In another thread, Kelly proposes the following thought-problem. Can a 75-year old single, with no debts, a $40k lifestyle, and $5 million to invest get by with investing in just Treasuries and win the hand of his corner-café waitress? The answer is “Yes” provided he never spends a penny more (adjusted for inflation) and he doesn’t exceed his average, maximum life expectancy. Otherwise, he’s begging for bread in his final year of life, having totally depleted his grubstake. Can’t happen? Won’t happen? You can answer this question for yourself and your own situation by doing the following. Build a spreadsheet that allows you to input the following variables: Age now. Age at death. Assets now. After-tax gains on those assets. Average, after-tax living-expenses now. Estimated, average forward inflation-rate. The way to make the numbers work for you is the following:(1) Under-estimate how long you will live(2) Under-estimate what your living expenses really are(3) Under-estimate what the rate of inflation will be (4) Under-estimate what your tax-rate will be.(5) Over-estimate what your after-tax gains rate will be. Then, presto, magic-o. Kelly can marry his waitress, and both can live happily thereafter. But if he uses the published actuarial number of 104 for males, the published inflation-rate of 9.07% (pre-‘82 method), published gains numbers (look it up), and published tax numbers (ditto), he comes a cropper, broke on his death bed, needing $636,746 to live another year, but having only $244,295 in the kitty. The point of this exercise isn’t who is right or who is wrong about the details, which can be endlessly argued. Rather, the point of such exercise is to test assumptions and to discover the conditions under which the model blows up. Putatively-safe investment vehicles, such as Treasuries will never, on average and over the long haul, provide a real rate of return after taxes and inflation. At best, they enable users to control their rates of loss. Therefore, they cannot be used as a sole investment strategy unless savings are large enough to overcome those losses, plus drawdowns. What is the median, household net-worth in this country even if real estate equity is included? Less than $260,000. That’s a far cry from the 75-year’s $5 million, but median, house living-expenses aren’t much below $40k. The median, household income is $46,326, and the median household savings rate is 5.3%. Do the math. Most people barely have their nose above water, and they are failing to take on sufficient investment-risk to provide for their retirement. For sure, most people will have multiple income-streams in retirement, only one of which will come from investments. Most people will have a public or private pension, plus Social Security Insurance. So include those in your spreadsheet and run your numbers again. Lower the inflation-rate from the reported 9.07% to what your actually-experienced inflation-rate is. http://dshort.com/inflation/inflation-since-1872.html?altern... Change your asset allocation from 100% Treasuries to a more sensible 80%-20% bonds to stocks, or to whatever boosts your rate of return without taking on intolerable risks. Cut back your spending a bit. Etc. Etc. What I’ve found, from building retirement spreadsheets for a lot of years, is three things:(1) What seems like a lot of money now really isn’t in 20 or 30 or 40 years.(2) It is very, very tough to match the reported historical investment returns. (3) For long periods of time (as you stock indexers found out in the past decade), investment returns can be very low. Run this exercise. Sell the business for $2 million. Keep the after-tax draw at $40k. Drop the inflation-rate to a more realistic 6%. Bump up the after-tax gains rate to 3%. The 75-year now gets to age 103 with a few bucks to spare. But if the least little thing about the plan goes wrong, he and wife are in the breadlines.
But if he uses the published actuarial number of 104 for males, the published inflation-rate of 9.07% (pre-‘82 method), published gains numbers (look it up), and published tax numbers (ditto),Using the SSA life tables for 2006, a 75 year old male has a life expectancy of just over 10 years (1 in 700 of making it to 104) so thanks for the extra years.John Williams and the shadow stats-- yea, currently running about 9-10% using that methodology which of course since it is on the internet is accurate. Think his average since 82 using that methodology has been around 7%. Personally, think the old method had its flaws as well and think 5% is about the (truth) average.Published gains - Schiller seems like a good source so will go with 5.2% as the 10 year government bond average since the real market crash (29)Published tax numbers (New I should have bought some muni's) an effective rate of 18% is about appropriate - And don't forget Social Security.. I mean I am 75 and it is solvent until like 2042--- SoLets use: I make it to 110 (I'd be the first in my family to hit that mark 30% above), Inflation is 7% (40% above my experience), returns are 3.2% (40% below the average and WAY below my experience) Taxes are 25% (40% above reality) and no social security.....So all numbers jacked up 30-40% from experience seems really conservative.You have me dying broke - my run shows me making it to 110 still leaving about a million - which ain't much but would buy a nice casket. The answer is “Yes” provided he never spends a penny more (adjusted for inflation) and he doesn’t exceed his average, maximum life expectancy.Looks to me like I have a ton of extra to spend - and for sensitivity - move any one of these numbers back to the realm of reality....and I am leaving the world at 104 with MILLIONS - Or, using what are realistic numbers, me and the waitress can spend 150000 inflation adjusted each year and I make it to 94 like Alfred the Butler!Yes - the model blows up if you use 9% inflation - 2% returns - living 20 extra years and paying 40% more tax.
