Seeking best strategy for if I have to retire tomorrow

[darius42]

Is the X different from what is implied by the $120K current income? I'm still not connecting the dots here.

I think I made a mistake with the simulator. I put in that I want $120k/year in inflation-adjusted dollars, but I was assuming that this was a pre-tax amount, and after reading through some commentary on the tool, I think that the spending figure that you put in is in post-tax dollars, which means that I can use a significantly lower spend/year amount.

I'll have to play with the simulator some more using my post-tax income instead.

[jebmke]

If I live longer than 90, though, I might end up being screwed. (Though with an annuity, if we end up with bad stagflation, I will end up getting screwed.)

Annuities get eaten by inflation whether it is stagflation or growthflation. IMO, unless one needs the insurance, annuities are generally not a good deal. The only reason I elected my pension this way is that J&S pensions are usually gender neutral so in our case, the lump sum priced out below the cost of an equivalent annuity. It is a small part of our financial life so even if it get gobbled by inflation we are unaffected.

[jebmke]

Is the X different from what is implied by the $120K current income? I'm still not connecting the dots here.

I think I made a mistake with the simulator. I put in that I want $120k/year in inflation-adjusted dollars, but I was assuming that this was a pre-tax amount, and after reading through some commentary on the tool, I think that the spending figure that you put in is in post-tax dollars, which means that I can use a significantly lower spend/year amount.

I'll have to play with the simulator some more using my post-tax income instead.

yes; I think the often overlooked part of retirement planning is getting a good handle on expenses. Often people just use a wet-finger number which can be "wrong" in either direction. In addition to the post-tax aspect, you should exclude the savings that are currently going into your retirement plans since once you retire, those stop. On the other hand, there might be expenses that you haven't considered or would like to add.

[dogagility]

Done. Simple.

Except that the simulator says that I'm likely to go broke before I die with this approach. If I had 25x what I want to spend at age 67 per year, and the market was at an historical average valuation (PE of 15), that would be a different story. But at 25x what I want to spend at age 61 with the market at a PE of 20, the simulator is not rosy about this plan.

I don't think PE has predictive value.

Are you including SS at age 70?

The calculators I used indicated you will have plenty of money to live to 95. (Retire at age 61. 3MM portfolio. 70/30 stock bond allocation. 40K/year SS at age 70 - just a guess for what you will receive. Expenses of 120K/year inflation adjusted each year.)
https://www.portfoliovisualizer.com/mon ... simulation
https://www.bogleheads.org/wiki/Variabl ... _Worksheet (See this thread for an explanation of VPW: viewtopic.php?t=120430)

[darius42]

I don't think PE has predictive value.

I don't see why it wouldn't. It lowers the earnings yield. At a PE of 15, the earnings yield is 6.6%. At 20, it's 5%. That's a difference in earnings yield of 1.6%, which is 25% less.

Unless you expect the lower earnings yield to be offset by a higher growth rate, which I see no reason to expect. Or the PE is temporarily higher because of lower earnings due to being in a recession, which will presumably pass. But I'm not aware of earnings being temporarily downtrodden at the moment.

The PE has likely been higher in recent years because interest rates have been so low. (Except for recently, but the market seems to be expecting them to drop again in the foreseeable future.) Investors are willing to accept a historically lower return in the stock market if the bonds are paying historically lower returns.

Are you including SS at age 70?

Yes.

The calculators I used indicated you will have plenty of money to live to 95.

Thanks! I will check out those calculators.

[darius42]

Wow, this is a huge relief, now that I'm entering the proper spend/year into the simulator! (I hope. I.e., post-tax spend, rather than pre-tax spend.)

At least according to the simulator that I've been using, I really don't need to do anything at all. I could leave all of my money in money markets and take out my current post-tax income every year in inflation-adjusted dollars and have zero chance of running out of money until I'm 90.

Alternatively, I can put 100% of my money in the stock market with no apparent risk.

Though with government debt climbing precipitously, I'm kind of worried about bad inflation someday. Perhaps I should be putting half of my money in stocks and half of my money in TIPS.

I'll have to check out those other calculators that were kindly provided to see if they are in complete agreement.

Phew! It's such a relief knowing that I could be fired tomorrow and not have to worry about it in the slightest.

[dogagility]

At least according to the simulator that I've been using, I really don't need to do anything at all. I could leave all of my money in money markets and take out my current post-tax income every year in inflation-adjusted dollars and have zero chance of running out of money until I'm 90.

Alternatively, I can put 100% of my money in the stock market with no apparent risk.

There is always some small risk that the US will have the fate of Czarist Russia or the Roman Empire in the next 30 years. I would diversify your stock holdings to include international because of this. Consider investing in a total world market index fund or put 20 - 40% of your equity allocation in an international total stock market index fund.

...I'm kind of worried about bad inflation someday. Perhaps I should be putting half of my money in stocks and half of my money in TIPS.

You are correct in thinking that unexpected high inflation is a risk for the retiree. Putting a significant amount of money in a TIPS index fund with an intermediate duration is a good idea. SCHP, SWRSX, FIPDX, or VIPSX are some options.

I think your idea of 50:50 equity/bond asset allocation is a good one. Keeps it simple.

Phew! It's such a relief knowing that I could be fired tomorrow and not have to worry about it in the slightest.

[smitcat]

"Me? I'm an almost there is never too much person so I'm going to err on the side of extreme caution and make sure there will always be too much and never not enough. This is in regards to retirement savings."
It is not possible to make sure there will always be too much - but by reaching for that goal it is often possible to never be happy.

How so? I don't deprive myself of anything I want but of am of a mindset that I can never have too much. That does not necessarily mean that I do without to get to that mythological "enough". I indulge myself in many ways (some of those ways are ways that many people do not).

"Me? I'm an almost there is never too much person so I'm going to err on the side of extreme caution and make sure there will always be too much and never not enough. This is in regards to retirement savings."
"It is not possible to make sure there will always be too much"

Are you saying that these are contradictory?

"Me? I'm an almost there is never too much person so I'm going to err on the side of extreme caution and make sure there will always be too much and never not enough. This is in regards to retirement savings"
It is never possible to ensure that you have erred on the extreme side of caution and make sure you have saved too much.

[vnatale]

"Me? I'm an almost there is never too much person so I'm going to err on the side of extreme caution and make sure there will always be too much and never not enough. This is in regards to retirement savings."
It is not possible to make sure there will always be too much - but by reaching for that goal it is often possible to never be happy.

How so? I don't deprive myself of anything I want but of am of a mindset that I can never have too much. That does not necessarily mean that I do without to get to that mythological "enough". I indulge myself in many ways (some of those ways are ways that many people do not).

"Me? I'm an almost there is never too much person so I'm going to err on the side of extreme caution and make sure there will always be too much and never not enough. This is in regards to retirement savings."
"It is not possible to make sure there will always be too much"

Are you saying that these are contradictory?

"Me? I'm an almost there is never too much person so I'm going to err on the side of extreme caution and make sure there will always be too much and never not enough. This is in regards to retirement savings"
It is never possible to ensure that you have erred on the extreme side of caution and make sure you have saved too much.

Are you saying my statement cannot be made because it has to be able to be made with 99.99999999999999999% certainty?

Do you think that Bill Gates is capable of making the statement you quoted me making?

[smitcat]

How so? I don't deprive myself of anything I want but of am of a mindset that I can never have too much. That does not necessarily mean that I do without to get to that mythological "enough". I indulge myself in many ways (some of those ways are ways that many people do not).

