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

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

Post by grok87 » Sat Apr 11, 2020 6:28 pm

JohnDoh wrote:
Sat Apr 11, 2020 5:56 pm
Horton wrote:
Sat Apr 11, 2020 5:07 pm
grok87 wrote:
Sat Apr 11, 2020 4:11 pm
Horton wrote:
Sat Apr 11, 2020 4:08 pm
If I was in or near retirement, I would seriously consider swapping a portion of my fixed income allocation for a Single Premium Immediate Annuity (SPIAs). SPIAs are typically priced using high quality corporate bond yields (AA). Since spreads have widened, corporate bond rates haven't fallen as much as Treasuries.

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

Image
Thanks for sharing this.
here's a chart showing BBB bond yields. they jumped over the past month or so but are headed back down.
https://fred.stlouisfed.org/series/BAMLC0A4CBBBEY
RIP Mr. Bogle.

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

Post by grok87 » Sat Apr 11, 2020 6:30 pm

Horton wrote:
Sat Apr 11, 2020 5:08 pm
Dottie57 wrote:
Sat Apr 11, 2020 4:53 pm
vineviz wrote:
Sat Apr 11, 2020 3:47 pm
Dottie57 wrote:
Sat Apr 11, 2020 3:20 pm
So what you invest in for FI is dependent on your time horizon. What is the time horizon! Is it retirement date, 5 years from retirement or ....?
Mathematically, your investment time horizon is the weighted average time to your future expenses.

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

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

In the example I used here, the investment time horizon of a 65-year old female would be approximately 16.5 years. The bond portfolio which minimizes interest rate risk for such an investor would have a weighted average duration of 16.5 years (give or take).
Thank you for such a clear answer?
In case its helpful, here is a link to the Longevity Illustrator.
i plugged some numbers in. sobering. i guess we should all plan on working longer/ have second careers, etc.
RIP Mr. Bogle.

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

Post by bigskyguy » Sat Apr 11, 2020 7:02 pm

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

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

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

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

If you have a DB pension consider yourself very fortunate.

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

BobK
I think you are spot on. There is no clear, optimal, inexpensive path. Unless one has substantive resources, whatever path one chooses will prove quite expensive. It probably is worthwhile calculating a baseline safe withdrawal from a TIPS/annuity portfolio: which will likely yield a high 2% to low 3% annual withdrawal equivalent going forward, which translates to a portfolio that is in the range 33-40 times annual draw. For those of us recently retired or entering retirement, this will indeed be challenging, however one slices it. I’d more than welcome a more optimistic counterargument.

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

Post by Horton » Sat Apr 11, 2020 7:05 pm

bigskyguy wrote:
Sat Apr 11, 2020 7:02 pm
bobcat2 wrote:
Sat Apr 11, 2020 2:56 pm
What should the new retiree do in this world of low yields?

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

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

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

If you have a DB pension consider yourself very fortunate.

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

BobK
I think you are spot on. There is no clear, optimal, inexpensive path. Unless one has substantive resources, whatever path one chooses will prove quite expensive. It probably is worthwhile calculating a baseline safe withdrawal from a TIPS/annuity portfolio: which will likely yield a high 2% to low 3% annual withdrawal equivalent going forward, which translates to a portfolio that is in the range 33-40 times annual draw. For those of us recently retired or entering retirement, this will indeed be challenging, however one slices it. I’d more than welcome a more optimistic counterargument.
Another option is to reduce your spending.

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

Post by MIretired » Sun Apr 12, 2020 7:20 am

Glad you posted this, grok87. Haven't paid attention to this retirement income problem for a while. It's an interesting battle re: BobK's no risk(especially using the longevity insurance of an annuity) vs beating it with a risky portfolio.

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

Post by MIretired » Sun Apr 12, 2020 7:28 am

I've had my own setup where you design 30 buckets(for 30 years), making each bucket progressively riskier on the idea that the bucket 30 years out should be set with an AA that is ,say, 95% probable to beat,say, a 10year treasury yield. And then sequentially spending them one bucket at a time, where each bucket's return is what you get, regardless, because you set that bucket up on probability of return. Haven't totally vetted it yet. Work in progress.

