Please register to participate in our discussions with 2 million other members - it's free and quick! Some forums can only be seen by registered members. After you create your account, you'll be able to customize options and access all our 15,000 new posts/day with fewer ads.
the problem is folks try to take long term investments which in my opinion require 12-15 years to mature historically and smooth out the returns and apply short term measuring sticks.
how many times has someone said equities stink because everything i put in over the last 5 years is behind....
how many actually had a plan that included rebalancing as well and buying more equities at the low..
if you did theres a good chance your higher then before, i know i am. but still it takes many years for long term investments to have their day in the sun and mature. looking short term is meaningless.
like i said the worst investment class for along time was gold if you counted the high, but given enough time and rebalancing gold almost performed as well as equities even if you bought at that 1,000 buck peak in the 80's...
dont have money thats for eating in 15 years or more? then re-look at your investment choices and tolerance for risk.
Listening to the tone of this discussion, it seems that are some issues that go beyond investment strategies. I am lucky enough to live in an area where the economic downturn has had a minimal impact. Housing values have dropped but only moderately and are now on the increase. Kids getting out of school are having a hard time getting career-oriented jobs, but unemployment among the middle class has been minimal. A lot of come and go businesses; e.g., strip mall stores and restaurants, have gone but most businesses have tightened expenses and are surviving or prospering. I suspect these conditions help my outlook. I think I would have a different outlook if I lived in south Florida and saw the worse of the housing bubble implosion.
As with everything in life it is an individual experience and generalizations may work in general but not always at the individual level. Thus as you point out we have our own life experiences and share them here.
investing is not just about stocks or bonds... a simple mix of gold, long term treasuries ,cash and a total market index fund has returned over 9% for the last 30 years...
it was even up 5% in 2008 when things crapped out.
investing in one asset class such as stocks or bonds and betting on only 1 outcome is an eventual train wreck . over long periods of time 15 years or more diversified funds of equities have a tendency to rise with almost certainty while betting on interest rates can be anyones best guess... who ever thought 40 years later and all that deficit spending and rising debt a 5-1/4% passbook savings account would be a blessing.
even everyones red headed step child gold if bought at that 1000 buck high decades ago but rebalanced in a portfolio yearly buying more when gold fell would have you seeing a 9.2% average return vs equities 9.8 over that time frame.
our portfolio is comprised of the above as well as following the fidelity insight newsletter's growth portfolio since 1987
up until about 3 years ago when we toned down to the capital preservation and income mix.
we arent retired yet but are figuring 4-6% as a outlook for our blend going forward. our mix is about 60% outside of retirement accounts and 40% in...
100k in the portfolio in 87 is worth just under 1.2 million today
as far as adjusting for taxes and inflation thats a personal thing and when comparing performance for the masses it really wont show much.
but dividends are very much part of performance.
we are all different and inflation is measured as a price index not a cost of living index and is so variable for each one of us as well as tax situations..
I looked back at the start of the thread - and since it's about retirement calculators - I think discussion of rate of return is reasonable (probably essential - because that's one of the most important numbers you have to plug into the calculator).
I think your gross estimated rate of return going forward looks reasonable as of today (it's close to mine). OTOH - it is a moving target IMO (albeit one that moves slowly).
One problem though is it doesn't take taxes into account (another factor you have to plug into a calculator). Or - more important - changes in the tax laws. For example - there'll be a big change next year when the Bush tax cut on dividends expires. We already know about that - but who knows what will happen over the course of the next 10-20 years when it comes to taxes. Our allocations between money in taxable accounts and "retirement accounts" are about the same. And although I'm a big believer in maximizing retirement accounts - I remember the short period of time (maybe a year) 10-20 years ago when there was an excise tax on large retirement accounts. Didn't affect me back then - but it would affect me (and a lot of other people) now. And I wouldn't dismiss such a tax as impossible - because we've had such a tax before. There is also current talk about changing the way income from municipal bonds will be treated/taxed. Also - we don't know what tax rates will be. When my husband and I were in our peak earning years - the top federal tax rate was 50% on earned income - 70% on "unearned" income. And our budget problems and class warfare rhetoric were at much lower levels then. Anyway - I spend a fair amount of time reading about taxes and "tax news" - so I have some sense of what may be coming down the road.
