I received a one-time payment that needs to last me the rest of my life [EU]

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Topic Author
pstffc
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I received a one-time payment that needs to last me the rest of my life [EU]

Post by pstffc » Sat Apr 27, 2019 9:31 am

I originally posted this elsewhere. It was suggested that I post this here.

I live in a small-ish country and my case was covered by the local media, so I have taken some steps to make it harder to identify me to avoid any unwanted attention. I am using a throwaway account, purposefully a bit vague and also converted the currency of my country to arbitrary units (au).

For context: The median annual post-tax salary where I live is about 26,000au. The mean annual post-tax salary is about 30,000au.

I sustained a musculoskeletal injury at work around 10 months ago. The injury forced me into medical leave. The injury occurred due to employer negligence.

I received a one-time post-tax payout of exactly 1,000,000au. My employer will also pay for any medical treatments for the duration of my lifetime, as long as they are musculoskeletal-related. The approved list of treatments includes regular physiotherapy and massages, so I am saving a serious amount of money even if the need for expensive treatments or operations never arises.

I was on the FIRE journey prior to my injury, and managed to save a decent amount of money. My current NW (payout included) is about 1,200,000au. My NW is in index funds and cash. I rent an apartment and sold my car, and therefore own nothing of value outside of stocks/cash. I have no debt.

Currently, excluding some pain, the only symptom I suffer with is that I can’t sit or stand for extended periods of time, and need to lie down for 5-10 minutes every few hours. Beyond that, it doesn’t currently affect my daily life, I am 29 so that might (probably will) change as I age. I feel pretty healthy overall.

Therefore, theoretically I could be able to work again in the near future. However, even if I was able to, the medical benefit is contingent on me not being able to work. If I work, I lose the benefit immediately. I fear they could theoretically come after the 1,000,000 as well, since the sum was calculated based on the same assumption. Even if I exclude that possibility, I will probably never work again because the lifetime medical benefit is worth too much.

My total spending during the past year was about 20,000au. I expect to maintain a similar spending level in the future.

My NW to spending ratio seems very high, which makes me wonder: Is there a point in stocks, and is there a point in fixed income? Am I rich enough to not have to take the risk with stocks? Or am I rich enough where stock volatility does not matter, and I should be 100% stocks? A half-half approach seems like the worst of both worlds, so I would prefer being all in on one option.

I want to stress that the money needs to last for the rest of my life since I do not expect to have any income ever again.

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Kenkat
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Re: I received a one-time payment that needs to last me the rest of my life

Post by Kenkat » Sat Apr 27, 2019 10:32 am

You are under a 2% draw rate based on your current expenses, which should be sustainable for a very long time. While you say a half-half approach seems like the worst of both worlds, most studies would state that is not true. Adding some equities will both increase total return and portfolio survivability. Something in the 25/75 to 50/50 range would probably be reasonable but there are many ways to approach this. As you said, you probably have enough money to handle a higher equity allocation but there is an element of risk to that as well.

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Re: I received a one-time payment that needs to last me the rest of my life

Post by quantAndHold » Sat Apr 27, 2019 10:36 am

Am I rich enough to not have to take the risk with stocks?
No. You don’t say what country you’re living in, but it kind of doesn’t matter. Inflation risk is a significant risk, no matter where in the world you are. Especially over the course of 50-70 years, even the low 2% inflation that governments typically target will make your money worth about 1/4 of what it’s worth now. Unless you can invest in something that’s indexed to inflation like TIPS in the US, you are taking a lot of inflation risk. Stocks are usually better at keeping up with inflation.
Or am I rich enough where stock volatility does not matter, and I should be 100% stocks?
I would look at 1929 USA, 1990’s Japan, and decide if your portfolio would be able to withstand that. One of the benefits of a diversified portfolio is the ability to rebalance into a crash. If everything is in stocks, you can’t do that.

Diversification is the only free lunch.
Yes, I’m really that pedantic.

livesoft
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Re: I received a one-time payment that needs to last me the rest of my life

Post by livesoft » Sat Apr 27, 2019 10:38 am

Generally, a single-premium immediate annuity that is indexed to inflation is a solution for some of this money. One may not be able to find such a thing though.
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aristotelian
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Re: I received a one-time payment that needs to last me the rest of my life

Post by aristotelian » Sat Apr 27, 2019 10:40 am

Hard to advise without knowing what country you are in and what index funds you have access to. Overall your plan seems good. Do your expenses include health care/insurance and tax?

I wonder if there are some "work from home" type jobs that you could do to earn some cash.

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pstffc
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Re: I received a one-time payment that needs to last me the rest of my life

Post by pstffc » Sat Apr 27, 2019 10:43 am

quantAndHold wrote:
Sat Apr 27, 2019 10:36 am
Or am I rich enough where stock volatility does not matter, and I should be 100% stocks?
I would look at 1929 USA, 1990’s Japan, and decide if your portfolio would be able to withstand that. One of the benefits of a diversified portfolio is the ability to rebalance into a crash. If everything is in stocks, you can’t do that.

Diversification is the only free lunch.
I guess the counterpoint that immediately came to me is that I could diversify by owning as many stocks as possible (eg. msci-acwi).

I’m open to comments or criticism on this way of thinking.

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pstffc
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Re: I received a one-time payment that needs to last me the rest of my life

Post by pstffc » Sat Apr 27, 2019 10:48 am

aristotelian wrote:
Sat Apr 27, 2019 10:40 am
Hard to advise without knowing what country you are in and what index funds you have access to. Overall your plan seems good. Do your expenses include health care/insurance and tax?

I wonder if there are some "work from home" type jobs that you could do to earn some cash.
My expenses include everything. Health insurance/costs will obviously go up as I age.

I am not allowed to work, officially or unofficially. I got rewarded what I did, because they stripped me of my ability to work.

