Kotlikoff - Upside investing strategy

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Fremdon Ferndock
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Kotlikoff - Upside investing strategy

Post by Fremdon Ferndock »

Lawrence Kotlikoff proposes a strategy for securing an income floor while taking advantage of potential stock market gains over time. This is a floor-and-upside investing/spending strategy that involves using his Maxfi software to implement in a more sophisticated way, but the essential concepts could be DIY. Might be worth a read.
To summarize, you set your stock investments by simply determining how much to put in the market. What’s left of your resources is used to build your base living-standard floor. You raise your floor, and thus your annual discretionary spending, as you convert your stocks to safe assets. Before then, you spend assuming your bucket of stocks is or will become worthless. This is what I mean by saying Upside Investing is a combined investing-spending strategy.
https://larrykotlikoff.substack.com/p/f ... the-market
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Wrench
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Re: Kotlikoff - Upside investing strategy

Post by Wrench »

Zvi Bodie has been singing this song for many, many years. He has advised that one should NOT count on stocks for retirement income, but rather invest in inflation adjusted bonds to generate income in retirement. He argues this is the ONLY safe way to assure a secure retirement. Kotlikoff may have refined the method, but he didn't come up with it.
Relative to DIY, it seems pretty simple to me to implement despite what Kotlikoff says. Delay social security as long as possible, preferably to 70 to maximize inflation adjusted government income. Then, purchase sufficient iBonds/TIPS ladder to cover whatever additional income is required to meet expected retirement expenses. After that, invest whatever is left using an asset allocation with as high a stock allocation as you can live with, and only withdraw from it in bull markets and/or to pay for unexpected one time expenses, or to buy more iBonds/TIPS if you want to increase your future income.
This is essentially the plan I have, though I also included an inflation adjusted annuity purchased when they were still available. I sleep well at night independent of what the stock market does. :happy

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squirrel1963
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Re: Kotlikoff - Upside investing strategy

Post by squirrel1963 »

It looks interesting but what I wonder is if this tool actually provides real value for BH types?
And how much risk there is in this investment strategy?

The article itself cites Zvi Bodie (should also cite Grok tip #8 but anyway) for an LMP approach which is so simple that in my opinion you don't even need to any math unless you are a BH geek and want to use #cruncher TIPS ladder builder tool.

If you want to take risk (inflation risk to be exact) out of the equation you build a TIPS ladder to cover all the retirement expenses after accounting for SSA benefits.

A strategy that slowly phases in TIPS from stocks (at least this is my understanding of their idea) may yield better returns but without a question takes more risk.

The talk about not being able to this just with excel, 29 years of software development work, dynamic programming and everything else sounds a lot like marketing mumbo jumbo to me. I could be wrong of course because up until 20 minutes ago I didn't even know who this guy is, it's just that I am skeptical of any kind of claim made by people who want to sell you an investment product.

Edit: I am now t saying the idea is bad, it is very interesting actually, but it needs to be evaluated according to the extra risk it incurs compared to pure LMP.

Edit 2: definitely worth the read :-)
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delamer
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Re: Kotlikoff - Upside investing strategy

Post by delamer »

I didn’t read the link, but is this substantively different than William Bernstein’s recommendation of putting 25 years of residual core expenses in cash equivalents and the remainder of the portfolio in stocks for growth (and discretionary spending)?
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dodecahedron
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Re: Kotlikoff - Upside investing strategy

Post by dodecahedron »

Wrench wrote: Fri Aug 05, 2022 6:29 pm Zvi Bodie has been singing this song for many, many years. He has advised that one should NOT count on stocks for retirement income, but rather invest in inflation adjusted bonds to generate income in retirement. He argues this is the ONLY safe way to assure a secure retirement. Kotlikoff may have refined the method, but he didn't come up with it.
Zvi Bodie and Larry Kotlikoff are longtime good friends and colleagues of one another. Zvi is actually on the advisory board of Larry's Maxifi company.

I read the book but have returned it to the library. I am pretty sure Larry gave Zvi credit for his influential intellectual contributions in his book. Larry's proposed scheme is much more complicated (and unconventional) than anything I have ever seen Zvi advocate.
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Re: Kotlikoff - Upside investing strategy

Post by yog »

I use MaxiFi for our tax-optimization planning in early retirement plan. We don't use all the features, but the Upside Investing strategy is under its "Living Standard Monte Carlo®" simulation area. It seems to work as advertised, but our strategy doesn't lend itself that well to Monte Carlo sims, so I have no opinion on its usefulness.

Essentially it is like modeling out a declining equity glide path using TIPS. You input your percent of present assets held in risk vs. safety, and then for each of your key accounts you predict when they will move from risk to safety by start & end year. The sim shows a starting floor in safe spending, and modeled increases in discretionary spend over time. The alternative monte carlo Full Risk strategy lets you compare a base strategy like moving to safety at a certain age to starting with a safe asset allocation like 30/70 to a more aggressively allocated risky strategy.

An overview can be found here, starting about halfway down the page:
https://maxifiplanner.com/features
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Fremdon Ferndock
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Re: Kotlikoff - Upside investing strategy

Post by Fremdon Ferndock »

Thanks for the link. I found this:
Upside Investing is very simple. You tell MaxiFi about your current and future stock investments and when you'll exit the market. It then builds a base living standard floor assuming all other investments are safe and that your stocks lose all value. As you exit the market, MaxiFi raises your living standard floor based on the simulated amount of stocks that have been converted to safe assets.
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rkhusky
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Re: Kotlikoff - Upside investing strategy

Post by rkhusky »

Wonder how the results compare to simply rebalancing out of stocks, but never into stocks.
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Re: Kotlikoff - Upside investing strategy

Post by arcticpineapplecorp. »

But, you respond:

The U.S. is not Japan. Over all 30-year periods from 1926 to the present, the U.S. stock market has yielded an annual return of at least 8 percent.

My response:

First, you need to adjust for inflation. Once you do so, the 8 percent minimum 30-year annual stock return is only 0.5 percent. Second, the U.S. data provide only three independent, 30-year cumulative-return data points. Studies that reference “all” 30-year periods are using the same annual return data over and over again. That’s not statistically kosher. Third, the U.S. stock data suffer from survivor bias. We don’t have data on stock returns from countries that didn’t survive the test of time or whose stock markets were closed during periods of occupation or regime change.
is he suggesting that inflation was 7.5% annual over all 30 year periods from 1926 to present (8% nominal return - 7.5% inflation = 0.05% real)??

clearly this is not true as historically inflation has been between 3%-4% annually (averaged), right?

methinks Larry's trying to sell his maxfi software:
Can You Do Upside Investing On Your Own?

If you’re Jane, why do you need MaxiFi Planner to do Upside Investing? Can’t you just put some money in the market, let it ride, and start taking it out at, say, 65, continuing through, say, 80?

Not really. You need to compute your baseline living standard floor in order to know how much to spend and save (in a safe manner) this year and through time. You also need to see the range of living-standard upsides you’ll potentially experience based on different choices of your base floor (choices of how much to put in the market). Otherwise, you won’t be able to make a reasoned decision on how much to put in the market.

This is not something anyone can do with Excel or some other spreadsheet program in an afternoon. The amount of technology underlying the figures presented above is simply enormous. MaxiFi’s computation engine received a patent for its method of iterative dynamic programming. The tool was developed over 29 years by a team of expert software engineers and economists. It incorporates incredible detail concerning federal and state taxes, Social Security benefits, and Medicare Part B premiums. Just the efficiently-crafted code for Social Security comprises a ream of paper were it to be printed out.
vanguard already put out a paper called dynamic retirement spending which deals with floor and ceiling:

https://www.vanguard.ca/documents/liter ... -paper.pdf
https://www.cbsnews.com/news/vanguard-p ... -paycheck/
https://retirementresearcher.com/floor- ... ing-twist/
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Wrench
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Re: Kotlikoff - Upside investing strategy

Post by Wrench »

dodecahedron wrote: Fri Aug 05, 2022 7:52 pm
Wrench wrote: Fri Aug 05, 2022 6:29 pm Zvi Bodie has been singing this song for many, many years. He has advised that one should NOT count on stocks for retirement income, but rather invest in inflation adjusted bonds to generate income in retirement. He argues this is the ONLY safe way to assure a secure retirement. Kotlikoff may have refined the method, but he didn't come up with it.
Zvi Bodie and Larry Kotlikoff are longtime good friends and colleagues of one another. Zvi is actually on the advisory board of Larry's Maxifi company.

