tag:blogger.com,1999:blog-5621914599310831423.post8742065604177498409..comments2024-03-28T18:17:18.688-07:00Comments on The Retirement Café: What's a Floor?Dirk Cottonhttp://www.blogger.com/profile/05616143752082768155noreply@blogger.comBlogger10125tag:blogger.com,1999:blog-5621914599310831423.post-39712634210432824622019-02-28T20:56:56.549-08:002019-02-28T20:56:56.549-08:00This comment has been removed by a blog administrator.Robert Limahttps://www.blogger.com/profile/10791314702657919232noreply@blogger.comtag:blogger.com,1999:blog-5621914599310831423.post-66290804118188887762018-02-12T11:20:39.988-08:002018-02-12T11:20:39.988-08:00Thanks for all your writing! Thanks in this parti...Thanks for all your writing! Thanks in this particular case for the footnote link to the videos of Merton’s finance class lectures. What a resource!Bobhttps://www.blogger.com/profile/08840856040484595346noreply@blogger.comtag:blogger.com,1999:blog-5621914599310831423.post-40588157122725587052018-02-11T07:15:36.845-08:002018-02-11T07:15:36.845-08:00Thanks for the thoughtful and honest response. I a...Thanks for the thoughtful and honest response. I also found the following article written by BobK to be particularly useful on this topic. Enjoy!<br /><br />https://finpage.blog/2016/12/04/a-three-fund-portfolio-tailored-for-stable-retirement-spending/#more-4071Anonymoushttps://www.blogger.com/profile/12215375986173202718noreply@blogger.comtag:blogger.com,1999:blog-5621914599310831423.post-80454145877848088802018-02-10T14:35:35.365-08:002018-02-10T14:35:35.365-08:00Good questions, Matthew.
TIPs aren't perfect ...Good questions, Matthew.<br /><br />TIPs aren't perfect because they don't completely hedge longevity, ladders are difficult to build, they're expensive because there are no mortality credits and there aren't TIPs with maturity dates matching several years. SPIAs aren't perfect because inflation protection is expensive. So, we have to build a floor with imperfect assets or, more likely, a combination of imperfect assets. A long TIPS ladder is difficult.<br /><br />I don't have an answer to the TIPs bonds versus funds question, though I'm searching for one. You can't easily match funds to liabilities because you need to match both duration and convexity, which basically means that you would have to build the fund from the same bonds as the ladder. You have no control over when the fund sells, of course.<br /><br />I used to think you couldn't match liabilities with funds but I now question that for two reasons. I believe it might be possible to match the funds closely to a ladder but I suspect that would require constantly updating your fund holdings. I'm trying to get a firm answer on that. It may be achievable but too much trouble.<br /><br />Second, I'm not sure how much difference it makes if you only approximate the ladder with funds. I don't know the answer to that one, yet, either.<br /><br />I approximate a ladder with funds but I have a large margin of error, so that's another issue. If you're wealthy enough, it probably doesn't matter.<br /><br />When I get the answers, I'll share.<br /><br />Thanks for the question.Dirk Cottonhttps://www.blogger.com/profile/05616143752082768155noreply@blogger.comtag:blogger.com,1999:blog-5621914599310831423.post-37049944482789664022018-02-10T10:47:37.526-08:002018-02-10T10:47:37.526-08:00Good article.
I provided a link below to article ...Good article.<br /><br />I provided a link below to article that Merton wrote (credit BobK) where he outlines that Tier 2 floor income can be constructed with a mix of short and long term TIPS funds where the duration matches the duration of your liability (ie, your expenses in retirement).<br /><br />What are your thoughts on TIPS funds when used to duration matched as opposed to building a long TIPS ladder? The cost should be roughly the same, perhaps even a bit more due to the funds’ expenses, but it may be more straight forward for those who do not work with an advisor.<br /><br />https://www.nestpensions.org.uk/schemeweb/NestWeb/includes/public/docs/Merton-Applying-life-cycle-economics,PDF.pdfAnonymoushttps://www.blogger.com/profile/12215375986173202718noreply@blogger.comtag:blogger.com,1999:blog-5621914599310831423.post-70790405192657767572018-02-03T15:41:23.557-08:002018-02-03T15:41:23.557-08:00So, your argument is that Paul Samuelson, Robert M...So, your argument is that Paul Samuelson, Robert Merton, Zvi Bodie and William Bernstein are confused?<br /><br />Let me consider than and get back to you.<br /><br />Thanks for writing! :-)Dirk Cottonhttps://www.blogger.com/profile/05616143752082768155noreply@blogger.comtag:blogger.com,1999:blog-5621914599310831423.post-57341632113243874582018-02-03T15:05:27.352-08:002018-02-03T15:05:27.352-08:00i think the indexed annuities are overpriced becau...i think the indexed annuities are overpriced because the insurers have difficulty estimating, let alone hedging, future inflation. thus they build in a hefty margin for the uncertainty. that may be proper pricing in a sense, but it's VERY expensive for the annuitant.<br /><br />the main problem with cpi-u is health care, which is severely under-represented in the index. and among a retiree population it is all the more relevant. similarly, shelter is under-represented. the bls constructed an index, cpi-e, which attempts to capture the differences, and cpi-e runs above cpi-u, and of course that difference compounds.