Kelly, If you trust your numbers, then act on them, and I wish you and your gal a long and prosperous life. I'm more risk-adverse than you. So I discount the future more heavily than you (aka, over-weight the bad things and under-weight the good things). That's why I demand a higher present return from my investments, so that I can manage future estimation errors. Also, I frame the retirement-funding problem differently than most people. I don't ask whether I will run out of money before I run out of life. I ask in what year will my net-worth begin to decrease. In other words, no matter how long I live, I demand that my cash-flow (after a draw for living-expenses) be positive. So I bypass the debate over Safe Withdrawal Rates and focus on Safe Investment Rates by asking, what is the lowest return I have to obtain in order to never go cash-flow negative? Right now, I am projecting that with a 6% inflation-rate, my customary tax-rates, and a pre-tax gains-rate of 5%, I get to age 105 before my investment-net worth that year is less than the prior year. Thus, 5% becomes a benchmark. If, on average across my portfolio --which includes 10% cash-- I am obtaining that much, then I'm on target. If I can pick up investments that offer twice that, or three times, or six times that, I do so. With those higher returns comes higher loss-rates as well. But if, across a basket of risks, my average return runs around 8%, then two things have been accomplished. Future gains can be lower (and accepted risks can be lower). But more importantly, skills are acquired which lower the risks of pursuing those higher returns if higher returns ever become needed. So the pursuit of higher returns than I would seem to need is a double insurance policy. And given the craziness of the world we now live in, I don't think I'm being overly cautious. If inflation heats up in this country, as everyone seems to expect it will given current Fed policy, then the buying time for Treasuries will come again. At the top of the interest-rate hikes, I'll go massively long and get out of the multi-sector game. Until then, I intend to obtain from the bond market very dollar I can on the theory that risks taken now are risks I don't have to accept later. Sometime, when you get a chance, go to Vanguard's website and look at the performance returns on their index funds. The past ten years haven't been kind to investors in any asset-class. Why should the next ten be even as good, given this country's unwillingness to fix its structural problems, like, not understanding that $2.2 trillion in government revenues doesn't enable $3.8 trillion in government spending? (That's the CBO numbers for 2011). The redistributionist rabble want to tax the "rich" to make up the shortfall. But the burden of tax-increases will fall on them, as will the necessary increases in interest-rates. And now that Japan, a formerly huge Treasury buyer, is repatriating yen, problems will only increase for US investors. The safest bet is that the 'teens will be another "lost decade" in which returns (nearly any asset-class except commodities) will be negative after taxes and inflation. How many presently formulated investment plans can tolerate that kind of distress? What are the current, food stamp figures? One in seven households? If I'm remembering right, one in three seniors is now below the poverty line. It's numbers like that make me want to keep "the pedal to the metal" in terms of pursuing returns. But to each, his own. Charlie
If you trust your numbers, then act on them -- I do...I'm more risk-adverse than you -- So is 98% (at least) of the planet. Right now, my equities portfolio is at about a 3.5 beta to the markets (S&P / Dow / NASDAQ ) so I can easily make and lose your annual benchmark in a day.If inflation heats up in this country, as everyone seems to expect it will given current Fed policy, then the buying time for Treasuries will come again. And you know my entry point - mid term 6%, that is when the doc starts allocating into Treasuries.Sometime, when you get a chance, go to Vanguard's website and look at the performance returns on their index funds. The past ten years haven't been kind to investors in any asset-class. ????? Your target return is 5%?:OK From the Vanguard website 10 year returns for a diversified portfolio50% Equity, 20% Debt, 20% Commodity, 10% Real EstateEquity:20% Windsor [large cap value] - 4.09% (Been around since 58' impressive)10% Mid-Cap Index - 7.83%10% Small Cap Growth - 9.20% [RX - diaganolly across the style box]5% Developed Markets - 4.92%5% Emerging Markets - 14.66% [RX - Developed Markets right now w/ Japan??]Debt:5% Long Term Investment Grade - 6.73%5% High Yield Corporate - 6.17%5% Inflation Protected Securities - 6.50%5% GNMA - 5.63% Or Pick your home State for muni's if favorable for 5%?? [RX - Not long Treasuries until mod term is 6% and may go with TBT]Commodities10% Energy - 15.79%10% Metals and Mining - 21.9% [RX - Bubble in precious metals?? How about going base/industrials?] Although short coffee and long lean hogs is good...Real Estate10% REIT - 11.58% [RX - Technology Space]with a weighted average return of 9.5% the end result is Bottom Line = Annual return 11.05%CAGRWith the worst asset class being <u>debt</u> unless you are a trader.Why should the next ten be even as good, given this country's unwillingness to fix its structural problems, like, not understanding that $2.2 trillion in government revenues doesn't enable $3.8 trillion in government spending?Totally agree: There are some structural issues that need to be addressed.The safest bet is that the 'teens will be another "lost decade" in which returns (nearly any asset-class except commodities) will be negative after taxes and inflation. If I had a nicely diversified portfolio like above, I would take another lost decade that hands me 11.05% annual returns. Individual years may be in the toilet and that is the reason to diversify. Even though under stress correlation seems to be-- correlated! I am quite diversified but not in the exact percentages above and even have the delusion I got a fair shot at getting the 11, but only time will tell. It's numbers like that make me want to keep "the pedal to the metal" in terms of pursuing returns. As mentioned before - I am more risk tolerant than most and have some things like 3X ETF's, and hedge funds - out of options right, watching volatility. Also thinking about TBT! So - She is wound tight and either my engine will blow or I cross the line...50/50!! d(Beta)/dT
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