Winning the game and investing in Fixed Income

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squirrel1963
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Re: Winning the game and investing in Fixed Income

Post by squirrel1963 »

Hebell wrote: Mon Jul 25, 2022 4:46 pm
Fremdon Ferndock wrote: Sat Jul 23, 2022 8:59 am An interesting challenge is what to do with your "spare" savings when you feel you've won the game. I have no problem with putting my winnings into bland, boring, low-returning safe investments; i.e., TIPS, I-Bonds, even some Cash. But what to do with the "surplus" - the money I don't think I'll probably even need to spend, at least not unless I have some catastrophic expenses near end-of-life.

Dr. Bernstein and Zvi Bodie both have said you can keep on playing the game with your "play money" if you want -- or not. I've wrestled with this forever. I like the idea of having a chunk of money in risky assets like stocks that I can afford to lose and still be OK for the rest of my life. But lately, I've been asking myself what the heck I'd do with even more money that I don't really need if I end up winning.

It only makes sense to play if I have some beneficial purpose -- it's going to go to charity, people in need, or my family heirs. I decided that's it's not worth gambling with their money either. As long as I'm playing I can't keep myself from continually fussing with how it's invested and watching the stock market like a hawk. So, I'm moving most of my "play money" into safe, boring stuff also. Just put a large chunk into 5-year and 10-year TIPs at auction. Maybe now I can quit obsessing about the stock market and find something more useful to do with my time.

How about you? What are you other "game winners" doing with your surplus? Going for more winnings in stocks, or pulling it all back into safe stuff like I'm doing?
Our play money is 15% in equities. Consisting of mostly US stocks. High on techs and agricultural stocks (XT and FARMX plus other sector ETFs). I intend to let it just grow, and not mess with it, unless we reach another grossly overvalued period, and then I'll trim off the froth to bring it back down to 15%.
I'm 59 and DW is 50, so in our case we have a potential average retirement of 35 years, which I think is long enough to place the surplus in stocks.

The other option is the following:
Our TIPS ladder funds us until 2052, and the plan is to annuitize the last 10 years worth of rungs to protect from mortality risks. The other option would be to use the excess returns to fund another 10 year worth of rungs, with the idea being the chance that DW and I both make it to 2062 is so ridiculously small that our children will almost for sure get a large chunk of the leftover rungs when we leave for better pastures.
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Re: Winning the game and investing in Fixed Income

Post by Fremdon Ferndock »

squirrel1963 wrote: Mon Jul 25, 2022 4:33 pm
WoodSpinner wrote: Mon Jul 25, 2022 9:36 am
TheTimeLord wrote: Mon Jul 25, 2022 8:53 am
Thanks. As someone who is normally very active in their financial management, it is sort of an odd feeling looking at my accounts this morning and feeling like there is nothing I should be doing.
This feeling is very tricky and can be pernicious if not well managed. For me, this represents one of the more challenging aspects of behavioral finance — the temptation to tinker and optimize.

Thanks for starting this thread — it’s been very helpful since I am also struggling with how to adapt my FI holdings given our current economic circumstances.

WoodSpinner
I am guilty of this myself. Having just retired I've been spending the past few months in consolidating accounts, simplifying things a bit but most of all building the TIPS ladder. The actual number of trades was relatively small but I spent a lot of time planning them. All I can do now is optimize and thinker things, but I myself have to be super careful. I limited myself at front loading I-bonds in the gift box because the plan was to buy I-bonds anyway in the next few years.

I just keeping reminding myself that almost always the best course of action is inaction.
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Re: Winning the game and investing in Fixed Income

Post by GaryA505 »

I'd love to see some sort of a comprehensive evaluation of how the different kinds of fixed income investments, annuities, and cash-value life insurance affect taxation of Social Security over time, when these assets are bought with taxable (i.e. after tax) money. Of course there's also the question of inclusion in FAFSA EFC calculation for college financial aid, if you have college-aged children.

Income from these fixed income sources is taxed in different ways, and affects SS taxation to various degrees. For example:
MUNIs - US tax-free, but added to AGI for calculating taxation of SS. Total asset included in FAFSA EFC.
MYGAs - tax-deferred, not added to AGI for calculating taxation of SS until cashed out (if annuitized, taxed like a SPIA). Not included in FAFSA EFC calculation until cashed out).
SPIA - taxed using exclusion ratio, taxable portion added to AGI for calculating taxation of SS until cashed out. Taxable portion included in FAFSA EFC.
FIA w/IncomeRider - taxed using LIFO, taxable portion added to AGI for calculating taxation of SS. Taxable portion included in FAFSA EFC.
Loans from cash-value life insurance - not taxed, not added to AGI for calculating taxation of SS. Not included in FAFSA EFC.

On online calculator/simulator for this would be awesome!
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Re: Winning the game and investing in Fixed Income

Post by hudson »

Blues wrote: Fri Jul 22, 2022 10:41 am We have what I consider a sufficient amount put away in Treasury notes / bills, brokered CDs, TSP's "G" Fund, Money Markets etc to more than cover 25 years of expenses over and above my federal pension, and (future) social security for my spouse. These accounts all have balances which cannot go down...but which may or may not keep up with inflation. (Inflation is not as big an issue for us as it would be for folks without pensions or social security with some built in inflation protection.)

The next layer is composed of TIPS funds invested in both short and intermediate term. This would be sufficient for roughly five or six years, assuming the value remained intact.

Finally, there is our 33% investment in equity funds.

Bernstein's thoughts, as well as Swedroe's comments on "need, ability, and willingness" to take on additional risk...have been great aids in forming our investment philosophy.

Add to those this comment from Warren Buffett:
...But to make money they didn't have and didn't need, they risked what they did have and did need. That is foolish. That is just plain foolish.
Most of that works for me!
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Re: Winning the game and investing in Fixed Income

Post by hudson »

goodenyou wrote: Sat Jul 23, 2022 8:59 am Is there a withdrawal rate threshold where one would rule-out or reconsider purchasing a SPIA? If you had a 2% SWR and 50% FI, would you buy a SPIA?
Probably not. I would first run the numbers.
To me SPIAs work for those who might come up short. Those who likely have enough might want to keep control of their money.
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Re: Winning the game and investing in Fixed Income

Post by hudson »

Engaging in sloth wrote: Sat Jul 23, 2022 1:11 pm We are retired. We have 33X expenses in fixed income, the rest in equities. Once we both start SS combined with our pensions that will fully cover expenses (and then some)- meaning we probably have way more than 33X expenses in fixed income. However I calculated this figure taking the fixed income each year because of unexpected situations/hardships/health/etc.

I think having a minimum of 20-25X expenses in fixed income as a retiree is very important. I also believe having the rest in equities make sense too. I have no desire for annuities (I realize some folks prefer them- to each his own)
I agree with all of the above although equities give me heartburn.
I don't think a SPIA comes close to working for you.
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Re: Winning the game and investing in Fixed Income

Post by hudson »

TheTimeLord wrote: Thu Jul 07, 2022 10:54 am Looking at my current situation makes me wonder, once you feel you have "won the game" is there any reason to invest in any fixed income instruments other than I-Bonds, TIPS and short duration investments like T-Bills and CDs (for liquidity) so you are only taking risk on the equity side? I assume a SPIA might be a possibility at a certain age.

