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Author: inparadise Big funky green star, 20000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 76384  
Subject: Impact of Retirees on Future Markets Date: 6/9/2014 7:53 AM
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America’s sprawling 401(k) pension system will turn cash flow negative in 2016, threatening disruption for asset managers and selling of equities, according to analysis by Cerulli Associates, a research house.
...
Amin Rajan, chief executive of Create Research, a consultancy, said IRAs tend to have a 20-35 per cent exposure to equities, compared with 45-60 per cent in 401(k) plans. This suggests equity-focused houses could lose market share to bond-based rivals such as Pimco and Principal Global Investors as the demographic changes mean the 401(k) system shrinks relative to the IRA market, which is already larger at about $5.4tn.


http://www.ft.com/intl/cms/s/0/eccee892-ecbf-11e3-8963-00144...

So I get that selling off in the stock market would reduce stock valuations of broadly based index funds, though if you are fortunate and wise enough to pick high quality individual stocks your valuations could still increase rather than decline. Is this perhaps the beginning of the end for index funds?

And what about the effect on bonds? I do not understand bonds well enough to figure this out. Will the increased interest trigger an increase in valuation, or will there being more supply to fund those bonds reduce the rate that companies and gov'ts are willing to pay to borrow?

There have also been several articles I've read recently regarding real estate valuation. The pessimistic view is that valuations for real estate will decline and decline sharply. One reason for this is the Millennials not buying because of high student loan debt and lack of savings causing difficulty in qualifying for loans, there being more Baby Boomers wanting to downsize than people looking to buy larger homes, and even solvency issues in China, which will impact the current Chinese real estate buying spree, though I am pretty darned sure that at least on the residential side that is taking place on much higher value properties than I would ever be involved with. But people will still need a place to live, so perhaps apartment REITs would be a good place to go? I still toy with the idea of buying properties for vacation rentals, but frankly that's a job, and I want to play.

So with the change in the demographics starting to hit, where do you plan to put your investments, or will you just assume that there will be no long term change and will maintain the status quo? Frankly I was surprised to see that IRAs are so much more bond heavy than 401Ks. Ours are 60/40 stocks/bonds, and I was looking to change that to 70/30 if we ever get a significant stock pull back.

IP
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Author: pauleckler Big funky green star, 20000 posts Top Favorite Fools Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 75164 of 76384
Subject: Re: Impact of Retirees on Future Markets Date: 6/9/2014 1:22 PM
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People have been saying the stock market would crash when boomers start to retire for years. They base that on the idea that people will suddenly sell their equities and put all their money in fixed incomes for safety.

But that is a far cry from the real world. Motley Fool routinely advises people to plan to be retired for 30 yrs or more. Inflation is the main concern. You need to be in equities, as much as you can tolerate, to hope to keep up with rising costs. Moving all to bonds would be disaster--especially while interest rates are so low. Most do increase their bond allocation, but 100% bonds is only for the very well fixed.

Sure the real estate market will have to adapt as boomers downsize. There will be new growth in retirement communities of various types. The need for new home construction could moderate, but I would be surprised to see housing prices fall as a result. Older homes will be torn down. Healthy new family formation will continue to buy up ones of appropriate size and price and yes they will continue to move up to nicer, larger homes when they have the equity.

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Author: inparadise Big funky green star, 20000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 75166 of 76384
Subject: Re: Impact of Retirees on Future Markets Date: 6/9/2014 1:51 PM
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People have been saying the stock market would crash when boomers start to retire for years. They base that on the idea that people will suddenly sell their equities and put all their money in fixed incomes for safety.

But have we really seen all that much of a wave of retirement yet? IMO many of those Boomers reaching retirement in this economy have put off retiring and have only really started to do so this year, so I am not convinced that we would have already seen it happen if it were to happen.

Motley Fool routinely advises people to plan to be retired for 30 yrs or more. Inflation is the main concern. You need to be in equities, as much as you can tolerate, to hope to keep up with rising costs. Moving all to bonds would be disaster--especially while interest rates are so low. Most do increase their bond allocation, but 100% bonds is only for the very well fixed.

The information in the article re ratio of stock to bonds surprised me, but it seemed to be data based. I think we Fools are prone to do differently from the general population, but we are a small percentage of the general population, so I would not expect to see Fool-like behavior by the crowd. So IF the crowd piles into bonds from stock, what would happen to the bond market?