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

Post by MIretired » Sun Apr 12, 2020 7:31 am

MIretired wrote:
Sun Apr 12, 2020 7:28 am
I've had my own setup where you design 30 buckets(for 30 years), making each bucket progressively riskier on the idea that the bucket 30 years out should be set with an AA that is ,say, 95% probable to beat,say, a 10year treasury yield. And then sequentially spending them one bucket at a time, where each bucket's return is what you get, regardless, because you set that bucket up on probability of return. Haven't totally vetted it yet. Work in progress.
I should say, the annuity and/or reverse mort. seems appealing for the non-discretionary income needed, then 'gamble' the rest. :happy

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

Post by grok87 » Sun Apr 12, 2020 8:21 am

MIretired wrote:
Sun Apr 12, 2020 7:31 am
MIretired wrote:
Sun Apr 12, 2020 7:28 am
I've had my own setup where you design 30 buckets(for 30 years), making each bucket progressively riskier on the idea that the bucket 30 years out should be set with an AA that is ,say, 95% probable to beat,say, a 10year treasury yield. And then sequentially spending them one bucket at a time, where each bucket's return is what you get, regardless, because you set that bucket up on probability of return. Haven't totally vetted it yet. Work in progress.
I should say, the annuity and/or reverse mort. seems appealing for the non-discretionary income needed, then 'gamble' the rest. :happy
swensen makes the portfolio progressively riskier up to year 10 at which point he thinks the LT portfolio is appropriate.

i'm not retired yet. my plan is to draw down from my tips ladder (and from my risk portfolio) in the early stages of retirement and eventually buy an inflation-protected annuity in my late 70s (DV).

if they were available i would like to buy a deferred inflation protected annuity now. but they don't exist.

as far as reverse mortgages, while they may make sense in theory, my understanding is that the fees are still extortionate. would love to be wrong about this.

cheers,
grok
RIP Mr. Bogle.

MIretired
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Joined: Fri Sep 06, 2013 12:35 pm

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

Post by MIretired » Sun Apr 12, 2020 8:33 am

grok87 wrote:
Sun Apr 12, 2020 8:21 am
MIretired wrote:
Sun Apr 12, 2020 7:31 am
MIretired wrote:
Sun Apr 12, 2020 7:28 am
I've had my own setup where you design 30 buckets(for 30 years), making each bucket progressively riskier on the idea that the bucket 30 years out should be set with an AA that is ,say, 95% probable to beat,say, a 10year treasury yield. And then sequentially spending them one bucket at a time, where each bucket's return is what you get, regardless, because you set that bucket up on probability of return. Haven't totally vetted it yet. Work in progress.
I should say, the annuity and/or reverse mort. seems appealing for the non-discretionary income needed, then 'gamble' the rest. :happy
swensen makes the portfolio progressively riskier up to year 10 at which point he thinks the LT portfolio is appropriate.

i'm not retired yet. my plan is to draw down from my tips ladder (and from my risk portfolio) in the early stages of retirement and eventually buy an inflation-protected annuity in my late 70s (DV).

if they were available i would like to buy a deferred inflation protected annuity now. but they don't exist.

as far as reverse mortgages, while they may make sense in theory, my understanding is that the fees are still extortionate. would love to be wrong about this.

cheers,
grok
Agree about the RM. For some reason banks think they 'deserve' a closing cost percentage of the market value of property and stuff. Plus I pay the fed insurance of the loan to cya the bank's risk.

Topic Author
grok87
Posts: 9138
Joined: Tue Feb 27, 2007 9:00 pm

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

Post by grok87 » Mon Apr 13, 2020 12:46 pm

MIretired wrote:
Sun Apr 12, 2020 8:33 am
grok87 wrote:
Sun Apr 12, 2020 8:21 am
MIretired wrote:
Sun Apr 12, 2020 7:31 am
MIretired wrote:
Sun Apr 12, 2020 7:28 am
I've had my own setup where you design 30 buckets(for 30 years), making each bucket progressively riskier on the idea that the bucket 30 years out should be set with an AA that is ,say, 95% probable to beat,say, a 10year treasury yield. And then sequentially spending them one bucket at a time, where each bucket's return is what you get, regardless, because you set that bucket up on probability of return. Haven't totally vetted it yet. Work in progress.
I should say, the annuity and/or reverse mort. seems appealing for the non-discretionary income needed, then 'gamble' the rest. :happy
swensen makes the portfolio progressively riskier up to year 10 at which point he thinks the LT portfolio is appropriate.