<br /><br />when i talk of an inflation hedging portfolio i am NOT talking especially about equities. for myself, i am following as a superstructure the "golden butterfly" portfolio at portfoliocharts dot com. the allocation to equities is 40%. from that allocation i subtract investments i have in private real-estate partnerships. then i manage the equity component using a taa strategy i assembled at allocatesmartly dot com. at the moment that strategy is 80% invested in equities+commodities. at the moment that has me, overall, 16% in equities, 2/3 of which are foreign [eem,ieur,ewj,vxus]. the superstructure calls for 40% split among fixed income, of which i have about half in a 9 year tips ladder starting at 2020, about 1/4 in currencies [fxe,dsum,fxy,cny], a bit in edv, some in cash. then i have about 20% in phys [closed end canadian-based fund that holds audited physical gold and is not subject to all the questions about gld].<br /><br />i am not recommending this to anyone else, i'm just saying that i'm attempting to hedge inflation with a very diversified rules-based portfolio.<br /><br />but you're right that the big problem is indexing. i can't accept cpi-u as a worthwhile index for retirees. jeffryhttps://www.blogger.com/profile/09444215127916586232noreply@blogger.comtag:blogger.com,1999:blog-5621914599310831423.post-10212548684000953252018-02-03T14:00:17.517-08:002018-02-03T14:00:17.517-08:00Bobcat2 and other proponents of liability matching...Bobcat2 and other proponents of liability matching seem to confuse the mean (the portfolio) with the end (the income). Where a floor is needed is for the income. This does NOT mean that one needs to partition their means (portfolio and other sources of income) accordingly. Bucketing strategies are plainly flawed, partitioning things which are NOT additive, or leading to strategies artificially altering long-term income for the sake of mental accounting. The concept of portfolio floor just doesn't make much sense. What is more sensible is to discuss strategies leading to an income floor with fairly solid (and yet not necessarily absolute) guarantees.Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-5621914599310831423.post-81244388437839384162018-02-03T13:40:33.881-08:002018-02-03T13:40:33.881-08:00You can get a CPU-adjusted annuity from a strong c...You can get a CPU-adjusted annuity from a strong carrier. Don't know if you should.<br /><br />"Overpriced" is subjective. If you live a long time and experience high inflation then the "overpriced" option will more than pay for itself. If that happens, was it overpriced? If your goal is to protect yourself from that scenario and it does, was the option overpriced? Are vaccines overpriced? Not if you get the flu. Inflation-adjusted annuities inoculate you against inflation but are a waste of money if high inflation doesn't develop.<br /><br />If you feel they are overpriced because you think insurers should accept lower margins, I think you're tilting at windmills. (I think Teslas are overpriced. I wish I could buy one cheaper. No one seems to care.)<br /><br />Jeffry, I think you're perhaps focussing too much on indexing. An index is an average and of course it is unlikely to mirror your individual situation. Your market returns are unlikely to match the S&P 500 index returns. <br /><br />CPI-U is an average of inflation in urban areas. If you don't live in a city, it probably won't match your inflation. In fact, it's an average for many cities and, further, an average of the averages within each of those cities. Until they come out with CPI-J (for Jeffry), you're going to have this issue. The problem isn't that the index doesn't work because of your age but because you aren't the average guy in the average city among all the cities in the index.<br /><br />Lastly, equity portfolios don't hedge inflation but they have historically outperformed it. They usually don't perform well <i>during</i> periods of high inflation. If you deplete your upside portfolio, your floor portfolio should save you from catastrophe. How will your upside portfolio have protected you from inflation then?<br /><br />You can't "inflation-proof" a retirement plan. I don't believe I have suggested that anywhere. At best you can mitigate inflation risk.<br /><br />As I mentioned, there is no perfect answer to retirement planning. If there were, I wouldn't be writing a blog.<br /><br />Regards. . .Dirk Cottonhttps://www.blogger.com/profile/05616143752082768155noreply@blogger.comtag:blogger.com,1999:blog-5621914599310831423.post-46162630701218049922018-02-03T12:31:35.177-08:002018-02-03T12:31:35.177-08:00i don't see how to inflation-proof my floor. ...i don't see how to inflation-proof my floor. i've priced step-up annuities [increased by 2 or 3% per year] and imo they are way overpriced. inflation indexing requires going to a lower-rated insurer, and those are also incredibly overpriced. <br /><br />even in that case you are assuming that cpi-u is somehow equal to the cost increases that YOU will experience. i think that is an overly optimistic as well as unlikely assumption,<br /><br />tips have the same problem of being tied to cpi-u. social security is tied to the same index. it's something, but imo it's inadequate inflation protection.<br /><br />otoh fixed spia's act more like DEflation insurance. in combination with one's inadequately indexed social security, they provide a deflation-protected floor.<br /><br />an inflation-targeted variable portfolio [in addition to or -more likely- instead of, your "upside" investments] can hedge inflation more effectively.jeffryhttps://www.blogger.com/profile/09444215127916586232noreply@blogger.com