"Me? I'm an almost there is never too much person so I'm going to err on the side of extreme caution and make sure there will always be too much and never not enough. This is in regards to retirement savings."
"It is not possible to make sure there will always be too much"

Are you saying that these are contradictory?

"Me? I'm an almost there is never too much person so I'm going to err on the side of extreme caution and make sure there will always be too much and never not enough. This is in regards to retirement savings"
It is never possible to ensure that you have erred on the extreme side of caution and make sure you have saved too much.

Are you saying my statement cannot be made because it has to be able to be made with 99.99999999999999999% certainty?

Do you think that Bill Gates is capable of making the statement you quoted me making?

Once you define something with descriptions like "always be too much' and 'never not enough' there is no room for other conditions.
Perhaps post all of the details of your situation and the goals and maybe someone can better assess your thoughts.

[darius42]

Consider investing in a total world market index fund or put 20 - 40% of your equity allocation in an international total stock market index fund.

It turns out that I mistakenly put a spend amount that was too low when I was dancing for joy in my previous post. The real number is smack dab in the middle. I'm still fine. According to the simulator, I could put all of my money in a money market and I wouldn't go broke until I'm 120. But I don't have the same leeway that I had with the mistakenly low number.

So now I'm a bit wary of doing anything that's not covered by the simulator. E.g., it doesn't have data for international stocks in it, and when I look at the performance of VT compared to SPY, VT has significantly underperformed SPY for nearly every time period that I've looked at.

You are correct in thinking that unexpected high inflation is a risk for the retiree. Putting a significant amount of money in a TIPS index fund with an intermediate duration is a good idea. SCHP, SWRSX, FIPDX, or VIPSX are some options.

I'm not really clear on how bond funds work, or whether they are good. If I buy a bond and hold it to maturity, I know that I won't lose money. (Except, perhaps, in inflation-adjusted dollars.) But bond funds go up and down in nominal dollars, so I don't understand their risk/reward characteristics.

A TIPS ladder is appealing to protect against potential hyperinflation. (Something that the simulator can't do, since there's no prior history of hyperinflation in the US for the simulator to use.) I know that there are other simulators out there that might be able to model such a portfolio (but maybe not with a hyperinflation scenario), but when I've looked at them, they have choices that I don't really understand. The "Rich, Broke or Dead?" simulator may not offer a huge amount of versatility, but it's easy to use, and provides a very nice visualization of the results.

[pizzy]

and when I look at the performance of VT compared to SPY, VT has significantly underperformed SPY for nearly every time period that I've looked at.

That's all in the past.

[darius42]

and when I look at the performance of VT compared to SPY, VT has significantly underperformed SPY for nearly every time period that I've looked at.

That's all in the past.

That's true, but I have no crystal ball. Unless I have a reliable simulator that can show me what likely outcomes are for the future given reasonable premises, I don't feel as if I have a good basis for making decisions.

Now the simulator I've been using clearly has no crystal ball either, but it does have data going back to 1871, and it putatively runs the simulation through every time window, including things like the Great Depression, the Great Recession, the Dot Com Bust, the 70s, etc., and comes up with its probabilities based on a lot of sh*t that has actually happened.

I don't really have a strong background in finance, so without being able to ask the simulator how I would have fared through all those time periods with a big basket of world equities, I'm not so comfortable with varying from what the simulator says is practically foolproof given all the historical data that it does have.

If my cushion were as big as I thought when I was jumping for joy, I could feel comfortable throwing more things into the mix. E.g., like gold, TIPS ladders, world equities, etc. Or maybe I'll get around to reading the stack of books that have been recommended to me in this forum, which I am thankful for. But I have to do most of my financial planning in the next few days, before I go back to the stressful salt mine that may cause me to retire. Then, if and when I'm retired, maybe I can dig into all of those books.

In the meantime, I don't want my money to be just sitting in cash. (Though apparently, I'm okay just sitting in cash until I'm 125, so maybe that wouldn't be the worst thing in the world, either... I hope that that simulator is right.)

[dogagility]

I'm not really clear on how bond funds work, or whether they are good. If I buy a bond and hold it to maturity, I know that I won't lose money. (Except, perhaps, in inflation-adjusted dollars.) But bond funds go up and down in nominal dollars, so I don't understand their risk/reward characteristics.

Here's the wiki on individual bonds vs bond funds that might help. https://www.bogleheads.org/wiki/Individ ... _bond_fund

For bond funds, duration is a key concept you want to consider when selecting bond funds (and reading that link above). Ideally, a bond fund's duration should approximate your investment time horizon. If you were to retire now, begin withdrawing from your portfolio immediately, and die in thirty years, your investment time thorizon would be half of 30 or 15 years. Still, many Bogleheads will use a total bond market index fund in their portfolio. These funds have average durations of about 6-7 years. Good enough.

[darius42]

Here's the wiki on individual bonds vs bond funds that might help. https://www.bogleheads.org/wiki/Individ ... _bond_fund

Thanks! Interesting reading.

[SnowBog]

I think you missed my point...

One's AA is arguably the most important decision for them in investing. It reflects your need, ability, and willingness to accept risk.

Thanks for the detailed advice!

How does this plan sound?

• I put half of that $3m in an S&P 500 index fund ASAP.

• For $1m I buy an annuity that pays me $100k/year until I die starting at age 67, which is when I plan on retiring if I can find a job that won't put me into the mental hospital. With the annuity, if I go bust, I'm still probably doing a lot better than living on just SS. (Modulo a long period of bad stagflation, which I don't know a way to guard against unless I had a lot more money to pile a sizable chunk into gold, or something.) The annuity is attractive to me since my family has a history of living past 90.

• I put $500k in a bond ladder, or money market so that if I have to retire tomorrow, I have plenty of cash to cover my expenses until my annuity starts paying out $100k/year. I don't put this money into the market now in order to protect against SORR.

• Since my family has a history of living past 90, I will wait until I am 70 to collect SS.

Candidly, it sounds like you are "throwing stuff at the wall to see if it sticks"... In my prior posts, I recommend (among other things):

• The asset allocation you'd be comfortable maintaining for life
• Your estimated annual expenses, broken out by "essential" and "discretionary" amounts
• When you want to retire - as I suspect you are more in control than you suspect...

I didn't see any of these (maybe further down thread - haven't read the rest as the discussion got sidetracked). As previously mentioned, I think it's important to not skip these steps. But I won't beat that horse anymore...

So, let's consider what you laid out...

You previously "guessed" your retirement expenses would be $120k - which is more than you spend now - but let's run with it...

You are proposing an annuity for $100k (granted, not inflation adjusted), and from your "planned" retirement date you'll also have IIRC $36k of (inflation adjusted) social security. Combined (before inflation), that's more than your estimated annual expenses... Meaning other than the $20k/year (plus any inflation) delta for your first 3 years, the rest of your retirement should be covered - and you will only use a fraction of your savings (beyond purchasing the annuity).

If it were my money, I wouldn't be as conservative. In general, as previously shared, I'm not opposed to the right kind of annuities (SPIA) - but I think they are better for helping to cover "essential" expenses (aka part of your expenses). As mentioned, we are in the process of creating a DIY Annuity of sorts with EE & I Bonds (combined with delayed social security and small pension) - will ensure that we have all "essential" expenses covered for life regardless of what the market does (although still exposed to inflation risk). So I'd scale back the annuity and not try to cover 100% of expected expenses between the annuity and social security.

That said, it's your money, you can't bring it with you (and leaving it behind isn't your priority). So, if buying the annuity brings you peace of mind - perhaps it's worth doing so and move onto enjoying the rest of your life.