Scrapr
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Re: I received a one-time payment that needs to last me the rest of my life

Post by Scrapr » Sat Apr 27, 2019 10:51 am

I would run your actual numbers through Fire Calc. But...I think it only calculates in dollars. So that might be an issue if your currency doesn't track USD. Or your financial market doesn't track US markets. Or has a Venezuela component

You can input different stock % and see what results look like. Essentially most things are equivalent at 30/70-70/30 stock %. You can also find a max spending amount with your portfolio

https://www.firecalc.com/

good luck

btenny
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Re: I received a one-time payment that needs to last me the rest of my life

Post by btenny » Sat Apr 27, 2019 11:03 am

I wonder how you are going to handle currency risk long term? I think this is a bigger issue than investment risk. Are you invested in the US stock market and converting $$ once a month or so to your local currency? So what happens if the US dollar drops versus your currency and cuts your effective NW to a lower number? Or is your home country stock market robust enough to cover all your investing needs?

Please advise. Good Luck.

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Re: I received a one-time payment that needs to last me the rest of my life

Post by ResearchMed » Sat Apr 27, 2019 11:06 am

quantAndHold wrote:
Sat Apr 27, 2019 10:36 am
Am I rich enough to not have to take the risk with stocks?
No. You don’t say what country you’re living in, but it kind of doesn’t matter. Inflation risk is a significant risk, no matter where in the world you are. Especially over the course of 50-70 years, even the low 2% inflation that governments typically target will make your money worth about 1/4 of what it’s worth now. Unless you can invest in something that’s indexed to inflation like TIPS in the US, you are taking a lot of inflation risk. Stocks are usually better at keeping up with inflation.
Or am I rich enough where stock volatility does not matter, and I should be 100% stocks?
I would look at 1929 USA, 1990’s Japan, and decide if your portfolio would be able to withstand that. One of the benefits of a diversified portfolio is the ability to rebalance into a crash. If everything is in stocks, you can’t do that.

Diversification is the only free lunch.
Very sorry you went through whatever it was you went through.

Inflation is definitely a risk, and you have a very long time frame. So probably yes to some equities, but I'll leave that to others.

In your country, how is late-life long-term care handled?
If you are responsible for those costs, or if you expect to want to get upgraded facilities/care/etc., then you need to plan for the possible need for higher annual expenses. How much and for how long... so hard to predict.
But it is something to plan for.

Good luck!

RM
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Topic Author
pstffc
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Re: I received a one-time payment that needs to last me the rest of my life

Post by pstffc » Sat Apr 27, 2019 11:13 am

Scrapr wrote:
Sat Apr 27, 2019 10:51 am
I would run your actual numbers through Fire Calc. But...I think it only calculates in dollars. So that might be an issue if your currency doesn't track USD. Or your financial market doesn't track US markets. Or has a Venezuela component

You can input different stock % and see what results look like. Essentially most things are equivalent at 30/70-70/30 stock %. You can also find a max spending amount with your portfolio

https://www.firecalc.com/

good luck
My future spending is hard to predict, but as long as it remains under 30,000(+inflation), it would appear that I have an extremely high chance of success regardless of asset allocation.
Last edited by pstffc on Sat Apr 27, 2019 3:30 pm, edited 1 time in total.

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pstffc
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Re: I received a one-time payment that needs to last me the rest of my life

Post by pstffc » Sat Apr 27, 2019 11:14 am

btenny wrote:
Sat Apr 27, 2019 11:03 am
I wonder how you are going to handle currency risk long term? I think this is a bigger issue than investment risk. Are you invested in the US stock market and converting $$ once a month or so to your local currency? So what happens if the US dollar drops versus your currency and cuts your effective NW to a lower number? Or is your home country stock market robust enough to cover all your investing needs?

Please advise. Good Luck.
I am planning on investing 100% of my stock allocation in the Msci-acwi index.

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JoMoney
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Re: I received a one-time payment that needs to last me the rest of my life

Post by JoMoney » Sat Apr 27, 2019 11:29 am

I would expect at your young age inflation will be a factor you can't afford to ignore.
I believe you're too young to be looking at annuities now, even if you found a company selling them to people under 40, at your age there are better options.

With 1,200,000 you have 60x your 20,000 annual expenses. Life expectancy for a 29 year old is roughly 54 years, so in nominal terms you do have enough to last the rest of your expected life with no need for stocks.
In the U.S. we have government guaranteed inflation indexed bonds, building a ladder of those would guarantee your annual withdrawals could more than beat inflation for the rest of your life. I could imagine a scenario where someone someone setup a ladder like that in their early years, then at a later stage using some of the remainder to buy a Single Premium Immediate Annuity to ensure income was guaranteed no matter how much longer they lived.
Personally, I am very heavy in stocks... but that's not suited for everyone, and there is more risk involved. You'll have to decide for yourself how much risk you're willing to take for a possibility of better or worse returns.
"To achieve satisfactory investment results is easier than most people realize; to achieve superior results is harder than it looks." - Benjamin Graham

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Re: I received a one-time payment that needs to last me the rest of my life

Post by RadAudit » Sat Apr 27, 2019 11:50 am

My NW to spending ratio seems very high, which makes me wonder:
Am I rich enough to not have to take the risk with stocks? No
Or am I rich enough where stock volatility does not matter, and I should be 100% stocks? No
A half-half approach seems like the worst of both worlds, so I would prefer being all in on one option.
Actually, half and half may not be all that bad. OTOH, do you have something like Vanguard's LifeStrategy funds available at a reasonable cost? They have several funds available from 80/20 to 20/80. I'd guess something like 60/40 might work. And it is one fund. Might be worth a look.

Best of luck.
FI is the best revenge. LBYM. Invest the rest. Stay the course. - PS: The cavalry isn't coming, kids. You are on your own.

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Re: I received a one-time payment that needs to last me the rest of my life

Post by btenny » Sat Apr 27, 2019 1:32 pm

That MSCI answer is what I was afraid you would say. The returns for international markets have been poor (vs US) for the last ten years and not a lot better since 1987. And forecasters see minimum future improvement. They offer reasons like political and economic environments are poor so return expectations are poor. Plus Brexit worsen these issues.

