Bernstein - Investing in Retirement

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Coyote22
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Bernstein - Investing in Retirement

Post by Coyote22 »

William Bernstein, the author of several excellent books, was interviewed for an article in Money magazine a year ago. The article is entitled "The Worst Retirement Investment Mistake". Key points of are quoted below:

"A lot of people had won the game before the crisis happened: They had pretty much saved enough for retirement, and they were continuing to take risk by investing in equities. When you've won the game, why keep playing it? "

"You want to end up with a portfolio that matches your liabilities, meaning the amount you'll need to spend in retirement. The rule of thumb I came up with, based on annuity payouts and spending patterns late in life, is that you should save 20 to 25 times your residual living expenses -- that is, the yearly shortfall you have to make up after Social Security and any pension. This portfolio should be in safe assets: Treasury Inflation-Protected Securities, annuities, or even short-term bonds. Anything above that, you can invest in risky assets. That's your risk portfolio. If you dream about taking an around-the-world trip, and the risk portfolio does well, you can use it for that. If the risk portfolio doesn't do well, at least you're not pushing a shopping cart under an overpass."

"You should be working until you get that number."

He makes sense to me. Am I missing something?
JW-Retired
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Re: Bernstein - Investing in Retirement

Post by JW-Retired »

Coyote22 wrote:William Bernstein, the author of several excellent books, was interviewed for an article in Money magazine a year ago. The article is entitled "The Worst Retirement Investment Mistake". Key points of are quoted below:

"A lot of people had won the game before the crisis happened: They had pretty much saved enough for retirement, and they were continuing to take risk by investing in equities. When you've won the game, why keep playing it? "

"You want to end up with a portfolio that matches your liabilities, meaning the amount you'll need to spend in retirement. The rule of thumb I came up with, based on annuity payouts and spending patterns late in life, is that you should save 20 to 25 times your residual living expenses -- that is, the yearly shortfall you have to make up after Social Security and any pension. This portfolio should be in safe assets: Treasury Inflation-Protected Securities, annuities, or even short-term bonds. Anything above that, you can invest in risky assets. That's your risk portfolio. If you dream about taking an around-the-world trip, and the risk portfolio does well, you can use it for that. If the risk portfolio doesn't do well, at least you're not pushing a shopping cart under an overpass."

"You should be working until you get that number."

He makes sense to me. Am I missing something?
What he is missing for me and I think plenty of others, is that this "residual living expenses" number is so highly malleable. We could live on social security if we really had to but 2X or 3X that amount is a lot more fun. Probably 6X would be even better since then we could send all the grandkids to expensive colleges and travel to our heart's content and leave a lot of money to heirs and charities. If/when we get to 6X we will probably think of something else. So at what level between 2X and 6X should I quit working?

Plus, some people like their work. :)
JW
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Browser
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Re: Bernstein - Investing in Retirement

Post by Browser »

Covered in his book "The Ages of the Investor" I got the Kindle version for a few bucks and it's well worth having in your library. I can't find much wrong with his logic either; but he discusses some of the pros and cons of various liability-matching approaches such as TIPS ladders, Annuities, etc. There are tradeoffs with each of these. But I generally agree that it makes sense to follow his advice and quit playing the investment roulette game once you've reached the 20-25 times residual retirement income needs, and move the money into safe liability-matching financial options. Anything above that is "gambling money" that you can put at risk with stocks, realizing that a good chuck of it could vaporize. He gives some examples of folks who stayed too long at the tables and later regretted that decision. "If you've already won the game, then stop playing." Lots of other in-depth info that fleshes out his philosophy in the book.
We don't know where we are, or where we're going -- but we're making good time.
furwut
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Re: Bernstein - Investing in Retirement

Post by furwut »

A portfolio laddered for 25 years with TIPS bonds eliminates the risks of a poor sequence of returns and inflation but doesn't remove longevity risk. Such a portfolio will last exactly 25 years. What if you last 26?
redhounds
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Re: Bernstein - Investing in Retirement

Post by redhounds »

furwut wrote:A portfolio laddered for 25 years with TIPS bonds eliminates the risks of a poor sequence of returns and inflation but doesn't remove longevity risk. Such a portfolio will last exactly 25 years. What if you last 26?
This is touched on in the book. Longevity insurance is one option mentioned.