In the OP, you were concerned about "having to retire tomorrow", now you are planning for a retirement at 67... To return to your OP, what happens if in fact you do get "retired" tomorrow? Your answer is $500k bond ladder? If your expenses are truly $120k, your $500k won't bridge you to until 67/70...

You also mentioned "don't put this money into the market now in order to protect against SORR"... Holding money in cash is not a protection for SORR - and could in fact make SORR worse (as once your bridge is depleted, you have no option but to sell). At the risk of getting back on the horse - IMHO this is simply another data point that you haven't yet sat down and figured out the proper AA for you. There is no way to fully mitigate SORR (other than simply savings boatloads extra where SORR is irrelevant). So, you need to have a long-term plan such that if the markets are down 2 years, 5 years, 10 years, etc. - you know what you are going to do. That's in part what an AA is... For example, if your AA is say 70/30 - in a "down" market you'll be selling off bonds [which presumably are rising - or not falling as fast at least] to maintain your AA. When markets start to rise, your stocks will be growing quicker - and thus you'll sell them off to maintain your AA. Works regardless of how long the markets are "down", "up", "flat". No predications required.

I feel like you need to work on this part more...

Which brings me back to when "you" want to retire? I'm not sure where your 67 age comes from - other than that being your "full retirement age" (presumably). Perhaps you've never thought about retiring at a different time - except when forced with your recent concerns from your employer.

But let's tie this back into the "gap" with retiring at 67... Why not have a plan that works if you "retire" tomorrow, are "retired" tomorrow, or decide to retire anytime between now and 67 (or even beyond)?

Unfortunately, this returns us to AA... IMHO your financial future becomes much simpler and much stronger if you can determine your AA, reach it, and maintain it going forward. Let's use your #'s above, but reflect as an AA - not some segmented thing based on predictions you can't make... If you put $1.5M in an S&P 500 (or similar "total market") fund and keep $0.5M in "fixed income" - expressed as an "asset allocation" that would be 75/25. That works - regardless of when you retire, simply get there and maintain it. For most people, I'd also say that might be a completely appropriate AA. My concern for you, is this seems like an aggressive AA for you. Let's reflect on why:

• Long standing advice for those in/near retirement is to be closer to something like 60/40. IIRC many target date funds still head towards that path by "retirement" date. Some may choose to be less - or more - but this gives you a frame of reference for retirement averages.
• Your concerns about the market/retirement/etc. have you considering putting 33% of your current funds into an annuity (which is generally a conservative action).
• My working theory is your retirement expenses are likely less than your current income (unless you are vastly inflating your lifestyle after retirement, that's usually the case), which means you likely have "enough" already. Again you don't "need" to take on that kind of risk.
• Your continued comments/concerns about PE, predicting future valuations, etc. We ultimately get what the market returns - no more - no less. But your focus on this seems like you are sensitive to "what" the market does ("news" about the market, etc.) - so having a higher AA will make it seem like the markets are volatile - and give you higher amounts of concern/risk.
• While you have stated you learned your lesson, the fact remains you sold out of the market in 2020 and have stayed out now for 3 years. Something will happen in the future, and it will trigger those same fears/emotions/rationalizations that got you out of the market the last time - and have prevented you from re-entering the market the last 3 years. The lower your AA (less in equities), the less likely you are to act on them.

And IMHO the most important part returns to "know they self" (the part you skipped). Said differently, its highly likely your revised plan works - "as-is" - if you can execute and stick to it, and nothing "challenges" the plan. But the reality is, everyone has a plan until "punched in the mouth." Again, hypothetically, what happens if you are "retired" (employer decision) and the markets crashes and stays down for 10 years - how will you react, how will your plan need to change?

So, my thoughts aren't so much as "do this instead" - but trying to get you to consider the future is going to evolve - maybe in a way you don't anticipate. If you have a simple yet robust plan based on understanding who you are as an investor and your goals, you are far more likely to learn to "stay the course", "tune out the noise", and "trust your plan" (regardless of what that plan is).

[dogagility]

OP, I completely agree with SnowBog.

For all investors, we are our worst enemy regarding achieving success. Having the wherewithal to stay the course when the news and market is telling us the stuff is hitting the fan is the single most important aspect to investing success.

To have success, you need to be comfortable with seeing your portfolio decline in value over a potentially long time, and not capitulate (sell) to the negativity surrounding you.

How to do this? Have a plan, make is yours (not mine or some other person's plan) so you know why you've chosen the plan, and write it down (an IPS) to refer back to when stuff hits the fan. Diversify your stock holdings across countries. Know the market's history in order to not succumb to the "this time is different" negativity that encompasses a market crash. Select an appropriate asset allocation.

Consider the potential effect of high inflation on a portfolio's capacity to support spending. TIPS; I-bonds; SS; and equities are your levers available to combat high inflation.

[darius42]

Candidly, it sounds like you are "throwing stuff at the wall to see if it sticks"...

If by "throwing stuff at the wall" you mean plugging a wide variety of parameter settings into a seemingly respected retirement simulator ("Rich, Dead, or Broke") to see what choices give me a close to 0% probability of going broke before I die. (Though this simulator has not been published in a respected peer-reviewed journal, or anything like that, so trusting it is a bit of a risk. I haven't seen a single person claiming that it is full of shit, though.)

In my prior posts, I recommend (among other things):

• The asset allocation you'd be comfortable maintaining for life
• Your estimated annual expenses, broken out by "essential" and "discretionary" amounts
• When you want to retire - as I suspect you are more in control than you suspect...

I don't really have any way of knowing what asset allocation I'm comfortable with without seeing what the probabilities of going broke are with different asset allocations. Hence the simulator.

As for retirement, I may not have the level of control that you think I do. My current job has become so stressful that it has driven me into a major depression. My boss told me to my face in February that he wants to fire me and my current programming skills aren't quite in sync with the current job market. Finding a less stressful software engineering job in my 60s while suffering from depression is daunting.

Re expenses, if you'd read a bit farther down, you'd see that I discovered that I was making a mistake with the simulator. I was putting in my pre-tax income as my "spend", rather than my take-home pay. My take-home pay is about $80k.

I don't live high on the hog, though I do live near Boston, which is an expensive place to live. I do save some money every year, but I also get great health insurance as a benefit that I don't have to pay for. If I retire, my medical expenses will go up significantly. And it's hard to know how much heating oil will cost in the future, etc.

I've been feeling a bit rosier about having to retire tomorrow if need be, when I put in a spend of $90k/year into the simulator. With $90k, rather than $120k, the simulator shows that I have 0% probability of running out of money until I'm 120 years old, even if I just keep all of my money in a money market.

With this in mind, I've been considering a 50/50 asset allocation, which the simulator shows me as having 100% probability of my money growing in perpetuity once I hit 90. (Yes, I understand that the simulator doesn't account for the possibility of hyperinflation, etc., since it uses only US historical data going back to 1871.)

If it were my money, I wouldn't be as conservative.

If I had children to leave my money to, growing my estate might be a priority. Since I don't, just living well until I die is my priority, and if being conservative increases the probability of this, then that's fine with me. From the simulator, with my corrected spend, it looks like I don't need an annuity. (With the $120k spend, I couldn't find another way to have the simulator not show me as having a chance of going broke before my likely life expectancy, which is into my 90s given my family history.)

As mentioned, we are in the process of creating a DIY Annuity of sorts with EE & I Bonds (combined with delayed social security and small pension) - will ensure that we have all "essential" expenses covered for life regardless of what the market does (although still exposed to inflation risk). So I'd scale back the annuity and not try to cover 100% of expected expenses between the annuity and social security.