Edit:
Original post can be read to imply going to 100% Fixed Income, that was not my intention, it was intended to ask that once you feel you have "won the game" why invest any of your Fixed Income allocation in any fixed income instruments other than I-Bonds, TIPS and short duration investments like T-Bills and CDs. Hopefully this clarifies what I was asking.
I don't know that I've won the game; that will only be known in around 20 years...but I figured that I could retire 8 years ago...so that might qualify me?
Any reason to invest in other than ibonds, TIPS and short duration investments?
Yes. Longer duration TIPS and very high quality fixed income products fit my needs.
I'm 74; I'm planning for 96; that's around 22 years. I think if my average duration is 11 years, that would be optimal.
Bottom Line: Longer duration products can work for some.
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Re: Winning the game and investing in Fixed Income

Post by goodenyou »

hudson wrote: Fri Aug 12, 2022 2:02 pm
Engaging in sloth wrote: Sat Jul 23, 2022 1:11 pm We are retired. We have 33X expenses in fixed income, the rest in equities. Once we both start SS combined with our pensions that will fully cover expenses (and then some)- meaning we probably have way more than 33X expenses in fixed income. However I calculated this figure taking the fixed income each year because of unexpected situations/hardships/health/etc.

I think having a minimum of 20-25X expenses in fixed income as a retiree is very important. I also believe having the rest in equities make sense too. I have no desire for annuities (I realize some folks prefer them- to each his own)
I agree with all of the above although equities give me heartburn.
I don't think a SPIA comes close to working for you.
This is what I struggle with. Equities wouldn’t give me heartburn if I had a lifetime guarantee of income that covered most of my expenses. I think I would be inclined to spend more, and I may end with a larger terminal portfolio by letting equities do their thing without being concerned with volatility. I am still working through that. It’s a work in progress.
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Re: Winning the game and investing in Fixed Income

Post by JayB »

Fremdon Ferndock wrote: Sat Jul 23, 2022 8:59 am An interesting challenge is what to do with your "spare" savings when you feel you've won the game...

How about you? What are you other "game winners" doing with your surplus? Going for more winnings in stocks, or pulling it all back into safe stuff like I'm doing?
As noted before, I hold no equities or equity funds; only zero coupon hold-to-maturity bonds plus TIAA Traditional annuities and a smattering of I and EE bonds. I feel that I've won the game in the sense I expect to have a lot of assets left at the end of my financial plan (age 96), no matter what the markets do. However, there is always tail risk, the biggest being that extended LTC costs over many years could exhaust that surplus beyond the limits of my LTC policy benefits. Thus I don't do anything special with the surplus -- just keep rolling over maturing bonds into new long-term ones. At end of life, whatever surplus there is will be donated to a land preservation organization.
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TheTimeLord
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Re: Winning the game and investing in Fixed Income

Post by TheTimeLord »

hudson wrote: Fri Aug 12, 2022 2:10 pm
TheTimeLord wrote: Thu Jul 07, 2022 10:54 am Looking at my current situation makes me wonder, once you feel you have "won the game" is there any reason to invest in any fixed income instruments other than I-Bonds, TIPS and short duration investments like T-Bills and CDs (for liquidity) so you are only taking risk on the equity side? I assume a SPIA might be a possibility at a certain age.

Edit:
Original post can be read to imply going to 100% Fixed Income, that was not my intention, it was intended to ask that once you feel you have "won the game" why invest any of your Fixed Income allocation in any fixed income instruments other than I-Bonds, TIPS and short duration investments like T-Bills and CDs. Hopefully this clarifies what I was asking.
I don't know that I've won the game; that will only be known in around 20 years...but I figured that I could retire 8 years ago...so that might qualify me?
Any reason to invest in other than ibonds, TIPS and short duration investments?
Yes. Longer duration TIPS and very high quality fixed income products fit my needs.
I'm 74; I'm planning for 96; that's around 22 years. I think if my average duration is 11 years, that would be optimal.
Bottom Line: Longer duration products can work for some.
Both TIPS and I-Bonds can be long duration products, I-Bonds have a flexible duration from 1-30 years. The only mention of short duration product was in reference to being available to provide liquidity.
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Re: Winning the game and investing in Fixed Income

Post by GaryA505 »

goodenyou wrote: Fri Aug 12, 2022 3:02 pm
hudson wrote: Fri Aug 12, 2022 2:02 pm
Engaging in sloth wrote: Sat Jul 23, 2022 1:11 pm We are retired. We have 33X expenses in fixed income, the rest in equities. Once we both start SS combined with our pensions that will fully cover expenses (and then some)- meaning we probably have way more than 33X expenses in fixed income. However I calculated this figure taking the fixed income each year because of unexpected situations/hardships/health/etc.

I think having a minimum of 20-25X expenses in fixed income as a retiree is very important. I also believe having the rest in equities make sense too. I have no desire for annuities (I realize some folks prefer them- to each his own)
I agree with all of the above although equities give me heartburn.
I don't think a SPIA comes close to working for you.
This is what I struggle with. Equities wouldn’t give me heartburn if I had a lifetime guarantee of income that covered most of my expenses. I think I would be inclined to spend more, and I may end with a larger terminal portfolio by letting equities do their thing without being concerned with volatility. I am still working through that. It’s a work in progress.
Wade Pfau talks about this a lot. It can be a behavioral thing. People who don't have a lifetime income guarantee that covers all their expenses may spend assets too conservatively to make sure they don't "run out of money". Consequently, in being extra "safe", they may end up with a larger balance at death than they intended. Now, if you know your basic expenses are covered by fixed income, you may be able tolerate the volatility of a higher allocation to equities in your other assets. Dr. Pfau claims that this can result in a better overall outcome than holding a stock/bond portfolio and using a 4% (inflation adjusted) withdrawal rate. As a person that worked my way out of poverty, I understand the behavioral issue.
Get most of it right and don't make any big mistakes. All else being equal, simpler is better. Simple is as simple does.
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Re: Winning the game and investing in Fixed Income

Post by hudson »

TheTimeLord,
Then we see eye to eye!
I like longer nominals and longer TIPS...again matched for my duration.
I like nominals that will give me guaranteed income and TIPS for inflation protection.
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Re: Winning the game and investing in Fixed Income

Post by Engaging in sloth »

Engaging in sloth wrote: Sat Jul 23, 2022 1:11 pm We are retired. We have 33X expenses in fixed income, the rest in equities. Once we both start SS combined with our pensions that will fully cover expenses (and then some)- meaning we probably have way more than 33X expenses in fixed income. However I calculated this figure taking the fixed income each year because of unexpected situations/hardships/health/etc.

