On Mar 12, 8:12 pm, joetaxpayer <joetaxpa...[at]nospam.com> wrote:
- quote -

Your point (which is a good one) is that it would be much harder to
implement his proposed strategy now, than it was then.

This is reflected here in the UK. When you retire, you have to buy an
annuity with the retirement funds you have saved in personal pension
schemes.

The income you would receive from those funds has more than halved in
the last 10 years. Someone retiring in 1996 with £100k, has twice the
retirement income of someone retiring in 2006 with £100k.

This is essentially why our pension system is in severe trouble. It's
not so much the performance of the stock market 1999-2005 (still not
reached its previous peak), it's the collapse in gilt (government
bond) yields which underpin the pensions both of DC and DB systems.
If you run a company DB scheme, the cost of insuring your pensioners'
pensions has effectively doubled.

The reaction of individuals has been to lean more towards property
markets, and particularly residential property-- both owner occupied
and investor. Since residential housing prices have risen by nearly 4-
fold in that time, this has been a good bet (for some). But it won't
be if prices stop rising, or start to fall.

Individuals are not, through personal or company plans, saving enough
for retirement, and the gap is large, and growing wider.

darkness39[at]yahoo.com wrote:

- quote -

It would seem that no strategy is risk free. In the endgame, an
inflation adjusting immediate annuity (there, I said it) would seem to
be close, but of course the risk there is you die shortly after buying
it, and the money is gone. There are tradeoffs, but no way to eliminate
all risk. The intent of my post was to highlight the irony in the fact
that this proposed 'worry free' strategy requires twice the deposits it
did just four years ago. I'd compare the S&P which dropped from 1500 to
800 a drop of 40% (after dividends) to the iBond real component dropping
from 3.6% in May, 2000 to 1.4% Nov 2006, a 60% drop. Copywrite date on
the book says 2003, the rate had already dropped below 2% in Nov 02,
but I guess you don't pull a book from release
just because its premise is faulty. You are correct, in hindsight the
3.6% was quite the buy.

JOE



- quote -

Yes, my wording was less than clear, but you knew that. He suggested to
invest 100% in iBonds/TIPS. Their real yield fell 50% (actually 60%).
And right now, post tax, their real yield is about 0%.

I just read this book too. I thought it was easy reading, with the
following interesting ideas:

1) Stocks are risky, even in the long run. The market can drop just
as you intend to cash out. This is perhaps the one big takeaway from
the book. Of course, this is worse in an overvalued market (Japan in
the 80s, US 1999).

2) Due to #1, target retirement funds may be a poor investment.
Imagine that the market drops every time the fund changes holding
percentages. Bodie says to change holdings based on portfolio
performance. I'm not 100% sure I understand this advice, but it
sounds interesting. I think he's saying that when limiting risk (due
to getting closer to your target withdrawal date) to change holdings
to more bonds when the market is up, not based on an arbitrary date.

3) An alternative to buying stocks is to put enough in a CD to
recover your principal and buy LEAPs for the market. You don't risk
the principle, but get some, albeit limited, upside if the market goes
up. I assume this is only intended for those who are time
constrained, otherwise you could wait out the bear market.

4) Use I bonds or TIPS to protect principal. I'm not sure about
this either (see next post about I bonds).

There's also advice and simple calculations to help you plan, set
goals, etc...

Overall I thought it was a good reality check about risk, although I'm
not going to run out to put any excess cash in I bonds right now.

On Mar 12, 12:07 am, joetaxpayer <joetaxpa...[at]nospam.com> wrote:
- quote -

Any strategy that is *not* about investing in US government real
return securities has risk

(that strategy has risks too: your own personal costs outstrip CPI,
and/or the US government gets into credit problems).

My own thought is you need to assess:

- how much you have
- how much you will need
- whether you have other sources of TIPS-like income, eg US Social
Security, in retirement

Monte Carlo simulation is the best technique available, then, for
assessing your probability of meeting your retirement goals. You can
assess different scenarios with, say, an 80% chance of meeting your
retirement goals, or a 90%, or a 99%, and see what asset allocations
give you those.

The William Sharpe website financialengines.com had some tools and
ideas on this, and I think www.efficientfrontier.com (if you search
the back issues) had some links to some tools.

The UK, being the UK, is 15 years behind on this ;-).

- quote -

Actually it's dropped 50% or so. 100% would mean no yield at all ;-).
- quote -

There was an exchange on efficientfrontier.com a couple of years back
between Bernstein and Bodie.

Bodie admitted that a problem with his approach is that if everyone
does it, that may change the real interest rate offered by TIPS or
other real return bonds. He refers to it as a 'general equilibrium'
problem.

Part of the problem is the publication delay lag between an author
writing a book and it hitting the shelves. When Bodie was first
pushing his viewpoint (about 1998) the consensus was that markets
could only go up, and TIPS were yielding 4% real. But the book didn't
come out until 2002-03, from memory.

In retrospect, stocks were overvalued, and TIPS were the buy of the
century.

My view is real estate is now in the position that stocks were in
1999, ie as the 'sure' retirement bet.

At 1.5% real yields, it is much less clear that TIPS are a bargain.

I don't recall which thread contained the reference to this book, but
the poster cited this author as suggesting that one could/should invest
in iBonds for truly 'worry free' retirement income. There were a series
of unanswered questions such as "what multiplier is needed at retirement
to provide the stream of income?" Any regular here is familiar with the
rule of 25, which is the inverse of the 4% withdrawal rate one hopes a
diversified portfolio will provide.

That said, I got the book and am far enough along to post my findings.
First is the link http://www.prenhall.com/worryfree/ which provides a
downloadable spreadsheet. The first assumption is that the TIPS (he
switches between TIPS and iBonds, I won't object as they are similar in
that both are linked to the CPI) have a 3% return. This means 3% plus
whatever CPI is running. He also assumes a replacement rate of 70% is
the goal, as social security will provide some, and 100% isn't the
target as one doesn't have to save 'for' retirement while retired. No
arguments there from me either. The sheet comes up assuming that one
starts saving at 35, retires at 65, and dies at 85. A savings rate of
21% is needed to accomplish this. I think 90 is more realistic, the rate
has to jump to 24%. Start saving at 25, the rate drops to below 16%. I'd
be great with this, only a visit to
http://www.treasurydirect.gov/indiv/...esandterms.htm
shows that the current rate on iBonds is 1.4%. The real return has
dropped by half. Leave the changes I made above (start at 25, live to
90) and the required savings rate shoots back up to 27%.

Had I read the book in 2003 and been sold on this plan, from a savings
rate of 16% (which I wouldn't worry about), I'd find, that as the real
rates dropped, the new bonds I purchased would require a saving rate
over 27%. This is worry-free?

I appreciated his anecdotes of the people who were on the verge of
retiring to then meet up with the crash of 2000-2. And the Enron widow.
These stories only reinforced my belief that much planning is needed in
those final years, but he suggests that no amount of diversification
will protect an investor from a long term bear market. I'm not convinced
either way, but I still lean toward the 5-6 years of spending in bonds
or cash equivalent, and the rest diversified among stocks, local and
foreign.

I wonder if he's changed some of his advice given the drop in yield of
the instrument he suggested to use 100%.

Joe
JoeTaxpayer.com