So how do you propose to get enough return on your stock investments to offset inflation risk long term? And even if you stay with the MSCI index I still see currency risk and long withdrawal period issues. Please advise.

And where and what do you plan to invest in for your bond allocations?

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pstffc
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Re: I received a one-time payment that needs to last me the rest of my life

Post by pstffc » Sat Apr 27, 2019 2:27 pm

btenny wrote:
Sat Apr 27, 2019 1:32 pm
That MSCI answer is what I was afraid you would say. The returns for international markets have been poor (vs US) for the last ten years and not a lot better since 1987. And forecasters see minimum future improvement. They offer reasons like political and economic environments are poor so return expectations are poor. Plus Brexit worsen these issues.

So how do you propose to get enough return on your stock investments to offset inflation risk long term? And even if you stay with the MSCI index I still see currency risk and long withdrawal period issues. Please advise.

And where and what do you plan to invest in for your bond allocations?
I wouldn’t select individual stocks, so I won’t select individual areas/countries either. I am assuming future expectations are priced in, and large cap stocks are fairly priced regardless of their domicile. Hence, in my mind it is better to grab as many as I can for diversification purposes.

Would the only solution for the currency risk issue to invest in local stocks? That does not seem very appealing. Please let me know if there is a better solution.

As for the bonds: If the purpose of the bond allocation is stability/security, I would go Triple A government bonds. Probably short term. I could afford to have a higher stock exposure compared to setups where I bare risk with the bonds themselves. I am very open to better ideas on this.

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pstffc
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Re: I received a one-time payment that needs to last me the rest of my life

Post by pstffc » Sat Apr 27, 2019 2:37 pm

RadAudit wrote:
Sat Apr 27, 2019 11:50 am
My NW to spending ratio seems very high, which makes me wonder:
Am I rich enough to not have to take the risk with stocks? No
Or am I rich enough where stock volatility does not matter, and I should be 100% stocks? No
A half-half approach seems like the worst of both worlds, so I would prefer being all in on one option.
Actually, half and half may not be all that bad. OTOH, do you have something like Vanguard's LifeStrategy funds available at a reasonable cost? They have several funds available from 80/20 to 20/80. I'd guess something like 60/40 might work. And it is one fund. Might be worth a look.

Best of luck.
I don’t have access to a low-cost readymade product like that, but I do have access to several low-cost funds that I can use to replicate that setup.

My major fear with a bond allocation that high is loss of purchasing power over the long term.

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Re: I received a one-time payment that needs to last me the rest of my life

Post by lakpr » Sat Apr 27, 2019 6:00 pm

Since you said your expenses incurred are approximately $20k AUD, I wonder if this Vanguard Fund is available for you to invest in?

https://www.vanguardinvestments.com.au/ ... /?overview

Perhaps investing in this fund will help you keep your nest egg abreast of inflation.

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Re: I received a one-time payment that needs to last me the rest of my life

Post by RadAudit » Sat Apr 27, 2019 6:14 pm

pstffc wrote:
Sat Apr 27, 2019 2:37 pm
My major fear with a bond allocation that high is loss of purchasing power over the long term.
Good point. Mine, too. But, I have a shorter time frame for long term.
FI is the best revenge. LBYM. Invest the rest. Stay the course. - PS: The cavalry isn't coming, kids. You are on your own.

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Re: I received a one-time payment that needs to last me the rest of my life

Post by Luckywon » Sat Apr 27, 2019 7:55 pm

It seems at 50 X expenses you are safe with whatever allocation you choose. If I was in your position and had legacy concerns, i.e. possibly children or a spouse to support after I die, I would invest 80:20 equities/bonds. If I did not, I would do 20:80 equities/bonds.

Is real estate an option where you live as a diversifier? If it is, I would consider investing in that, but keeping 30-40 x expenses in my equity/bond portfolio.

Best wishes.

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Re: I received a one-time payment that needs to last me the rest of my life

Post by leeks » Sat Apr 27, 2019 8:44 pm

You are very young, there is much life ahead for you and the path it takes may not be anything like what you expect right now.

Be wary of dating someone who thinks your money will also need to last the rest of his/her life!

But you may meet someone and raise a family and lots of things might change. If the disincentive to earn money is truly permanent, perhaps you will find yourself as the stay-at-home parent.

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Re: I received a one-time payment that needs to last me the rest of my life

Post by 2pedals » Sat Apr 27, 2019 9:27 pm

pstffc wrote:
Sat Apr 27, 2019 9:31 am

Currently, excluding some pain, the only symptom I suffer with is that I can’t sit or stand for extended periods of time, and need to lie down for 5-10 minutes every few hours. Beyond that, it doesn’t currently affect my daily life, I am 29 so that might (probably will) change as I age. I feel pretty healthy overall.

Therefore, theoretically I could be able to work again in the near future. However, even if I was able to, the medical benefit is contingent on me not being able to work. If I work, I lose the benefit immediately. I fear they could theoretically come after the 1,000,000 as well, since the sum was calculated based on the same assumption. Even if I exclude that possibility, I will probably never work again because the lifetime medical benefit is worth too much.
I am very sorry for you injury and conundrum.

I would spend ALOT of time evaluating the assumption that you may never work again. I have a very hard time thinking you could be happy with this arrangement at your age of no work ever. Even part time???. This arrangement seems unfair to your mental and social health. I would also get good legal advise before you make the assumption that you would lose your 1,000,000 and/or lifetime medical benefits if you go back to work.

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Re: I received a one-time payment that needs to last me the rest of my life

Post by btenny » Sat Apr 27, 2019 10:11 pm

A good point was brought up... Why can't you become a real estate investor and improve returns via doing your own management and some lite repair stuff. That could be a great job like thing for you and from what you said is OK by the rules... The reason I asked is one of the richest guys I know is in a wheel chair. And always has been. He started as a cashier worker at McDonalds. He now owns several of them...