I think having a minimum of 20-25X expenses in fixed income as a retiree is very important. I also believe having the rest in equities make sense too. I have no desire for annuities (I realize some folks prefer them- to each his own)
I apologize: I meant to write that I believe having a minimum of 20-25X yrs in estimated expenses in fixed income as a retiree is very important
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Re: Winning the game and investing in Fixed Income

Post by hudson »

JayB wrote: Fri Aug 12, 2022 3:19 pm
Fremdon Ferndock wrote: Sat Jul 23, 2022 8:59 am An interesting challenge is what to do with your "spare" savings when you feel you've won the game...

How about you? What are you other "game winners" doing with your surplus? Going for more winnings in stocks, or pulling it all back into safe stuff like I'm doing?
As noted before, I hold no equities or equity funds; only zero coupon hold-to-maturity bonds plus TIAA Traditional annuities and a smattering of I and EE bonds. I feel that I've won the game in the sense I expect to have a lot of assets left at the end of my financial plan (age 96), no matter what the markets do. However, there is always tail risk, the biggest being that extended LTC costs over many years could exhaust that surplus beyond the limits of my LTC policy benefits. Thus I don't do anything special with the surplus -- just keep rolling over maturing bonds into new long-term ones. At end of life, whatever surplus there is will be donated to a land preservation organization.
JayB
no equities...that fits me since 2008
long long term care is a risk for me; I'm self insured
assets left at the end of my financial plan? I hope there's some left for survivors!
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Re: Winning the game and investing in Fixed Income

Post by squirrel1963 »

hudson wrote: Fri Aug 12, 2022 1:59 pm
goodenyou wrote: Sat Jul 23, 2022 8:59 am Is there a withdrawal rate threshold where one would rule-out or reconsider purchasing a SPIA? If you had a 2% SWR and 50% FI, would you buy a SPIA?
Probably not. I would first run the numbers.
To me SPIAs work for those who might come up short. Those who likely have enough might want to keep control of their money.
TIPS & I-bonds + SSA benefits have us well covered for 30 years, and we really need very little from the equity portion, even 0% real return would work for us.
I'm 59 and DW is 50, so we have a very long time (15 years?) before I would even consider a SPIA.
Perhaps one good reason we would do it is behavioral, to protect against making bad decisions at old age and for peace of mind given my wife will almost certainly outlive me and has no interest in finance.
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Re: Winning the game and investing in Fixed Income

Post by JayB »

hudson wrote: Fri Aug 12, 2022 4:10 pm
JayB wrote: Fri Aug 12, 2022 3:19 pm
Fremdon Ferndock wrote: Sat Jul 23, 2022 8:59 am An interesting challenge is what to do with your "spare" savings when you feel you've won the game...

How about you? What are you other "game winners" doing with your surplus? Going for more winnings in stocks, or pulling it all back into safe stuff like I'm doing?
As noted before, I hold no equities or equity funds; only zero coupon hold-to-maturity bonds plus TIAA Traditional annuities and a smattering of I and EE bonds. I feel that I've won the game in the sense I expect to have a lot of assets left at the end of my financial plan (age 96), no matter what the markets do. However, there is always tail risk, the biggest being that extended LTC costs over many years could exhaust that surplus beyond the limits of my LTC policy benefits. Thus I don't do anything special with the surplus -- just keep rolling over maturing bonds into new long-term ones. At end of life, whatever surplus there is will be donated to a land preservation organization.
JayB
no equities...that fits me since 2008
long long term care is a risk for me; I'm self insured
assets left at the end of my financial plan? I hope there's some left for survivors!
Hudson,
We must be two of the very few on BH without equities. I'd love to hear from others similarly situated. After winning the game, some people dial up their ownership of equities, others like me dial down unneeded risk and volatility.
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Re: Winning the game and investing in Fixed Income

Post by squirrel1963 »

JayB wrote: Fri Aug 12, 2022 6:29 pm
hudson wrote: Fri Aug 12, 2022 4:10 pm
JayB wrote: Fri Aug 12, 2022 3:19 pm
Fremdon Ferndock wrote: Sat Jul 23, 2022 8:59 am An interesting challenge is what to do with your "spare" savings when you feel you've won the game...

How about you? What are you other "game winners" doing with your surplus? Going for more winnings in stocks, or pulling it all back into safe stuff like I'm doing?
As noted before, I hold no equities or equity funds; only zero coupon hold-to-maturity bonds plus TIAA Traditional annuities and a smattering of I and EE bonds. I feel that I've won the game in the sense I expect to have a lot of assets left at the end of my financial plan (age 96), no matter what the markets do. However, there is always tail risk, the biggest being that extended LTC costs over many years could exhaust that surplus beyond the limits of my LTC policy benefits. Thus I don't do anything special with the surplus -- just keep rolling over maturing bonds into new long-term ones. At end of life, whatever surplus there is will be donated to a land preservation organization.
JayB
no equities...that fits me since 2008
long long term care is a risk for me; I'm self insured
assets left at the end of my financial plan? I hope there's some left for survivors!
Hudson,
We must be two of the very few on BH without equities. I'd love to hear from others similarly situated. After winning the game, some people dial up their ownership of equities, others like me dial down unneeded risk and volatility.
The two of you are definitely not the only one, although probably not common. I've been tempted myself to go 100% TIPS but decided against and I actually upped my equity portion once I went above 40X and having 35X in TIPS and I-bonds.
I still keep thinking about it thought.
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Re: Winning the game and investing in Fixed Income

Post by JayB »

squirrel1963 wrote: Fri Aug 12, 2022 6:55 pm The two of you are definitely not the only one, although probably not common. I've been tempted myself to go 100% TIPS but decided against and I actually upped my equity portion once I went above 40X and having 35X in TIPS and I-bonds.
I still keep thinking about it thought.
It's good to be clear about why you are still in equities, especially given your impressive 40X. And ask if having equities contributes to your peace of mind and ability to sleep well. Owning equities is a lot more than about possibly building wealth. For some people, it's also exciting, for others, it gives a powerful sense of connection with others (such as those on BH), gives something to hope for (i.e., a big payday), and/or addresses the irrational belief that a portfolio MUST beat inflation (no matter how large it is).
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Re: Winning the game and investing in Fixed Income

Post by GaryA505 »

When people says they have 20x or 30x of expenses, is that their base (minimal) expenses or total spending?
Get most of it right and don't make any big mistakes. All else being equal, simpler is better. Simple is as simple does.
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Re: Winning the game and investing in Fixed Income

Post by goodenyou »

GaryA505 wrote: Fri Aug 12, 2022 4:04 pm
goodenyou wrote: Fri Aug 12, 2022 3:02 pm
hudson wrote: Fri Aug 12, 2022 2:02 pm
Engaging in sloth wrote: Sat Jul 23, 2022 1:11 pm We are retired. We have 33X expenses in fixed income, the rest in equities. Once we both start SS combined with our pensions that will fully cover expenses (and then some)- meaning we probably have way more than 33X expenses in fixed income. However I calculated this figure taking the fixed income each year because of unexpected situations/hardships/health/etc.

