tag:blogger.com,1999:blog-5621914599310831423.post4754212002775663186..comments2024-03-28T18:17:18.688-07:00Comments on The Retirement Café: Three PortfoliosDirk Cottonhttp://www.blogger.com/profile/05616143752082768155noreply@blogger.comBlogger10125tag:blogger.com,1999:blog-5621914599310831423.post-44457931782983442302014-11-01T07:52:44.735-07:002014-11-01T07:52:44.735-07:00I do see issues. I'm not in any way suggesting...I do see issues. I'm not in any way suggesting that you don't have a reasonable strategy for retirement income, but real estate is a risky asset (see 2008) and doesn't belong in the floor portfolio.<br /><br />Assets in a floor portfolio should ideally provide income for as long as you live. I grant a small waiver to long TIPs bond ladders of perhaps 30 years, but Social Security benefits and annuities protect against the risk of retirements that might last even longer. A portfolio of rental properties could last that long. On the other hand, I know someone who had $5M of rental properties and lost them all in 2008, which eventually resulted in losing his home.<br /><br />Floor assets should also provide safe, predictable income, and by "safe" I mean Treasury bond safe. Real estate rental income isn't that safe and isn't that predictable.<br /><br />Floor portfolios are intended to consist of the safest possible assets, capable of providing relatively risk-free, predictable income for as long as you (and a spouse) might live and ideally, with inflation protection. Real estate properties don't fit that description, in my opinion, and belong in your risky portfolio. Social Security benefits, life annuities, and long TIPs Bond ladders do belong there.<br /><br />So, I think you might have a reasonable strategy for someone who can tolerate the maintenance issues even after they are quite old (I'm a former landlord, can you tell?), but I don't think real estate is a solid floor, if you'll pardon the pun.<br /><br />As for your expected returns, economist Robert Shiller showed in Irrational Exuberance that long-term appreciation of real estate is actually quite low. That won't affect your income, but it might make that estate smaller than you expect. <br /><br />Thanks for writing and for visiting my blog. I hope you'll stick around!Dirk Cottonhttps://www.blogger.com/profile/05616143752082768155noreply@blogger.comtag:blogger.com,1999:blog-5621914599310831423.post-77849962738979166842014-10-31T23:04:09.086-07:002014-10-31T23:04:09.086-07:00Hi,
This is my first visit as your blog was just ...Hi,<br /><br />This is my first visit as your blog was just recommended by a post on Early- Retirement.org. Your division of portfolios resonates with my thinking as I am trying to build a floor with rental real estate. I am expecting overall returns to be equal or better than long term bonds (6%) but less than long term stocks (10%).<br /><br />I also figure this gives me inflation protection and allows me to have a higher stock ratio in my "volatile" portfolio than without the real estate... and hopefully leave a bigger estate.<br /><br />So long as I maintain generous reserves for maintenance, low or no leverage after retirement, do you see any issues with my allocation of rental income to the floor portfolio.?<br /><br />Thanks.Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-5621914599310831423.post-73604463916164704812014-10-08T07:57:56.045-07:002014-10-08T07:57:56.045-07:00I believe you are referring to David Blanchett'...I believe you are referring to David Blanchett's "spending smile". The paper is available if you Google "Estimating the True Cost of Retirement - Morningstar". <br /><br />EBRI has a different estimate of "typical" spending, showing that it constantly declines (Google "Expenditure Patterns of Older Americans, 2001-2009")<br /><br />Both of these are arguments for future retirement spending for "typical" retirees, they are different, and neither of them may predict your personal spending pattern.<br /><br />My concern with a U-shaped spending pattern is similar to my concern with Pfau's U-shaped asset allocation: if you don't live much longer than the median retiree life span, you won't enjoy much of the right portion of that graph.<br /><br />I suggest that you develop a plan to manage inflation, because even low levels will make a big difference if you do live 30 years. And don't count too much on future financial benefits that you might not live to see.<br /><br />Does that mean that you can fully compensate for inflation for every floor asset? No, and even if you can you might not be able to afford it.<br /><br />Thanks for writing!Dirk Cottonhttps://www.blogger.com/profile/05616143752082768155noreply@blogger.comtag:blogger.com,1999:blog-5621914599310831423.post-7234801142438229782014-10-07T18:52:38.226-07:002014-10-07T18:52:38.226-07:00The concept of a U-shaped spending curve as discus...The concept of a U-shaped spending curve as discussed by Wade Pfau and others means that full inflation adjustment of every "floor" asset may not be critical for the early and middle retirement years. Growth of the retirement income portfolio would be critical to the later years if the rising part of the U spending curve occurs at a significant magnitude. The "non-retirement " part of the portfolio would also act as insurance against this event as well as it can probably be re-allocated in a crisis..<br /><br />My spouse's NYS Teachers pension has a relatively complex inflation adjustment component with partial adjustment subject to caps so that it will probably end up with a net adjustment of about one-third of inflation during a typical period. Not great, but better than nothing and reduces the issue in the middle years some.<br />.Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-5621914599310831423.post-73451700292718005722014-10-07T16:24:31.676-07:002014-10-07T16:24:31.676-07:00I agree. I recommend inflation-adjusted fixed annu...I agree. I recommend inflation-adjusted fixed annuities and I think my preference for TIPS instead of nominal bonds in the floor is well documented. That really only leaves pensions as the floor asset that can't usually be inflation-protected. But the fact that pensions usually aren't inflation protected isn't enough to move them out of the "floor" category. They clearly provide retirement income and they aren't an investment, so they don't fit in the other two. Dirk Cottonhttps://www.blogger.com/profile/05616143752082768155noreply@blogger.comtag:blogger.com,1999:blog-5621914599310831423.post-44710407158356107332014-10-07T16:14:35.770-07:002014-10-07T16:14:35.770-07:00A small point for your consideration: your secure ...A small point for your consideration: your secure floor concept excludes any reference to inflation-rate risk to go along with the market and interest-rate risks you do identify. If this risk is added to the definition, it alters the relative security of those assets that do provide inflation-rate risk (e.g. Social Security, Inflation-Adjusted Annuities, and TIP bond ladders) to those that don't (e.g. fixed rate pensions and annuities, and nominal bond ladders). Given the potentially large difference between nominal and real income over a multi-decade retirement, I would think the useful concept of a floor would need to factor in inflation risk. Anonymoushttps://www.blogger.com/profile/05836288027457009432noreply@blogger.comtag:blogger.com,1999:blog-5621914599310831423.post-82757988361581333752014-10-06T16:27:17.562-07:002014-10-06T16:27:17.562-07:00That's an important point. If you sell your ho...That's an important point. If you sell your home, you're still going to have to live somewhere. Some of the proceeds from the sale will go to pay the new housing costs no matter where you end up (unless you mooch off the kids, of course). You'll also pay a realtor 6% to sell the house and have moving costs. Whatever's left, you get to turn into income.<br /><br />Thanks for writing!Dirk Cottonhttps://www.blogger.com/profile/05616143752082768155noreply@blogger.comtag:blogger.com,1999:blog-5621914599310831423.post-46098771009791552862014-10-06T16:22:03.040-07:002014-10-06T16:22:03.040-07:00Re: Home equity.
I have pondered the question of ...Re: Home equity.<br /><br />I have pondered the question of the house and generally put the home equity into an insurance pool because needing to move out of the house will require moving into another housing arrangement, which can often be quite expensive if it requires assisted living or nursing. As such, it isn't part of the regular retirement income portfolio but is parallel to a long term care insurance policy instead. The asset may get shifted into the income pool at a later date, but isn't relied upon for expenses while healthy.Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-5621914599310831423.post-19304203654739498412014-10-06T09:58:35.456-07:002014-10-06T09:58:35.456-07:00Brad, I am a huge Bogle and Vanguard fan. In fact,...Brad, I am a huge Bogle and Vanguard fan. In fact, I consider myself a closet Boglehead. There are several valid ways to look at this issue, including Jack's. I prefer mine because, as I mentioned, the purpose of asset diversification is to protect against market and interest-rate volatility and Social Security benefits aren't volatile. Non-volatile assets are always a consideration, as I also mentioned. If you have a huge floor, you can take more stock risk, and vice versa, and that is essentially the same thing Bogel is saying. If you treat SS benefits as a risk-free bond and put it in your risky portfolio allocation, then you will buy more stocks for the same asset allocation. But SS benefits aren't exactly like a bond.<br /><br />I believe my approach is more in line with Bernstein, who looks at the "shortfall" of retirement income after subtracting Social Security benefits and pensions, and I think it's easier to understand.<br /><br />As for which of the three portfolios to put your LTC savings, I believe the retirement income portfolio is the best place. Assuming you will invest them in stocks and/or bonds, and you will spend the income, you're basically hoping that you will have an adequate portfolio to cover both retirement costs and possible LTC costs. The assets are exposed to market and/or interest-rate risk and the income goes to retirement expenses, so that seems like the best place for it.Dirk Cottonhttps://www.blogger.com/profile/05616143752082768155noreply@blogger.comtag:blogger.com,1999:blog-5621914599310831423.post-85618173652782417932014-10-06T09:28:46.674-07:002014-10-06T09:28:46.674-07:00Dirk, another good post. Again, you have taken a ...Dirk, another good post. Again, you have taken a complicated topic and distilled it to it's essence. I like the way you have categorized one's assets into the three buckets. Just an aside, I struggled with Jack Bogle's recommendation to take the present value of one's expected Social Security benefits into account when determining ones retirement income portfolio asset allocation, but in the end like you I chose not to consider it in my asset allocation (though either way made little difference in my case). I do have a question though. I have money set aside for potential long term care expenses. I do plan on using the interest on this money to fund retirement income, but I don't plan on using the principal. I assume this money should be considered as part of my retirement income portfolio and considered in my asset allocation decision correct? Thanks, Brad.Anonymousnoreply@blogger.com