I think your plan is fine really.. BUT no plan is good for decades with no change... So I think you need to plan on a major review and maybe big portfolio chages if warranted every 7 to 10 years.

Please advise and good luck....

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Re: I received a one-time payment that needs to last me the rest of my life

Post by andrew99999 » Sun Apr 28, 2019 1:08 am

pstffc wrote:
Sat Apr 27, 2019 2:27 pm
btenny wrote:
Sat Apr 27, 2019 1:32 pm
That MSCI answer is what I was afraid you would say. The returns for international markets have been poor (vs US) for the last ten years and not a lot better since 1987. And forecasters see minimum future improvement. They offer reasons like political and economic environments are poor so return expectations are poor. Plus Brexit worsen these issues.

So how do you propose to get enough return on your stock investments to offset inflation risk long term? And even if you stay with the MSCI index I still see currency risk and long withdrawal period issues. Please advise.

And where and what do you plan to invest in for your bond allocations?
I wouldn’t select individual stocks, so I won’t select individual areas/countries either. I am assuming future expectations are priced in, and large cap stocks are fairly priced regardless of their domicile. Hence, in my mind it is better to grab as many as I can for diversification purposes.

Would the only solution for the currency risk issue to invest in local stocks? That does not seem very appealing. Please let me know if there is a better solution.

As for the bonds: If the purpose of the bond allocation is stability/security, I would go Triple A government bonds. Probably short term. I could afford to have a higher stock exposure compared to setups where I bare risk with the bonds themselves. I am very open to better ideas on this.
Yes you are spot on with the situation already being priced in.

Regarding ways to lower currency risk -
1. First, if you do or will own a house, that has reduced currency risk
2. Bonds in your home currency reduce currency risk.

If you still have under 50% of total assets in your home currency, the 2 ways to reduce currency risk further are
1. A total market fund in your home country (this has concentration risk)
2. A home-currency hedged global fund (this has a bit of a cost plus it is not offered in smaller markets)

I think if you are not too far from 50% with home & bonds, then say 10 or 15% in even a small home country or home currency hedged global fund is probably ok to get you close to 50%

Oh also, it depends on the stability of your currency. I did not see which country you are in. If it is an unstable economy, then the whole home country bonds and home country equities may need a re-think, so that is something to be wary of. If you are not in the US, it is worth posting in the non-US sub-forum and letting people know your country for more specific advice on these things.

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Re: I received a one-time payment that needs to last me the rest of my life

Post by LadyGeek » Sun Apr 28, 2019 7:22 am

Based on the OP's intent to invest in MSCI ACWI Index and concerns for currency risk, this thread is now in the Non-US Investing forum.

Also note the OP is using arbitrary currency units defined as "au", not Australian as mentioned previously.

If anonymity is desired, could you provide the investing region? Asia / pacific, Europe (or EU if it applies), South America, etc.?
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Re: I received a one-time payment that needs to last me the rest of my life

Post by sergio » Sun Apr 28, 2019 8:13 am

2pedals wrote:
Sat Apr 27, 2019 9:27 pm
pstffc wrote:
Sat Apr 27, 2019 9:31 am

Currently, excluding some pain, the only symptom I suffer with is that I can’t sit or stand for extended periods of time, and need to lie down for 5-10 minutes every few hours. Beyond that, it doesn’t currently affect my daily life, I am 29 so that might (probably will) change as I age. I feel pretty healthy overall.

Therefore, theoretically I could be able to work again in the near future. However, even if I was able to, the medical benefit is contingent on me not being able to work. If I work, I lose the benefit immediately. I fear they could theoretically come after the 1,000,000 as well, since the sum was calculated based on the same assumption. Even if I exclude that possibility, I will probably never work again because the lifetime medical benefit is worth too much.
I am very sorry for you injury and conundrum.

I would spend ALOT of time evaluating the assumption that you may never work again. I have a very hard time thinking you could be happy with this arrangement at your age of no work ever. Even part time???. This arrangement seems unfair to your mental and social health. I would also get good legal advise before you make the assumption that you would lose your 1,000,000 and/or lifetime medical benefits if you go back to work.
I second the idea of going back and getting everything 100% clarified with a lawyer with regards to working.

I'm going to be a little extreme here, but with your arrangement, even just working part time in a retail job making 700au/month will give you a lot more breathing room and will probably be better for you mental health.

Lots of allocation advice, as someone in the US I probably would go 40/10/50 US stocks/Int'l Stocks/Bonds and try to live of the distributions without touching the principal. This will be a lot easier with a little extra part time income.

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pstffc
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Re: I received a one-time payment that needs to last me the rest of my life

Post by pstffc » Sun Apr 28, 2019 10:27 am

sergio wrote:
Sun Apr 28, 2019 8:13 am
2pedals wrote:
Sat Apr 27, 2019 9:27 pm
pstffc wrote:
Sat Apr 27, 2019 9:31 am

Currently, excluding some pain, the only symptom I suffer with is that I can’t sit or stand for extended periods of time, and need to lie down for 5-10 minutes every few hours. Beyond that, it doesn’t currently affect my daily life, I am 29 so that might (probably will) change as I age. I feel pretty healthy overall.

Therefore, theoretically I could be able to work again in the near future. However, even if I was able to, the medical benefit is contingent on me not being able to work. If I work, I lose the benefit immediately. I fear they could theoretically come after the 1,000,000 as well, since the sum was calculated based on the same assumption. Even if I exclude that possibility, I will probably never work again because the lifetime medical benefit is worth too much.
I am very sorry for you injury and conundrum.

I would spend ALOT of time evaluating the assumption that you may never work again. I have a very hard time thinking you could be happy with this arrangement at your age of no work ever. Even part time???. This arrangement seems unfair to your mental and social health. I would also get good legal advise before you make the assumption that you would lose your 1,000,000 and/or lifetime medical benefits if you go back to work.
I second the idea of going back and getting everything 100% clarified with a lawyer with regards to working.