I understand the advantages of I Bonds and I should start buying them. But I don't have any yet. And I'm limited to buying only $10k/year. I'm not sure that I understand the allure of EE bonds at the moment.

For example, if your AA is say 70/30 - in a "down" market you'll be selling off bonds [which presumably are rising - or not falling as fast at least] to maintain your AA. When markets start to rise, your stocks will be growing quicker - and thus you'll sell them off to maintain your AA. Works regardless of how long the markets are "down", "up", "flat". No predications required.

That makes sense. Thanks for the clear explanation.

Which brings me back to when "you" want to retire? I'm not sure where your 67 age comes from - other than that being your "full retirement age" (presumably). Perhaps you've never thought about retiring at a different time - except when forced with your recent concerns from your employer.

Well, I enjoy working when it's not too stressful. I may end up being offered a job that I think that I'd enjoy. On the other hand, being a software engineer is becoming an increasingly stressful profession. It used to be that you'd be given a project to do, and only make occasional progress reports. Now, most employers have you stand up every morning and make a daily progress report, and it turns out that sitting at a computer and typing all day long is very hard on the body. It's gotten to the point where every day, at the end of the day, I feel as if I've been beaten with a bat.

Thanks again for all your advice!

P.S. What do you think about someone else's suggestion of just putting my bond allocation into a bond fund, rather than actually buying bonds?

[SnowBog]

Good update - I feel like you are making progress! I did want to call out a few items, maybe less so for you, but more for anyone else following a similar path.

In my prior posts, I recommend (among other things):

• The asset allocation you'd be comfortable maintaining for life
• Your estimated annual expenses, broken out by "essential" and "discretionary" amounts
• When you want to retire - as I suspect you are more in control than you suspect...

I don't really have any way of knowing what asset allocation I'm comfortable with without seeing what the probabilities of going broke are with different asset allocations. Hence the simulator.

The only problem with that, the simulations/probabilities only reflect your "need" for risk. One's asset allocation should be based on the combination of one's need, ability, and willingness to take risk.

To state differently, if an AA of 100/0 shows the best numerical probability of success, but the investor can't handle the exposure - and say sells out of the market in the middle of a pandemic - then it was arguably the wrong AA for that investor. On the other side, there are investors who are so fearful of the markets they have a hard time getting even to 30% equities, even though it shows a lower chance of success - but to make their plans "successful" they end up working longer and saving "more" (compared with having a higher AA).

This is why one's AA is highly personal - as only you can figure out what balance of need/ability/willingness of risk is appropriate for you. The "fearful" investor with a low AA might end up working "longer than they could have", but ultimately as long as their "plan works for them" - it's a good plan. The "aggressive" investor might see those probabilities/simulations implode if they can't handle the risk. The "goal" is to figure out where you are such that you can invest - and maintain - your AA for the long term.

That said, looks like you are considering an AA of 50/50. Again, only you can decide if that's "right" - but to me it seems more realistic/appropriate given your numbers/situation than trying to return to 100/0 (or stay at 0/100).

As for retirement, I may not have the level of control that you think I do. My current job has become so stressful that it has driven me into a major depression. My boss told me to my face in February that he wants to fire me and my current programming skills aren't quite in sync with the current job market. Finding a less stressful software engineering job in my 60s while suffering from depression is daunting.

Sorry to hear that! For clarity, my reference to "control" was more that I think your numbers could work "today" (as it appears my assumption on your expenses being less than you initially stated was correct, and assuming you execute on a plan, get your money invested quickly and not remain in cash, etc.). Meaning, if you "get retired" - I suspect it will work out better than you fear currently...

If it helps, I'm in a not too dissimilar situation. While my boss isn't talking about firing me, my company does regular layoffs and restructuring (not due to economic reasons, just part of how they run the business), and my gut says its just a matter of time until "my number" is called. That's demotivating on its own... But the way the run the business is getting more burdensome and moving me from wanting to work here to wondering how much longer I can stand working here. Both put me on a similar path of getting my plan solidified such that whether they "retire" me or I decide to retire and/or move to a different (less stress/etc.) job - I have options. Like you, I think my numbers are far better than most - and both of us have "earned" our options through years of living below our means and investing the rest.

In the words of JL Collins - we have our "FU money"! (If you aren't familiar with him or the term, https://jlcollinsnh.com/2011/06/06/why- ... you-money/; although I first heard of it through his book https://www.amazon.com/Simple-Path-Weal ... 1533667926).

It's taken me years to realize this - I suspect once you realize it, you'll start to feel better and understand you have way more control than you currently think...

I understand the advantages of I Bonds and I should start buying them. But I don't have any yet. And I'm limited to buying only $10k/year. I'm not sure that I understand the allure of EE bonds at the moment.

Given where you are at - timing left - low limits, I wouldn't say I or EE Bonds will make a materially impact for you. If you work another 5 years and max out I Bonds - you'd only have $50k, which is a rounding error in your overall plan. So this might be a "simplicity is better" moment for you, and just pass on them.

That said, they wouldn't "hurt". I Bonds provide inflation protection, can be a great "emergency" fund, etc. You just don't have enough time to make them a material part of your plan. If you are concerned about inflation, looking at TIPS would be a better option.

For you, I'd pass on EE Bonds as well... But to answer your question for EE Bonds, it's a bit more complicated. Viewed in isolation, and as an "independent investment" - it's hard to make a case for buying EE Bonds right now versus buying something like a 20-year Zero Treasury Bond (which has a higher rate). My use is more the "strategy" of building a DIY Annuity - using a ladder of EE Bonds. While we don't know the "buying power" as they lack inflation protection, $10k of EE Bonds today returns a guaranteed $20k in 20 years. More on the overall idea/concept can be found in the "EE Bond Manifesto" I wrote a few years ago viewtopic.php?t=358793 Of note, while written for (and about) EE Bonds - much of the concepts/approach also apply if a person were to use 20-year Zero Treasuries - which currently have a higher rate. Personally, the difference of 20-year Zero Treasuries isn't enough for me to add the complexity, so I'm accepting a lower "return" for just using EE Bonds. But some following the overall DIY Annuity idea are swapping out EE Bond for 20-year treasuries - doesn't change the overal concept.

Again for you, I don't see EE Bonds making sense. As noted, they require a 20-year window, by that point you'll have social security and potentially your annuity paying you. I didn't start 20-years early... I started roughly 10-years prior, and am "backfilling" the other years via I Bonds (including via trusts).

P.S. What do you think about someone else's suggestion of just putting my bond allocation into a bond fund, rather than actually buying bonds?

With the exception of Treasuries like EE & I Bonds, I use bond funds. There's a lot to be said for the simplicity of just using a "total bond fund" - aka the "Three Fund Portfolio". But if you want a better comparison, check out: https://www.bogleheads.org/wiki/Individ ... _bond_fund

[unwitting_gulag]

As for retirement, I may not have the level of control that you think I do. My current job has become so stressful that it has driven me into a major depression. My boss told me to my face in February that he wants to fire me and my current programming skills aren't quite in sync with the current job market. Finding a less stressful software engineering job in my 60s while suffering from depression is daunting.

This, I'd aver, is a major reason why some of us are considering early retirement. It has nothing to do with yearning for a career-change, or desire to start a winery, climb Mt. Everest, or write the Great American Novel. Neither is it really a badge of success - "hey, look at me, I'm such an old-world aristocrat, I don't even need to work anymore". Rather, early retirement is a form of involuntary unemployment, where the unemployed is doing sufficiently well financially, that ensuing indefinite unemployment is financially OK. Financial Independence, the first half of "FIRE", is an insurance policy of sorts. The objective is less about living a lavish life, or the best possible life; instead, the objective is to insulate oneself from the coarse vagaries of the working-world, so that non-work, if so it comes to be imperative, isn't a hardship.