I am concerned that we are about to see a change in traditional returns from the stock, bond and real estate market. While of course past returns are not predictive of future, blah, blah, blah, the past is what we tend to base things on. Me, I am trying to peer into the future, but could use some help with my crystal ball.

As for real estate, I've been a bull for years. I am just not so sure anymore, suspecting that we are in for a change in that market too. I wish I were alone in that gut feeling.

IP

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Author: intercst Big funky green star, 20000 posts Top Favorite Fools Top Recommended Fools Feste Award Nominee! Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 75167 of 76384
Subject: Re: Impact of Retirees on Future Markets Date: 6/9/2014 2:04 PM
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There have also been several articles I've read recently regarding real estate valuation.

Multi-million dollar homes for the 1% continue to sell well.


High-End Home Sales Rise in California
http://dsnews.com/news/02-05-2014/high-end-home-sales-rise-i...

Strong sales continue for high-end housing market
http://www.bizjournals.com/houston/blog/breaking-ground/2014...

intercst

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Author: inparadise Big funky green star, 20000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 75170 of 76384
Subject: Re: Impact of Retirees on Future Markets Date: 6/9/2014 2:28 PM
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Multi-million dollar homes for the 1% continue to sell well.

And just how many are getting snapped up by Chinese investors?

Of all the U.S. real estate purchases made by Chinese last year, over half were in California – mostly in urban and suburban areas of the state.

Suburban Los Angeles in particular has been seeing a boom of Chinese buyers. "People are getting money out of mainland China and sticking it here," Mel Wong, president of the West San Gabriel Valley Association of Realtors, recently told the L.A. Times.


http://finance.yahoo.com/news/chinese-buyers-enthusiastic-u-...

Lots of economic woes in China casting doubt on their ability to continue snapping up real estate: https://www.google.com/search?q=chinese+economy+and+real+est...

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Author: reallyalldone Big funky green star, 20000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 75177 of 76384
Subject: Re: Impact of Retirees on Future Markets Date: 6/9/2014 3:20 PM
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And just how many are getting snapped up by Chinese investors?

Of all the U.S. real estate purchases made by Chinese last year, over half were in California – mostly in urban and suburban areas of the state.


There's a data disconnect here. Half of the purchases by Chinese were in California. How many purchases are we talking about ? And wouldn't CA make sense for Chinese?

I'm not seeing Chinese investors in either of my necks of the woods. In my primary location, the high but not highest priced houses in good locations are selling fast to people who want to move up or people who move to the area and want a good location.

I wouldn't go Chicken Little over this one.

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Author: MetalDecathlete Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 75178 of 76384
Subject: Re: Impact of Retirees on Future Markets Date: 6/9/2014 3:21 PM
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ip
The information in the article re ratio of stock to bonds surprised me, but it seemed to be data based. I think we Fools are prone to do differently from the general population, but we are a small percentage of the general population, so I would not expect to see Fool-like behavior by the crowd. So IF the crowd piles into bonds from stock, what would happen to the bond market?

I am concerned that we are about to see a change in traditional returns from the stock, bond and real estate market. While of course past returns are not predictive of future, blah, blah, blah, the past is what we tend to base things on. Me, I am trying to peer into the future, but could use some help with my crystal ball.

As for real estate, I've been a bull for years. I am just not so sure anymore, suspecting that we are in for a change in that market too. I wish I were alone in that gut feeling.

IP



Like you IP, I'm still trying to figure out what to do since I'm moving from the accumulating stage to the withdrawal stage as 2014 ends. For the past 10 years as I've neared my FIRE date, I was going to follow the KISS principle of 70-75% index stock funds and 25-30% bonds with a little cash. But several things have changed in the economy, as well as changing in my thinking:

- Bonds seem to be destined to decline because of low rates. I will probably start with 25-30% cash until this low interest era changes and rates improve somewhat.

- On the stock front, I just don't know how the boomer retirement will affect the market. Most of us are probably ok with lower returns as long as we are beating inflation. What we can't stand is a mega crash every 7 years or so. So I'll stick with the 70-75% stock allocation or perhaps adjust to 50% if it appears we are near an aging bull market. I'll forego index funds. Instead I'll experiment with ETF indexes, dividend stocks and growth stocks (which brought me to the brink of FIRE faster than I was expecting).