i'm not retired yet. my plan is to draw down from my tips ladder (and from my risk portfolio) in the early stages of retirement and eventually buy an inflation-protected annuity in my late 70s (DV).

if they were available i would like to buy a deferred inflation protected annuity now. but they don't exist.

as far as reverse mortgages, while they may make sense in theory, my understanding is that the fees are still extortionate. would love to be wrong about this.

cheers,
grok
Agree about the RM. For some reason banks think they 'deserve' a closing cost percentage of the market value of property and stuff. Plus I pay the fed insurance of the loan to cya the bank's risk.
hopefully competition will bring that down over time.
in the meantime, i'm wondering if its worth not paying down one's mortgage necessarily but defeasing it. in other words take the funds you would have used to pay down the mortgage and stick them in duration matched bonds.

cheers,
grok
RIP Mr. Bogle.

MIretired
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Joined: Fri Sep 06, 2013 12:35 pm

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

Post by MIretired » Mon Apr 13, 2020 2:21 pm

I'd have to re-investigate the RM. There's got to be a best way to get some of that value out. If I can resolve to aging in place, that is.
When my mortgage got down to under 5 years left, I couldn't resist paying it off. At 5%, it's easy money. Even at 3%. At 10+ years left, it's not as enticing to me.

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

Post by grok87 » Fri Jul 31, 2020 4:52 am

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

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

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

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

So here is an alternative, based on ideas presented in David Swensen’s book Unconventional Success.
....
thought this was worth a bump just to mark how much TIPS real yields have dropped. as of today

5 year TIPS real yield = -1.18%
10 year TIPS = -0.99%
20 year TIPS = -0.54%
30 year TIPS = -0.44%

meanwhile nominal treasuries are at

5 year Treasury yield = 0.22%
10 year = 0.53%
20 year = 0.94% (per ws)
30 year = 1.18%

implying the following breakeven inflation rates (BEI)

5 year BEI = 1.40%
10 year BEI = 1.52%
20 year BEI = 1.48%
30 year BEI = 1.62%

5x5 BEI = 1.64%
10x10 BEI = 1.44%
10x20 BEI = 1.84%

it's hard to know what to make of these up and down breakeven inflation numbers.

As per the thrust of this original post, while i'm holding on to my long term tips, (although the negative -0.5% yields do give me some pause) i've stopped adding to my tips ladder (it was pretty much built pre covid crisis anyway) and am directing tips coupons, new funds and some of my short term tips into building up the David Swensen retirement portfolio.

cheers,
grok
RIP Mr. Bogle.

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

Post by Hayden » Fri Jul 31, 2020 8:14 am

I am early retired, living off dividends. I like the simplicity of a fund like LTPZ.

Where should I put the TIPS fund. In my Roth, traditional IRA, or taxable?

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

Post by vineviz » Fri Jul 31, 2020 9:31 am

Hayden wrote:
Fri Jul 31, 2020 8:14 am
I am early retired, living off dividends. I like the simplicity of a fund like LTPZ.

Where should I put the TIPS fund. In my Roth, traditional IRA, or taxable?
The traditional advice would probably be to put something like LTPZ in a traditional IRA if you've got the space there for it, preserving the Roth for faster-growing assets and taxable for more tax-efficient assets (like stocks). It's unlikely to make a big difference one way or the other, but that's probably what I'd do.
"Far more money has been lost by investors preparing for corrections than has been lost in corrections themselves." ~~ Peter Lynch

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

Post by grok87 » Fri Jul 31, 2020 10:47 am

vineviz wrote:
Fri Jul 31, 2020 9:31 am
Hayden wrote:
Fri Jul 31, 2020 8:14 am
I am early retired, living off dividends. I like the simplicity of a fund like LTPZ.

Where should I put the TIPS fund. In my Roth, traditional IRA, or taxable?
The traditional advice would probably be to put something like LTPZ in a traditional IRA if you've got the space there for it, preserving the Roth for faster-growing assets and taxable for more tax-efficient assets (like stocks). It's unlikely to make a big difference one way or the other, but that's probably what I'd do.
I agree.
RIP Mr. Bogle.

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