If I had children to leave my money to, growing my estate might be a priority. Since I don't, just living well until I die is my priority, and if being conservative increases the probability of this, then that's fine with me.

Some of us have a burning psychological desire to die with more, than we have on the day of retirement... growth for growth's sake. Thus we keep working, not because we "have to", but because we can't justify cessation of effort to keep earning and saving. That speaks to my earlier point. We never retire voluntarily! Instead, one day we just get fired, and upon concluding that we have "enough", we no longer look for work.

If you're free of the shackles of needing-to-die-with-more, then you have an advantage.

[darius42]

Good update - I feel like you are making progress! I did want to call out a few items, maybe less so for you, but more for anyone else following a similar path.

Thanks for all the useful information and advice.

To state differently, if an AA of 100/0 shows the best numerical probability of success, but the investor can't handle the exposure - and say sells out of the market in the middle of a pandemic - then it was arguably the wrong AA for that investor.

Perhaps if such an investor had armed themself with a good simulator, they wouldn't have made such a mistake to begin with.

Though at the time, I figured I was being clever. Having watched what happened in 2008/9, I figured I could get back in when the market was down 60% and make a killing. So much for being clever! Unfortunately, I learned the hard way that I'm not as clever as I thought I was.

On the other side, there are investors who are so fearful of the markets they have a hard time getting even to 30% equities, even though it shows a lower chance of success - but to make their plans "successful" they end up working longer and saving "more" (compared with having a higher AA).

Well, if you enjoy your work a lot, then there's no reason not to work for as long as you can. I, myself, do like working, and even if I can retire tomorrow, am not sure that I'd want to. As long as I can find a job that isn't stressful to me, and doesn't cause me anxiety and depression. (I was happy enough at my current job before my boss said that he wants to fire me.)

If I do have to retire, then I'll always go with the plan that has the best data going for it.

I was playing around with another simulator by the same person. It shows that with a 3% spend, my best AA is 75/25, if I want to live to 100 without going broke. (I'd have a 7% chance of going broke, and that's as low as I can get it.) But with this simulator, there's no Social Security, which if I add in with the other simulator, my probability of going broke does down to 0%. (And with Social Security it seems I can keep all my money in a money market and still be fine. Though given that the future may stray significantly from every past series of events, 50/50 seems good at the moment.)

If it helps, I'm in a not too dissimilar situation. While my boss isn't talking about firing me, my company does regular layoffs and restructuring (not due to economic reasons, just part of how they run the business), and my gut says its just a matter of time until "my number" is called.

Wow, that's a terrible way to run a business. I would go insane in an environment like that. I hope that this kind of thing doesn't cause you too much anxiety. Anxiety is no fun!

In the words of JL Collins - we have our "FU money"! (If you aren't familiar with him or the term, https://jlcollinsnh.com/2011/06/06/why- ... you-money/; although I first heard of it through his book https://www.amazon.com/Simple-Path-Weal ... 1533667926).

I'll check it out. Thanks!

There's a lot to be said for the simplicity of just using a "total bond fund" - aka the "Three Fund Portfolio".

So, is BND a good choice? Or is there something better out there?

Thanks again.

[darius42]

If you're free of the shackles of needing-to-die-with-more, then you have an advantage.

Well, I enjoyed working until recently. And having suffered some bad losses early in life, I always have a feeling that the bottom is going to fall out under me, so in that sense more is better.

On the other hand, if my job is now going to force me into having ECT, maybe it's time to take my nest egg and go home! I'll always find interesting stuff to keep me busy. E.g., like the learning I've been doing now on retirement finance.

[SnowBog]

Perhaps if such an investor had armed themself with a good simulator, they wouldn't have made such a mistake to begin with.

Though at the time, I figured I was being clever. Having watched what happened in 2008/9, I figured I could get back in when the market was down 60% and make a killing. So much for being clever! Unfortunately, I learned the hard way that I'm not as clever as I thought I was.

Investors have lost tons of money trying to be "clever". In part - you have to be right twice - getting out and getting in. Thus, "timing the market" is never recommended on BH.

While I doubt it was stated to apply to investing, IMHO this quote is still relevant:

There are three kinds of men. The ones that learn by readin’. The few who learn by observation.
The rest of them have to pee on the electric fence for themselves.”
― Will Rogers

Well, if you enjoy your work a lot, then there's no reason not to work for as long as you can. I, myself, do like working, and even if I can retire tomorrow, am not sure that I'd want to. As long as I can find a job that isn't stressful to me, and doesn't cause me anxiety and depression. (I was happy enough at my current job before my boss said that he wants to fire me.)

As the saying goes, "if you love what you do, you won't work a day in your life"! I too will probably "work" on something when I retire - even it that something is an unpaid internship here and other places where I can try to help others!

So, is BND a good choice? Or is there something better out there?

Perfectly fine - but don't get too hung up on "which" fund. Often your choice of fund(s) is driven/dictated by where you have your money invested. If you haven't found it/read it yet, recommend checking out the Three Fund Portfolio page. https://www.bogleheads.org/wiki/Three-fund_portfolio The "default" recommendation is VBTLX, which is the mutual fund version of BND (same "investment" - just sold with different mechanics). The page also lists common alternatives at other brokerages. For example, most of my accounts are at Fidelity, so I use FXNAX. The difference between these funds is negligible - so just use what's available to you.

If I do have to retire, then I'll always go with the plan that has the best data going for it.

I was playing around with another simulator by the same person. It shows that with a 3% spend, my best AA is 75/25, if I want to live to 100 without going broke. (I'd have a 7% chance of going broke, and that's as low as I can get it.) But with this simulator, there's no Social Security, which if I add in with the other simulator, my probability of going broke does down to 0%. (And with Social Security it seems I can keep all my money in a money market and still be fine. Though given that the future may stray significantly from every past series of events, 50/50 seems good at the moment.)

OK - tough love time... As I noted previously, you should not set your AA based purely on simulations. Yes - it's a data point. Your attempt at being "clever" is another data point. But investing isn't purely financial - as you experienced first-hand. We need to accept that we are influenced by emotions - and as such work to guard against them.

Think of it this way, let's say you invest your IIRC $1.5M in a 75/25 AA - "because that's the best result". Right after you retire - the markets plummet - it's worse than COVID - and everyone around you, everyone in the media, all of the so-called "experts" are saying "sell, sell, sell." You watch your $1.5M - representing your entire life savings - go down to $0.9M ($0.6M loss - assuming 50% equities crash) with only $0.375M in "safe" assets. You are going to panic (who wouldn't - I would). You'll be thinking "SORR showed up in a bad way", "this time is different", "I can't just sit here and watch my entire life savings disappear."

Again, not saying it's right, only you can determine the right AA for you... But let's contrast the 50/50 AA you referenced before. That same hypothetical 50% crash would leave you with $1.1M, still down a little under $0.4M - but still above $1M overall - and with $0.75M in "safe" assets.

Even people who "know better", who had a balanced AA, who understand and otherwise lived by "stay the course" can get shaken. It's an older (and long) thread, but this gives a great insight into the mindset of someone who know better - their fear - and their stress at feeling "forced" to take action. viewtopic.php?t=25126

So as recommended before, try to "know they self". It doesn't matter if 75/25 is "better" on paper if it's not something you can live with the rest of your life.