- What I hope is that the 25-30% cash allocation, invested in a cd ladder (or something like that), will help me weather the storms of a major downturn. For example, if I have a 5 year cd ladder set up and the market declines 50%, I'll just not pull any money out each year from the stock portfolio until the market recovers. 5 years, historically, should give you plenty of time for a recovery.

- for various reasons, real estate investing does not interest me at all. We will have a debt free small home in a rural setting and leave it at that.

Anyway, that's where I'm at now. It's less than 7 months until my tentative FIRE date. I'll probably change/refine my plan at least 10 times until then. ;)

Metal

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Author: inparadise Big funky green star, 20000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 75182 of 76384
Subject: Re: Impact of Retirees on Future Markets Date: 6/9/2014 4:11 PM
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It's less than 7 months until my tentative FIRE date.

Well keep us posted on how that goes. We have a minimum of 12 months to go...more if this house doesn't sell quickly. I don't want to stop work income with this place on our backs.

I can't help but think of Hocus when it comes to CD ladders. At today's pitiful rates, how would that keep you at all ahead? I did pretty well with Ibonds, but they are a PITA to purchase, and are at less than 2% right now for new buys. Fortunately, I got mine with a good base rate and am still at about 6%. The points on the credit card at time of purchase, something no longer available IIRC, was nice too. We have about two years of college costs saved up in them, with the ability to not pay tax on them if cashed in for college.

IP

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Author: Rayvt Big gold star, 5000 posts Top Favorite Fools Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 75187 of 76384
Subject: Re: Impact of Retirees on Future Markets Date: 6/9/2014 5:55 PM
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But have we really seen all that much of a wave of retirement yet?
Yes, absolutely. You can see it by what's happening in the normal (non-fad) retirement areas. Mid south, etc. Like Arkansas. When we retired and moved from Chicago to Ar, we were just after the leading edge of the wave. Northerners are coming down here with their money and buying up land & houses and driving up prices and killing the locals.

So IF the crowd piles into bonds from stock, what would happen to the bond market?
I recently read a paper discussing just this.
An individual can change his asset allocation, but the overall market can't. Every asset is owned by exactly one person. If you want to sell your stock, then somebody else must buy it from you.

If you want to go from 60/40 to 20/80, then somebody else has to go from 20/80 to 60/40. Most importantly, the valuations would shift.

If lots of people sell stocks, that drives down the prices of stocks. If lots of people buy bonds, that drives up the price of bonds. Hence, stock dividends would go up and bonds yields would go down. Thereby negating what the crowd was trying to accomplish.

I am concerned that we are about to see a change in traditional returns.
Here's one thing you can take to the bank: It is *never* different this time.
If you make plans based on things being different this time, you will lose.

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Author: Rayvt Big gold star, 5000 posts Top Favorite Fools Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 75189 of 76384
Subject: Re: Impact of Retirees on Future Markets Date: 6/9/2014 6:10 PM
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I can't help but think of Hocus when it comes to CD ladders.

There are a whole lot of really bad ideas being tossed about now, largely by people who have no idea of how to characterize or analyse risk. There are a lot of people who are reaching for yield without realizing that's what they're doing, and the danger involved, and who get very nasty when it is pointed out to them.

When told “More money has been lost reaching for yield than at the point of a gun.” they generally respond "Yeah, that's what all you fuddy-duddy old-timers say, but *my* strategy is different. I've been doing this since 2011[*] and never had any problems, so it's a sure-fire never-fail strategy."

[*] Of course, they never bother to look at a chart and see that they've been investing in a pure bull market.

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Author: inparadise Big funky green star, 20000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 75190 of 76384
Subject: Re: Impact of Retirees on Future Markets Date: 6/9/2014 6:47 PM
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I can't help but think of Hocus when it comes to CD ladders.
...
There are a whole lot of really bad ideas...


Aren't those two things synonymous? Hocus and bad ideas?

Guess I assumed everyone else still shuddered at the memory of those endless long threads on REHP.

IP

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Author: Rayvt Big gold star, 5000 posts Top Favorite Fools Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 75191 of 76384
Subject: Re: Impact of Retirees on Future Markets Date: 6/9/2014 6:56 PM
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Aren't those two things synonymous? Hocus and bad ideas?

Guess I assumed everyone else still shuddered at the memory of those endless long threads on REHP.


