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Location: Formerly Pleasanton Ca, now in Marietta Ga
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Originally Posted by CLR210
Completely agree with this.
I agree with stealth rabbit. It completely depends on the situation. Math Jack assumes that you are loaning money to someone who can't qualify for a bank loan on the long term mortgage. But there are a lot of opportunities to do short term hard money loans to investors such as home flippers. I have a friend that comes up with the money for a home flipper and then split the profit with the whole flip. He has done this multiple times and makes way more than 10% on his money. Of course you have to make sure that the person getting the loan knows what they're doing and has a track record of success. The loans are typically less than 12 months.
I know other people that have done short-term loans with a great return on properties that have so much equity that there is no way they are going to lose their money.
It's surprising how many people have a lot of assets or gray paint jobs that can't come up with cash at certain times.
i know we don't want any investments in retirement that are not both totally passive , liquid and require no dependency on any individual for the outcome .
we got involved with a supposedly benign tax lien certificate sale where we were supposed to get 18% interest until the lien was paid off . what a horror that turned out to be when we were awarded the house and the old owners refused to move out .
the pitfalls you only find out afterwards can be a horror .
we didn't really expect to get the property . we really were doing it for the 18% interest . the owners always come up with the money at the last minute .
well this time they didn't . so with the people still living in the house we had to start the eviction process .
so now we are in to this for 2 years back taxes at 12k a year , and now legal fees .
they used every tactic to stall the court so they were finally evicted almost one year later and 3 years taxes later at almost 9k a year
but now they left their stuff behind . it was basically junk but nj law says we have to store it for months and if not claimed and paid for it is ours .
so now a moving company moved everything out to storage . now we had storage fees for 6 months and moving expenses .
at the end of the time frame we had to pay again to have the stuff removed .
while the house was empty , we can't prove it but we are pretty sure the ex owners went back inside and vandalized the house ripping out all plumbing and wiring .
basically the house was trashed . my partner luckily was a builder so we ended up gutting it and starting over inside .
by the time we sold it the money we made and the aggravation was hardly worth it .
i would never get involved with these tax liens ever again . nothing to stop the same outcome when someone you sold to defaults on their payments to you.
it is bad enough when this happens during your working and aggressive investing years . do you really want to chance this crap in retirement where it is your source of income ? i would sooner just invest through prosper if i want to take the risk .
Last edited by mathjak107; 04-30-2017 at 02:45 AM..
I suspect that your parents and grandparents were getting a much higher interest rate on their CDs, bank savings accounts, or money market accounts than any of us can get now (or for the past 8 or 9 years). If rates ever go up to those levels again during my retirement lifetime, I will definitely move a good chunk of my mutual fund investments to "cash" in these FDIC-insured investments.
Regarding the OP's question. Check with the company that runs your 401k. They may provide free "investment advice" to 401k participants (not saying it will or will not be the best advice, but it might provide a start for your education about investments) They probably have a lot of good information on their web site, too.
fully 1/3 of the time cd's have had negative real returns regardless of rates and that turns to 40% when inflation and taxes are included .
it isn't what the yield is as much as it is yield vs inflation and taxes .
the only use i have for cd's is for the current years spending i let a ladder come due monthly as well as a bit of emergency money . other than that i want all parts of the portfolio to be able to build up a cushion when it is their day in the sun for the years it isn't .
keep in mind too that the good years we are having now are not "gravy " or the cream . they are the cushion in our investments the lean years need down the road to balance things out .
1987 to 2003 saw incredible returns of almost 14% for 17 years . if you were a retiree you thought you could spend so much more . peter lynch stated the safe withdrawal rate for retirees should be 7% .
well then the 2000's came and if you look at the full period starting in 1987 as if you were a retiree starting out in that year , you know how you ended up 30 years later ?
you ended up 30 years later with the same average return the markets always had . a real return of 7.86% cagr , that is after inflation and pretty normal . going back to 1970 and going forward to the start of 2017 the long term real return average for a total market fund would have been 8.20% , not much different , even with 17 years of almost 14% nominal returns .
so periods of good performance tend to end up reverting back to the mean and giving you average performance at the end . if you treat the up years like they are golden and special and are something extra or additional , you may find in the later years you really needed that cushion in the portfolio that you spent or pulled out and things are really no better than average for your return if you just left things alone ..
when we have a good run up we tend to think we can spend this extra dough or pull it out of our investments but in the end it is needed and those good years just end up being average normal years at the end of the day .