Additionally, I'll point out that all models are wrong, some models are useful. (Thanks George Box! https://en.wikipedia.org/wiki/All_models_are_wrong). There is simply no way to predict what your path is going to be. The markets are going to return what they are going to return - nothing more, nothing less. You are going to be tempted again to do something "clever." You should not "rely" on what these tools/reports/simulations/etc. tell you.

Does that mean they are pointless? No - they are "useful." They can give us insights, based on historical data (and/or simulations such as monte carlo based on historical data), on how our inputs would turn out. But the future is not the past. The models are wrong (they always are). So, don't take them "literally" in the sense that this AA has a 7% chance of better returns? 7% is "noise" when it comes to market returns, intangibles like tax changes, inheritance, changes to medical care/costs, lifespan, etc.

On a similar notion, there is effectively no meaningful difference with AA's that are say 5% apart. That's not what the models will show - but that's the reality. In part, in practice one's AA is not "exact". My target AA is 65/35 - but at any given point in time it might be as high as 69/31 or as low as 61/39 as either stocks and/or bonds are doing better/worse. During working/accumulation years, I try to "nudge" them back towards my target by directing my contributions to whatever is currently "low." During retirement, I do the inverse and "sell/spend" whichever is "high". (And if they get massively misaligned - for me that's > 5% off target and/or 25% of the $$ amount off - I'll "exchange" one for the other to bring me closer to target.) Thus, you are chasing an impossible scenario trying to find the "precise" AA that's "best".

So, my advice is either "put the models down", or accept them as a "useful input" - but not the only useful input. Again - "know they self". Don't be fooled into being "clever" thinking some model can answer life's questions and give you an infallible answer.

As you seem to be struggling with finding your AA, perhaps you would benefit by a "questionnaire" format. https://investor.vanguard.com/tools-cal ... stionnaire This will walk through common "investor" questions/scenarios - and tell you what Vanguard thinks would be an appropriate AA as a result. (Again - this is simply a data point, factor it in with the others, don't just "accept" it as somehow being magically accurate for you).

[darius42]

Think of it this way, let's say you invest your IIRC $1.5M in a 75/25 AA - "because that's the best result".

Actually, it's $3m. And to make sure that I don't pull all my money out when the market corrects, I'm just assuming due to Murphy's Law that the market will correct the day after I put all my money into the market by 25% to match historical PEs. To account for this, I put a value of $2.25m into the simulator, and with $2.25m I'm still golden, at least according to the simulator, at any AA.

As you seem to be struggling with finding your AA, perhaps you would benefit by a "questionnaire" format. https://investor.vanguard.com/tools-cal ... stionnaire

I did the questionnaire and it told me 50/50, which is what I was planning on already. It read my mind!

Thanks for all the other info. I'll have a look at it soon.

[SnowBog]

Think of it this way, let's say you invest your IIRC $1.5M in a 75/25 AA - "because that's the best result".

Actually, it's $3m.

My apologies. I was thinking it was $2.5M with $1M going to your annuity, leaving $1.5M to "invest". Feel free to redo my numbers if/as needed, but it shouldn't change the intent of what I was hoping to get across!

Again, glad to see you are making progress on your plan!

Just don't forget to "execute" it!

As I shared earlier, IMHO you should be getting back into the market ASAP, ideally no longer than 12 months. If you are ready to "lock in" your AA at 50/50, that means you need to get $1M (50% of the remaining $2M if you buy your $1M annuity) to $1.5M (if you don't do an annuity) invested back into the market. Using the lower end ($1M), that would mean roughly $83k a month invested in equities (whatever your S&P 500 or "total stock" fund) to get there within a year. If you can, set this up as "automatic" - take emotions/PE/"clever" out of it. If you can't automate it, then be disciplined, set a schedule, and hold yourself accountable.

Hopefully as you keep moving down this path, you'll realize that you don't have to care about your job - you are on a good path with - or without - them!

[darius42]

Even people who "know better", who had a balanced AA, who understand and otherwise lived by "stay the course" can get shaken. It's an older (and long) thread, but this gives a great insight into the mindset of someone who know better - their fear - and their stress at feeling "forced" to take action. viewtopic.php?t=25126

Yes, that's a sobering thread. Me, I wanted to buy more S&P500 when the market was down in 2008/9. When it was down 60%, that seemed like a great value purchase! Of course, I had a large time horizon back then. If I didn't have a good AA, and I was looking at having to potentially live on a third of my retirement funds, that would have been scary indeed.

Unfortunately, I had no big piles of cash at the time, since almost all of my savings were already in the S&P500. I was considering moving a bunch of money into a 3X S&P500 index fund when the market was down 60%, but I later learned (via purchasing $10k worth of 3X bond bear ETFs) that these 3X funds don't track the index well over long periods of time. So perhaps not doing so was for the best. In theory, I should have ended up with a tidy profit on the 3X bond bear ETF recently due to the run-up in interest rates, but instead, I just decided to finally sell with a small loss.

I do believe that the expected return of an index fund is related to its valuation, so I guess I am for market timing if you have cash and valuations are low. Not putting money that needs to be invested when valuations are high however is fraught. The market can still go up and then plateau, and if you hadn't bought, you'd still have lost out, despite the high valuations.

I think that there is some valuation cut-off where you should not pour cash into an index fund. E.g., if the P/E of the S&P 500 were to go to 100 for some reason, and we weren't in a recession (in a recession P/E's can be very high due to companies temporarily losing money), then dumping all of one's money into the S&P500 would be crazy. Can anyone honestly say otherwise? Fortunately, that's not a situation that we typically need to worry about.

[protagonist]

61 y o, $3M, single, no dependents, no debt....you are in great shape. If your lifestyle is not extravagant you can easily retire tomorrow or whenever you get laid off.
Consider a TIPS ladder for a secure inflation protected income stream.
How much of the $3M you want to put into it depends on how much risk you are willing to take and how much SS (or other unmentioned income) you will eventually collect.

My approach is fairly conservative....put everything you cannot afford to lose in a TIPS ladder. That plus SS is what you will mostly live on. Dump the rest in a broad based stock index fund and think of it as your gambling money. Just leave it there and don't give it much thought. That way, barring extreme events, your financial life will be simple and should be worry-free.

[mdigital]

Thanks for all the free psychoanalysis. I know that it typically costs hundreds of dollars per hour these days. At least from a trained professional...

But the fact that you got out of the market entirely and now are asking if you should get back into the market entirely, says to me you simply haven't figured out what your true asset allocation should be. Hint: it isn't 100% stocks or 0% stocks but somewhere in between.

I find it interesting that you can colorize bits of my text to make your argument, and yet with all that red ink, come to the conclusion that I was considering getting back into the market 100%, when instead I specifically said that I was considering putting ⅓ of my money into a fixed annuity and ⅔ of my money into the market.

4. I'm not sure where you get the idea that buying in at the top of a market can take 20 years to recover.

From Peter Lynch in One Up On Wall Street. He pointed out in this book that if you invested at the height of the market in 1968, it would have taken you more than twenty years to break even in inflation-adjusted dollars.

Stock tip? Single stock risk for your mother? Cisco may have been a lucky pick but you should never confuse outcome with strategy.

I had quite a few other stock tips for my mother that did quite well: Amazon in the late 90s, Google in 2004, Red Hat in 1999, Apple and Microsoft in the early teens, etc.

thoughts?

My thoughts are that I'd find your advice more compelling without all the pointless polemic.

What stocks would you recommend today?