Another problem is inflation. I don't believe that all inflation numbers are personal. One extremely significant factor going forward IMO is what seniors will pay for medical insurance and care. I am gradually coming around to the view that within the next decade - seniors who are better off will pay a lot more for their medicare than they pay today (I realize that's not really "inflation" - but it does mean higher costs). Yes - rates for medicare part B do go up at various income levels today - but those income levels are very high. I suspect they'll go lower. And medicare part A won't be free. The health care bill incorporates the notion that people should pay up to X% of their income for health insurance - and I think we'll get that with medicare as well. Wouldn't be surprised with a number around 8% or so (except for low income seniors). And the deductibility of these expenses will be increasingly limited (they were limited in the health care bill - the 7.5% number was raised to 10%).
Of course - the cost of medical care will continue to go up - and that means premiums will go up as well. One interesting point for those of you who are younger is that although medicare premiums can't go up more than the rate of inflation for people already on medicare - they can go up for those not yet on medicare. So my husband - who is going on medicare this year - will be paying $110 for part B - not the $95 people who were on medicare last year are paying.
Anyway - I am anticipating paying a lot more for medical things in the future than I would have anticipated 10-15 years ago (especially if I want better care - because I do see medical rationing coming in various ways, shapes and forms). Robyn
investing is not just about stocks or bonds... a simple mix of gold, long term treasuries ,cash and a total market index fund has returned over 9% for the last 30 years...
it was even up 5% in 2008 when things crapped out.
investing in one asset class such as stocks or bonds and betting on only 1 outcome is an eventual train wreck . over long periods of time 15 years or more diversified funds of equities have a tendency to rise with almost certainty while betting on interest rates can be anyones best guess... who ever thought 40 years later and all that deficit spending and rising debt a 5-1/4% passbook savings account would be a blessing.
even everyones red headed step child gold if bought at that 1000 buck high decades ago but rebalanced in a portfolio yearly buying more when gold fell would have you seeing a 9.2% average return vs equities 9.8 over that time frame...
Again going back to rate of return. You mention investing isn't just about stocks or bonds - but only add in gold and cash (I assume your total market fund is either an equity or equity/bond fund). There's the old saw about gold - always own a little - and hope it never goes up - because that means the rest of the world is falling apart. I own some. Will keep it forever. It is a terrible thing to try to sell (the spreads even on things like coins are pretty big - and any gains are subject to regular tax rates - not capital gains rates). Have never thought of cash as an investment - more of a parking place for money between investments. Two new areas (new for me) I've been working with in the last couple of years are currency and commodity ETFs. Jury is still out on those. Are you working with any other asset classes?
I think if history has taught us anything in recent years - it's that asset classes are more correlated than people thought. And that this is not the market of 20 years ago. There's a lot more year-to-year volatility. Now assume a person made a reasonable assumption about long term rate of return on a calculator - but happened to retire in 2006-2007. And made withdrawals according to the calculator schedule. That person wound up in a world of hurt (much like people who retired right before the '73-'74 recession).
Now I know some "experts" recommend keeping 2 or 3 years of cash on hand to pay bills all the time - but that is an awful lot of cash IMO - especially when cash pays zero.
Which is where fixed income investments come into play. A fixed income investment does just that - it "fixes" your income. If one has a large enough portfolio of individual fixed income instruments (not funds - which I don't care for at all) - well parts roll over all the time - and although your income will change over time - it won't change drastically year-to-year unless you put everything in short term instruments. Takes a lot of the guesswork about the return number you put in the calculator. The ultimate "no guesswork" investment for that calculator is the STRIP (zero coupon treasuries). If you buy and hold to maturity - you know exactly what you'll get X years down the road (unless the US defaults on its debt - not likely while I'm alive IMO).