I'm going to be a little extreme here, but with your arrangement, even just working part time in a retail job making 700au/month will give you a lot more breathing room and will probably be better for you mental health.

Lots of allocation advice, as someone in the US I probably would go 40/10/50 US stocks/Int'l Stocks/Bonds and try to live of the distributions without touching the principal. This will be a lot easier with a little extra part time income.
It is clear that I lose the medical benefit if I regain my ability to work. So the minute I start working, I am financially in the negative as a result of that choice. I don’t know how my injury will (or won’t) affect me later in life, so I’m not excited to lose the benefit. Especially since it is very vague, covering anything musculoskeletal. For example: my injury was not a hip injury, but a hip replacement would be covered by the agreement. Cancer for example, would not.
LadyGeek wrote:
Sun Apr 28, 2019 7:22 am
Based on the OP's intent to invest in MSCI ACWI Index and concerns for currency risk, this thread is now in the Non-US Investing forum.

Also note the OP is using arbitrary currency units defined as "au", not Australian as mentioned previously.

If anonymity is desired, could you provide the investing region? Asia / pacific, Europe (or EU if it applies), South America, etc.?
I am in the EU. My currency is the euro.

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Re: I received a one-time payment that needs to last me the rest of my life [EU]

Post by LadyGeek » Sun Apr 28, 2019 11:24 am

Thank you. I have added "EU" to the thread title to attract the attention of our EU experts.

Also, the wiki has some background info: EU investing
Wiki To some, the glass is half full. To others, the glass is half empty. To an engineer, it's twice the size it needs to be.

pennylane
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Re: I received a one-time payment that needs to last me the rest of my life [EU]

Post by pennylane » Sun Apr 28, 2019 11:28 am

I would invest a small portion into cash flowing real estate that you’re able to live off of. The rest in a 3 fund portfolio that appreciates and isn’t touched.

Topic Author
pstffc
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Re: I received a one-time payment that needs to last me the rest of my life [EU]

Post by pstffc » Sun Apr 28, 2019 11:37 am

pennylane wrote:
Sun Apr 28, 2019 11:28 am
I would invest a small portion into cash flowing real estate that you’re able to live off of. The rest in a 3 fund portfolio that appreciates and isn’t touched.
Would a REIT do the same job? I am not thrilled about becoming an active investor.

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pstffc
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Re: I received a one-time payment that needs to last me the rest of my life [EU]

Post by pstffc » Sun Apr 28, 2019 12:08 pm

LadyGeek wrote:
Sun Apr 28, 2019 11:24 am
Thank you. I have added "EU" to the thread title to attract the attention of our EU experts.

Also, the wiki has some background info: EU investing
Now that this is out there, an open question for anyone:

Would it be beneficial for my equities to be 100% eurozone rather than 100% msci-acwi?

Laurizas
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Re: I received a one-time payment that needs to last me the rest of my life [EU]

Post by Laurizas » Sun Apr 28, 2019 2:59 pm

pstffc wrote:
Sun Apr 28, 2019 12:08 pm
Would it be beneficial for my equities to be 100% eurozone rather than 100% msci-acwi?
Go with msci acwi, in that case you would own the world.

pennylane
Posts: 256
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Re: I received a one-time payment that needs to last me the rest of my life [EU]

Post by pennylane » Sun Apr 28, 2019 9:53 pm

pstffc wrote:
Sun Apr 28, 2019 11:37 am
pennylane wrote:
Sun Apr 28, 2019 11:28 am
I would invest a small portion into cash flowing real estate that you’re able to live off of. The rest in a 3 fund portfolio that appreciates and isn’t touched.
Would a REIT do the same job? I am not thrilled about becoming an active investor.
No it would not.

andrew99999
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Re: I received a one-time payment that needs to last me the rest of my life [EU]

Post by andrew99999 » Sun Apr 28, 2019 10:32 pm

pstffc wrote:
Sun Apr 28, 2019 12:08 pm
Now that this is out there, an open question for anyone:

Would it be beneficial for my equities to be 100% eurozone rather than 100% msci-acwi?
No.

Why are you investing in more than 1 company?
Why are you investing in more than 1 sector?
Why are you investing in more than 1 country?
The same answer is why to invest in more than 1 region.

Who knows if eurozone will trail the rest of the world for 5, 10, or 40 years.
Also who knows if the opposite will occur.

Tilt some if you like, but for the majority of equities, buy it all.

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pstffc
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Re: I received a one-time payment that needs to last me the rest of my life [EU]

Post by pstffc » Mon Apr 29, 2019 3:33 pm

pennylane wrote:
Sun Apr 28, 2019 9:53 pm
pstffc wrote:
Sun Apr 28, 2019 11:37 am
pennylane wrote:
Sun Apr 28, 2019 11:28 am
I would invest a small portion into cash flowing real estate that you’re able to live off of. The rest in a 3 fund portfolio that appreciates and isn’t touched.
Would a REIT do the same job? I am not thrilled about becoming an active investor.
No it would not.
Why not?

Topic Author
pstffc
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Re: I received a one-time payment that needs to last me the rest of my life [EU]

Post by pstffc » Mon Apr 29, 2019 3:35 pm

andrew99999 wrote:
Sun Apr 28, 2019 10:32 pm
pstffc wrote:
Sun Apr 28, 2019 12:08 pm
Now that this is out there, an open question for anyone:

Would it be beneficial for my equities to be 100% eurozone rather than 100% msci-acwi?
No.

Why are you investing in more than 1 company?
Why are you investing in more than 1 sector?
Why are you investing in more than 1 country?
The same answer is why to invest in more than 1 region.

Who knows if eurozone will trail the rest of the world for 5, 10, or 40 years.
Also who knows if the opposite will occur.