I read the book but have returned it to the library. I am pretty sure Larry gave Zvi credit for his influential intellectual contributions in his book. Larry's proposed scheme is much more complicated (and unconventional) than anything I have ever seen Zvi advocate.
Right. Did not mean to imply Larry claimed credit for the idea. Just that his idea is a refinement of concepts promoted by Zvi for many years. Larry and Zvi are (former - Zvi is retired I believe) colleagues at BU, and I presume have worked together, if not on this specific approach, on others like it.
I use MaxFi myself, but have not had a chance to play around with this new wrinkle. As presented, though, I am not seeing any major advantage for my situation. YMMV.

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Re: Kotlikoff - Upside investing strategy

Post by Florida Orange »

delamer - I don't think it is.

RKHuskey - I expect they're very similar.
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Re: Kotlikoff - Upside investing strategy

Post by Fremdon Ferndock »

I rather liked the idea that I believe was formulated by Kotlikoff: spending should only come from your "safe" bucket of assets (e.g., TIPs). Income is never withdrawn from the "risk" bucket of stocks, etc. If you don't have enough in the safe bucket to support your spending objective, then transfer more from the risk bucket to the safe bucket. Never depend on the risk bucket for your consumption; act "as if' it is or will be worthless. And, of course, it's a one-way street -- you never put more money in the "risk" bucket, as in re-balancing.
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Re: Kotlikoff - Upside investing strategy

Post by squirrel1963 »

Fremdon Ferndock wrote: Sun Aug 07, 2022 9:08 am I rather liked the idea that I believe was formulated by Kotlikoff: spending should only come from your "safe" bucket of assets (e.g., TIPs). Income is never withdrawn from the "risk" bucket of stocks, etc. If you don't have enough in the safe bucket to support your spending objective, then transfer more from the risk bucket to the safe bucket. Never depend on the risk bucket for your consumption; act "as if' it is or will be worthless. And, of course, it's a one-way street -- you never put more money in the "risk" bucket, as in re-balancing.
So how is it different from what Zvi Bodie or Wade Pfau recommend? Obviously it's great to have a software tool that does the work for you, I am just trying to understand what would be the value add for DIY types who don't mind mind reading Bodie & Pfau and use #cruncher TIPS ladder builder.
Does the software simply do all the work for you and shift a portion of your assets toward riskless instruments or does more than that? In my case it's probably too late anyway because I'm retired already, but I wonder if there is something I can learn or it's worthwhile trying out at this point. Thanks :-)
| LMP | safe portfolio: TIPS ladder + I-bonds + Treasuries | risky portfolio: US stocks / US REIT / International stocks |
Wrench
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Re: Kotlikoff - Upside investing strategy

Post by Wrench »

squirrel1963 wrote: Sun Aug 07, 2022 2:48 pm
Fremdon Ferndock wrote: Sun Aug 07, 2022 9:08 am I rather liked the idea that I believe was formulated by Kotlikoff: spending should only come from your "safe" bucket of assets (e.g., TIPs). Income is never withdrawn from the "risk" bucket of stocks, etc. If you don't have enough in the safe bucket to support your spending objective, then transfer more from the risk bucket to the safe bucket. Never depend on the risk bucket for your consumption; act "as if' it is or will be worthless. And, of course, it's a one-way street -- you never put more money in the "risk" bucket, as in re-balancing.
So how is it different from what Zvi Bodie or Wade Pfau recommend? Obviously it's great to have a software tool that does the work for you, I am just trying to understand what would be the value add for DIY types who don't mind mind reading Bodie & Pfau and use #cruncher TIPS ladder builder.
Does the software simply do all the work for you and shift a portion of your assets toward riskless instruments or does more than that? In my case it's probably too late anyway because I'm retired already, but I wonder if there is something I can learn or it's worthwhile trying out at this point. Thanks :-)
The software only shows you recommendations. It is not connected to your accounts and thus cannot actively make changes. I also did not see explicit recommendations like, "buy a TIPS ladder" or something. But, I may have missed it. This software is pretty complex and takes a while to learn.

I have played with the "Upside" module it a little bit. As near as I can tell it takes your income sources and then adds to it the income from your non-risk assets using a base real return. (I am not sure what that is right now - they change it every quarter, but it is roughly the intermediate term TIPS rate, so maybe today it is about 0.5%?). They call this the floor income. Then they run a monte-carlo analysis on the risk assets to estimate the value of those assets, and the return one might expect from them. They call this discretionary income, and show you various probabilities for what amount that will be based upon the monte-carlo analysis. I think the idea is you take the discretionary income each year and either spend it (in addition to the floor income) or invest it in non-risk assets to increase your floor in future years. Or I guess you could just leave it to grow in the risk assets. The details of exactly what you do (or should do) with that "discretionary income" were not clear to me. Thus, the model is dynamic (just as VPW or ABW are) in the sense that the total income changes as your balances and the assumed rates of return change. At least that is my interpretation from the few runs I did for my situation, but I am certainly no expert on MaxFi of the upside module.

In my case, I did not find it particularly useful because I have built a plan already that generates a "floor" income that will meet all our expected retirement expenses, including some discretionary spending. The balance of our portfolio is available for lumpy one-time expenses, but primarily will be available to use for long-term care if needed, and if not, a legacy for our children. YMMV.

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Re: Kotlikoff - Upside investing strategy

Post by squirrel1963 »

Wrench wrote: Sun Aug 07, 2022 4:21 pm
squirrel1963 wrote: Sun Aug 07, 2022 2:48 pm
Fremdon Ferndock wrote: Sun Aug 07, 2022 9:08 am I rather liked the idea that I believe was formulated by Kotlikoff: spending should only come from your "safe" bucket of assets (e.g., TIPs). Income is never withdrawn from the "risk" bucket of stocks, etc. If you don't have enough in the safe bucket to support your spending objective, then transfer more from the risk bucket to the safe bucket. Never depend on the risk bucket for your consumption; act "as if' it is or will be worthless. And, of course, it's a one-way street -- you never put more money in the "risk" bucket, as in re-balancing.
So how is it different from what Zvi Bodie or Wade Pfau recommend? Obviously it's great to have a software tool that does the work for you, I am just trying to understand what would be the value add for DIY types who don't mind mind reading Bodie & Pfau and use #cruncher TIPS ladder builder.
Does the software simply do all the work for you and shift a portion of your assets toward riskless instruments or does more than that? In my case it's probably too late anyway because I'm retired already, but I wonder if there is something I can learn or it's worthwhile trying out at this point. Thanks :-)
The software only shows you recommendations. It is not connected to your accounts and thus cannot actively make changes. I also did not see explicit recommendations like, "buy a TIPS ladder" or something. But, I may have missed it. This software is pretty complex and takes a while to learn.

I have played with the "Upside" module it a little bit. As near as I can tell it takes your income sources and then adds to it the income from your non-risk assets using a base real return. (I am not sure what that is right now - they change it every quarter, but it is roughly the intermediate term TIPS rate, so maybe today it is about 0.5%?). They call this the floor income. Then they run a monte-carlo analysis on the risk assets to estimate the value of those assets, and the return one might expect from them. They call this discretionary income, and show you various probabilities for what amount that will be based upon the monte-carlo analysis. I think the idea is you take the discretionary income each year and either spend it (in addition to the floor income) or invest it in non-risk assets to increase your floor in future years. Or I guess you could just leave it to grow in the risk assets. The details of exactly what you do (or should do) with that "discretionary income" were not clear to me. Thus, the model is dynamic (just as VPW or ABW are) in the sense that the total income changes as your balances and the assumed rates of return change. At least that is my interpretation from the few runs I did for my situation, but I am certainly no expert on MaxFi of the upside module.

In my case, I did not find it particularly useful because I have built a plan already that generates a "floor" income that will meet all our expected retirement expenses, including some discretionary spending. The balance of our portfolio is available for lumpy one-time expenses, but primarily will be available to use for long-term care if needed, and if not, a legacy for our children. YMMV.