One does not have to guess about what interest rates will be in the future if one is buying today. You know exactly what you're getting. I do believe there are better and worse times to buy than others for fixed income (as well as everything else). But - when I buy - it's WYSIWYG. I find the exact opposite with equities (which are basically the whipped cream and cherry on top of my basic portfolio). I don't have a clue what my return in those will look like 5-10 years from now (although I won't lose a lot because I have a pretty strict trading discipline).
Nor do fixed income instruments represent a singular view of the world (except a belief that the whole financial system isn't going to fall apart). Because they come in all flavors. Buying a 30 year STRIP in an IRA represents one view - but buying a highly rated shorter term muni in a taxable account represents another. And sometimes there are just good values. I bought long term callable CDs for years - because they were yielding 100-150 bp over treasuries. With credit demand down - that market is pretty bad (in terms of spreads) these days IMO. I even own some funny CDs - where the payments depend on things like the 10/30 year tbond spread - or 6 month LIBOR staying below a certain percentage. I do have a particular view of the world today (couldn't do anything without a basic theoretical framework) - but it may change a year or two down the road. But - looking at my portfolio - I can be pretty accurate about what number to plug into that calculator (even people who are retired have to plan for the rest of their retirement). Robyn
Hmmm so you feel pretty comfortable that anyone who usese a 7-8% return at age 65 and spends accordingly has a pretty big risk of ruin before meeting his or her maker. WRONG! What if they have sizable pensions and don't need to draw down their investments? There are a lot of us you know. Again sweeping generalizations when faced with individual circumstances stand a pretty big risk of ruin. They can spend their pension and assume a 7-8% return if they are not drawing that money down and using it as a long term investment just like they did at 40?
Well if I had a pension large enough to meet my current spending needs/wants - I'd probably invest the non-pension money - money that I didn't need today - conservatively to meet needs my husband and I will probably have when we get older (like more help around the house - higher medical expenses - possible need for a SNF - etc.). And it really wouldn't matter what return figure I put into a financial calculator. Because if you're not dipping into a fund - you don't have to worry about "tapping out" (unless you invest poorly). Which is pretty much what we do today - live off our taxable portfolio - as if it were a pension - and save in our retirement accounts.
Also - depending on the company - I'd probably try to avoid getting into a situation where my pension depended on the company - and where I had a ton of company stock as well (too many eggs in one basket) I'd also keep a pretty close eye on my company (I know a few airline pilots who wound up in pretty bad shape when their airlines went bust because their pensions were over PBGC limits - and because they were looking to retire early - but PBGC has rules that limit that option). Guess I also wouldn't assume that any medical benefits I thought I might receive from my employer when I retired would be there (unlike pensions - those benefits usually aren't guaranteed). I'd also keep an "ear to the ground" regarding proposed pension changes if I hadn't yet retired (I think that big IBM case - where IBM changed its pension rules in the middle of the game) is still pending. I've never worked for a big company - so those are thoughts off the top of my head. Robyn
actually the major asset classes if diversified correctly are not correlated much... the problem is when assets are hybrids of each other.
such as treasury bonds are not the same as owning corporate bonds more ofton then not.
in a recession corporate bonds took a bath and dropped as they responded like stocks. what was bad for stocks was bad for bonds ..that drop was in the face of falling rates too..
on the other hand long term treasuries soard almost 28% in TLT in 2008 . that coupled with the rise in gold actually left you up 5% for 2008.
the issue is the old buy foreign stocks or buy foreign bonds is not the diversification people hoped for. corporate bonds were no equal to treasuries..
in its purist sense the only true diversification is equities,gold, treasuries and cash.... those are the only 4 that can be counted on to react to certain economic scenerios of which there really are only 4.
prosperity
inflation
recession
depression.
there is stag flation but thats just a short term stop to one of the above.
by carefully choosing what reacts strongly to those 4 out comes is the only true diversification.
as we saw last year even swapping commodites for the gold wasnt the same. oil and commodities dropped like stocks, gold broke new highs.
its not that there isnt ways of un-correlating assets its just there is to much in hybrids that are sold as proxies that arent really going to do the trick ala corporate bonds being substituted for treasury bonds.
as far as large cash positions in a portfolio , for some strategies they arent counting cash for returns,they are counting on the cash to dampen volatility and risk.