Tilt some if you like, but for the majority of equities, buy it all.
[ quote fixed by admin LadyGeek]
Laurizas wrote:
Sun Apr 28, 2019 2:59 pm
pstffc wrote:
Sun Apr 28, 2019 12:08 pm
Would it be beneficial for my equities to be 100% eurozone rather than 100% msci-acwi?
Go with msci acwi, in that case you would own the world.
The reason I asked this is people seemed to be worried about currency risk, and prefer owning equities in their local currency.

andrew99999
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Re: I received a one-time payment that needs to last me the rest of my life [EU]

Post by andrew99999 » Mon Apr 29, 2019 8:22 pm

pstffc wrote:
Mon Apr 29, 2019 3:35 pm
The reason I asked this is people seemed to be worried about currency risk, and prefer owning equities in their local currency.
I don't know anything about the stability of the Euro since my home country is Australia, so that may change things, but for my situation, here is how I would handle currency risk.

1. Shoot for 50-75% of "total wealth" in home "currency" (for me that is Australian dollars)
Total wealth includes your non income producing assets such as home, and also includes anything in home currency such as bonds in your home currency..

2. If you either own no home (renting) and/or have an aggressive asset allocation (not much bonds), then you would fail to meet the 50%-75% target, and in that case I would increase my home currency equities through one of 2 ways

A. Increase proportion of country or region equities (for you I suppose that is eurozone)
B. Increase proportion of global equities that are hedged to your local currency (for you that is EUR)

The first one increases concentration risk (lower diversification).
The second one has a cost to hedging, plus may not exist for certain markets.
So both have downsides. One option is to mix in the above 2 to lower the total downsides of each.


Here is an example.

Say I rent (own no property), and are an early retiree shooting for a semi aggressive 70/30 allocation, so then my total home country currency is only 30%, so lets say I decided on a target of 60% in home currency to reduce currency risk, then I would need another 30%.
Putting 30% in home country equities may be too much of concentration risk for my small home country market, and I may consider 20% acceptable and then I could put the last 10% in a home currency hedged global fund. Or I may consider 20% too much and put 15/15, or I could put the whole 30% in a home currency hedged global fund to make sure I have no concentration risk at all.

One more example

Say I own property that is worth 30% of total my net worth, and say I had a 60/40 portfolio of stocks (more common for retirees).
Then I would have 30/42/28 property/stocks/bonds, and the home currency would represent 58% of my total net worth (more for you since euro stocks probably takes up more than 5% of the world). and you have little-to-no currency risk so there would be no need to tilt away from global cap weighted stocks in your portfolio.

Hope this makes some sense.

andrew99999
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Re: I received a one-time payment that needs to last me the rest of my life [EU]

Post by andrew99999 » Mon Apr 29, 2019 8:22 pm

pstffc wrote:
Mon Apr 29, 2019 3:33 pm
pennylane wrote:
Sun Apr 28, 2019 9:53 pm
pstffc wrote:
Sun Apr 28, 2019 11:37 am
Would a REIT do the same job? I am not thrilled about becoming an active investor.
No it would not.
Why not?
REIT's behave much more like stocks than unlisted residential property.

Not that you need to hold some form of property, and if you don't want the hassle then there is no need.
But REIT's are not like unlisted residential property, they are like stocks.

MotoTrojan
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Re: I received a one-time payment that needs to last me the rest of my life [EU]

Post by MotoTrojan » Mon Apr 29, 2019 9:38 pm

I would personally go 60/40 in a Total World equity fund and a reasonably diverse bond fund (not familiar with foreign bonds but something that is paying out an interest rate slightly above current inflation expectation, or perhaps indexed to inflation).

Not sure why you are thinking that you need to be all or nothing in equities vs. bonds... exposure to both will give you stability in rough times while still providing you upside growth.

Laurizas
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Location: Lithuania

Re: I received a one-time payment that needs to last me the rest of my life [EU]

Post by Laurizas » Tue Apr 30, 2019 12:30 am

pstffc wrote:
Mon Apr 29, 2019 3:35 pm
The reason I asked this is people seemed to be worried about currency risk, and prefer owning equities in their local currency.
In that case you could use msci acwi hedged to euros. Also currency risk is more significant to bonds then to stocks so in general one should not prefer owning equities in their local currency.

msk
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Re: I received a one-time payment that needs to last me the rest of my life [EU]

Post by msk » Tue Apr 30, 2019 1:58 am

Personally I am interested in only a "forever" investment horizon. After much researching I have concluded that:
100% US stocks (actually also worldwide if you look at a long enough horizon) can support a maximum of 5% withdrawal in any one year.
100% Total US bonds (I did not check worldwide) can support 2.5% maximum withdrawal in any year.
NEVER exceed the 5%/2.5% withdrawal in any year and both your money-of-the-day cash-out and the portfolio balance should, on average, keep up with inflation forever.
Use VWRD (Ireland based) instead of ACWI (US situs?) for tax reasons but please check the situs of ACWI.

Hence for your circumstances I would seriously consider:
Purchase a small apartment at some ideal location to be your base (and real estate "investment") for the next decade or 3 or 6.
Invest in Euro bonds to cover 3 to 5 years expenses (60k to 100k EUR?) in case the world stock markets collapse everywhere and massively.
Put all the balance in VWRD. Frankly I feel the fears of the Great Depression and Japan messes repeating are overdone when taken in the context of the WHOLE world. Three to 5 years' worth of bonds should enable you to ride out such a world calamity. Keep the bonds in medium maturity. No need to ever spend any except when a worldwide calamity strikes the stock markets and you hit the 5% annual withdrawal ceiling from your VWRD and cannot maintain your standard of living (NB no rent since you own your apartment).