I don't remember it mentioned in the book, but another option, of course, would be to convert some of the risk portfolio into additional rungs later in life.

Also, if my LMP is lasting from age 70-95 and my wife or I outlived it, I will still be getting an inflation adjusted annuity in the form of Social Security. While my goal is to have enough money to fund 105 years of life, we could live off of the approximately $34,000 a year of Social Security if we had to.
--Red
Leesbro63
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Re: Bernstein - Investing in Retirement

Post by Leesbro63 »

What he misses is that TIPS are subject to taxflation if the very inflation they are owned to hedge ever gets ugly. Because in order to have 25x spending, it usually requires a big taxable account.
redhounds
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Re: Bernstein - Investing in Retirement

Post by redhounds »

Leesbro63 wrote:What he misses is that TIPS are subject to taxflation if the very inflation they are owned to hedge ever gets ugly. Because in order to have 25x spending, it usually requires a big taxable account.
Actually, regarding an investor with most of their money in taxable accounts, Dr. Bernstein says that "a more conventional "age in bonds" balanced strategy might be more appropriate."
--Red
Leesbro63
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Re: Bernstein - Investing in Retirement

Post by Leesbro63 »

redhounds wrote:
Leesbro63 wrote:What he misses is that TIPS are subject to taxflation if the very inflation they are owned to hedge ever gets ugly. Because in order to have 25x spending, it usually requires a big taxable account.
Actually, regarding an investor with most of their money in taxable accounts, Dr. Bernstein says that "a more conventional "age in bonds" balanced strategy might be more appropriate."
Exactly.
dbr
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Re: Bernstein - Investing in Retirement

Post by dbr »

JW Nearly Retired wrote: What he is missing for me and I think plenty of others, is that this "residual living expenses" number is so highly malleable. We could live on social security if we really had to but 2X or 3X that amount is a lot more fun. Probably 6X would be even better since then we could send all the grandkids to expensive colleges and travel to our heart's content and leave a lot of money to heirs and charities. If/when we get to 6X we will probably think of something else. So at what level between 2X and 6X should I quit working?
I agree that this arbitrary division between "liabilities" and "residual" is fundamentally illogical. It is not just that there is a fuzzy continuum across needs and wants but also a persons needs and wants are not completely predictable and depend partly on events beyond our control.

I also would ask whether or not there is a fallacy in capitalizing expenses as "liabilities." It seems to be that falls afoul of the same problem that comes up in discussions about capitalizing income streams and treating them as assets.

It does make sense to me to focus on matching income streams to expenses. In that sense, making sure we think about SS and other annuities and their role in retirement is a good idea.

I am also a bit lost about the TIPS ladder as that seems to focus on period certainty of income at the expense of the real issue which is longevity risk. It may well be that longevity insurance is a great idea, but I am not so sure about the practical availability of such a tool.
blueridge
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Re: Bernstein - Investing in Retirement

Post by blueridge »

What Dr. Bernstein is saying here makes a lot of sense to me, but it also flies in the face of much of what I've learned about investing.

So let's say one has "enough" to live comfortably and happily for the rest of his/her life (lives). Is he really suggesting that your AA should be (close to) 0/100? And that anything above "enough" can go into equities, so you might be 5/95 or 10/90 if you're a little over your goal?
MoonOrb
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Re: Bernstein - Investing in Retirement

Post by MoonOrb »

I read this to embrace these principles:

(1) Figure out how much risk you need to take and take no more risk beyond that;
(2) In determining #1, take into account the fact that failing to have enough accumulated to meet your basic necessities is a result that must be avoided at all costs, while failing to have enough accumulated to live a lift of (varying degrees) of luxury is a result that you can live with.
Leesbro63
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Re: Bernstein - Investing in Retirement

Post by Leesbro63 »

I think a big issue for those of us in the middle (age 50ish) is "what is risk"? Swedrowe and Bernstein, particularly since 2008, have focused on equity risk. But it's not clear, for those of us with taxable accounts (where TIPS don't work well) that too LITTLE equity isn't just as risky over our remaining life expectancy. This is sort of Warren Buffett thinking. Bernstein has advised market timing bonds to shorter term bonds as well. So defining "need to take risk" to mean "don't take too much equity risk" for Dr. Bernstein kinda puts you heavy into near-cash investments. And longer term, it's not clear that this is not even more risky than riding the volatility of stock risk. Of course if the current stock market euphoria turns out to have been just a printed and borrowed bubble, I'll wish I had defined risk as "equity risk".