I think having a minimum of 20-25X expenses in fixed income as a retiree is very important. I also believe having the rest in equities make sense too. I have no desire for annuities (I realize some folks prefer them- to each his own)
I agree with all of the above although equities give me heartburn.
I don't think a SPIA comes close to working for you.
This is what I struggle with. Equities wouldn’t give me heartburn if I had a lifetime guarantee of income that covered most of my expenses. I think I would be inclined to spend more, and I may end with a larger terminal portfolio by letting equities do their thing without being concerned with volatility. I am still working through that. It’s a work in progress.
Wade Pfau talks about this a lot. It can be a behavioral thing. People who don't have a lifetime income guarantee that covers all their expenses may spend assets too conservatively to make sure they don't "run out of money". Consequently, in being extra "safe", they may end up with a larger balance at death than they intended. Now, if you know your basic expenses are covered by fixed income, you may be able tolerate the volatility of a higher allocation to equities in your other assets. Dr. Pfau claims that this can result in a better overall outcome than holding a stock/bond portfolio and using a 4% (inflation adjusted) withdrawal rate. As a person that worked my way out of poverty, I understand the behavioral issue.
He sure has and I have read all his books. Age has a way of changing your perspective. Simplicity and security look more attractive when considering the inevitable cognitive decline and handing off the responsibilities to someone who has no interest in managing money.
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Re: Winning the game and investing in Fixed Income

Post by squirrel1963 »

JayB wrote: Fri Aug 12, 2022 7:35 pm
squirrel1963 wrote: Fri Aug 12, 2022 6:55 pm The two of you are definitely not the only one, although probably not common. I've been tempted myself to go 100% TIPS but decided against and I actually upped my equity portion once I went above 40X and having 35X in TIPS and I-bonds.
I still keep thinking about it thought.
It's good to be clear about why you are still in equities, especially given your impressive 40X. And ask if having equities contributes to your peace of mind and ability to sleep well. Owning equities is a lot more than about possibly building wealth. For some people, it's also exciting, for others, it gives a powerful sense of connection with others (such as those on BH), gives something to hope for (i.e., a big payday), and/or addresses the irrational belief that a portfolio MUST beat inflation (no matter how large it is).
What you say is absolutely right.
I don't really have expectations for the stock portfolio, sorry maybe I should have phrased it better. The TIPS ladder + I-bonds provides for floor income for necessities and some reasonable discretionary spending (including vacation to Europe which is very cheap for us given we have family and friends over there). If do end up in getting 0% real return we might spend some of the stock portion but we don't have to. I just set 0% real return as an arbitrary threshold. We also have two daughters, so if we get really lucky they'll get to spend what is left after we pass away. So I guess our motives are some luxuries like around the world cruises, travel to polar regions and bequest.
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Re: Winning the game and investing in Fixed Income

Post by squirrel1963 »

GaryA505 wrote: Fri Aug 12, 2022 7:52 pm When people says they have 20x or 30x of expenses, is that their base (minimal) expenses or total spending?
1x to me means the average spending we had since 2015, which is not much more than normal living expenses (assuming house fully paid) plus some domestic travel and one trip to Europe a year, which is very cheap to us because we have family there (so basically just the cost of airfare, as everything else is cheaper than here).
It's not a constant number in 2022 dollars because we have to fully fund ourselves until social security arrives in 11 years, but it is constant once accounting SSA benefits.
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Re: Winning the game and investing in Fixed Income

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Re: Winning the game and investing in Fixed Income

Post by AnnetteLouisan »

GaryA505 wrote: Fri Aug 12, 2022 7:52 pm When people says they have 20x or 30x of expenses, is that their base (minimal) expenses or total spending?
My understanding is it’s your residual spending need in retirement, i.e., the amount not covered by pension, social security or other known and definite income source. Where I get hung up is that x, for many of us, will increase over time in retirement: it’s not static (and pensions and ss can be reduced or taxed more). Maybe that’s a renter’s mind-set, or reflects that my formative years were in a period of relatively high inflation.
Last edited by AnnetteLouisan on Sat Aug 13, 2022 7:18 am, edited 1 time in total.
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Re: Winning the game and investing in Fixed Income

Post by vineviz »

AnnetteLouisan wrote: Sat Aug 13, 2022 6:33 am
GaryA505 wrote: Fri Aug 12, 2022 7:52 pm When people says they have 20x or 30x of expenses, is that their base (minimal) expenses or total spending?
My understanding is it’s your residual spending need in retirement, i.e., the amount not covered by pension, social security or other known and definite income source.
I agree that this is the number that SHOULD be used, though it's not clear to me that "most people" on this forum always use the proper base.
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Re: Winning the game and investing in Fixed Income

Post by AnnetteLouisan »

vineviz wrote: Sat Aug 13, 2022 7:11 am
AnnetteLouisan wrote: Sat Aug 13, 2022 6:33 am
GaryA505 wrote: Fri Aug 12, 2022 7:52 pm When people says they have 20x or 30x of expenses, is that their base (minimal) expenses or total spending?
My understanding is it’s your residual spending need in retirement, i.e., the amount not covered by pension, social security or other known and definite income source.
I agree that this is the number that SHOULD be used, though it's not clear to me that "most people" on this forum always use the proper base.
I spend $38k a year (lockdown), $45k normally, $75k was my lifetime max. All figures exclude taxes. Cola’d Pension and ss should cover most of that if my expenses are $75k in retirement.

But I spent $58k one holiday weekend in the hospital. Insurance covered 99 percent of it but it’s expenses of that kind that tend to increase as one ages. My housing costs went up over $500/mo this year.

So my X would be…?

A. 10k
B. 75k
C. $75k+$58k+expected taxes
D. Projected assisted living costs in my location
E. Other

I use $75k as my expected annual spend in retirement but I really have no idea.

But to keep it on topic, I haven’t won the game and I have realized the glory of and accepted equities into my life despite being from a fixed income background.
Last edited by AnnetteLouisan on Sat Aug 13, 2022 9:04 am, edited 1 time in total.
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Re: Winning the game and investing in Fixed Income

Post by goodenyou »

vineviz wrote: Sat Aug 13, 2022 7:11 am
AnnetteLouisan wrote: Sat Aug 13, 2022 6:33 am
GaryA505 wrote: Fri Aug 12, 2022 7:52 pm When people says they have 20x or 30x of expenses, is that their base (minimal) expenses or total spending?
My understanding is it’s your residual spending need in retirement, i.e., the amount not covered by pension, social security or other known and definite income source.
I agree that this is the number that SHOULD be used, though it's not clear to me that "most people" on this forum always use the proper base.
It appears that many people are conditioned to believe that Social Security is poorly managed and at the whim of elected officials. The uncertainty drives investors to dismiss it as “definite” income source. I believe it is pervasive on this forum. It leads to an overestimate of spending needs.
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Re: Winning the game and investing in Fixed Income

Post by Blues »

hudson wrote: Fri Aug 12, 2022 1:56 pm
Blues wrote: Fri Jul 22, 2022 10:41 am We have what I consider a sufficient amount put away in Treasury notes / bills, brokered CDs, TSP's "G" Fund, Money Markets etc to more than cover 25 years of expenses over and above my federal pension, and (future) social security for my spouse. These accounts all have balances which cannot go down...but which may or may not keep up with inflation. (Inflation is not as big an issue for us as it would be for folks without pensions or social security with some built in inflation protection.)