[SnowBog]

I think that there is some valuation cut-off where you should not pour cash into an index fund. E.g., if the P/E of the S&P 500 were to go to 100 for some reason, and we weren't in a recession (in a recession P/E's can be very high due to companies temporarily losing money), then dumping all of one's money into the S&P500 would be crazy. Can anyone honestly say otherwise? Fortunately, that's not a situation that we typically need to worry about.

You are risking being "clever" again...

When I have money to invest, it gets invested according to my AA. I do not look at valuations. I do not look at today's price, price trends, or anything else.

I invest because I expect over the long term for the value to go up.

[darius42]

What stocks would you recommend today?

I don't have any stocks to recommend today. I happened to be in the right place at the right time with the right experience back in the 90s to be able to pick some good stocks. That's not true anymore.

Well, I still know some good companies, but none of the ones that I'm intimately familiar with these days are likely to grow by a factor of 1,000x, and they are all selling at valuations that I do not like. E.g., the Magnificent Seven are all great companies, but unfortunately, they already have that fact priced into them. (I did buy some Meta when its price dropped and I now have a profit on it. Unfortunately, not nearly enough to retire on.)

I would have recommended Discord six years ago if they were publicly traded and the price wasn't crazy. Unfortunately, when they do go public, the price will no doubt be at a very lofty valuation.

[darius42]

You are risking being "clever" again...

When I have money to invest, it gets invested according to my AA. I do not look at valuations. I do not look at today's price, price trends, or anything else.

We can have this discussion again when the P/E of the S&P 500 goes to 100 when the economy is not in recession. Since it'll be a very cold day in hell when that happens, I don't think either of us has to worry about such hypotheticals.

On the other hand, Peter Lynch has said that when yields on long-term government bonds exceed the dividend yields of the S&P 500 by 6% or more, it’s time to sell stocks and buy bonds. My mother did this back in '81 or so, when 10-year treasuries were paying over 15%. She did well. So this particular anomaly has happened, and changing one's AA more towards long-term bonds was indeed the right thing.

[Dottie57]

I, for one, learned something new from this thread.

"Polemic"

+1.

[jebmke]

You are risking being "clever" again...

When I have money to invest, it gets invested according to my AA. I do not look at valuations. I do not look at today's price, price trends, or anything else.

We can have this discussion again when the P/E of the S&P 500 goes to 100 when the economy is not in recession. Since it'll be a very cold day in hell when that happens, I don't think either of us has to worry about such hypotheticals.

On the other hand, Peter Lynch has said that when yields on long-term government bonds exceed the dividend yields of the S&P 500 by 6% or more, it’s time to sell stocks and buy bonds. My mother did this back in '81 or so, when 10-year treasuries were paying over 15%. She did well. So this particular anomaly has happened, and changing one's AA more towards long-term bonds was indeed the right thing.

Tips allows one to make that move long in real dollar space. Real rates were over 3% in 2008 which is why I placed a large dollar amount in 2025s. Essentially I decide 3% was good enough.

[Dottie57]

Deleted

[darius42]

Tips allows one to make that move long in real dollar space. Real rates were over 3% in 2008 which is why I placed a large dollar amount in 2025s. Essentially I decide 3% was good enough.

I'd be loathe to sell stock if it was beaten down a lot by that point since it will eventually, no doubt recover. On the other hand, a 3% return in inflation-adjusted dollars is certainly a very attractive bet if that income meets your needs. Especially if that bet is made in scary times.

[jebmke]

Tips allows one to make that move long in real dollar space. Real rates were over 3% in 2008 which is why I placed a large dollar amount in 2025s. Essentially I decide 3% was good enough.

I'd be loathe to sell stock if it was beaten down a lot by that point since it will eventually, no doubt recover. On the other hand, a 3% return in inflation-adjusted dollars is certainly a very attractive bet if that income meets your needs. Especially if that bet is made in scary times.

I had some new funds coming in. Retired in December, 2007; exercised a couple of tranches of NQ options and the cash came in the next quarter. This was all part of a planned shift to lower equity allocation. The Tips were placed in an IRA - I try to avoid income in taxable when I can.

[darius42]

Tips allows one to make that move long in real dollar space. Real rates were over 3% in 2008 which is why I placed a large dollar amount in 2025s. Essentially I decide 3% was good enough.

I'm looking at TIPS right now on Fidelity, but I'm not sure how to interpret all of the information that it is showing me. There's a 30-year TIPS listed with a 1.5% coupon. I understand the coupon. This means that I'll get paid 1.5% of the principal every year, and the principal is adjusted for inflation twice a year. When the TIPS matures, I'll get my inflation-adjusted principal back.

There's also a column for "yield", but I'm not sure exactly how to interpret this. The yield is listed as 2%, and since this greater than 1.5%, I assume that this means that the TIPS is selling at a discount compared to its current principal.

What I don't understand is, does this 2% yield end up being inflation-adjusted too? I.e., will I be getting 2% of my inflation-adjusted purchase price every year for the next 30 years? Or is this 2% yield more ephemeral than that?

It seems to me that if I buy the TIPS at such a discount to its premium, then I would indeed get a 2% inflation-adjusted yield, but it gives me a bit of a headache to think about this.

(I'm not going to buy this, since I don't think that 2% is good enough. But if it were to ever rise to 3%, it might be attractive. Assuming that the 3% actually is an inflation-adjusted return.)

[dogagility]

I'm not going to buy this, since I don't think that 2% is good enough.

If you hold the TIPS to maturity, you will receive the (unknown now) inflation rate during the time you hold the TIPS plus the 2%.

There is a value called the TIPS/Treasury breakeven rate. This is the inflation rate that the market thinks will occur during the time you own the TIPS (to maturity). If inflation ends up being higher than the breakeven rate, then TIPS were the better investment compared to Treasuries.

Because of this, it is said that TIPS protect against "unexpected" inflation compared to Treasuries.

[Dottie57]

SS is the only form of "annuity" that I know about that is adjusted for inflation. For me, the longevity insurance is quite attractive.

I triple underline that one. I waited until I was 70 so as to collect maximum Social Security. I'm on a personal mission to convince everyone I know to do the same. There is just about no other inflation adjusted "pension" available anywhere.

I was easily able to do it, never needing the money from Social Security if I'd started at 62. Seems like you should be arrange things to do the same.

I have been able to convince several people to wait by using the phrase “Cashflow is King”. I think I heard the phrase here. Explaining that waiting until 70 means more money at age 70 and later was key. Also the fact of inflation raises are larger if made on a larger amount.

I am glad my friends listened - it was a light bulb moment.

P.s. no harangues. Just a statement which generated lots of questions.

[jebmke]

Tips allows one to make that move long in real dollar space. Real rates were over 3% in 2008 which is why I placed a large dollar amount in 2025s. Essentially I decide 3% was good enough.

I'm looking at TIPS right now on Fidelity, but I'm not sure how to interpret all of the information that it is showing me. There's a 30-year TIPS listed with a 1.5% coupon. I understand the coupon. This means that I'll get paid 1.5% of the principal every year, and the principal is adjusted for inflation twice a year. When the TIPS matures, I'll get my inflation-adjusted principal back.

There's also a column for "yield", but I'm not sure exactly how to interpret this. The yield is listed as 2%, and since this greater than 1.5%, I assume that this means that the TIPS is selling at a discount compared to its current principal.

What I don't understand is, does this 2% yield end up being inflation-adjusted too? I.e., will I be getting 2% of my inflation-adjusted purchase price every year for the next 30 years? Or is this 2% yield more ephemeral than that?

It seems to me that if I buy the TIPS at such a discount to its premium, then I would indeed get a 2% inflation-adjusted yield, but it gives me a bit of a headache to think about this.