Wrench
Thanks much Wrench, I'm your situation too so sounds like may not be useful but maybe worth checking out if anything to look at what-if scenarios .
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Re: Kotlikoff - Upside investing strategy

Post by JBTX »

Wrench wrote: Fri Aug 05, 2022 6:29 pm Zvi Bodie has been singing this song for many, many years. He has advised that one should NOT count on stocks for retirement income, but rather invest in inflation adjusted bonds to generate income in retirement. He argues this is the ONLY safe way to assure a secure retirement. Kotlikoff may have refined the method, but he didn't come up with it.
Relative to DIY, it seems pretty simple to me to implement despite what Kotlikoff says. Delay social security as long as possible, preferably to 70 to maximize inflation adjusted government income. Then, purchase sufficient iBonds/TIPS ladder to cover whatever additional income is required to meet expected retirement expenses. After that, invest whatever is left using an asset allocation with as high a stock allocation as you can live with, and only withdraw from it in bull markets and/or to pay for unexpected one time expenses, or to buy more iBonds/TIPS if you want to increase your future income.
This is essentially the plan I have, though I also included an inflation adjusted annuity purchased when they were still available. I sleep well at night independent of what the stock market does. :happy

Wrench
This approach has a lot of appeal to it. So how far out do you secure base spending with TIPS/ibonds? If you are 60, would you invest in a 30+ year TIPS ladder for amounts needed over social security? If we were to apply it to our situation, I think it would result in a current allocation of less than 50% stocks at 60 years old which seems light, and as you age most likely your stock percent increases, which seems backwards.
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Re: Kotlikoff - Upside investing strategy

Post by Wrench »

JBTX wrote: Sun Aug 07, 2022 9:11 pm
Wrench wrote: Fri Aug 05, 2022 6:29 pm Zvi Bodie has been singing this song for many, many years. He has advised that one should NOT count on stocks for retirement income, but rather invest in inflation adjusted bonds to generate income in retirement. He argues this is the ONLY safe way to assure a secure retirement. Kotlikoff may have refined the method, but he didn't come up with it.
Relative to DIY, it seems pretty simple to me to implement despite what Kotlikoff says. Delay social security as long as possible, preferably to 70 to maximize inflation adjusted government income. Then, purchase sufficient iBonds/TIPS ladder to cover whatever additional income is required to meet expected retirement expenses. After that, invest whatever is left using an asset allocation with as high a stock allocation as you can live with, and only withdraw from it in bull markets and/or to pay for unexpected one time expenses, or to buy more iBonds/TIPS if you want to increase your future income.
This is essentially the plan I have, though I also included an inflation adjusted annuity purchased when they were still available. I sleep well at night independent of what the stock market does. :happy

Wrench
This approach has a lot of appeal to it. So how far out do you secure base spending with TIPS/ibonds? If you are 60, would you invest in a 30+ year TIPS ladder for amounts needed over social security? If we were to apply it to our situation, I think it would result in a current allocation of less than 50% stocks at 60 years old which seems light, and as you age most likely your stock percent increases, which seems backwards.
Great question. How long do you expect to live? For my situation, I assume my wife and I will both live to 100, but our floor income includes social security and an inflation adjusted annuity that last forever, plus withdrawals from a stable value fund that will last to age 104. I only use TIPS/iBonds ladder to cover ~25 years starting in 2029 to cover a potential reduction of ~20% in social security. (If that reduction does not happen, the proceeds as they mature will likely go into our stock allocation). Waiting until 70 for social security benefits is a key component for us, and we will both wait that long to maximize our benefit, providing longevity insurance in case we both do make it to age 100.

Relative to stock/bond allocations I think it is more about your risk tolerance than what is light or heavy in stocks. My thinking is that if you have all the income you need, I am perfectly willing to live with high volatility and/or large short term losses in the non-income producing portion of my portfolio. What does it matter since it does not impact my spending or everyday life? I can basically ignore it until I need/want to use it (which may be never). Thus, for me, 80-100% in stocks is OK for that portion of the portfolio. But, I recognize that may be hard for some people, in which case higher stock allocations as you age would not be appropriate, and they should keep more in bonds outside of their income producing assets.

Wrench
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Re: Kotlikoff - Upside investing strategy

Post by loukycpa »

VPW offers the same premise to me. Just look at your "Annual Income After Loss" as your base floor of income and off you go.

What he is selling here is nothing but another way of looking at your pile of assets. If one owns a portfolio of stocks (risky assets as he calls them) and bonds (safe assets), and at the same time has a earned enough Social Security benefits at retirement age, one can always do this. Look at their pile of safe assets (if they aren't drawing SS yet some of this is a SS bridge and the rest isn't) and their Social Security benefits and determine how much they could spend annually forever from this pile of assets until age 90. Then from your stocks, pick ultra safe perpetual withdrawal rate. Go crazy safe if you want to. 2% to 3%? Once determined, add these numbers together and again off you go.

Oh and construct a duration matched TIPS ladder for your safe assets.

Yeah I don't need to pay him for help with this. Thanks anyway.
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Re: Kotlikoff - Upside investing strategy

Post by squirrel1963 »

Wrench wrote: Mon Aug 08, 2022 5:56 am
JBTX wrote: Sun Aug 07, 2022 9:11 pm
Wrench wrote: Fri Aug 05, 2022 6:29 pm Zvi Bodie has been singing this song for many, many years. He has advised that one should NOT count on stocks for retirement income, but rather invest in inflation adjusted bonds to generate income in retirement. He argues this is the ONLY safe way to assure a secure retirement. Kotlikoff may have refined the method, but he didn't come up with it.
Relative to DIY, it seems pretty simple to me to implement despite what Kotlikoff says. Delay social security as long as possible, preferably to 70 to maximize inflation adjusted government income. Then, purchase sufficient iBonds/TIPS ladder to cover whatever additional income is required to meet expected retirement expenses. After that, invest whatever is left using an asset allocation with as high a stock allocation as you can live with, and only withdraw from it in bull markets and/or to pay for unexpected one time expenses, or to buy more iBonds/TIPS if you want to increase your future income.
This is essentially the plan I have, though I also included an inflation adjusted annuity purchased when they were still available. I sleep well at night independent of what the stock market does. :happy

Wrench
This approach has a lot of appeal to it. So how far out do you secure base spending with TIPS/ibonds? If you are 60, would you invest in a 30+ year TIPS ladder for amounts needed over social security? If we were to apply it to our situation, I think it would result in a current allocation of less than 50% stocks at 60 years old which seems light, and as you age most likely your stock percent increases, which seems backwards.
Great question. How long do you expect to live? For my situation, I assume my wife and I will both live to 100, but our floor income includes social security and an inflation adjusted annuity that last forever, plus withdrawals from a stable value fund that will last to age 104. I only use TIPS/iBonds ladder to cover ~25 years starting in 2029 to cover a potential reduction of ~20% in social security. (If that reduction does not happen, the proceeds as they mature will likely go into our stock allocation). Waiting until 70 for social security benefits is a key component for us, and we will both wait that long to maximize our benefit, providing longevity insurance in case we both do make it to age 100.

Relative to stock/bond allocations I think it is more about your risk tolerance than what is light or heavy in stocks. My thinking is that if you have all the income you need, I am perfectly willing to live with high volatility and/or large short term losses in the non-income producing portion of my portfolio. What does it matter since it does not impact my spending or everyday life? I can basically ignore it until I need/want to use it (which may be never). Thus, for me, 80-100% in stocks is OK for that portion of the portfolio. But, I recognize that may be hard for some people, in which case higher stock allocations as you age would not be appropriate, and they should keep more in bonds outside of their income producing assets.

Wrench
My approach is very similar to Wrench. I just retired at 59 and DW is 50. Our ladder runs from 2023 to 2052 because while my health is poor, my wife is in good health will almost certainly live beyond 80. It's not as expensive as I thought because the bulk of the TIPS has to fund the bridge to SS including & healthcare insurance at full cost in the marketplace until 65 and will wait until 70 for SSA benefits. We are also loading up heavily on I-bonds as a wildcard for unexpected expenses and possibly buying a SPIA at some point.

On the risky part of the portfolio, right now is 95% equity. I am somewhat unsure if it should be this high. 5% is nominal treasuries which I use as buffer to avoid withdrawals from stocks during times like these. We just a largish windfall from selling our previous house, I am undecided where to allocate it, maybe I should be 85% equity and 15% bonds ? To be honest I am not sure but we are lucky to have a large nest egg relative to expenses, so I am not stressing it. If Mr Market kindly decides to give us excess returns in stocks I might beef the TIPS ladder and just be 100% stocks. Either way I'll make sure DW has enough funds from SSA benefits and SPIA to be comfortable for as long as she lives.
I think I am going to take Kotlikoff 's software for a spin and see what it tells me.

To me, Zvi Bodie, LMP, Grok Tip #8 have been a great source of inspiration. 10 years ago I was 50/50 but after discovering LMP and building enough TIPS as a secure floor I abandoned the caution and I'm very comfortable at being 95% stocks in risky portfolio. In my opinion this is an aspect that is undervalued about LMP, GI (like Wade calls it), or any kind of safety-first approach. Having a solid floor income you can then stop worrying about the markets and be very risky, you know that you won't need to sell when the times are tough. I would not take this risk with a "classical" AA view.
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Re: Kotlikoff - Upside investing strategy

Post by Leesbro63 »

How does using a TIPS/iBonds base for income work for high net worth/high income taxpayers? If we get big inflation, like now, the tax punishment seems too severe.
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Re: Kotlikoff - Upside investing strategy

Post by Wrench »

Leesbro63 wrote: Mon Aug 08, 2022 7:28 am How does using a TIPS/iBonds base for income work for high net worth/high income taxpayers? If we get big inflation, like now, the tax punishment seems too severe.
Maybe it doesn't? If you have net worth in 8 figures then I suspect that there are other alternatives for generating income that may be far more tax efficient.