The next layer is composed of TIPS funds invested in both short and intermediate term. This would be sufficient for roughly five or six years, assuming the value remained intact.

Finally, there is our 33% investment in equity funds.

Bernstein's thoughts, as well as Swedroe's comments on "need, ability, and willingness" to take on additional risk...have been great aids in forming our investment philosophy.

Add to those this comment from Warren Buffett:
...But to make money they didn't have and didn't need, they risked what they did have and did need. That is foolish. That is just plain foolish.
Most of that works for me!
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Appreciate the feedback.
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Re: Winning the game and investing in Fixed Income

Post by AnnetteLouisan »

That Warren Buffet quote is very profound.
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Re: Winning the game and investing in Fixed Income

Post by dbr »

Two points:

1. X has nothing to do with spending as such. X has to do with how much one intends to withdraw from one's portfolio over time and the answer affects how long the portfolio might last or how large or how small it will be at the end. 25X is nothing more than the observations made about what happens to a portfolio where withdrawals are 4% inflation adjusted of the initial value: 1/.04=25. 25X is frequently just parroting something that was not understood from the get-go.

2. But, financial planning does indeed require figuring out how to find income to support one's spending. Making a reasonable estimate of what one might spend in the different years of retirement is not completely simple. There is a lot to figure out and the amount will vary randomly year by year and probably also systematically over time. You do the best you can to come up with likely numbers and go from there. Many planning programs allow some expenses to start or stop at different times, and one can run a plan with a possible contingency expense allowed to see what might happen. One can also plan with a best estimate, a low estimate, and a high estimate.

Also, because the concept arises from understanding what portfolios do under withdrawal, one can take the "spending" as an allowance and understand that one is going to have to live within that allowance. It is also true that the 4% observation is taken by worst case analysis and that in reality one will not likely get the worst case. So the retiree has to understand that outcomes can be uncertain and be prepared to deal with it.

25x is probably an illustration of the stupidity of investing by rules of thumb without understanding where they come from, at least it is stupidity if one does not understand where it comes from. If one does understand that number then it can be used as far as it goes as a rough planning estimate.
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Re: Winning the game and investing in Fixed Income

Post by hudson »

AnnetteLouisan wrote: Sat Aug 13, 2022 9:09 am That Warren Buffet quote is very profound.
Larry Swedroe said almost the same thing in April 2012: "First, if have no need to take risk, don't. Rule number one of investing. Also Rule 2 and 3.

viewtopic.php?p=1372822#p1372822
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Re: Winning the game and investing in Fixed Income

Post by Blues »

hudson wrote: Sat Aug 13, 2022 9:34 am
AnnetteLouisan wrote: Sat Aug 13, 2022 9:09 am That Warren Buffet quote is very profound.
Larry Swedroe said almost the same thing in April 2012: "First, if have no need to take risk, don't. Rule number one of investing. Also Rule 2 and 3.

viewtopic.php?p=1372822#p1372822
Yep. Swedroe and Bernstein have helped me immeasurably with focusing and tightening up both our investment philosophy and portfolio.

And I must add that recently I've received some excellent insights from both vineviz and grabiner.

The value of the contributions from this site cannot be overstated. (At least, imho.) :beer
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Re: Winning the game and investing in Fixed Income

Post by GaryA505 »

I'm starting to think X doesn't have much value in retirement income planning, but I could be wrong. :wink:
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Re: Winning the game and investing in Fixed Income

Post by squirrel1963 »

goodenyou wrote: Sat Aug 13, 2022 9:01 am
vineviz wrote: Sat Aug 13, 2022 7:11 am
AnnetteLouisan wrote: Sat Aug 13, 2022 6:33 am
GaryA505 wrote: Fri Aug 12, 2022 7:52 pm When people says they have 20x or 30x of expenses, is that their base (minimal) expenses or total spending?
My understanding is it’s your residual spending need in retirement, i.e., the amount not covered by pension, social security or other known and definite income source.
I agree that this is the number that SHOULD be used, though it's not clear to me that "most people" on this forum always use the proper base.
It appears that many people are conditioned to believe that Social Security is poorly managed and at the whim of elected officials. The uncertainty drives investors to dismiss it as “definite” income source. I believe it is pervasive on this forum. It leads to an overestimate of spending needs.
My SS benefits begin in 11 years and DW will probably begin in 13 years, I've accounted for them but only at 70% of expected benefits.
As a side note I find it really dangerous that young kids (like many of my former coworkers) in their 30s think SS won't be there for them, I keep telling them it's their right, so vote for politicians which will uphold this part of the social contract.
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Re: Winning the game and investing in Fixed Income

Post by seajay »

hudson wrote: Sat Aug 13, 2022 9:34 am
AnnetteLouisan wrote: Sat Aug 13, 2022 9:09 am That Warren Buffet quote is very profound.
Larry Swedroe said almost the same thing in April 2012: "First, if have no need to take risk, don't. Rule number one of investing. Also Rule 2 and 3.

viewtopic.php?p=1372822#p1372822
But nothing is risk-free. The best we might do is to diversify to avoid the high risk of over-concentration.

Inflation bonds backed by the state tend to be lower yield in being sold as being risk-free, but push come to shove can turn out not to have been risk-free. Over-concentration risk is a major risk.

Lending to someone who can direct inflation (print/spend - that devalues all other notes in circulation), change interest rates, change taxation rates, change the rules ... and you're lending to someone who can manipulate things so as to appear to have never defaulted, whilst having at least partially defaulted via one means or another. All fiat currencies sooner or later default via one means or another, but can paint pictures where no such (albeit partial) default occurred.

UK equivalent of iBonds were withdrawn from new issues/sales following the 2009 financial crisis. Taxation rules can be changed such that when inflation is 20%, inflation bonds paying 20% might be taxed at 25%, resulting in -5% net real ...etc. And such changes tend to occur at the worst possible time, just when you needed the protection the most, as the drivers of that need may also be affecting tax revenues/broad-economy.