one portfolio i use is 25% cash,25% gld,25% tlt and 25% vti,rebalanced once a year.
my actively managed portfoilo is about 25% cash ,35% equities, 40% short and intermediate term investment grade bonds
i dont really care about the cash position, its merely there as an anchor to dampen volatility. the overall returns meet my goals and risk level
Why wouldn't you include dividends as part of the return? If you are invested in a dividend fund that is a major component of the return. That 7% includes the need to adjust for inflation and taxes. If you draw down 2 million at a 4% draw down rate of course you are going to pay taxes on the 80K income. If inflation is 9% and you are earning 7% yes you have a problem maintaining your principal. We have had lots of discussion in this and many other threads and we often know where each other is coming from and what their situation is. The variable about kids and parents is very valid but again is one of personal situation. Not sure what a SNF is but if it is related to health care we have had discussions about how much to have set aside for Long Term and the need for Long Term Insurance and the need for cash flow to cover annual medical expenses. We previously discussed that the definition of safety is related to the individual and their risk tolerance. Driving 75 is safe to some and not others.
I would be wary of dividend funds. I know too many older people who bought high dividend stocks (mostly financials) and got clobbered the last few years. Also - unless you think there's a realistic chance that Congress will extend the 15% tax rate on dividends - I think stocks whose primary attraction is higher dividends will become a lot less attractive beginning 2011.
I don't include dividends because they have been so low in general in recent years - not over 2%. Once you factor in inflation and taxes - they're all but gone. But if you want to add 1.82% in dividends (current DY on the SP500 - that's ok by me).
If I were advising a person with $2 million in a taxable account - I'd be talking a fair amount about municipal bonds.
I believe that discussions about risk tolerance become increasingly less relevant as people get older. If you're 40 - want to bet the house - and go belly up - you have time to recover. Someone who is 70 or 80 or 90 doesn't. The place where my father lives had a waiting list when he moved here in early 2006. Now it's 1/3 vacant because so many elderly people lost so much money they couldn't pay their rent and had to move in with their kids. I think they put the wrong rate of return into their retirement calculators . Robyn
i only go for total return, couldnt care less if its dividends or capital appreciation... if my net worth is up im up and if it dropped im down. dont matter what dividend im getting ...
When I look at retirement income, I try different scenarios for rate of return on investments and for inflation rates. I typically use 6% as a conservative rate of return and 3.5% as an average for inflation. Depending on life expectancy and some other factors you should be able to pull out at least 4%/year and still keep up with inflation. I have an additional cushion built in to my projections. Realistically, I should need even less money as I get older. I expect to be more active and spend more early in retirement.
Why do you think you'll need less money? Let's think something simple - teeth (not covered by Medicare). My father had great teeth all his life - but has spent $10k+ in the last 2 years dealing with failing caps - cracked teeth - new bridgework - etc. Teeth only last so long - even if they're great teeth when you're young. So you want a nice smile? Or are you going to go with the quick fit budget denture?
Or another simple thing - eyes. Medicare will pay for your basic cataract surgery - but not the new zippy lens implants. Those were about $4k. Anything medical will almost certainly cost you more than most activities you can think of doing when you're younger. The medical stuff is a real "budget buster". I will probably need cataract surgery soon (seems that a lot of us who have lived in the south for decades are getting cataracts earlier than people who have lived up north). And I'm going to spring for the zippy lens implants. Robyn
im planning on needing about the same amount for the rest of our lives.
younger we are doing more, buying more , traveling more and into our hobbies. i forsee as we age greatly increased medical costs and spending more and doing more for our grand children..
we merely expect our spending to shift but not drop.
Please register to post and access all features of our very popular forum. It is free and quick. Over $68,000 in prizes has already been given out to active posters on our forum. Additional giveaways are planned.
Detailed information about all U.S. cities, counties, and zip codes on our site: City-data.com.
Please register to participate in our discussions with 2 million other members - it's free and quick! Some forums can only be seen by registered members. After you create your account, you'll be able to customize options and access all our 15,000 new posts/day with fewer ads.
. Robyn