Will
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Re: Kotlikoff - Upside investing strategy

Post by Leesbro63 »

Wrench wrote: Mon Aug 08, 2022 8:06 am
Leesbro63 wrote: Mon Aug 08, 2022 7:28 am How does using a TIPS/iBonds base for income work for high net worth/high income taxpayers? If we get big inflation, like now, the tax punishment seems too severe.
Maybe it doesn't? If you have net worth in 8 figures then I suspect that there are other alternatives for generating income that may be far more tax efficient.

Will
Such as?
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Re: Kotlikoff - Upside investing strategy

Post by squirrel1963 »

Leesbro63 wrote: Mon Aug 08, 2022 8:15 am
Wrench wrote: Mon Aug 08, 2022 8:06 am
Leesbro63 wrote: Mon Aug 08, 2022 7:28 am How does using a TIPS/iBonds base for income work for high net worth/high income taxpayers? If we get big inflation, like now, the tax punishment seems too severe.
Maybe it doesn't? If you have net worth in 8 figures then I suspect that there are other alternatives for generating income that may be far more tax efficient.

Will
Such as?
If you have $10,000,000 net worth you set aside maybe $1,000,000 for TIPS as relatively low floor income and the remaining $9,000,000 goes in stocks, you withdraw 2% so you get about 180K income and chances are you will die with a lot more money than you started with. Heck if I had $10,000,000 I wouldn't even bother to optimize or use LMP, even at small negative real returns it's very difficult to imagine making less than 100K a year at long term capital gains, hence very low taxation rates.
If you have $20,000,000 you can just put everything in stocks and be able to have 200K / year for 100 years even at 0% real returns. Chances are after 100 years you'll have a lot more money.
It's a very different world if you have 8 figures, and you can take a lot of risk at incredible tax efficiency.
For us mere mortals we have to optimize with Bodie, LMP, Pfau and Kotlikoff because otherwise the risk is just too high.
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Re: Kotlikoff - Upside investing strategy

Post by nisiprius »

squirrel1963 wrote: Fri Aug 05, 2022 7:35 pm...The talk about not being able to this just with excel, 29 years of software development work, dynamic programming and everything else sounds a lot like marketing mumbo jumbo to me...
I had the same impression when I read the 2009 book, Spend 'Til the End: The Revolutionary Guide to Raising Your Living Standard--Today and When You Retire, by Laurence J. Kotlikoff and Scott Burns. In this book the people are constantly going to the computer to "do a study," and the unnamed product, hovering over the book like a cloud, was a software product called ESPlanner, which Laurence Kotlikoff just happened to have an interest in. I'll leave it to others to figure out what the difference between ESPlanner and MaxFi is.

It was all about "consumption smoothing," the premise being that your happiness in retirement was tied directly to exactly how stable and unvarying a stream of spending you could support. And the computer was necessary because, starting from input data that was far far more precise than anything you could find in real life, it was able to process the complex interactions between e.g. IRA distributions and Social Security taxability, to tell you would be the optimum strategy if only you knew a lot about the future.
Annual income twenty pounds, annual expenditure nineteen nineteen and six, result happiness; Annual income twenty pounds, annual expenditure twenty pounds ought and six, result misery.
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Re: Kotlikoff - Upside investing strategy

Post by delamer »

JBTX wrote: Sun Aug 07, 2022 9:11 pm
Wrench wrote: Fri Aug 05, 2022 6:29 pm Zvi Bodie has been singing this song for many, many years. He has advised that one should NOT count on stocks for retirement income, but rather invest in inflation adjusted bonds to generate income in retirement. He argues this is the ONLY safe way to assure a secure retirement. Kotlikoff may have refined the method, but he didn't come up with it.
Relative to DIY, it seems pretty simple to me to implement despite what Kotlikoff says. Delay social security as long as possible, preferably to 70 to maximize inflation adjusted government income. Then, purchase sufficient iBonds/TIPS ladder to cover whatever additional income is required to meet expected retirement expenses. After that, invest whatever is left using an asset allocation with as high a stock allocation as you can live with, and only withdraw from it in bull markets and/or to pay for unexpected one time expenses, or to buy more iBonds/TIPS if you want to increase your future income.
This is essentially the plan I have, though I also included an inflation adjusted annuity purchased when they were still available. I sleep well at night independent of what the stock market does. :happy

Wrench
This approach has a lot of appeal to it. So how far out do you secure base spending with TIPS/ibonds? If you are 60, would you invest in a 30+ year TIPS ladder for amounts needed over social security? If we were to apply it to our situation, I think it would result in a current allocation of less than 50% stocks at 60 years old which seems light, and as you age most likely your stock percent increases, which seems backwards.
There are three things to do with the money in the stock bucket — spend it on discretionary expenses, use it to replenish the secure base, or save it.

Obviously returns are unknown, but if you do the first two then your stock percentage is less likely to increase as you age.
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Re: Kotlikoff - Upside investing strategy

Post by Leesbro63 »

squirrel1963 wrote: Mon Aug 08, 2022 9:33 am
Leesbro63 wrote: Mon Aug 08, 2022 8:15 am
Wrench wrote: Mon Aug 08, 2022 8:06 am
Leesbro63 wrote: Mon Aug 08, 2022 7:28 am How does using a TIPS/iBonds base for income work for high net worth/high income taxpayers? If we get big inflation, like now, the tax punishment seems too severe.
Maybe it doesn't? If you have net worth in 8 figures then I suspect that there are other alternatives for generating income that may be far more tax efficient.

Will
Such as?
If you have $10,000,000 net worth you set aside maybe $1,000,000 for TIPS as relatively low floor income and the remaining $9,000,000 goes in stocks, you withdraw 2% so you get about 180K income and chances are you will die with a lot more money than you started with. Heck if I had $10,000,000 I wouldn't even bother to optimize or use LMP, even at small negative real returns it's very difficult to imagine making less than 100K a year at long term capital gains, hence very low taxation rates.
If you have $20,000,000 you can just put everything in stocks and be able to have 200K / year for 100 years even at 0% real returns. Chances are after 100 years you'll have a lot more money.
It's a very different world if you have 8 figures, and you can take a lot of risk at incredible tax efficiency.
For us mere mortals we have to optimize with Bodie, LMP, Pfau and Kotlikoff because otherwise the risk is just too high.
I don't get what $1M TIPS/$9M stocks does to help the $10M investor. The $1M tips income and inflation phantom income will be taxed as high as 40ish percent. It's a small amount of income anyway, so why bother? The $9M in stock will spit out about $180,000 (2%) in dividends. So how does $1M in TIPS help the $10M investor?
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Re: Kotlikoff - Upside investing strategy

Post by NoRoboGuy »

arcticpineapplecorp. wrote: Sat Aug 06, 2022 12:17 pm
But, you respond:

The U.S. is not Japan. Over all 30-year periods from 1926 to the present, the U.S. stock market has yielded an annual return of at least 8 percent.

My response:

First, you need to adjust for inflation. Once you do so, the 8 percent minimum 30-year annual stock return is only 0.5 percent. Second, the U.S. data provide only three independent, 30-year cumulative-return data points. Studies that reference “all” 30-year periods are using the same annual return data over and over again. That’s not statistically kosher. Third, the U.S. stock data suffer from survivor bias. We don’t have data on stock returns from countries that didn’t survive the test of time or whose stock markets were closed during periods of occupation or regime change.
is he suggesting that inflation was 7.5% annual over all 30 year periods from 1926 to present (8% nominal return - 7.5% inflation = 0.05% real)??

clearly this is not true as historically inflation has been between 3%-4% annually (averaged), right?
Yeah, spotted that right away. When seeing that kind of deception, I stop reading and stop wasting time.
There is no free lunch.
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Re: Kotlikoff - Upside investing strategy

Post by yog »

NoRoboGuy wrote: Mon Aug 08, 2022 11:05 am
arcticpineapplecorp. wrote: Sat Aug 06, 2022 12:17 pm
But, you respond:

The U.S. is not Japan. Over all 30-year periods from 1926 to the present, the U.S. stock market has yielded an annual return of at least 8 percent.