Last edited by mathjak107; 04-30-2017 at 03:50 AM..
fully 1/3 of the time cd's have had negative real returns regardless of rates and that turns to 40% when inflation and taxes are included .
it isn't what the yield is as much as it is yield vs inflation and taxes .
the only use i have for cd's is for the current years spending i let a ladder come due monthly as well as a bit of emergency money . other than that i want all parts of the portfolio to be able to build up a cushion when it is their day in the sun for the years it isn't .
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I think CD laddering is a vital component of financial retirement planning. Sure CD yields are not great but they are safe and you know what you have. Also there is always albeit small positive gains. Nothing worse than having to wait for a market to recover to get your money unless you take a big loss. Math is not my strong suit but I fail to see where CD's have negative returns. I have yet to find something that will beat CD's with no risk of losing principal amount invested.
That being said, I will have some money invested in equities in retirement for growth.
Last edited by jasperhobbs; 04-30-2017 at 03:17 PM..
cd laddering is where you hold the money for spending , emergency money or money waiting to be invested . they are poor investments themselves.
a good investment plan never has you waiting for stocks to recover .
but even if you held no cash and had a 50/50 or 60/40 mix of equities and bonds , just rebalancing in good or bad markets would leave you just fine .
the drag of cash does not develop the same cushion equities does in a rising market . the extra gains not holding cash actually leaves you with more income as well as makes most drops irrelevant over the long term . .
subtract inflation and taxes from the cd rate . it is real returns that count not nominal .
cd laddering is where you hold the money for spending , emergency money or money waiting to be invested . they are poor investments themselves.
a good investment plan never has you waiting for stocks to recover .
Tell me a good investment plan with stocks involved that didn't get hit after 9/11 and the banking crisis in 2008? I suspect a lot of people had to wait for a recovery.
What I am saying is in retirement, I want a substantial amount of money in CD's for peace of mind. YMMV
any portfolio including 100% equities stood up just fine . just because you shelled out a few extra bucks in a v shaped down turn means nothing . you make it back in the up cycle by not having the weight of cash and bonds . not that i am saying go 100% equities . but even if you did you would have done just fine over almost every rolling 30 year period since 1871 .
that includes the great depression years , world wars and the 1965/1966 time frames which were the worst group ever.
the 2008 retiree with a 60/40 mix of equities and bonds is at the same point any other average group of retirees in history was at this many years in .
the 2000 retiree is fine too but the 2008 retiree did much better .
a 50/50 portfolio is optimum for a 30 year retirement and a 4% inflation adjusted draw rate. at least 35-40% equities is needed to support 4% safely but the balance at 30 years may be a bit light depending on outcomes .
i suggest before you get close to retiring you start to read the research and studies in this area so you start to learn what are old myths and wives tales vs the facts about retirement planning . you can start by reading some of michael kitce's work in the field of retirement planning .
here is the summary:
EXECUTIVE SUMMARY
The 4% rule has been much maligned lately, as recent market woes of the past 15 years – from the tech crash of 2000 to the global financial crisis of 2008 – have pressured both market returns and the portfolios of retirees.
Yet a deeper look reveals that if a 2008 or even a 2000 retiree had been following the 4% rule since retirement, their portfolios would be no worse off than any of the other “terrible” historical market scenarios that created the 4% rule from retirement years like 1929, 1937, and 1966. To some extent, the portfolio of the modern retiree is buoyed by the (only) modest inflation that has been occurring in recent years, yet even after adjusting for inflation, today’s retirees are not doing any materially worse than other historical bad-market scenarios where the 4% rule worked.
