk

Post by RoadRat »

marcopolo wrote: Sat Oct 09, 2021 8:41 pm
RoadRat wrote: Sat Oct 09, 2021 6:36 pm
David Jay wrote: Sat Oct 09, 2021 6:25 pm
CygX1 wrote: Sat Oct 09, 2021 6:07 pm
RoadRat wrote: Sat Oct 09, 2021 6:00 pm

Reread the OPs first sentence
He says "assume 2.5% inflation". How does he know that assumption is correct?
I’m old enough to remember 21% inflation.
Exactly. Isn't the rule of 25 (4% rule) predicated on an assumed 3% inflation? All plans have assumptions and risks on both sides of the equation.
Nope. "4% rule" analysed actual returns and inflation, including the high inflation of the 70s.
How is that different from what I said? 3% assumed inflation
Grt2bOutdoors
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Re: Retirement with zero stock/bond market risk

Post by Grt2bOutdoors »

smectym wrote: Sat Oct 09, 2021 10:19 pm
Gnomon wrote: Sat Oct 09, 2021 9:41 pm
babystep wrote: Sat Oct 09, 2021 8:47 pm I would add two more options to the approach.

You can buy EE bonds which are guaranteed to double in 20 years so provide 3.54%. There is a 10-15k per year limit but as an example if you do this from year 1 to 20 then you are guaranteed to get 3.54% return for years 21 to 40 which is better than your expectation of 2.5% inflation.

You can buy TIPS, which are US government bonds whose face value rises with inflation so you don't need to accumulate additional money to compensate for inflation.
Thanks for that. I’ll look into them. In the limited amount I’ve read on TIPS, it seems like a challenging topic to understand how to choose and use them. I see from a quick search that there are TIPS funds and ETFs, but maybe that wouldn’t have the same effect as buying them individually? Also, if it's an easy question to answer, how come the annual limit on EE bonds is so low?
Gnomon, the answer to your last question, a good one, isn’t clear. Annual purchase limits of both I and EE used to be much higher. At some point, Treasury seems to have decided that a small corps of affluents were piling in and getting “too good a deal.” The idea being that the savings bond program is really for “the little guy,” and not for big shots snapping up $30,000 a year per SSN in each security. But to my knowledge, Treasury has never spelled out its rationale in depth. Others with better information, please weigh in.
You hit the nail on the head! There were folks who were buying much more than $30k per year per TIN using both personal and trust accounts to do so, gaming the system. It’s as you said a savings program for average middle income savers but average middle income earners who have annual incomes of $50k aren’t using the entirety of that income to purchase savings bonds. The next logical thought was the folks gobbling up these instruments were people of “means”. So, the folks at the Treasury put the kibosh on it.
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Grt2bOutdoors
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Re: Retirement with zero stock/bond market risk

Post by Grt2bOutdoors »

OP - your scenario is based on hypotheticals that are a bit far-fetched. Social Security at 67 will not be the amount you quoted simply because the latest Trustees report indicates that Social Security trust fund will run out of funds to pay full benefits in 2034 and unless action is taken there will be an immediate reduction in payouts of roughly 24 percent.
Second, if the 10 year Treasury is yielding 1.6 percent, what is the 5 year Treasury yielding and consequently what is a 5 year CD yielding? Let me tell you what I saw today in 5 year CD rates. I saw 0.80%, that is .45% below your requirement. The only logical choice to make up for yield shortfall is to take risk, equity risk is the best option right now because you can diversify your holdings while holding a call option on higher returns over the long term.
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KlangFool
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Re: Retirement with zero stock/bond market risk

Post by KlangFool »

Gnomon wrote: Sat Oct 09, 2021 10:22 pm
The impact of inflation, whether the long-term average is 1% or 4%, has a big impact over a multi-decade timeframe. The magic of compounding works for inflation too.
Gnomon,

So does the magic of compounding for the portfolio.

Let's assume that the portfolio is 2 million (50X) and the annual expense is 40K per year. The inflation is 2% and the portfolio growth is 3%.