My response:

First, you need to adjust for inflation. Once you do so, the 8 percent minimum 30-year annual stock return is only 0.5 percent. Second, the U.S. data provide only three independent, 30-year cumulative-return data points. Studies that reference “all” 30-year periods are using the same annual return data over and over again. That’s not statistically kosher. Third, the U.S. stock data suffer from survivor bias. We don’t have data on stock returns from countries that didn’t survive the test of time or whose stock markets were closed during periods of occupation or regime change.
is he suggesting that inflation was 7.5% annual over all 30 year periods from 1926 to present (8% nominal return - 7.5% inflation = 0.05% real)??

clearly this is not true as historically inflation has been between 3%-4% annually (averaged), right?
Yeah, spotted that right away. When seeing that kind of deception, I stop reading and stop wasting time.
The article has a link to the inflation-adjusted returns for the S&P 500. Since 1926 the inflation-adjusted annualized CAGR of the worst 30yr period in the stock market is roughly .5%.
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Re: Kotlikoff - Upside investing strategy

Post by NoRoboGuy »

Who decided the standard for measuring long term stock market performance is 30 years? There is no consensus. If we are considering average annual return, it is calculated using any number of periods, but usually between 5 and 10 years, not 30.
There is no free lunch.
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Re: Kotlikoff - Upside investing strategy

Post by squirrel1963 »

Leesbro63 wrote: Mon Aug 08, 2022 10:37 am
squirrel1963 wrote: Mon Aug 08, 2022 9:33 am
Leesbro63 wrote: Mon Aug 08, 2022 8:15 am
Wrench wrote: Mon Aug 08, 2022 8:06 am
Leesbro63 wrote: Mon Aug 08, 2022 7:28 am How does using a TIPS/iBonds base for income work for high net worth/high income taxpayers? If we get big inflation, like now, the tax punishment seems too severe.
Maybe it doesn't? If you have net worth in 8 figures then I suspect that there are other alternatives for generating income that may be far more tax efficient.

Will
Such as?
If you have $10,000,000 net worth you set aside maybe $1,000,000 for TIPS as relatively low floor income and the remaining $9,000,000 goes in stocks, you withdraw 2% so you get about 180K income and chances are you will die with a lot more money than you started with. Heck if I had $10,000,000 I wouldn't even bother to optimize or use LMP, even at small negative real returns it's very difficult to imagine making less than 100K a year at long term capital gains, hence very low taxation rates.
If you have $20,000,000 you can just put everything in stocks and be able to have 200K / year for 100 years even at 0% real returns. Chances are after 100 years you'll have a lot more money.
It's a very different world if you have 8 figures, and you can take a lot of risk at incredible tax efficiency.
For us mere mortals we have to optimize with Bodie, LMP, Pfau and Kotlikoff because otherwise the risk is just too high.
I don't get what $1M TIPS/$9M stocks does to help the $10M investor. The $1M tips income and inflation phantom income will be taxed as high as 40ish percent. It's a small amount of income anyway, so why bother? The $9M in stock will spit out about $180,000 (2%) in dividends. So how does $1M in TIPS help the $10M investor?
Assumption is that you keep TIPS in tax deferred, but it's just one example, your could keep $1M in taxable using nominals treasuries or munis.
Or could just 100% stocks and even assuming 1% withdrawal you'd have a pretty fat income (for my standards anyway), and be super tax efficient.

The point is that if you have an 8 figure net worth, there are a lot of options that open up to you, no need to overthink or optimize, almost any reasonable plan will work out great.
Even 100% treasuries in taxable will work.

Only reason I would stocks 90% stocks / 10% treasuries it's because it's not a good idea to have 100% of anything, and you need some liquidity. This is actually what I would if I had $10M or more.

Edit: also IMHO no reason to be overly concerned about taxation with this kind of net worth, just avoid tax inefficient stuff, keep TIPS in tax deferred or buy nominal Treasuries if you don't have enough space in tax deferred.
There are a lot of other ways to optimize, for instance opening a variable deferred annuity, dump $1M in there and buy TIPS, you can use a variable deferred annuity as a fancy IRA with no contribution limits albeit at the annual charge of 0.3%-0.45%, well worth the price to avoid phantom income -- you definitely do not want phantom income.
| LMP | safe portfolio: TIPS ladder + I-bonds + Treasuries | risky portfolio: US stocks / US REIT / International stocks |
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Re: Kotlikoff - Upside investing strategy

Post by MarkRoulo »

Fremdon Ferndock wrote: Fri Aug 05, 2022 6:00 pm Lawrence Kotlikoff proposes a strategy for securing an income floor while taking advantage of potential stock market gains over time. This is a floor-and-upside investing/spending strategy that involves using his Maxfi software to implement in a more sophisticated way, but the essential concepts could be DIY. Might be worth a read.
To summarize, you set your stock investments by simply determining how much to put in the market. What’s left of your resources is used to build your base living-standard floor. You raise your floor, and thus your annual discretionary spending, as you convert your stocks to safe assets. Before then, you spend assuming your bucket of stocks is or will become worthless. This is what I mean by saying Upside Investing is a combined investing-spending strategy.
https://larrykotlikoff.substack.com/p/f ... the-market
This:
Can You Do Upside Investing On Your Own?

...

Not really. You need to compute your baseline living standard floor in order to know how much to spend and save (in a safe manner) this year and through time. You also need to see the range of living-standard upsides you’ll potentially experience based on different choices of your base floor (choices of how much to put in the market). Otherwise, you won’t be able to make a reasoned decision on how much to put in the market.

This is not something anyone can do with Excel or some other spreadsheet program in an afternoon. The amount of technology underlying the figures presented above is simply enormous. MaxiFi’s computation engine received a patent for its method of iterative dynamic programming. The tool was developed over 29 years by a team of expert software engineers and economists. It incorporates incredible detail concerning federal and state taxes, Social Security benefits, and Medicare Part B premiums. Just the efficiently-crafted code for Social Security comprises a ream of paper were it to be printed out.
would make me very nervous.

You can't get an approximate idea with a spreadsheet?

That level of complexity is likely to be very fragile.
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Re: Kotlikoff - Upside investing strategy

Post by MarkRoulo »

arcticpineapplecorp. wrote: Sat Aug 06, 2022 12:17 pm
But, you respond:

The U.S. is not Japan. Over all 30-year periods from 1926 to the present, the U.S. stock market has yielded an annual return of at least 8 percent.

My response:

First, you need to adjust for inflation. Once you do so, the 8 percent minimum 30-year annual stock return is only 0.5 percent. Second, the U.S. data provide only three independent, 30-year cumulative-return data points. Studies that reference “all” 30-year periods are using the same annual return data over and over again. That’s not statistically kosher. Third, the U.S. stock data suffer from survivor bias. We don’t have data on stock returns from countries that didn’t survive the test of time or whose stock markets were closed during periods of occupation or regime change.
is he suggesting that inflation was 7.5% annual over all 30 year periods from 1926 to present (8% nominal return - 7.5% inflation = 0.05% real)??

clearly this is not true as historically inflation has been between 3%-4% annually (averaged), right?

methinks Larry's trying to sell his maxfi software:
No. He's claiming that the worst 30 period for US stocks had a 0.5% real return.

Edit: And I don't know what those 30 years would be.
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Re: Kotlikoff - Upside investing strategy

Post by yog »

MarkRoulo wrote: Mon Aug 08, 2022 12:24 pm
arcticpineapplecorp. wrote: Sat Aug 06, 2022 12:17 pm
But, you respond:

The U.S. is not Japan. Over all 30-year periods from 1926 to the present, the U.S. stock market has yielded an annual return of at least 8 percent.

My response:

First, you need to adjust for inflation. Once you do so, the 8 percent minimum 30-year annual stock return is only 0.5 percent. Second, the U.S. data provide only three independent, 30-year cumulative-return data points. Studies that reference “all” 30-year periods are using the same annual return data over and over again. That’s not statistically kosher. Third, the U.S. stock data suffer from survivor bias. We don’t have data on stock returns from countries that didn’t survive the test of time or whose stock markets were closed during periods of occupation or regime change.
is he suggesting that inflation was 7.5% annual over all 30 year periods from 1926 to present (8% nominal return - 7.5% inflation = 0.05% real)??

clearly this is not true as historically inflation has been between 3%-4% annually (averaged), right?

methinks Larry's trying to sell his maxfi software:
No. He's claiming that the worst 30 period for US stocks had a 0.5% real return.

Edit: And I don't know what those 30 years would be.
The 30yr period ending in the middle of 1982 at the trough of the recession qualifies.
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Re: Kotlikoff - Upside investing strategy

Post by MarkRoulo »

yog wrote: Mon Aug 08, 2022 1:08 pm
MarkRoulo wrote: Mon Aug 08, 2022 12:24 pm
arcticpineapplecorp. wrote: Sat Aug 06, 2022 12:17 pm
But, you respond:

The U.S. is not Japan. Over all 30-year periods from 1926 to the present, the U.S. stock market has yielded an annual return of at least 8 percent.