Topic Author
pstffc
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Re: I received a one-time payment that needs to last me the rest of my life [EU]

Post by pstffc » Tue Apr 30, 2019 8:54 am

msk wrote:
Tue Apr 30, 2019 1:58 am
Hence for your circumstances I would seriously consider:
Purchase a small apartment at some ideal location to be your base (and real estate "investment") for the next decade or 3 or 6.
Invest in Euro bonds to cover 3 to 5 years expenses (60k to 100k EUR?) in case the world stock markets collapse everywhere and massively.
Put all the balance in VWRD. Frankly I feel the fears of the Great Depression and Japan messes repeating are overdone when taken in the context of the WHOLE world. Three to 5 years' worth of bonds should enable you to ride out such a world calamity. Keep the bonds in medium maturity. No need to ever spend any except when a worldwide calamity strikes the stock markets and you hit the 5% annual withdrawal ceiling from your VWRD and cannot maintain your standard of living (NB no rent since you own your apartment).
This makes the most sense to me at the moment. Although, I’m leaning towards cash/ultra-short bonds rather than longer-term instruments. If the event I’m hedging against is something which results/includes the whole world stock market crashing, I feel cash may be a better option than bonds.

My plan is as follows:
Buy an apartment: 200k
I would be left with 1m.
Hold <100k cash/ultrashort. Dump rest (900k+) into world stockmarket.

mdavis6890
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Re: I received a one-time payment that needs to last me the rest of my life [EU]

Post by mdavis6890 » Tue Apr 30, 2019 3:49 pm

You've been getting a lot of great financial advice in this thread, but I think that's just a small part of the picture. You're only 29, and you only live once.

Your settlement doesn't sound like enough money to live comfortably and enjoy all the experiences that you might want to for the next 50 years. Just enough to live, basically (please correct me if I'm wrong, I'm loosely translating AU's to Dollars). The healthcare benefit is of somewhat unknown (but possibly large) value, although that too might be contingent on the financial health of your employer or their willingness to pay over the next 50 years of your life.

The ability to create and contribute ("work") is one of life's greatest pleasures, and giving that up is a high cost to pay. So is having a wide range of experiences, some of which might require money.

I think you should
A. Talk to a therapist
B. Talk to a lawyer and figure out the definition of "work" for the purposes of the medical benefit, and also determine whether your 1M is at risk.
C. Think about what you want out of life, from here. Can you live the fulfilling life you want on 20,000 AU's per year?

Don't let this relatively small (I think) settlement become the chains that bind you for the remainder of your life.

andrew99999
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Re: I received a one-time payment that needs to last me the rest of my life [EU]

Post by andrew99999 » Tue Apr 30, 2019 7:31 pm

^^ Good advice

msk
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Re: I received a one-time payment that needs to last me the rest of my life [EU]

Post by msk » Wed May 01, 2019 2:54 am

pstffc wrote:
Tue Apr 30, 2019 8:54 am
msk wrote:
Tue Apr 30, 2019 1:58 am
Hence for your circumstances I would seriously consider:
Purchase a small apartment at some ideal location to be your base (and real estate "investment") for the next decade or 3 or 6.
Invest in Euro bonds to cover 3 to 5 years expenses (60k to 100k EUR?) in case the world stock markets collapse everywhere and massively.
Put all the balance in VWRD. Frankly I feel the fears of the Great Depression and Japan messes repeating are overdone when taken in the context of the WHOLE world. Three to 5 years' worth of bonds should enable you to ride out such a world calamity. Keep the bonds in medium maturity. No need to ever spend any except when a worldwide calamity strikes the stock markets and you hit the 5% annual withdrawal ceiling from your VWRD and cannot maintain your standard of living (NB no rent since you own your apartment).
This makes the most sense to me at the moment. Although, I’m leaning towards cash/ultra-short bonds rather than longer-term instruments. If the event I’m hedging against is something which results/includes the whole world stock market crashing, I feel cash may be a better option than bonds.

My plan is as follows:
Buy an apartment: 200k
I would be left with 1m.
Hold <100k cash/ultrashort. Dump rest (900k+) into world stockmarket.
Sounds good except for the "cash ultra short". To get any useful interest rate you need to put your money aside for at least a few months. Your local bank can quote you the rates for fixed-term deposits of EUR 100k (or smaller amounts) over 3 months, six, one year, two, etc. So if you want almost-cash I would examine my possible needs closely. You only "need" this money in case there is a very major stock market crash. This is how I withdraw cash from my stocks portfolio for gifts to my heirs:
Once every year (on my birthday) I withdraw the next year's total gifts from the stocks+dividends portfolio. The account with VWRD pays between 1 and 2% dividends split quarterly. I then tell my adult kids how much each will get every month for the next 12 months. If the amount exceeds 5% I plan to limit it to 5% of the total portfolio. You must apply the same limit otherwise you run a chance of running out of money or protection against inflation. Let's assume your stocks portfolio comes to EUR700k. 5%=35k, but you say you need only 20k (note apartment already paid for separately). So you withdraw EUR20k and let the rest accumulate over the next year. "Normally" it'll accumulate, on average, to at least EUR700k+inflation. But stuff happens, and a 50% market fall occurs before your next birthday. Your stocks are then worth EUR350k and so the 5% max gives you only 17.5k. So, over the next year you will need to get 2.5k from your cash/bonds. See, even with a 50% stock market fall, worldwide, you will need to take only a small amount of cash, slowly. Hence for your cash/bonds of 100k IMHO you need, say, 10k in 3 month deposit, 10k in 6 month deposit and 20k in one-year deposit and the rest in 2-year deposit. That ought to give you a nicer interest profile then if you keep too much in cash or very short deposits. Also note that if you use Interactive Brokers and activate "Margin" you can always borrow instant cash at a low interest rate. Look into IB. Open a EUR account and get organised. You can ofcourse use quarterly rather than annual withdrawals. Monte Carlo simulations indicate that it will work even with monthly withdrawals. Just NEVER exceed 5% total in any year! Best wishes.

ignition
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Re: I received a one-time payment that needs to last me the rest of my life

Post by ignition » Wed May 01, 2019 4:11 am

pstffc wrote:
Sat Apr 27, 2019 2:37 pm
RadAudit wrote:
Sat Apr 27, 2019 11:50 am
My NW to spending ratio seems very high, which makes me wonder:
Am I rich enough to not have to take the risk with stocks? No
Or am I rich enough where stock volatility does not matter, and I should be 100% stocks? No
A half-half approach seems like the worst of both worlds, so I would prefer being all in on one option.
Actually, half and half may not be all that bad. OTOH, do you have something like Vanguard's LifeStrategy funds available at a reasonable cost? They have several funds available from 80/20 to 20/80. I'd guess something like 60/40 might work. And it is one fund. Might be worth a look.