Year 0

40K expense

Portfolio = 2 million - 40K = 1.96 million

Year end portfolio size = 1.96 X 1.03 = 2.0188 million

Year 1

Expense = 40K X 1.02 = 40.8K

Portfolio = 2.0188 million - 40.8K = 1.978 million

Year end portfolio size = 1.978 X 1.03 = 2.03734 million

The portfolio is much bigger (50X). As long as it grew slightly bigger than inflation, the portfolio will grew bigger every year.

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nedsaid
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Re: Retirement with zero stock/bond market risk

Post by nedsaid »

Gnomon wrote: Sat Oct 09, 2021 9:54 pm
nedsaid wrote: Sat Oct 09, 2021 6:40 pm Problem is that inflation is heating up and this might not be as transitory as we have been told. If we see inflation at sustained rates of 4% to 5% instead of 1% to 2% for years to come, this changes everything. You would just get killed by inflation. You are going to need to take some risk in the financial markets to stay ahead of inflation. The key word is "some", I don't think you have to take big portfolio risks.
I can easily bump my inflation number up from 2.5% in my spreadsheet. Given the planning horizon I'm using of 40 years, out to age 100, as JoMoney noted that's about 15 years of cushion for the average or whatever statistic the life expectancy tables are based on.

Nedsaid: If you had a very large nest egg, in theory you could have enough money to last for a lifetime with zero market risk. Problem is, I am not sure I would just sit by passively and not take any steps at all to protect the purchasing power of my stash. Lots of things look good in theory but for whatever reasons don't work in real life. Certain things human nature will not allow.

There is also the issue of where you would put your money? The picture of Scrooge McDuck setting in a room full of money throwing it up in the air in celebration is not true to life. The monies will be almost certainly go into financial instruments and not stored in vaults. You could store gold or silver coins with a face value in dollars stamped on the surface but there would be a market value different from what the face of the coin says. Whatever instruments you use would fluctuate in value according to market value even Short Term Treasuries and C.D.s. Even money market funds have the risk of "breaking the buck." So I think you are starting with a flawed premise that you can avoid the volatility from holding financial instruments or even hard assets.

I just think that everything fluctuates in Value, that "safety" is somewhat illusory. No such thing as zero market risk. There are formal and informal markets for everything you can imagine. Everything has a market value. Just two people can make a market, it won't be very efficient but it is a market nonetheless.

Then you have unexpected outside events like an asteroid striking and destroying a major American city. We can plan within a framework of civilization and our financial system being able to carry on and function. There gets to be a point where an event could be so catastrophic that planning just doesn't help. So we can be relatively safe only within a range of outcomes, there are outliers than could end life as we know it but the possibility is so remote that there is no use planning for it. If the very remote possibility of utter doom did happen, no amount of preparation would save us anyways.

Even if you don't worry about such things as killer asteroids, there is a range of outcomes beyond which the financial system just completely breaks down. Hyperinflation, such as what was experienced in Weimar Germany would blow apart any calculations on a spreadsheet. If inflation were confined to a narrower range then you could in theory put together a nest egg large enough to not run out of purchasing power before the end of life. If the social order completely breaks down, a roomful of Scrooge McDuck's gold coins wouldn't save you either. Probably you would be better off with consumer staples that could be traded. Razor blades and toilet paper would be more valuable than Gold in that environment.

A more realistic view would be to take as little risk as possible. Probably the best portfolio for the very risk averse would be about 20% stocks/80% bonds which might actually be less volatile than a 100% bond portfolio. We just have to realize there will be market risk but be realistic that we can reduce but not completely eliminate it.

There gets to be a point where the assumptions are unrealistic to the point where the discussion has no value. It gets to be where theologians debate how many Angels can dance on the head of a pin. It might be a mental exercise but there really is nothing learned.


Wouldn't that greatly reduce the need for the 2.5% inflation number to be right? And if inflation is higher for some extended period, wouldn't the actual SS COLA compensate (at least for the portion of my expenses due to SS)? I proposed using 1.4% for the SS COLA in my spreadsheet and that is lower than the average of the last 5, 10, and 20 year periods. Still, it's certainly possible, but only in hindsight, to say that was too low.

Nedsaid: Yes, COLA adjustments for Social Security greatly help if you want to minimize market risk with your nest egg.