My response:

First, you need to adjust for inflation. Once you do so, the 8 percent minimum 30-year annual stock return is only 0.5 percent. Second, the U.S. data provide only three independent, 30-year cumulative-return data points. Studies that reference “all” 30-year periods are using the same annual return data over and over again. That’s not statistically kosher. Third, the U.S. stock data suffer from survivor bias. We don’t have data on stock returns from countries that didn’t survive the test of time or whose stock markets were closed during periods of occupation or regime change.
is he suggesting that inflation was 7.5% annual over all 30 year periods from 1926 to present (8% nominal return - 7.5% inflation = 0.05% real)??

clearly this is not true as historically inflation has been between 3%-4% annually (averaged), right?

methinks Larry's trying to sell his maxfi software:
No. He's claiming that the worst 30 period for US stocks had a 0.5% real return.

Edit: And I don't know what those 30 years would be.
The 30yr period ending in the middle of 1982 at the trough of the recession qualifies.
Using this: https://dqydj.com/sp-500-return-calculator/

And July 1952 - July 1982 as the 30 years I get:
*) 0.59% annualized real return, but
*) 4.6% annualized real return with dividends re-invested.

It isn't fair to score US stock returns without including dividends. Do you think this is what Koltikoff did to get the 0.5% real return?
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Re: Kotlikoff - Upside investing strategy

Post by yog »

MarkRoulo wrote: Mon Aug 08, 2022 1:14 pm
yog wrote: Mon Aug 08, 2022 1:08 pm
MarkRoulo wrote: Mon Aug 08, 2022 12:24 pm
arcticpineapplecorp. wrote: Sat Aug 06, 2022 12:17 pm
But, you respond:

The U.S. is not Japan. Over all 30-year periods from 1926 to the present, the U.S. stock market has yielded an annual return of at least 8 percent.

My response:

First, you need to adjust for inflation. Once you do so, the 8 percent minimum 30-year annual stock return is only 0.5 percent. Second, the U.S. data provide only three independent, 30-year cumulative-return data points. Studies that reference “all” 30-year periods are using the same annual return data over and over again. That’s not statistically kosher. Third, the U.S. stock data suffer from survivor bias. We don’t have data on stock returns from countries that didn’t survive the test of time or whose stock markets were closed during periods of occupation or regime change.
is he suggesting that inflation was 7.5% annual over all 30 year periods from 1926 to present (8% nominal return - 7.5% inflation = 0.05% real)??

clearly this is not true as historically inflation has been between 3%-4% annually (averaged), right?

methinks Larry's trying to sell his maxfi software:
No. He's claiming that the worst 30 period for US stocks had a 0.5% real return.

Edit: And I don't know what those 30 years would be.
The 30yr period ending in the middle of 1982 at the trough of the recession qualifies.
Using this: https://dqydj.com/sp-500-return-calculator/

And July 1952 - July 1982 as the 30 years I get:
*) 0.59% annualized real return, but
*) 4.6% annualized real return with dividends re-invested.

It isn't fair to score US stock returns without including dividends. Do you think this is what Koltikoff did to get the 0.5% real return?
Dividends are not reinvested in retirement.
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Re: Kotlikoff - Upside investing strategy

Post by Wrench »

Leesbro63 wrote: Mon Aug 08, 2022 8:15 am
Wrench wrote: Mon Aug 08, 2022 8:06 am
Leesbro63 wrote: Mon Aug 08, 2022 7:28 am How does using a TIPS/iBonds base for income work for high net worth/high income taxpayers? If we get big inflation, like now, the tax punishment seems too severe.
Maybe it doesn't? If you have net worth in 8 figures then I suspect that there are other alternatives for generating income that may be far more tax efficient.

Will
Such as?
Well, I suppose if your net worth is high enough, you do what the ultra rich do and borrow money on your assets, deduct the interest and let your assets grow untouched. Apparently, with this approach you can pay very little in taxes:
https://www.cnbc.com/2021/09/20/the-wea ... o-it-.html
I had a neighbor many years ago that supported himself with rental income from real estate investments and he claimed he paid no federal tax so maybe that is a similar approach? Frankly, minimizing my taxes has never been one of my major objectives in retirement planning. About all I do is Roth conversions up to the top of my current tax bracket, and I do that mostly because I just like having a pot of money for which I don't have to worry about tax implications no matter what I do with it.

Wrench
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Re: Kotlikoff - Upside investing strategy

Post by squirrel1963 »

MarkRoulo wrote: Mon Aug 08, 2022 12:20 pm
Fremdon Ferndock wrote: Fri Aug 05, 2022 6:00 pm Lawrence Kotlikoff proposes a strategy for securing an income floor while taking advantage of potential stock market gains over time. This is a floor-and-upside investing/spending strategy that involves using his Maxfi software to implement in a more sophisticated way, but the essential concepts could be DIY. Might be worth a read.
To summarize, you set your stock investments by simply determining how much to put in the market. What’s left of your resources is used to build your base living-standard floor. You raise your floor, and thus your annual discretionary spending, as you convert your stocks to safe assets. Before then, you spend assuming your bucket of stocks is or will become worthless. This is what I mean by saying Upside Investing is a combined investing-spending strategy.
https://larrykotlikoff.substack.com/p/f ... the-market
This:
Can You Do Upside Investing On Your Own?

...

Not really. You need to compute your baseline living standard floor in order to know how much to spend and save (in a safe manner) this year and through time. You also need to see the range of living-standard upsides you’ll potentially experience based on different choices of your base floor (choices of how much to put in the market). Otherwise, you won’t be able to make a reasoned decision on how much to put in the market.

This is not something anyone can do with Excel or some other spreadsheet program in an afternoon. The amount of technology underlying the figures presented above is simply enormous. MaxiFi’s computation engine received a patent for its method of iterative dynamic programming. The tool was developed over 29 years by a team of expert software engineers and economists. It incorporates incredible detail concerning federal and state taxes, Social Security benefits, and Medicare Part B premiums. Just the efficiently-crafted code for Social Security comprises a ream of paper were it to be printed out.
would make me very nervous.

You can't get an approximate idea with a spreadsheet?

That level of complexity is likely to be very fragile.
You should read @nisiprius comment about this.

I haven't tried this tool yet, but there is a danger of over optimize things based on many assumptions about future expectations or by doing back-testing on historical data.
You can also use fairly sophisticated simulations based on statistical analisys with Monte Carlo simulations, but the problem has always been and always will be that the more you optimize based on statistical models or historical data, the more unstable the Model actually gets.
McClung in his book does a great analysis showing that optimization of SWR strategies can be super optimized, but if you do that for instance with US stock market data for all possible years back to 1871, you will get a model that only really works for this data but will break down for Europe or Japan stock markets. This is also called over fitting and it's a well know problem of mathematical models as well as a well known problem in computer science.

So paradoxically an optimized model leads to unstable and unpredictable behavior in situations not encountered before.

Add this the fact that future is unknown.

I cannot speak about this tool because I don't know it, but what I have seen is that reasonable simple models done with pen and paper yield reasonably good expectations, and the value add of serious back-testing or any kind serious computation is not as high as some people think.

If you follow Zvi Bodie or other well known simple approaches you can get in my opinion 90% of the value of most sophisticated models without losing too much precision. I think that LMP approach or AA approach analysis done at the level many folks do it here on BH is far better than what most financial advisors do, they typically plug your numbers on an excel spreadsheet they don't even understand and basically go with what the Model recommends.

The biggest value IMHO in using Excel is that most is fairly easy to understand, but most of all it is something that you know how it works.

I wrote software for 38 years, and one of the principles is that it's generally better to use a simple well known and understood model rather than a complex proprietary model for which the code is not available for inspection.
The concept of "open source" is that you have many people looking at the code you use, so it will have better quality than proprietary code simply because the more eyeballs you have, the more flaws you fix. Proprietary code is usually not the best choice.
| LMP | safe portfolio: TIPS ladder + I-bonds + Treasuries | risky portfolio: US stocks / US REIT / International stocks |
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Re: Kotlikoff - Upside investing strategy

Post by NoRoboGuy »

The idea of preferring bonds over stocks when you have "won the game" is sound. The variable mostly ignored in these kinds of models is consideration of what is the legacy goal: spend it to zero, leave most to others/charity, or somewhere in-between.

If you have enough, it is obvious there is no need to take on stock market risk, but also obvious there is an ability to take on stock market risk without impacting one's chosen standard of living for the unused portion. If the goal is to spend it all down, choose the former, and if the goal is to bequest it, choose the latter.