There is no easy solution, so I'm about 50/50, splitting the difference.

Those guys talk about "having won the game", but if you have a 30-50 yr remaining joint life expectancy, how can you define the game as won with so much time left on the game clock?
countdown
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Re: Bernstein - Investing in Retirement

Post by countdown »

Blueridge wrote:

"What Dr. Bernstein is saying here makes a lot of sense to me, but it also flies in the face of much of what I've learned about investing.
So let's say one has "enough" to live comfortably and happily for the rest of his/her life (lives). Is he really suggesting that your AA should be (close to) 0/100? And that anything above "enough" can go into equities, so you might be 5/95 or 10/90 if you're a little over your goal?"


Yes, after listening to the Fireside Chat, my impression was that is exactly what he is suggesting, if you have 'enough'. (Please correct me if I'm wrong.). Why risk it?
I have just ordered his book to learn more about this approach.
Browser
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Re: Bernstein - Investing in Retirement

Post by Browser »

Before TIPS and I-Bonds came along, the only "liability matching" asset available was inflation-adjusted annuities. It's hard to match future liabilities when inflation is a wildcard. Now you can do it with TIPS and I-Bonds, and if you can get a decent IA Annuity that too. So it is certainly possible to do it without staying heavily in the stock market and risking ruination on the premise that the higher gains from stocks are going to solve the inflation problem for you. It's sort of a no-brainer to me to lock up an acceptable level of inflation-adjusted income if you have the capital to do it. If you don't, then maybe you should consider saving more or working longer as an alternative to gambling with a high equity allocation when nearing or beginning your retirement. And if leaving the casino is too much of a letdown for you and you need the thrill, then by all means have a chaser of stocks -- recognizing that you are trading off some of your future income flow to do so.
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Re: Bernstein - Investing in Retirement

Post by Abe »

blueridge wrote:What Dr. Bernstein is saying here makes a lot of sense to me, but it also flies in the face of much of what I've learned about investing.

So let's say one has "enough" to live comfortably and happily for the rest of his/her life (lives). Is he really suggesting that your AA should be (close to) 0/100? And that anything above "enough" can go into equities, so you might be 5/95 or 10/90 if you're a little over your goal?
I think Dr. Bernsteins retirement strategy is basically for people who have more than enough to fund their retirement. If someone is on the borderline, then I would think there could be some flexibility there regarding some portion of assets in equities. For example, if someone needed $80,000 per year residual living expenses and they have say $2,000.000 then they would not have enough to invest any in equities using the 25 times residual living expenses formula. In a situation like this, assuming they want some equity exposure, I don't see any reason why they couldn't go something like 33/67 stock/fixed, and still not be taking on too much risk. I could be wrong, but that's the way I see it.
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redhounds
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Re: Bernstein - Investing in Retirement

Post by redhounds »

Abe wrote:
blueridge wrote:What Dr. Bernstein is saying here makes a lot of sense to me, but it also flies in the face of much of what I've learned about investing.

So let's say one has "enough" to live comfortably and happily for the rest of his/her life (lives). Is he really suggesting that your AA should be (close to) 0/100? And that anything above "enough" can go into equities, so you might be 5/95 or 10/90 if you're a little over your goal?
I think Dr. Bernsteins retirement strategy is basically for people who have more than enough to fund their retirement. If someone is on the borderline, then I would think there could be some flexibility there regarding some portion of assets in equities. For example, if someone needed $80,000 per year residual living expenses and they have say $2,000.000 then they would not have enough to invest any in equities using the 25 times residual living expenses formula. In a situation like this, assuming they want some equity exposure, I don't see any reason why they couldn't go something like 33/67 stock/fixed, and still not be taking on too much risk. I could be wrong, but that's the way I see it.
I think that the argument made in his writings are that the closer you are to the line, the more important safety becomes. For someone who is right at the edge, it seems like SPIA annuities start making sense, if one is willing to take on the risk of the insurers going under. As I don't have my Kindle handy to double check the book, I could be remembering wrong.