Ultimately, this doesn’t necessarily mean that the coming years won’t turn out to be even worse or that the 4% rule is “sacred”, but it does emphasize just how bad the historical market returns were that created it and just how conservative the 4% rule actually is, and that recent market events like the financial crisis are not an example of the failings of the 4% rule but how robustly it succeeds!
as far as cash buckets go , i do use them but they are a mental thing not an advantage financially : you can start your education here :
EXECUTIVE SUMMARY
Cash reserve strategies that hold aside several years of spending to avoid liquidations during bear markets are a popular way to manage withdrawals for retirees. In theory, the strategy is presumed to enhance risk-adjusted returns by allowing retirees to spend down their cash during market declines and then replenish it after the recovery. Yet recent research in the Journal of Financial Planning reveals that the strategy actually results in more harm than good; while in some scenarios the cash reserves effectively allow the retiree to “time” the market by avoiding an untimely liquidation, more often the retiree simply ends out with less money due to the ongoing return drag of a significant portfolio position in cash. As a result, the superior strategy for those who want to alter their asset allocation through market volatility (the effective result of spending down cash in declines and replenishing it later) appears to be simply tactically altering asset allocation directly, without the adverse impact of a cash return drag. Nonetheless, this still fails to account for the psychological benefits the client enjoys by having a clearly identifiable cash reserve to manage spending through volatility – even though the reality is that it results in less retirement income, not more. Does that mean cash reserve strategies are still superior for their psychological benefits alone, even if they’re not an effective way to time the market? Or do total return strategies simply need to find a better way to communicate their benefits and value?
The inspiration for today’s blog post is a recent article entitled “Sustainable Withdrawal Rates: The Historical Evidence on Buffer Zone Strategies” authored in the Journal of Financial Planning by Walter Woerheide and David Nanigan of The American College (and covered originally in the May 19/20 edition of Weekend Reading for Financial Planners on this blog). In their research, Woerheide and Nanigan examined the impact of so-called “buffer zone” strategies – essentially, strategies that hold aside several years’ worth of withdrawals in cash reserves to avoid the need to liquidate during a market decline – and found that despite their popularity, such an approach actually hurts the sustainability of retirement income far more often than it helps!
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EXECUTIVE SUMMARY
For retirees who fear the impact of a market downturn on their spending, an increasingly popular strategy is just to hold several years of cash in a reserve account to accomplish near-term spending goals. As the logic goes, if there are years of spending money already available, the portfolio can avoid selling equities in a down market to raise the required cash, and clients don’t have to sweat where their retirement income distributions will come from while waiting for the markets to recover.
Yet the mathematics of rebalancing reveals in the truth, even clients following a standard rebalancing strategy don’t sell equities in down markets, rendering the cash reserve strategy potentially moot. On the other hand, some benefits still remain – although aside from an indirect short-term tactical bet, the most significant impact of a cash reserve strategy may be more mental than real.
Nonetheless, is the cash reserve bucket strategy still a viable option for retirees? Or is it just another bucket strategy mirage?
The inspiration for today’s blog post was a recent conversation I had with another planner regarding the use of so-called “cash reserve” strategies with retirees, where 2-3 years worth of cash is set aside in a separate account to fund the next several years of expenses. The concept is pretty straightforward: by having a portion of funds set aside to fund near term expenses, the retiree avoids the risk of potentially needing to sell stocks in a down market that might impair their future recovery.
The problem is, as I examined the approach further, I found that the cash reserve strategy – similar to other ‘bucket’ strategies I’ve written about previously – may be more of a mirage than a reality for protecting clients from selling out in severe downturns.
Should you make some adjustments to your retirement nest egg?
"It's a question of a decent asset allocation, which in this day and age, in this current market is not so easy to puzzle through," Bogle says.
He advised a 50-50 blend of stock and bonds for "all investors of all types." But he argued that if you're younger, an allocation of 80 percent stocks and 20 percent bonds might be a reasonable mix. And "when you're older, depending on circumstances, 40 percent or 30 percent in stocks and 70 percent in bonds. "
"I happen to be in the middle of that," Bogle told CNBC, adding "I'm at 50-50."
Still, Bogle admits "I have my own concerns and worry. I don't have all the answers. Half the time, I wonder why I have so much in stocks and other times I wonder why I have so little. So, I'm probably about right."
Bogle shared his message for retirement investors: Own the stock market and diversify, buy in at low-cost, invest for the long term and don't trade.
With everything going on, hazardous times is putting it mildly.
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