When the US$ stepped up to take over from gold that was by common agreement and on the promise that the US would act responsibly as it gave the US the capacity to control flows, export inflation onto others. As that trust has faded over time the common argument is TINA, there is no alternative - to the likes of all clearance flowing through the US no matter where those transactions may occur, such that the US could (and at times has) suspend transactions. As of present over a billion China population, along with over another billion India population, along with Russia, S America, and more recently continental Africa, as well as Arabia ...etc. are all inclined to look elsewhere than the US dollar. Whilst there's no common agreement, no current viable alternative - one could be formed sooner or later, where a very large chunk of the global population utilize alternative(s). Likely wont be critical to the US, but will likely involve invoking some kind of partial defaults one way or another. Nothing new, just repeats of former Spanish, British, French ...etc. "empire" collapses. Whether such changes occur in ones own particular 30/whatever year investment/drawdown lifetime ??? Going all-in that it wont is a big bold (concentrated) bet.
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Re: Winning the game and investing in Fixed Income

Post by squirrel1963 »

AnnetteLouisan wrote: Sat Aug 13, 2022 7:35 am
vineviz wrote: Sat Aug 13, 2022 7:11 am
AnnetteLouisan wrote: Sat Aug 13, 2022 6:33 am
GaryA505 wrote: Fri Aug 12, 2022 7:52 pm When people says they have 20x or 30x of expenses, is that their base (minimal) expenses or total spending?
My understanding is it’s your residual spending need in retirement, i.e., the amount not covered by pension, social security or other known and definite income source.
I agree that this is the number that SHOULD be used, though it's not clear to me that "most people" on this forum always use the proper base.
I spend $38k a year (lockdown), $45k normally, $75k was my lifetime max. All figures exclude taxes. Cola’d Pension and ss should cover most of that if my expenses are $75k in retirement.

But I spent $58k one holiday weekend in the hospital. Insurance covered 99 percent of it but it’s expenses of that kind that tend to increase as one ages. My housing costs went up over $500/mo this year.

So my X would be…?

A. 10k
B. 75k
C. $75k+$58k+expected taxes
D. Projected assisted living costs in my location
E. Other

I use $75k as my expected annual spend in retirement but I really have no idea.

But to keep it on topic, I haven’t won the game and I have realized the glory of and accepted equities into my life despite being from a fixed income background.
We used the average spending 2015-2018 as a baseline, thus excluding covid years.
So if you spent $45k, $45k, $75k, $45k during this interval for instance, I'd do the average = $52.5k, and then account for taxes as well, so if they are $5k add up to $57.5k.
If pensions and SS cover that than congratulations, you only need to fund the retirement years before SS and pensions kick in.
So X is not a static number but changes quite a bit before and during SS. In our case since I'm 59 and DW is 50 we also had to take the pre-medicare insurance costs into account.
For housing we took only property taxes into account as we own the home, that's usually the case for most BH but in your case it seems you are renting. That would be my greatest concern.
Studies indicate that most retirees actually tend to spend more during early years and less as they age, so I'm not overly concerned about LTC costs.
Of course you can never predict the future so we padded X quite a bit.

So in short X is more of an art than science, but I think it's something that needs to be calculated one way or another in order to do retirement calculations. Of course one needs to be flexible and adjust their spending if needed.
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Re: Winning the game and investing in Fixed Income

Post by Blues »

squirrel1963 wrote: Sat Aug 13, 2022 12:10 pm
So in short X is more of an art than science, but I think it's something that needs to be calculated one way or another in order to do retirement calculations. Of course one needs to be flexible and adjust their spending if needed.
I agree. In our case, I used a number which was significantly higher than what I would expect our needs could be beyond pension / social security and figured for a minimum of 30 years. (I'm just shy of 70, the missus a few years behind.)

Belt and suspenders planning, I suppose...but it was sort of ingrained in my upbringing, so it's hard to break the habit. (Probably not all that unusual for baby boomers who were the children of those raised during the Depression.)
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Re: Winning the game and investing in Fixed Income

Post by goodenyou »

squirrel1963 wrote: Sat Aug 13, 2022 11:56 am
goodenyou wrote: Sat Aug 13, 2022 9:01 am
vineviz wrote: Sat Aug 13, 2022 7:11 am
AnnetteLouisan wrote: Sat Aug 13, 2022 6:33 am
GaryA505 wrote: Fri Aug 12, 2022 7:52 pm When people says they have 20x or 30x of expenses, is that their base (minimal) expenses or total spending?
My understanding is it’s your residual spending need in retirement, i.e., the amount not covered by pension, social security or other known and definite income source.
I agree that this is the number that SHOULD be used, though it's not clear to me that "most people" on this forum always use the proper base.
It appears that many people are conditioned to believe that Social Security is poorly managed and at the whim of elected officials. The uncertainty drives investors to dismiss it as “definite” income source. I believe it is pervasive on this forum. It leads to an overestimate of spending needs.
My SS benefits begin in 11 years and DW will probably begin in 13 years, I've accounted for them but only at 70% of expected benefits.
As a side note I find it really dangerous that young kids (like many of my former coworkers) in their 30s think SS won't be there for them, I keep telling them it's their right, so vote for politicians which will uphold this part of the social contract.
I will claim in about 13 years as well. I sure hope that the 35 years of contributing the maximum tax will not devolve into a retroactive tax. People on this forum are inclined to control what they can control, and Social Security is definitely not run as responsibly as many BH Members manage their own money. But, Bogleheads aren't fortunate enough to be able to run a money printing press as part of their retirement strategy. The strategy is to plan for an under promise and hope for an over deliver on their Social Security benefits. For those of us in our 50s, it will reach peak SNAFU at the time of retirement, if nothing is done before. It's an unknown.
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Re: Winning the game and investing in Fixed Income

Post by TheTimeLord »

Blues wrote: Sat Aug 13, 2022 12:21 pm
squirrel1963 wrote: Sat Aug 13, 2022 12:10 pm
So in short X is more of an art than science, but I think it's something that needs to be calculated one way or another in order to do retirement calculations. Of course one needs to be flexible and adjust their spending if needed.
I agree. In our case, I used a number which was significantly higher than what I would expect our needs could be beyond pension / social security and figured for a minimum of 30 years. (I'm just shy of 70, the missus a few years behind.)

Belt and suspenders planning, I suppose...but it was sort of ingrained in my upbringing, so it's hard to break the habit. (Probably not all that unusual for baby boomers who were the children of those raised during the Depression.)
Personally, I find planning easier with an X than without, especially if I am trying to liability match.
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Re: Winning the game and investing in Fixed Income

Post by Itster »

squirrel1963 wrote: Sat Aug 13, 2022 12:10 pm
AnnetteLouisan wrote: Sat Aug 13, 2022 7:35 am
vineviz wrote: Sat Aug 13, 2022 7:11 am
AnnetteLouisan wrote: Sat Aug 13, 2022 6:33 am
GaryA505 wrote: Fri Aug 12, 2022 7:52 pm When people says they have 20x or 30x of expenses, is that their base (minimal) expenses or total spending?
My understanding is it’s your residual spending need in retirement, i.e., the amount not covered by pension, social security or other known and definite income source.
I agree that this is the number that SHOULD be used, though it's not clear to me that "most people" on this forum always use the proper base.
I spend $38k a year (lockdown), $45k normally, $75k was my lifetime max. All figures exclude taxes. Cola’d Pension and ss should cover most of that if my expenses are $75k in retirement.