I'm not 100% opposed to some low level of market risk, but I wonder if that's something where periodic portfolio status checks could lead me to take some market risk if I'm getting behind, x years into retirement, as opposed to having market risk from the get-go. Any thoughts on that?

Nedsaid: The discussion of taking market risk to as low as possible is very useful. As I have said above, it can be minimized but not eliminated altogether. You would have to eliminate markets, which you have anytime two people get together and decide to make a trade. A discussion of zero market risk just has no value in the world as it actually functions. There has to be a range of outcomes by which the financial system can continue to function. There gets to be a point where all bets are off.
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smectym
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Re: Retirement with zero stock/bond market risk

Post by smectym »

Grt2bOutdoors wrote: Sat Oct 09, 2021 10:50 pm
smectym wrote: Sat Oct 09, 2021 10:19 pm
Gnomon wrote: Sat Oct 09, 2021 9:41 pm
babystep wrote: Sat Oct 09, 2021 8:47 pm I would add two more options to the approach.

You can buy EE bonds which are guaranteed to double in 20 years so provide 3.54%. There is a 10-15k per year limit but as an example if you do this from year 1 to 20 then you are guaranteed to get 3.54% return for years 21 to 40 which is better than your expectation of 2.5% inflation.

You can buy TIPS, which are US government bonds whose face value rises with inflation so you don't need to accumulate additional money to compensate for inflation.
Thanks for that. I’ll look into them. In the limited amount I’ve read on TIPS, it seems like a challenging topic to understand how to choose and use them. I see from a quick search that there are TIPS funds and ETFs, but maybe that wouldn’t have the same effect as buying them individually? Also, if it's an easy question to answer, how come the annual limit on EE bonds is so low?
Gnomon, the answer to your last question, a good one, isn’t clear. Annual purchase limits of both I and EE used to be much higher. At some point, Treasury seems to have decided that a small corps of affluents were piling in and getting “too good a deal.” The idea being that the savings bond program is really for “the little guy,” and not for big shots snapping up $30,000 a year per SSN in each security. But to my knowledge, Treasury has never spelled out its rationale in depth. Others with better information, please weigh in.
You hit the nail on the head! There were folks who were buying much more than $30k per year per TIN using both personal and trust accounts to do so, gaming the system. It’s as you said a savings program for average middle income savers but average middle income earners who have annual incomes of $50k aren’t using the entirety of that income to purchase savings bonds. The next logical thought was the folks gobbling up these instruments were people of “means”. So, the folks at the Treasury put the kibosh on it.
Correct, and yet I see no economic rationale for the restriction. Yes, people with more money can buy more I bonds if they wish, than people with less money. And that’s bad and wrong because…? Not clear to me what the answer is
marcopolo
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Re: Retirement with zero stock/bond market risk

Post by marcopolo »

RoadRat wrote: Sat Oct 09, 2021 10:43 pm
marcopolo wrote: Sat Oct 09, 2021 8:41 pm
RoadRat wrote: Sat Oct 09, 2021 6:36 pm
David Jay wrote: Sat Oct 09, 2021 6:25 pm
CygX1 wrote: Sat Oct 09, 2021 6:07 pm

He says "assume 2.5% inflation". How does he know that assumption is correct?
I’m old enough to remember 21% inflation.
Exactly. Isn't the rule of 25 (4% rule) predicated on an assumed 3% inflation? All plans have assumptions and risks on both sides of the equation.
Nope. "4% rule" analysed actual returns and inflation, including the high inflation of the 70s.
How is that different from what I said? 3% assumed inflation
There are NO assumptions made about inflation in the 4% rule analysis.
The studies used the ACTUAL inflation for each year.
Completely different than assuming 3%
billfromct
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Re: Retirement with zero stock/bond market risk

Post by billfromct »

Inflation never got to 21% in recent history.

The inflation rate in the 1979, 1980 got into the 12%-13% range. If my memory serves me correctly, the Vanguard Prime Money Market Fund was paying about 21% then, but that was only for a short time.