Seems I came late to that party. By the time I discovered Hocus he was gone and all that was left was interminable threads. It made for some very interesting reading, I quickly learned to go make some popcorn whenever I discovered a new thread.

Then there were the "Money-Merge Account" threads, some going over 2000+ comments. And nowadays there are the Dividend Growth Investing threads on Seeking Alpha, pushing toward 1000 comments.

Great fun, great fun. Bad ideas are everywhere.

My nightmare is that the Dunning–Kruger effect has crept into my brain, and _I'm_ the one spouting absolute nonsense. Which brings up a meta-question: If you are aware of the Dunning–Kruger effect, are you largely inoculated to it?

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Author: inparadise Big funky green star, 20000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 75192 of 76384
Subject: Re: Impact of Retirees on Future Markets Date: 6/9/2014 8:35 PM
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Which brings up a meta-question: If you are aware of the Dunning–Kruger effect, are you largely inoculated to it?

I guess it depends on what kind of hotel you stayed at last night. ;-)

IP

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Author: MetalDecathlete Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 75195 of 76384
Subject: Re: Impact of Retirees on Future Markets Date: 6/10/2014 10:44 AM
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IP
Well keep us posted on how that goes. We have a minimum of 12 months to go...more if this house doesn't sell quickly. I don't want to stop work income with this place on our backs.

Will do. From a strict asset base POV, DW and I could have FIRE'd in February. However, we have several issues going on that I did not expect.

1) Sooner than expected FIRE hit date with one kid in college still. I had not planned for her to be on my insurances etc... I was going to FIRE after all kids were off the payroll no sooner than age 54. (I'm 52 now).

2) Expected home to be paid off by FIRE date as well. Not quite there. But it won't matter that much since we will just sell and downsize to a debt free home.

3) Low interest rate environment. How that affects me is unique to the SEP 72(t) rules. The vast amount of my assets is in IRA/401k TIRA's and will be relying on distributions from them solely. I'm going to let my much smaller investments in Roth and taxable accounts continue to grow without touching them. Because of the IRS rules on the method that I was going to use is based on the prevailing interest rates, I cannot draw what I wanted to. I'm currently exploring other ways to come up with a supplement to overcome that. I have a few good ideas.

I can't help but think of Hocus when it comes to CD ladders. At today's pitiful rates, how would that keep you at all ahead? I did pretty well with Ibonds, but they are a PITA to purchase, and are at less than 2% right now for new buys. Fortunately, I got mine with a good base rate and am still at about 6%. The points on the credit card at time of purchase, something no longer available IIRC, was nice too. We have about two years of college costs saved up in them, with the ability to not pay tax on them if cashed in for college.


Nice. 6%. Hopefully, rates will move up again. This environment is not right for retirees. You can run an economy that benefits borrowers and punishes the savers for only so long.

Metal

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Author: inparadise Big funky green star, 20000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 75196 of 76384
Subject: Re: Impact of Retirees on Future Markets Date: 6/10/2014 11:05 AM
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Sooner than expected FIRE hit date with one kid in college still. I had not planned for her to be on my insurances etc... I was going to FIRE after all kids were off the payroll no sooner than age 54.

But that's a good thing, right? That you get to retire earlier than expected? We always had Youngest graduating high school as our earliest we could leave the workforce, coinciding nicely with qualifying for retiree health care at work, which is considerably better than the HCA. Lets hope the HCA doesn't make the company cancel retiree healthcare! Honestly, I've been working on DH wrt retirement for over two decades. I come from parents who retired early while his dad worked well into his 70's for the fun of it. I don't think he ever expected this would happen and has for the most part been humoring me all these years. We didn't start seriously analyzing our ability to retire until we met up with the financial adviser a few years ago.

I've posted a link to this on another thread, but it could be helpful for your kid in college: http://www.forbes.com/sites/troyonink/2013/07/30/college-tax... The premise is you and your wife gift appreciated assets to your daughter, which allows her to pay for half or more of her college, allowing her to become independent tax wise. She takes on the capital gains and gets the deductions, perhaps even qualifying for ACA subsidies if she needs to get insurance that way? That's my own leap, not in the article. This approach is an interesting one for us since there are no kids on retiree healthcare, (though they can probably get coverage from school,) and I don't know if we will be able to take advantage of tax deductions anymore, given no mortgage, low property and income taxes. Either way, it's worth a read through. We indirectly have JAFO to thank for this idea, since it was a link on a link he provided. Would appreciate hearing what you think.