But I spent $58k one holiday weekend in the hospital. Insurance covered 99 percent of it but it’s expenses of that kind that tend to increase as one ages. My housing costs went up over $500/mo this year.

So my X would be…?

A. 10k
B. 75k
C. $75k+$58k+expected taxes
D. Projected assisted living costs in my location
E. Other

I use $75k as my expected annual spend in retirement but I really have no idea.

But to keep it on topic, I haven’t won the game and I have realized the glory of and accepted equities into my life despite being from a fixed income background.
We used the average spending 2015-2018 as a baseline, thus excluding covid years.
So if you spent $45k, $45k, $75k, $45k during this interval for instance, I'd do the average = $52.5k, and then account for taxes as well, so if they are $5k add up to $57.5k.
If pensions and SS cover that than congratulations, you only need to fund the retirement years before SS and pensions kick in.
So X is not a static number but changes quite a bit before and during SS. In our case since I'm 59 and DW is 50 we also had to take the pre-medicare insurance costs into account.
For housing we took only property taxes into account as we own the home, that's usually the case for most BH but in your case it seems you are renting. That would be my greatest concern.
Studies indicate that most retirees actually tend to spend more during early years and less as they age, so I'm not overly concerned about LTC costs.
Of course you can never predict the future so we padded X quite a bit.

So in short X is more of an art than science, but I think it's something that needs to be calculated one way or another in order to do retirement calculations. Of course one needs to be flexible and adjust their spending if needed.
This discussion has been very helpful for me as well. My situation seems fairly close to AnnetteLouisan expense-wise. My SS and pension should cover a decent portion of expenses, but I simply got a very late start with retirement savings for various reasons. So I do worry about having to rely on the SS/pension coverage so much, but it is what it is. I probably would have enough to bridge, however, provided no nasty surprises between now and then. But then it's those surprises that need to be accounted for.
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Re: Winning the game and investing in Fixed Income

Post by hudson »

seajay wrote: Sat Aug 13, 2022 12:10 pm
hudson wrote: Sat Aug 13, 2022 9:34 am
AnnetteLouisan wrote: Sat Aug 13, 2022 9:09 am That Warren Buffet quote is very profound.
Larry Swedroe said almost the same thing in April 2012: "First, if have no need to take risk, don't. Rule number one of investing. Also Rule 2 and 3.

viewtopic.php?p=1372822#p1372822
But nothing is risk-free. The best we might do is to diversify to avoid the high risk of over-concentration.

Inflation bonds backed by the state tend to be lower yield in being sold as being risk-free, but push come to shove can turn out not to have been risk-free. Over-concentration risk is a major risk.
Thanks seajay!
My future plan (Feb. 2024) may be over concentrating.
It will likely be:
50% TIPS for inflation protection
50% CDs or nominal treasuries for guaranteed income
stocks give me heartburn.

How would you spread things out and maintain safety?
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Re: Winning the game and investing in Fixed Income

Post by Blues »

hudson wrote: Sun Aug 14, 2022 7:57 am
seajay wrote: Sat Aug 13, 2022 12:10 pm
hudson wrote: Sat Aug 13, 2022 9:34 am
AnnetteLouisan wrote: Sat Aug 13, 2022 9:09 am That Warren Buffet quote is very profound.
Larry Swedroe said almost the same thing in April 2012: "First, if have no need to take risk, don't. Rule number one of investing. Also Rule 2 and 3.

viewtopic.php?p=1372822#p1372822
But nothing is risk-free. The best we might do is to diversify to avoid the high risk of over-concentration.

Inflation bonds backed by the state tend to be lower yield in being sold as being risk-free, but push come to shove can turn out not to have been risk-free. Over-concentration risk is a major risk.
Thanks seajay!
My future plan (Feb. 2024) may be over concentrating.
It will likely be:
50% TIPS for inflation protection
50% CDs or nominal treasuries for guaranteed income
stocks give me heartburn.

How would you spread things out and maintain safety?
Heartburn aside, would you consider a 20 to 25% stake in equities? I think that might be prudent. (Apologies...if you only intended for a reply from seajay.)
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Re: Winning the game and investing in Fixed Income

Post by hudson »

Blues wrote: Sun Aug 14, 2022 8:02 am
hudson wrote: Sun Aug 14, 2022 7:57 am
seajay wrote: Sat Aug 13, 2022 12:10 pm
hudson wrote: Sat Aug 13, 2022 9:34 am
AnnetteLouisan wrote: Sat Aug 13, 2022 9:09 am That Warren Buffet quote is very profound.
Larry Swedroe said almost the same thing in April 2012: "First, if have no need to take risk, don't. Rule number one of investing. Also Rule 2 and 3.

viewtopic.php?p=1372822#p1372822
But nothing is risk-free. The best we might do is to diversify to avoid the high risk of over-concentration.

Inflation bonds backed by the state tend to be lower yield in being sold as being risk-free, but push come to shove can turn out not to have been risk-free. Over-concentration risk is a major risk.
Thanks seajay!
My future plan (Feb. 2024) may be over concentrating.
It will likely be:
50% TIPS for inflation protection
50% CDs or nominal treasuries for guaranteed income
stocks give me heartburn.

How would you spread things out and maintain safety?
Heartburn aside, would you consider a 20 to 25% stake in equities? I think that might be prudent. (Apologies...if you only intended for a reply from seajay.)
Thanks Blues!
I agree that that would be prudent and it would be the standard Boglehead recommendation.
I have considered that, but it doesn't pass my sleep test.
The chances of me buying even one stock ETF are very low.
Would I recommend 100% fixed for anyone? no way. I would recommend that one read Boglehead book, the forum, and take the sleep test. 100% stocks and 100% fixed can work for some; it depends.
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Re: Winning the game and investing in Fixed Income

Post by Blues »

Well, in that case, I guess if you have "enough" set aside in fixed income, that combined with your other "guaranteed" sources of income provide a comfortable cushion for foreseeable events...then its doable.

I think that for our chosen lifestyle we could probably get away with it, but I still try to keep somewhere between 25 and 35% invested in equities...even if we don't expressly require it. There are several different ways of looking at, and rationalizing it. Perhaps over time I'll pare down that percentage...or just let it run. I vacillate between those two poles.

:sharebeer
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Re: Winning the game and investing in Fixed Income

Post by dbr »

I think it might be good to put that Swedroe quote in context by suggesting that almost everyone MIGHT NEED to take that 25% stock allocation risk.

It can happen, of course, that a person with enough money can go all bonds. In FireCalc (which does not use TIPS in the data), portfolios down to around 30% in stocks tend to replicate the 4% observation about portfolio withdrawals, but a 100% bond portfolio sees that drop to 2.8% and then best with long bonds. That is one way to put some numbers on the question of need.
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Re: Winning the game and investing in Fixed Income

Post by hudson »

dbr wrote: Sun Aug 14, 2022 9:12 am I think it might be good to put that Swedroe quote in context by suggesting that almost everyone MIGHT NEED to take that 25% stock allocation risk.

