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August 22, 2011

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Tom Sightings

Your analysis is so true, esp. the part about how, over time, inflation is more devastating to a nest egg than “periodic rounds of volatility.” However, it's absolutely crucial to remember that, because of the volatility, you should never ever put money in the stock market that you're going to need (to buy or renovate a house, to pay tuition, to live on) in the next five years.

That said, you've convinced me -- I'm going to get rid of some of the cash in my IRA and pick up a few more mutual fund shares.

Retired Syd

@Tom: I'd go even a step further for a retiree--I'd say a retiree should have enough for 10 years of living expenses in cash and fixed-income (vs. equities). The conservative 50/50 allocation (or even a 60/40 allocation) should cover that.

penta

I think the key when things get volatile is to not fixate on your current value of your "Number". Because depending on on how much you have, this can fluctuate by 10's of thousands of $'s every day...And if you fall into the trap of saying, we could have gone on a great world-wide vacation with what we lost today, then you have fallen into the trap of "mental accounting"....And this is where you become at risk of doing something silly....So a deceptively simple antidote is to just commit to your allocation and withdrawal rate; rebalance on an automated schedule; and go back to thinking about whatever it is you enjoy thinking about...which hopefully isn't the mastenations of the next fed policy debate, etc...

Janette

We have been popping in and out of the market for the last four years. Not day trading- but usually holding for a year. Mutual funds have fallen out of favor in our house- since they are way to difficult to get out of when we see the market ready to take a plunge.
I think being retired gives us much more time to watch the news and read the analysis. We have made quite a bit in the time we have been doing it all ourselves. Right now it is mostly sitting on the side lines and will be until the next elections. I think it is going to be VERY messy and the market will not know what to do. If we miss a big run up - we have little fear that it will be down again within the year.
Come on ---we are ready for a flat rate tax! :>)
If you have any suggestions for fixed income bonds- I am all ears!

Retired Syd

@Penta: That sounds generally like my approach!

@Janette: I'm not one to go in and out but if you are, you might consider ETF's instead of traditional funds because they trade like a stock--so you can sell immediately instead of waiting for the end-of-day price.

I don't really have specific bond recommendations other than to keep the maturities short for now. With interest rates so low, you're likely to get hammered in the not-too-distant future with longer maturities.

Good for you for taking the time to learn and do it yourself!

dgpcolorado

The idea that bonds can't keep up with inflation isn't strictly true. Treasury Inflation Protection Securities (TIPS) and Series I Savings Bonds both have an inflation adjustment. I have some 3% Series I Savings bonds (that's 3% plus inflation) and some 3.6% TIPS (again, that's 3.6% plus inflation).

The problem is that inflation bonds have been "discovered" since I bought mine and the yields are way down and unlikely to ever again approach the 4% levels of a decade ago. 30 year TIPS can be had at about 0.94% plus inflation, 18 year TIPS are at 0.61% plus inflation, and Series I Savings Bonds are currently selling at 0% plus inflation. Yes, it isn't much, but it does match or beat inflation.

Just sayin'...

One of my regrets was that I didn't sell much of my portfolio in 2000 and buy TIPS at 4+%. It would have made for a very placid and predictable retirement portfolio. 20-20 hindsight and all that.

[One caveat: TIPS are best held in a retirement account because when held in a taxable account federal tax must be paid on the inflation adjustment each year, which is a nuisance.]

Retired Syd

@dgpcolorado: It takes quite a tidy nest egg sum to retire for 30 or 40 years only earning 1% over inflation though. Not something most folks could manage, myself included. And with a maturity of 30 years, I'd bet money you'd come out way ahead in stocks--and at less tax cost.

But you are not the only one without 20/20 hindsight--in a perfect world I would have sold all my tech stocks in 1999 and retired 15 years earlier. Which is exactly why I now rebalance to my target allocation no matter what's going on around me. (And yes, that target allocation includes some TIPS).

dgpcolorado

@Syd, Yes, 1% isn't much of a return, but that 4% I could have gotten in 2000 would have been nice because my portfolio was based on a conservative 4% real return projection. And I'm doing quite well considering I've been living off it since 1999, have survived two bear markets and am still doing ok. [The fact that I don't engage in panic selling during bear markets but, rather, view them as "buying opportunities" probably has something to do with it.]

However, at a minimum, my portfolio was intended to support me until I reached full SS age (66) or age 70 if I can stretch it that far. I realize this is heresy in the retirement planning community, but I am thrifty enough that I could live quite comfortably on Social Security. My age 70 SS benefit would be downright luxurious by my frugal standards. Of course, one reason I could do that is because I own my house free and clear, so my housing expenses consist of rather modest property taxes (~$1200 a year and going down), utilities, insurance and, perhaps someday, some maintenance on a house I designed to be low maintenance.

So, the idea that my portfolio has to support me for 40+ years isn't really valid in my case. Ideally I'd like some of it to last as a cushion against catastrophe, but it isn't strictly necessary.

Retired Syd

@dgp: Well you don't really need to kick yourself for that, you are doing very well with your retirement finances! A cool head helps, definitely.

All those rules of thumb on how much you need to save for retirement are based on your income needs after taking into consideration the income you will receive from other sources (like Social Security). You are not alone with regard to Social Security--according to the Social Security Administration, for 35% of recipients, Social Security represents over 90% of their income. So basically 35% of recipients are living almost exclusively on SS. And for 66% of recipients, it represents at least 50% of their income--so the amount they must replace on their own is greatly reduced.

A lot of people act as if Social Security is insignificant, but according to those numbers it sure isn't. And since you are only trying to get from here to there, you really don't need to take on unnecessary risk with regard to your portfolio. You are exactly right, inflation isn't too much of an issue when you're not talking decades of time.

(P.S. By the way, I do intend to share your wisdom with my readers--the great essay you sent me months ago. I plan to debut it in pieces on "Money Mondays."--Hope you're still up for that!)

dgpcolorado

@Syd,

Yes, you are welcome to use my retirement planning essay. As I said back when I sent it to you, it was intended as a teaching tool (you know how much I hate that 80% rule-of-thumb).

But those scared of the "B-word" ("budget") won't derive much benefit from it!

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