In 1981, the 30 year Treasury bond was paying 12% or 13%. I don’t remember if the 30 Year Zero Coupon Bond was in place back then but what a retirement investment that would have been.

bill
Last edited by billfromct on Sun Oct 10, 2021 12:27 pm, edited 2 times in total.
michaeljc70
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Re: Retirement with zero stock/bond market risk

Post by michaeljc70 »

KlangFool wrote: Sat Oct 09, 2021 10:03 pm OP,

If you have 50X or bigger with a 60/40 portfolio, why would you care about the stock/bond market risk? After the first few years, the portfolio will grew bigger even with withdrawal. After the first 10 years, the portfolio would be so big that nothing matters.

As for inflation, why should you care? It is your own personal inflation rate that matters. If you own your house, you had shielded yourself from the housing portion of the inflation.

In summary, I have no idea what are you protecting against.


The only thing that could break everything is hyperinflation. But, in that case, CASH does not help you. You need previous metal and you probably need to move to some other country.

KlangFool
+1

I cannot imagine doing what the OP proposes. I would be kept up way more at night thinking about how much money I left on the table than worrying about sequence of return risk or a market drop. But that is me.....
AnnetteLouisan
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Re: Retirement with zero stock/bond market risk

Post by AnnetteLouisan »

My folks don’t have any stocks, bonds or index funds. But they do have real estate, savings, social security and one has a pension. I’m not advocating this at all. They left a lot of money on the table, as did I, by not enthusiastically availing ourselves of the capital markets, except indirectly as consumers. A sibling has individual stocks and a few index funds.
Stormbringer
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Re: Retirement with zero stock/bond market risk

Post by Stormbringer »

The closest thing to zero risk I can think of would be a TIPs ladder with a longevity annuity at the backend. Holding each TIP until maturity eliminates the market risk, and the inflation protection (mostly) eliminates the inflation risk.
RoadRat
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Re: Retirement with zero stock/bond market risk

Post by RoadRat »

marcopolo wrote: Sun Oct 10, 2021 2:53 am
RoadRat wrote: Sat Oct 09, 2021 10:43 pm
marcopolo wrote: Sat Oct 09, 2021 8:41 pm
RoadRat wrote: Sat Oct 09, 2021 6:36 pm
David Jay wrote: Sat Oct 09, 2021 6:25 pm
I’m old enough to remember 21% inflation.
Exactly. Isn't the rule of 25 (4% rule) predicated on an assumed 3% inflation? All plans have assumptions and risks on both sides of the equation.
Nope. "4% rule" analysed actual returns and inflation, including the high inflation of the 70s.
How is that different from what I said? 3% assumed inflation
There are NO assumptions made about inflation in the 4% rule analysis.
The studies used the ACTUAL inflation for each year.
Completely different than assuming 3%
Thanks!
Gill
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Re: Retirement with zero stock/bond market risk

Post by Gill »

David Jay wrote: Sat Oct 09, 2021 6:25 pm
I’m old enough to remember 21% inflation.
When was that? 1980 was the highest in the last century at 13.5% How old are you? In 2007 you said you were in your late 60's so you must be early 80's born in the late 1930's You've never seen 21% inflation.
Gill
Last edited by Gill on Sun Oct 10, 2021 11:11 am, edited 1 time in total.
adam1712
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Re: Retirement with zero stock/bond market risk

Post by adam1712 »

To me, it’s a very expensive way to retire. Working to accumulate a huge amount just to pay the basic bills. I’d venture to guess in at least 95% of cases you’d do significantly better taking on market risk. And in the really bad, Great Depression type situation with significant market losses, I think there’s some comfort in knowing you’d be in the same boat as a lot of other retirees (and likely better if you have a conservative asset allocation that isn’t stock heavy). Expenses are likely to be down for everyone, you can protect a lot by owning your home, you likely have social security.

[OT comment removed by Moderator Misenplace.] I’d rather take the risk I’m left with only social security for the chance to have a better retirement, leave a legacy for my heirs, and give to charity. I didn’t approach my career happy with a $40k salary just to pay the bills, I was willing to take some reasonable risks. And I plan to live that way until the day I die.
dbr
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Re: Retirement with zero stock/bond market risk

Post by dbr »

The answer is simple. It takes more money to retire without owning any stocks. Sequence of returns risk is a minor blip compared to insufficient real return. In short you are throwing out the baby with the bath water. Of course that is perfectly ok if you have lots of money and don't know what to do with it other than retire with no stock investments.