It can happen, of course, that a person with enough money can go all bonds. In FireCalc (which does not use TIPS in the data), portfolios down to around 30% in stocks tend to replicate the 4% observation about portfolio withdrawals, but a 100% bond portfolio sees that drop to 2.8% and then best with long bonds. That is one way to put some numbers on the question of need.
I agree. It just doesn't work for me because I'm a scaredy-cat.
Larry probably put exactly that in one of his books.

In his book The Good, the Flawed, the Bad, and the Ugly https://www.amazon.com/Only-Guide-Alter ... 1576603105, he did give at least one other option:

viewtopic.php?p=23364#p23364
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Blues
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Re: Winning the game and investing in Fixed Income

Post by Blues »

The interesting thing about the concept of "winning the game" is how different "winning the game" is for different investors...depending upon their chosen lifestyles and the various other individual facets which may enter into determining the bottom line.

I'm sure our ceiling wouldn't even be considered the floor for many, and yet it seems remarkable to us that given our current positioning and lifestyle, we should never (foreseeably) have to take on additional risk to maintain it.


Paul Simon had it right when he sang "one man's ceiling is another man's floor".
seajay
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Re: Winning the game and investing in Fixed Income

Post by seajay »

hudson wrote: Sun Aug 14, 2022 7:57 am
seajay wrote: Sat Aug 13, 2022 12:10 pm
hudson wrote: Sat Aug 13, 2022 9:34 am
AnnetteLouisan wrote: Sat Aug 13, 2022 9:09 am That Warren Buffet quote is very profound.
Larry Swedroe said almost the same thing in April 2012: "First, if have no need to take risk, don't. Rule number one of investing. Also Rule 2 and 3.

viewtopic.php?p=1372822#p1372822
But nothing is risk-free. The best we might do is to diversify to avoid the high risk of over-concentration.

Inflation bonds backed by the state tend to be lower yield in being sold as being risk-free, but push come to shove can turn out not to have been risk-free. Over-concentration risk is a major risk.
Thanks seajay!
My future plan (Feb. 2024) may be over concentrating.
It will likely be:
50% TIPS for inflation protection
50% CDs or nominal treasuries for guaranteed income
stocks give me heartburn.

How would you spread things out and maintain safety?
Personally I don't like treasuries/lending of any sort - such as depository banks where you lend your money to the bank in return for interest, rather than of-old where banks just provided secure storage of your money/assets. All too easy when your money/deposit becomes the banks money for them to get greedy and speculate on a heads they win, tails they default on your 'loan'.

Inflation bonds might not be honored, if for instance inflation was running at 20% I suspect that the borrower would find some kind of get-out, perhaps changing tax laws to tax the 20% to leave you with -5% net real.

Each asset has dislikes, but you have to invest somewhere. To diversify CD/TIPS risks - some stock and gold mixed in. Dislike all of those for different reasons. Personally I clump CD/T-Bills/Bonds all into the same 'lending' category so for me equal measures is more like thirds stock/gold/'lending'. A form of Larry Portfolio but with gold also mixed in. Historic inflation adjusted rewards have been good PV as have been Monte-Carlo simulations suggested that for getting your inflation adjusted money back (3.33% 30 year SWR) the probabilities have been 99.99% PV, and where I suspect in the 3 out of 10000 cases that didn't see the money last 30 years that likely it got quite close, maybe lasted 25 years, which for a 60 something year old I suspect is better odds than them living to see another 25 years. As a Brit I also like to currency diversify across Pounds/USD/global non-fiat (gold) currencies. Which for me is a preference of British treasuries, US stocks, gold. Three assets/three currencies, none of which are likely to go totally broke so maximum downside is less than 33% - excepting very exceptional circumstances in which case likely portfolio value would be a very low concern at the time.
2pedals
Posts: 1988
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Re: Winning the game and investing in Fixed Income

Post by 2pedals »

Interesting discussion. Fixed rates are becoming more attractive now that the interest rates have been increasing lately. Folks that have been on the shorter side of the duration can now extend the duration out to take advantage of the higher rates, if one has expected liabilities with longer durations .:beer
hudson
Posts: 7119
Joined: Fri Apr 06, 2007 9:15 am

Re: Winning the game and investing in Fixed Income

Post by hudson »

seajay wrote: Sun Aug 14, 2022 5:48 pm
hudson wrote: Sun Aug 14, 2022 7:57 am
seajay wrote: Sat Aug 13, 2022 12:10 pm
hudson wrote: Sat Aug 13, 2022 9:34 am
AnnetteLouisan wrote: Sat Aug 13, 2022 9:09 am That Warren Buffet quote is very profound.
Larry Swedroe said almost the same thing in April 2012: "First, if have no need to take risk, don't. Rule number one of investing. Also Rule 2 and 3.

viewtopic.php?p=1372822#p1372822
But nothing is risk-free. The best we might do is to diversify to avoid the high risk of over-concentration.

Inflation bonds backed by the state tend to be lower yield in being sold as being risk-free, but push come to shove can turn out not to have been risk-free. Over-concentration risk is a major risk.
Thanks seajay!
My future plan (Feb. 2024) may be over concentrating.
It will likely be:
50% TIPS for inflation protection
50% CDs or nominal treasuries for guaranteed income
stocks give me heartburn.

How would you spread things out and maintain safety?
Personally I don't like treasuries/lending of any sort - such as depository banks where you lend your money to the bank in return for interest, rather than of-old where banks just provided secure storage of your money/assets. All too easy when your money/deposit becomes the banks money for them to get greedy and speculate on a heads they win, tails they default on your 'loan'.

Inflation bonds might not be honored, if for instance inflation was running at 20% I suspect that the borrower would find some kind of get-out, perhaps changing tax laws to tax the 20% to leave you with -5% net real.

Each asset has dislikes, but you have to invest somewhere. To diversify CD/TIPS risks - some stock and gold mixed in. Dislike all of those for different reasons. Personally I clump CD/T-Bills/Bonds all into the same 'lending' category so for me equal measures is more like thirds stock/gold/'lending'. A form of Larry Portfolio but with gold also mixed in. Historic inflation adjusted rewards have been good PV as have been Monte-Carlo simulations suggested that for getting your inflation adjusted money back (3.33% 30 year SWR) the probabilities have been 99.99% PV, and where I suspect in the 3 out of 10000 cases that didn't see the money last 30 years that likely it got quite close, maybe lasted 25 years, which for a 60 something year old I suspect is better odds than them living to see another 25 years. As a Brit I also like to currency diversify across Pounds/USD/global non-fiat (gold) currencies. Which for me is a preference of British treasuries, US stocks, gold. Three assets/three currencies, none of which are likely to go totally broke so maximum downside is less than 33% - excepting very exceptional circumstances in which case likely portfolio value would be a very low concern at the time.
Thanks seajay of Britain!
It sounds like it's stocks, gold, and fixed income for you.
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