It's not rocket surgery.
There is no free lunch.
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Re: Kotlikoff - Upside investing strategy

Post by Leesbro63 »

Wrench wrote: Mon Aug 08, 2022 1:27 pm
Leesbro63 wrote: Mon Aug 08, 2022 8:15 am
Wrench wrote: Mon Aug 08, 2022 8:06 am
Leesbro63 wrote: Mon Aug 08, 2022 7:28 am How does using a TIPS/iBonds base for income work for high net worth/high income taxpayers? If we get big inflation, like now, the tax punishment seems too severe.
Maybe it doesn't? If you have net worth in 8 figures then I suspect that there are other alternatives for generating income that may be far more tax efficient.

Will
Such as?
Well, I suppose if your net worth is high enough, you do what the ultra rich do and borrow money on your assets, deduct the interest and let your assets grow untouched. Apparently, with this approach you can pay very little in taxes:
https://www.cnbc.com/2021/09/20/the-wea ... o-it-.html
I had a neighbor many years ago that supported himself with rental income from real estate investments and he claimed he paid no federal tax so maybe that is a similar approach? Frankly, minimizing my taxes has never been one of my major objectives in retirement planning. About all I do is Roth conversions up to the top of my current tax bracket, and I do that mostly because I just like having a pot of money for which I don't have to worry about tax implications no matter what I do with it.

Wrench
That assumes we don't get a 1929.
MarkRoulo
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Re: Kotlikoff - Upside investing strategy

Post by MarkRoulo »

yog wrote: Mon Aug 08, 2022 1:20 pm
MarkRoulo wrote: Mon Aug 08, 2022 1:14 pm
yog wrote: Mon Aug 08, 2022 1:08 pm
MarkRoulo wrote: Mon Aug 08, 2022 12:24 pm
arcticpineapplecorp. wrote: Sat Aug 06, 2022 12:17 pm

is he suggesting that inflation was 7.5% annual over all 30 year periods from 1926 to present (8% nominal return - 7.5% inflation = 0.05% real)??

clearly this is not true as historically inflation has been between 3%-4% annually (averaged), right?

methinks Larry's trying to sell his maxfi software:
No. He's claiming that the worst 30 period for US stocks had a 0.5% real return.

Edit: And I don't know what those 30 years would be.
The 30yr period ending in the middle of 1982 at the trough of the recession qualifies.
Using this: https://dqydj.com/sp-500-return-calculator/

And July 1952 - July 1982 as the 30 years I get:
*) 0.59% annualized real return, but
*) 4.6% annualized real return with dividends re-invested.

It isn't fair to score US stock returns without including dividends. Do you think this is what Koltikoff did to get the 0.5% real return?
Dividends are not reinvested in retirement.
I realize that you are not the one making the claim that the worst 30 year period for stocks showed a ~0.5% gain not counting dividends, but ...

Is the claim supposed to be that:
  • TIPS have a (today) real yield of between 0.3% on the low end (5 - 10 years) to about 0.75% on the high end (30 year)
  • The worst 30-year period for stocks showed only a ~0.5% real return after spending about 4% per year in dividends.
So ... if you spend only the real return for TIPS you can spend ~0.5% of your portfolio per year and keep up with inflation while in the worst performing 30 year period for stocks you can spend only 4% of your portfolio per year (basically, spend the dividends) which is only 6x - 8x as much as the TIPS.

This seems like an odd argument to make. I understand this is not your argument. Is it the one Koltikoff is making? Or is the idea that one can safely spend down a TIPS portfolio because the (real) returns are much more reliable/predictable than the safe real returns for stocks so the idea is to compare:
  • Living off dividends for stocks with
  • Spending down a TIPS portfolio
Because if the idea is "never spend principle" then making a TIPS portfolio work with sub-1% real returns seems ... ambitious.
yog
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Re: Kotlikoff - Upside investing strategy

Post by yog »

MarkRoulo wrote: Mon Aug 08, 2022 7:27 pm
yog wrote: Mon Aug 08, 2022 1:20 pm
MarkRoulo wrote: Mon Aug 08, 2022 1:14 pm
yog wrote: Mon Aug 08, 2022 1:08 pm
MarkRoulo wrote: Mon Aug 08, 2022 12:24 pm

No. He's claiming that the worst 30 period for US stocks had a 0.5% real return.

Edit: And I don't know what those 30 years would be.
The 30yr period ending in the middle of 1982 at the trough of the recession qualifies.
Using this: https://dqydj.com/sp-500-return-calculator/

And July 1952 - July 1982 as the 30 years I get:
*) 0.59% annualized real return, but
*) 4.6% annualized real return with dividends re-invested.

It isn't fair to score US stock returns without including dividends. Do you think this is what Koltikoff did to get the 0.5% real return?
Dividends are not reinvested in retirement.
I realize that you are not the one making the claim that the worst 30 year period for stocks showed a ~0.5% gain not counting dividends, but ...

Is the claim supposed to be that:
  • TIPS have a (today) real yield of between 0.3% on the low end (5 - 10 years) to about 0.75% on the high end (30 year)
  • The worst 30-year period for stocks showed only a ~0.5% real return after spending about 4% per year in dividends.
So ... if you spend only the real return for TIPS you can spend ~0.5% of your portfolio per year and keep up with inflation while in the worst performing 30 year period for stocks you can spend only 4% of your portfolio per year (basically, spend the dividends) which is only 6x - 8x as much as the TIPS.

This seems like an odd argument to make. I understand this is not your argument. Is it the one Koltikoff is making? Or is the idea that one can safely spend down a TIPS portfolio because the (real) returns are much more reliable/predictable than the safe real returns for stocks so the idea is to compare:
  • Living off dividends for stocks with
  • Spending down a TIPS portfolio
Because if the idea is "never spend principle" then making a TIPS portfolio work with sub-1% real returns seems ... ambitious.
I took the claim at face value - it is possible to have a 30 year retirement with next to nothing for real returns, even though equities have an average return of 8%+ historically. The link he provides for S&P 500 inflation-adjusted returns uses headline inflation vs. your chart using Shiller's inflation data, and the same 30yr period in his chart appears to be just under .5% CAGR. It's linked in the phrase "Once you do so, ...".

The normal way MaxiFi works produces a tax-optimized deterministic model using your cash flows, portfolio's asset allocation, and inflation-adjusted return assumptions over your plan's finite horizon. Cash flows are sequenced maximizing lifetime after-tax wealth. SS claiming strategy is figured accurately to the age & month. Legacy intent is possible. Even insurance or annuitization of some assets can be planned.

The Upside Investing model is part of the monte carlo simulations in MaxFi, and this model only plans spending from safe assets such as TIPS. If you believe you are exposed to a a 30yr retirement where risk assets might only return .5% real, then this may not be an unreasonable maximum safety baseline assumption given history. Entering retirement you would need to already have saved enough to cover the gap in SS, pensions, or other cash flows and invest this gap in TIPS to create a true income floor. Any remaining risky assets can only increase spend after they have been removed from equities and converted to safe assets. The tool provides a means for planning the move from risk to safety over time, so it may be best for someone still working and/or moving from a higher equity allocation to a much lower equity allocation as early as possible in retirement.

This is one model. The Full Risk monte carlo model includes 3 different models which use the entire portfolio to support spending - baseline, safe, & risky - and each can have some modifiers which can help visualize stochastic outcomes.
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Beensabu
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Re: Kotlikoff - Upside investing strategy

Post by Beensabu »

The whole concept is for people who are already wealthy.

It's completely irrelevant to accumulators, unless they have the ability to save large enough amounts in TIPS to match future projected consumption.

Just pointing that out for anybody who hasn't realized it yet.
"The only thing that makes life possible is permanent, intolerable uncertainty; not knowing what comes next." ~Ursula LeGuin
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squirrel1963
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Re: Kotlikoff - Upside investing strategy

Post by squirrel1963 »

Beensabu wrote: Mon Aug 08, 2022 10:32 pm The whole concept is for people who are already wealthy.

It's completely irrelevant to accumulators, unless they have the ability to save large enough amounts in TIPS to match future projected consumption.

Just pointing that out for anybody who hasn't realized it yet.
Well, wealth is a very relative term, to me wealth simply "winning the game" with 40x expenses. Other people will probably have a different idea of what wealth means.

I it seems very difficult to imagine LMP or any kind of safety first strategy with a 25X portfolio. A 25 year TIPS ladder is about 22X portfolio assuming current real yields. There almost nothing left and there is absolutely no room for error, so you have to have risk. A 40X portfolio is very good IMHO and sufficient in many cases -- it really depends on your total net assets including projected real income from social security, expected cash buffer size and make up of risky assets, how you have in taxable.. So yeah this is what I mean by pen and paper calculations BTW, with excel you can come up with far more accurate calculations even though they will not be optimized, as I said earlier and as many others have pointed out, any serious calculations risks over fitting especially on the Montecarlo and real data back-testing stuff, YMMV.