(I'm not going to buy this, since I don't think that 2% is good enough. But if it were to ever rise to 3%, it might be attractive. Assuming that the 3% actually is an inflation-adjusted return.)

3% real rate is unusual. The last time I recall Tips being in that range was in 2008. I happened to have new money available to pour into long Tips at 3%+.

[darius42]

3% real rate is unusual. The last time I recall Tips being in that range was in 2008. I happened to have new money available to pour into long Tips at 3%+.

Yes, I can certainly believe that long TIPS paying out 3% above inflation is a very rare occurrence. It's difficult to imagine how this could ever happen since they'd be so desirable at this rate, which should very quickly drive the rate down.

It's ironic how certain crises offer great opportunities if you happen to look in the right place.

[SnowBog]

3% real rate is unusual. The last time I recall Tips being in that range was in 2008. I happened to have new money available to pour into long Tips at 3%+.

Yes, I can certainly believe that long TIPS paying out 3% above inflation is a very rare occurrence. It's difficult to imagine how this could ever happen since they'd be so desirable at this rate, which should very quickly drive the rate down.

It's ironic how certain crises offer great opportunities if you happen to look in the right place.

Or, if you happen to be a disciplined investor, who continues to invest (during accumulation years) regardless of the market is up/down/flat... If it's a natural part of what you do anyway, you'll do it anyway.

(ETA: To expand and provide context... With a balanced AA, as previously noted, when stocks are "down" - you'll naturally be buying more stocks to maintain your AA. Likewise, if bonds are "down", as presumably they would be as rates rise, again you'd naturally be buying bonds to maintain your AA. In effect, you are forced to "buy high and sell low" - as doing so is how you maintain your AA. If you want to use TIPS for inflation protection, presumably that would already be factored into your AA [aka you'll decide TIPS should make up X% of your fixed income portion of your AA]. Thus, one doesn't need to be "clever", or even "look" for opportunities. One just needs to create a plan that works and execute the plan. The rest is noise that risks them getting off track.)

[vnatale]

61 y o, $3M, single, no dependents, no debt....you are in great shape. If your lifestyle is not extravagant you can easily retire tomorrow or whenever you get laid off.
Consider a TIPS ladder for a secure inflation protected income stream.
How much of the $3M you want to put into it depends on how much risk you are willing to take and how much SS (or other unmentioned income) you will eventually collect.

My approach is fairly conservative....put everything you cannot afford to lose in a TIPS ladder. That plus SS is what you will mostly live on. Dump the rest in a broad based stock index fund and think of it as your gambling money. Just leave it there and don't give it much thought. That way, barring extreme events, your financial life will be simple and should be worry-free.

Seems like solid, concise advice to me!

[vnatale]

Tips allows one to make that move long in real dollar space. Real rates were over 3% in 2008 which is why I placed a large dollar amount in 2025s. Essentially I decide 3% was good enough.

I'm looking at TIPS right now on Fidelity, but I'm not sure how to interpret all of the information that it is showing me. There's a 30-year TIPS listed with a 1.5% coupon. I understand the coupon. This means that I'll get paid 1.5% of the principal every year, and the principal is adjusted for inflation twice a year. When the TIPS matures, I'll get my inflation-adjusted principal back.

There's also a column for "yield", but I'm not sure exactly how to interpret this. The yield is listed as 2%, and since this greater than 1.5%, I assume that this means that the TIPS is selling at a discount compared to its current principal.

What I don't understand is, does this 2% yield end up being inflation-adjusted too? I.e., will I be getting 2% of my inflation-adjusted purchase price every year for the next 30 years? Or is this 2% yield more ephemeral than that?

It seems to me that if I buy the TIPS at such a discount to its premium, then I would indeed get a 2% inflation-adjusted yield, but it gives me a bit of a headache to think about this.

(I'm not going to buy this, since I don't think that 2% is good enough. But if it were to ever rise to 3%, it might be attractive. Assuming that the 3% actually is an inflation-adjusted return.)

If you want to learn a lot more TIPS:

1) Go here frequently: https://tipswatch.com/2023/09/17/10-yea ... -14-years/

2) Buy this book. Old but still extremely relevant and a short book.

https://www.amazon.com/dp/B08HN9PYGC/?r ... l_huc_item

Explore TIPS: A Practical Guide to Investing in Treasury Inflation-Protected Securities Kindle Edition
by Harry Sit (Author)

[darius42]

If you want to learn a lot more TIPS:

1) Go here frequently: https://tipswatch.com/2023/09/17/10-yea ... -14-years/

2) Buy this book. Old but still extremely relevant and a short book.

https://www.amazon.com/dp/B08HN9PYGC/?r ... l_huc_item

Explore TIPS: A Practical Guide to Investing in Treasury Inflation-Protected Securities Kindle Edition
by Harry Sit (Author)

Thanks for the pointers!

(Apparently, I already bought the Kindle version of the book more than a year and a half ago, but then forgot that I had it.)

[vnatale]

If you want to learn a lot more TIPS:

1) Go here frequently: https://tipswatch.com/2023/09/17/10-yea ... -14-years/

2) Buy this book. Old but still extremely relevant and a short book.

https://www.amazon.com/dp/B08HN9PYGC/?r ... l_huc_item

Explore TIPS: A Practical Guide to Investing in Treasury Inflation-Protected Securities Kindle Edition
by Harry Sit (Author)

Thanks for the pointers!

(Apparently, I already bought the Kindle version of the book more than a year and a half ago, but then forgot that I had it.)

The book is so short that I think I have read it at least two, if not three times, this summer. Fast read. But I do / did want to master all in it as being a big time TIPS owner seems like it may be a path for me to follow. I have never prior owned any in any form.

[darius42]

The book is so short that I think I have read it at least two, if not three times, this summer. Fast read. But I do / did want to master all in it as being a big time TIPS owner seems like it may be a path for me to follow. I have never prior owned any in any form.

Hmm, I wasn't really thinking seriously about TIPS before because I was thinking that I need to be able to spend at least 3% of my capital each year (and have it adjust for inflation), and TIPS are currently only paying a 2% yield right now.

But I just now realized that since I won't live forever, I can also spend down my principal too.

Except then I'll be getting 2% each year on an ever-decreasing amount. And now figuring out how long my principal would last is complicated enough that it's giving me a headache to think about.

I need a TIPS simulator like the Rich, Dead, or Broke simulator....

[dogagility]

I need a TIPS simulator like the Rich, Dead, or Broke simulator....

Think of TIPS the same way as nominal Treasuries, only better... because of the protection against unexpected inflation that nominal Treasuries don't offer.

I'd invest a heavy amount of my fixed income in TIPS at 2% real or a TIPS fund(s) of appropriate duration, if I were you. For an appropriate duration, see this excellent thread on "investment horizon". viewtopic.php?t=340252

I'd also max my I-bond contribution each year.

[vnatale]

I need a TIPS simulator like the Rich, Dead, or Broke simulator....

Think of TIPS the same way as nominal Treasuries, only better... because of the protection against unexpected inflation that nominal Treasuries don't offer.

I'd invest a heavy amount of my fixed income in TIPS at 2% real or a TIPS fund(s) of appropriate duration, if I were you. For an appropriate duration, see this excellent thread on "investment horizon". viewtopic.php?t=340252

I'd also max my I-bond contribution each year.

Which for a single person is $10,000 per year via direct investment plus another $5,000 per year via using a tax refund (though I am only 2-4 on those attempts).

There are some other ways to buy more. Almost certain those methods are covered in some other TIPS topics i this forum.