**EDITED TO ADD** For the record, I agree with you that if one still wanted some equity exposure, something like you discussed would be a good way to get there. It's just not the guaranteed floor that one has with the LMP.
--Red
dbr
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Re: Bernstein - Investing in Retirement

Post by dbr »

redhounds wrote:
I think that the argument made in his writings are that the closer you are to the line, the more important safety becomes. For someone who is right at the edge, it seems like SPIA annuities start making sense, if one is willing to take on the risk of the insurers going under. As I don't have my Kindle handy to double check the book, I could be remembering wrong.
I believe Jim Otar argues in his book that SPIA's are most indicated when one is in gray zone between more than enough and certainly not enough.
blueridge
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Re: Bernstein - Investing in Retirement

Post by blueridge »

dbr wrote:
redhounds wrote:
I think that the argument made in his writings are that the closer you are to the line, the more important safety becomes. For someone who is right at the edge, it seems like SPIA annuities start making sense, if one is willing to take on the risk of the insurers going under. As I don't have my Kindle handy to double check the book, I could be remembering wrong.
I believe Jim Otar argues in his book that SPIA's are most indicated when one is in gray zone between more than enough and certainly not enough.
Haha, isn't that everybody?
dbr
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Re: Bernstein - Investing in Retirement

Post by dbr »

blueridge wrote:
dbr wrote:
redhounds wrote:
I think that the argument made in his writings are that the closer you are to the line, the more important safety becomes. For someone who is right at the edge, it seems like SPIA annuities start making sense, if one is willing to take on the risk of the insurers going under. As I don't have my Kindle handy to double check the book, I could be remembering wrong.
I believe Jim Otar argues in his book that SPIA's are most indicated when one is in gray zone between more than enough and certainly not enough.
Haha, isn't that everybody?
Actually that is not at all a crazy and/or humorous comment. Most people do indeed find their way to that zone and, therefore, we might well believe that annuitizing in part or finding oneself annuitized in part would be appropriate for almost everyone.
dharrythomas
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Re: Bernstein - Investing in Retirement

Post by dharrythomas »

I think the recommendation is to take no more risk than absolutely necessary. That the markets are volatile enough that to continue to play the game after you've got 'enough' is to risk losing.

How to define 'enough' to minimize potential regret is tough. Many get greedy and keep moving the goal line as their nest egg grows, some of those get caught :oops: . How to apply the concept (no more risk than absolutely necessary) in your individual circumstance is complicated even if you've got a strong handle on the definition. :annoyed

Good Luck

Harry
TT
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Re: Bernstein - Investing in Retirement

Post by TT »

Leesbro63 wrote:I think a big issue for those of us in the middle (age 50ish) is "what is risk"? Swedrowe and Bernstein, particularly since 2008, have focused on equity risk. But it's not clear, for those of us with taxable accounts (where TIPS don't work well) that too LITTLE equity isn't just as risky over our remaining life expectancy. This is sort of Warren Buffett thinking. Bernstein has advised market timing bonds to shorter term bonds as well. So defining "need to take risk" to mean "don't take too much equity risk" for Dr. Bernstein kinda puts you heavy into near-cash investments. And longer term, it's not clear that this is not even more risky than riding the volatility of stock risk. Of course if the current stock market euphoria turns out to have been just a printed and borrowed bubble, I'll wish I had defined risk as "equity risk".

There is no easy solution, so I'm about 50/50, splitting the difference.

Those guys talk about "having won the game", but if you have a 30-50 yr remaining joint life expectancy, how can you define the game as won with so much time left on the game clock?


Being prepared to downsize also is a viable option as one gets older generally you can make due with less and actually desire less.
Dandy
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Re: Bernstein - Investing in Retirement

Post by Dandy »

makes a lot of sense. Most negative comments are not significant - to me. If you have 20-25 yrs safe you will probably have more in the "risk" category. That will fund a bit of living large(r) and a bit of living longer. I have no problem with those who want to accumulate more or spend more but having 25 or so in the "bank" makes sense.

If you want to live large and are willing to take the risks/reward of that investment/spending strategy more power to you. Just don't whine about expenses in your old age (and I won't whine about missed opportunities to live it up in mine). Let's face it we don't know our life or health expectancy or what future investment/tax/interest rate etc environment will be. So it is somewhat a roll of the dice as to whether a conservative or aggressive plan will be best. I'd rather leave some money on the table (for children) than run out in my later years.
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