As people have mentioned assuming a number for inflation is riskier than holding some stocks.

You can also rely on annuitization except that there does not seem to be anyone around who will inflation index your SPIA, though fixed COLA options exist.

You can use Bernstein's favorite "no stock risk" income stream of a 30 year ladder of TIPS but at current real interest rates that supports a withdrawal rate of about 3.2% right now. Such a scheme also leaves what happens after 30 years and what happens if you need to meet a large expenditure along the way to be answered by something else.

But you get to study the options and decide what you want to do with your money.
59Gibson
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Re: Retirement with zero stock/bond market risk

Post by 59Gibson »

This theory is not risk free. I think staying within 25/75-75/25 range would be advisable. Whether deviating from bond %with cash/ precious metals/ crypto/ Real estate etc.is personal, but I'd want at least 25% stock exposure regardless.
Admiral
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Re: Retirement with zero stock/bond market risk

Post by Admiral »

What happens to your theory if you encounter large bulky expenses? Like... you get early onset Alzheimers and need 24 hour care for, say, 30 years? My friend's mother is in a facility that costs $12k a MONTH.

Life usually doesn't work out such that our expenses stay at a relatively low level... forever.

The stock market has been the greatest wealth-building machine in the history of humanity. Why not save enough so you can invest in the market but only require a paltry return, like 2-3% per annum? Your odds of going broke would be essentially zero.

Also I highly doubt anyone who saves $1.5m is going to plan to live on $50k/year. I will have $1.5-2m and $50k would be a barebones retirement with very little travel and discretionary expenses. Could I live on that? Yes. Do I want to? No. What's the point of saving for 30 years if you can't spend what you've saved?
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JoeRetire
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Re: Retirement with zero stock/bond market risk

Post by JoeRetire »

Gnomon wrote: Sat Oct 09, 2021 5:41 pm In theory, if a person has enough saved at retirement to cover their inflation-adjusted expenses over their estimated lifetime, they would not have to take any stock market risk with their savings, and would have no sequence of returns risk since there is no reliance on market returns.

Is there anything fundamentally wrong with this approach of taking zero market risk during retirement
Good theory.

Seems like you'd have to be able to predict inflation and lifetime fairly accurately.
Good luck with that.
Just remember: it's not a lie if you believe it.
WhiteMaxima
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Re: Retirement with zero stock/bond market risk

Post by WhiteMaxima »

Buy couple of investment properties and you can live on rental income. Rent is pretty much inflation protected. You need be handy and fix the house in case your tenant call you mid-of night.
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Gnomon
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Re: Retirement with zero stock/bond market risk

Post by Gnomon »

I'm not clear on the belief that, as a rule, in periods of high inflation (say >4%), stock returns were also high and/or reflected inflation in a positive way. When I look at the Shiller data set, it was true in some periods but horribly wrong in others. There doesn't appear to be very strong statistical support for that claim, or at least for using it as a general rule.

5 year CD yields were in double digits in the early 80's when inflation was in double digits. And while you have to do a lot of work to see it, the best 5 year CD yields have historically beat inflation in most years that data can be found.

While there's no 5 year CD info in the Shiller data set, the yield on 10 year treasuries between 1960 and 2015 averaged 2.42% higher in absolute terms than CPI for the year, and it was only less than CPI in 5 years during that entire time frame. Since 1871 it was 2.35% higher on average.

So it almost seems like certain bonds and CDs are a better and more consistent choice to moderate or beat inflation than equities. If someone can show data on the effective use of equity indexes as an inflation hedge, I'd appreciate it.
tibbitts
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Re: Retirement with zero stock/bond market risk

Post by tibbitts »

Admiral wrote: Sun Oct 10, 2021 12:59 pm Also I highly doubt anyone who saves $1.5m is going to plan to live on $50k/year. I will have $1.5-2m and $50k would be a barebones retirement with very little travel and discretionary expenses. Could I live on that? Yes. Do I want to? No.
And yet many of us in similar positions are living on that $50k now thanks to the pandemic, and have been for a couple of years now. Were we planning to do that? No. How many more years or decades we'll be doing that, we don't know.
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