It will be interesting what numbers MaxFI tool comes up with, I'm very intrigued right now.
| LMP | safe portfolio: TIPS ladder + I-bonds + Treasuries | risky portfolio: US stocks / US REIT / International stocks |
Leesbro63
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Re: Kotlikoff - Upside investing strategy

Post by Leesbro63 »

Beensabu wrote: Mon Aug 08, 2022 10:32 pm The whole concept is for people who are already wealthy.

It's completely irrelevant to accumulators, unless they have the ability to save large enough amounts in TIPS to match future projected consumption.

Just pointing that out for anybody who hasn't realized it yet.
If you are wealthy, you generally will have a large taxable portfolio. TIPS don’t work well in that case due to taxflation.
BitTooAggressive
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Re: Kotlikoff - Upside investing strategy

Post by BitTooAggressive »

MarkRoulo wrote: Mon Aug 08, 2022 1:14 pm
yog wrote: Mon Aug 08, 2022 1:08 pm
MarkRoulo wrote: Mon Aug 08, 2022 12:24 pm
arcticpineapplecorp. wrote: Sat Aug 06, 2022 12:17 pm
But, you respond:

The U.S. is not Japan. Over all 30-year periods from 1926 to the present, the U.S. stock market has yielded an annual return of at least 8 percent.

My response:

First, you need to adjust for inflation. Once you do so, the 8 percent minimum 30-year annual stock return is only 0.5 percent. Second, the U.S. data provide only three independent, 30-year cumulative-return data points. Studies that reference “all” 30-year periods are using the same annual return data over and over again. That’s not statistically kosher. Third, the U.S. stock data suffer from survivor bias. We don’t have data on stock returns from countries that didn’t survive the test of time or whose stock markets were closed during periods of occupation or regime change.
is he suggesting that inflation was 7.5% annual over all 30 year periods from 1926 to present (8% nominal return - 7.5% inflation = 0.05% real)??

clearly this is not true as historically inflation has been between 3%-4% annually (averaged), right?

methinks Larry's trying to sell his maxfi software:
No. He's claiming that the worst 30 period for US stocks had a 0.5% real return.

Edit: And I don't know what those 30 years would be.
The 30yr period ending in the middle of 1982 at the trough of the recession qualifies.
Using this: https://dqydj.com/sp-500-return-calculator/

And July 1952 - July 1982 as the 30 years I get:
*) 0.59% annualized real return, but
*) 4.6% annualized real return with dividends re-invested.

It isn't fair to score US stock returns without including dividends. Do you think this is what Koltikoff did to get the 0.5% real return?
Why not? He came across to me with his sales pitch just like the guys peddling annuities. They do that quite often when they pitch indexed annuities. Very dishonest.

Stock market risky oh no. Get the upside but not the downside…
Last edited by BitTooAggressive on Tue Aug 09, 2022 12:07 pm, edited 1 time in total.
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firebirdparts
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Re: Kotlikoff - Upside investing strategy

Post by firebirdparts »

squirrel1963 wrote: Fri Aug 05, 2022 7:35 pm It looks interesting but what I wonder is if this tool actually provides real value for BH types?
I think the value is that it's telling you to work longer, isn't it? I don't know about you guys, but if I work to 65, none of this investing stuff is going to matter.

Risk and reward.
A fool and your money are soon partners
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NoRoboGuy
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Re: Kotlikoff - Upside investing strategy

Post by NoRoboGuy »

BitTooAggressive wrote: Tue Aug 09, 2022 8:01 am
Why not? He came across to me with his sales pitch just like the guys peddling annuities. They do that quite often when they pitch indexed annuities. Very dishonest.

Stock market risky oh no. Get the upside but not the downside…
Yep. Aaaaaand final judgment...... hokum.
There is no free lunch.
Wrench
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Re: Kotlikoff - Upside investing strategy

Post by Wrench »

NoRoboGuy wrote: Tue Aug 09, 2022 1:58 pm
BitTooAggressive wrote: Tue Aug 09, 2022 8:01 am
Why not? He came across to me with his sales pitch just like the guys peddling annuities. They do that quite often when they pitch indexed annuities. Very dishonest.

Stock market risky oh no. Get the upside but not the downside…
Yep. Aaaaaand final judgment...... hokum.
That is a bit harsh. Larry Kotlikoff is a well respected economist who has a career investigating retirement issues. His program and approach are one way to tackle retirement planning/funding. I have a lot of respect for him. He has responded to my questions about MaxFi with personal e-mails, and followed up with a telephone call, spending almost an hour talking to me, with no additional benefits accruing to him for his time.

He is selling his approach, the same way others sell theirs. Sure he believes in it and its benefits, and wants to sell it. By doing that, he can maintain and improve it. More power to him. That's what entrepreneurship is all about. But to imply that it is dishonest or "hokum" does a disservice to him, and the entire community that studies retirement.

Wrench
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Kenkat
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Re: Kotlikoff - Upside investing strategy

Post by Kenkat »

squirrel1963 wrote: Tue Aug 09, 2022 12:51 am it seems very difficult to imagine LMP or any kind of safety first strategy with a 25X portfolio. A 25 year TIPS ladder is about 22X portfolio assuming current real yields. There almost nothing left and there is absolutely no room for error, so you have to have risk. A 40X portfolio is very good IMHO and sufficient in many cases -- it really depends on your total net assets including projected real income from social security, expected cash buffer size and make up of risky assets…
Do you really need 25 years though? With social security to fall back on and with maximizing it to age 70, you probably are looking at a before social security scenario and an after social security scenario. In my specific situation, I need to fund 11 years of retirement from my portfolio until social security @70. So I am using a conservative mix of stable value, TIPS and a few equities to fully fund that 11 years at 0% real expected return. Hopefully a little better than that, but that’s the target.

Then I have my risk portfolio that I don’t need to touch until age 70 and will probably only need to draw 1% or less from once the other bucket is gone, again hopefully at 70 or later. So I feel like this works at a 25X overall starting point - 11X in “safe” and 14X in “risk” - which becomes much larger than 14X once social security kicks in, covering most of your expenses. Now, if you want to retire at 45, or will have high expenses in retirement, then I agree with you.

Whether this is an LMP approach or a bonds first approach or an upside investing strategy approach - it seems like there are some similarities here among all three so I am not sure what to call it exactly. :happy
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squirrel1963
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Re: Kotlikoff - Upside investing strategy

Post by squirrel1963 »

Kenkat wrote: Tue Aug 09, 2022 3:14 pm
squirrel1963 wrote: Tue Aug 09, 2022 12:51 am it seems very difficult to imagine LMP or any kind of safety first strategy with a 25X portfolio. A 25 year TIPS ladder is about 22X portfolio assuming current real yields. There almost nothing left and there is absolutely no room for error, so you have to have risk. A 40X portfolio is very good IMHO and sufficient in many cases -- it really depends on your total net assets including projected real income from social security, expected cash buffer size and make up of risky assets…
Do you really need 25 years though? With social security to fall back on and with maximizing it to age 70, you probably are looking at a before social security scenario and an after social security scenario. In my specific situation, I need to fund 11 years of retirement from my portfolio until social security @70. So I am using a conservative mix of stable value, TIPS and a few equities to fully fund that 11 years at 0% real expected return. Hopefully a little better than that, but that’s the target.

Then I have my risk portfolio that I don’t need to touch until age 70 and will probably only need to draw 1% or less from once the other bucket is gone, again hopefully at 70 or later. So I feel like this works at a 25X overall starting point - 11X in “safe” and 14X in “risk” - which becomes much larger than 14X once social security kicks in, covering most of your expenses. Now, if you want to retire at 45, or will have high expenses in retirement, then I agree with you.

Whether this is an LMP approach or a bonds first approach or an upside investing strategy approach - it seems like there are some similarities here among all three so I am not sure what to call it exactly. :happy
Yeah for sure the exact number depends on your specific situation. I'm my case I am also 59 DW is 50 so we are looking at 35 years average let's say.
The next 11 years will be quite pricey especially for the health care insurance, we have no choice but buying it at full cost ouch! Social security won't be enough so we need to supplement it.
I'm not complaining though, we have enough and even at 0% real return from equities we should be fine :-)

Edit: the bottom line as you also point out 25x is just a very rough ballpark, only works for the mythical average retiree, you really Ned to run your numbers to figure out yours.
| LMP | safe portfolio: TIPS ladder + I-bonds + Treasuries | risky portfolio: US stocks / US REIT / International stocks |
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