Best of luck.
I don’t have access to a low-cost readymade product like that, but I do have access to several low-cost funds that I can use to replicate that setup.

My major fear with a bond allocation that high is loss of purchasing power over the long term.
You can set your bonds to 10-20%. That way, if there is a stock market crash you can survive 5-10 years without having to sell stocks.

Bonds in your local currency (or hedged to your local currency) are best to rule out currency risk.

Owning your own house or apartment might help with inflation risk as will a bigger percentage of equities.

When I am FI (also from Europe) and would retire early I plan to:
- buy my own house/apartment (no mcmansion, well within my means unless renting is really cheap compared to owning)
- keep a small percentage of my portfolio in cash (5% max)
- put the rest in an 85/15 stock/bond allocation: stock = total world stock market allocation (maybe hedge 25% to euro)/bonds = total world bond market allocation - investment grade (100% hedged to euro)
- keep my yearly expenses to 3% of my portfolio value with a floor of 2% of the initial portfolio value (inflation-adjusted) in year 1.

ignition
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Re: I received a one-time payment that needs to last me the rest of my life [EU]

Post by ignition » Wed May 01, 2019 4:29 am

mdavis6890 wrote:
Tue Apr 30, 2019 3:49 pm
You've been getting a lot of great financial advice in this thread, but I think that's just a small part of the picture. You're only 29, and you only live once.

Your settlement doesn't sound like enough money to live comfortably and enjoy all the experiences that you might want to for the next 50 years. Just enough to live, basically (please correct me if I'm wrong, I'm loosely translating AU's to Dollars). The healthcare benefit is of somewhat unknown (but possibly large) value, although that too might be contingent on the financial health of your employer or their willingness to pay over the next 50 years of your life.

The ability to create and contribute ("work") is one of life's greatest pleasures, and giving that up is a high cost to pay. So is having a wide range of experiences, some of which might require money.

I think you should
A. Talk to a therapist
B. Talk to a lawyer and figure out the definition of "work" for the purposes of the medical benefit, and also determine whether your 1M is at risk.
C. Think about what you want out of life, from here. Can you live the fulfilling life you want on 20,000 AU's per year?

Don't let this relatively small (I think) settlement become the chains that bind you for the remainder of your life.
He only spends about 20,000 AU per year at the moment. He has a large enough portfolio to spend 36,000 AU per year. Almost double his current spending with a large probability of his portfolio growing even while spending 36,000 AU (increasing his future spending even further).

Plus, you don't need a lot of money to be happy. It's a fallacy that spending more money will make you happier (what really makes people happy is having more money than their peers funnily enough irrespective of how much money/purchasing power they have).

YRT70
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Re: I received a one-time payment that needs to last me the rest of my life [EU]

Post by YRT70 » Wed May 01, 2019 7:21 am

msk wrote:
Tue Apr 30, 2019 1:58 am
Invest in Euro bonds to cover 3 to 5 years expenses (60k to 100k EUR?) in case the world stock markets collapse everywhere and massively.
Put all the balance in VWRD.
I'm curious to learn why you recommend euro bonds. I see Vanguard recommend global bonds hedged to EUR and the Bogle wiki recommends global aggregated bonds hedged to EUR.

I'm new to investing in bonds and trying to learn about the topic.

msk
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Re: I received a one-time payment that needs to last me the rest of my life [EU]

Post by msk » Wed May 01, 2019 1:58 pm

Personally I do not invest in bonds at all; so no expert! 100% stocks worldwide by market weight, but the OP spends in EUR and he wishes to protect himself against massive and rapid falls in stocks, also possibly a rapid rise in the exchange rate of the EUR, say, from USD 1.10 to 1.35. From a EUR point of view that rise would look terrible for the current 55% world stocks exposure to US stocks. Longer term we all expect it to be inconsequential. I am rather unsure about the hedging of currencies for short/medium term bonds for the OP. All pricing of bonds in any currency has every sentiment already built in. The EUR is a major currency and the OP is going to spend EUR anyway. Why would he need any bond not issued in EUR? Hopefully he will never face the need to spend any bonds anyway and he can survive satisfactorily within the 5% WR from his stocks. IMHO he is not chasing yield in bonds (anyone does?) so I see no reason why he should expose his minor bond portfolio to any foreign currency such as GBP or USD or Renminbi or whatever. The perspective may well be different for somebody with, say, 50% bonds with long maturities trying to eke out the last decimal in yield but terrified that his foreign currency exposure may not have been brilliant. I also see nil attraction in a US resident buying anything but USD bonds if his AA to bonds is minor.

YRT70
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Re: I received a one-time payment that needs to last me the rest of my life [EU]

Post by YRT70 » Wed May 01, 2019 3:12 pm

I'm no expert either. Just following the advice here:
An allocation to global bond markets gives investors exposure to a greater number of
securities, markets, and economic and inflation environments than they would have with
a portfolio composed purely of local market fixed income. In theory, this diversification
can help reduce a portfolio’s volatility without necessarily decreasing its total return.

We tested the empirical reality across five markets: the United States, Canada, the
United Kingdom, the euro area, and Australia. In each market, reality confirms theory—
but with a critical qualifier: The key to realizing the diversification potential of global
bonds is to hedge the currency exposure back to the investor’s local currency.
https://personal.vanguard.com/pdf/ISGGLBD.pdf

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