IP


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Author: MetalDecathlete Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 75198 of 76384
Subject: Re: Impact of Retirees on Future Markets Date: 6/10/2014 12:39 PM
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IP
I've posted a link to this on another thread, but it could be helpful for your kid in college: http://www.forbes.com/sites/troyonink/2013/07/30/college-tax...... The premise is you and your wife gift appreciated assets to your daughter, which allows her to pay for half or more of her college, allowing her to become independent tax wise. She takes on the capital gains and gets the deductions, perhaps even qualifying for ACA subsidies if she needs to get insurance that way? That's my own leap, not in the article. This approach is an interesting one for us since there are no kids on retiree healthcare, (though they can probably get coverage from school,) and I don't know if we will be able to take advantage of tax deductions anymore, given no mortgage, low property and income taxes. Either way, it's worth a read through. We indirectly have JAFO to thank for this idea, since it was a link on a link he provided. Would appreciate hearing what you think.


Thanks for the link. I read through it. It sounds like a good way to go if you have a good chunk of $ set aside for your kids.

The gifting part won't really matter to us because she is paying as she goes via a job, some scholarship money and with us picking up the rest. Also, she moved back home after fall 2013 to finish her degree commuting to a local college that is low cost. This helped tremendously with overall costs.

She plans on living with us until she graduates in 2015 or the 1st part of 2016.

As far as health insurance goes, I'm looking into her going on the gov't exchanges vs taking advantage of the health insurance from her job.

She may claiming herself to get the collect tax credits in 2015 as well since our income will go significantly down after FIRE.

Metal

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Author: 2gifts Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 75200 of 76384
Subject: Re: Impact of Retirees on Future Markets Date: 6/10/2014 4:00 PM
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As far as health insurance goes, I'm looking into her going on the gov't exchanges vs taking advantage of the health insurance from her job.

If she is under 26, have you considered the cost to carry her on your plan? I carry both of my kids on my health insurance, and plan to do so until they turn 26 in 3 years, which is also when I plan to retire. As it turns out, it is cheaper for me to have family insurance than for them to each get health insurance for themselves, although with DS changing jobs, I'm not even sure he will have health insurance offered through an employer, and he needs to be covered due to his health issues.

It might be worth investigating as an alternative since you are looking at different insurances anyhow.

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Author: MetalDecathlete Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 75201 of 76384
Subject: Re: Impact of Retirees on Future Markets Date: 6/11/2014 10:35 AM
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2gifts
If she is under 26, have you considered the cost to carry her on your plan? I carry both of my kids on my health insurance, and plan to do so until they turn 26 in 3 years, which is also when I plan to retire. As it turns out, it is cheaper for me to have family insurance than for them to each get health insurance for themselves, although with DS changing jobs, I'm not even sure he will have health insurance offered through an employer, and he needs to be covered due to his health issues.

It might be worth investigating as an alternative since you are looking at different insurances anyhow.


I guess I had assumed once I FIRE'd and was out in the open market for insurance, the costs would be higher with a child on my plan vs her going separate and taking advantage of her job or the tax credits if she gets insurance through an exchange.

Thanks for the suggestion. I'll look into that as well.

Metal

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Author: RetiredVermonter Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 75202 of 76384
Subject: Re: Impact of Retirees on Future Markets Date: 6/12/2014 10:56 AM
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I have zilch in bonds.

As I have said many time, I manage my own IRA and stay pretty much in equities, balancing carefully between some "adventurous" ones and some giving nice dividends. As a retiree, I can take time to watch closely and adjust as I feel the need, after doing my own research.

Vermonter

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Author: MacNugget Big red star, 1000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 75206 of 76384
Subject: Re: Impact of Retirees on Future Markets Date: 6/13/2014 12:47 PM
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My nightmare is that the Dunning–Kruger effect has crept into my brain, and _I'm_ the one spouting absolute nonsense. Which brings up a meta-question: If you are aware of the Dunning–Kruger effect, are you largely inoculated to it?

I think Dunning-Kruger is brutally domain-specific. It doesn't seem to intrude much into my finances, but I seem to have to re-learn this reality each time I head to Home Depot to buy supplies for a "simple" home repair.

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