Here's a statement of the obvious: The opinions expressed here are those of the participants, not those of the Mutual Fund Observer. We cannot vouch for the accuracy or appropriateness of any of it, though we do encourage civility and good humor.
I think the conclusion says more than anything else: "It is easy to recommend allocating a large percentage of your retirement investment portfolio to “safe” investments. To be honest, for those giving the advice and for those receiving it, it just feels all warm and fuzzy.
It is much harder to take into consideration the long-term impact of inflation, taxes and the often low yields of fixed income investments. Watch your expenses. Invest for the long-term. And never, ever forget about the insidious effect of inflation. That’s my “expert” advice."
The inflation rate "has wobbled a bit, but it has been steadily rising." Hmm.
How about: filtering out short term noise, there's a clear upward long term trend? Not at all steady, but unmistakable.
She writes that you'd need $246K in an IRA to draw enough to spend $1K/mo. The only way I see getting $246K is if I assume 0% return (not the 6.5% she assumed), and no taxes (not her 25%). Then, $246K/$12K (per year) = 20.5 years. That takes a 65 year old to 85.5, which just happens to be the average expectancy she gave (84.3 male, 86.7 female = 85.5 average). Coincidence? You decide.
Worse, she simply doesn't get IRAs. She writes that "I assumed a 6.5 percent pre-tax return, a 25 percent combined federal and state income tax rate yielding a 4.875 percent after-tax return."
That's the effective after tax yield in a taxable account. When the income is taxed annually, you just subtract off the tax rate from the investment rate of return to get the annual return rate that compounds (assuming you don't withdraw all the money).
It's not so simple in a tax-sheltered account. There, you don't pay taxes until you withdraw the money. For example, here's how to compute the effective rate of return on $100 that is left in the IRA for ten years:
Start: $100 After 10 years: $100 x (1 + 6.5%) ^ 10 = $187.71 Gain: $87.71 Tax on gain: 25% x $87.71 = $21.93 Net gain: $65.78 (65.78%) Annualized after-tax gain: 5.18%
If it had come out the same as in a taxable account, there would be no point using an IRA. Of course there's tax owed on the original $100 as well, but that doesn't play into the effective rate of growth.
The right way to compute amortization in an IRA is to start with how much you want to draw after tax annually, use the tax rate to figure out how much that is in pre-tax dollars, and use that as your annual "payment" from the IRA. Then you use the rate of growth (here, 6.5%) as the "interest" rate. Plug that into an amortization calculator to see how long your starting amount lasts.
With annual "payments" (withdrawals) and compounding, payments starting a year after the beginning of the "loan", it computes that this will last almost 17 years. After one year, the balance in the "loan" (IRA) is $96,500. That's right, because after that year, the $100K has grown to $106.5K, and you draw out $10K. It keeps going from there.
Okay, the "author" of the referenced Forbes article is: ---Contributor Kerri Zane I'm an Emmy award-winning television executive producer and development expert with 20+ years of experience. Take the right spin and every reality show idea can get greenlit! Love connecting with readers through my personal finance & travel posts. Wrote a saucy Lifetime-like beach read called, "My Lover's Keeper." It's Amazon-purchasable. A big supporter of single mom's. Wrote the bestseller, "It Takes All 5: A Single Mom's Guide to Finding the REAL One. Made media friends with appearances on KTLA Morning News, The Wendy Williams Show, and Huff Post Live. I have an M.A. in Spiritual Psychology from USM and a B.A. in Sociology from UCLA. Connect with me www.kerrizane.com Follow me on Twitter: kerrizane & Instagram @kzloveslife
AND the ParadisePost author is: ---Lori Flesher has been a Certified Financial Planner™ professional since 1989. Investment advisory services offered through Lori Flesher, CFP® a fee-only Registered Investment Advisor. She can be reached at 877-2244 or via email at [email protected].
>>>An IMHO view..... There are numerous folks here who can provide valuable "a real investor's experience in the markets for 'x' number of years" that would provide more quality and evidence based knowledge, versus the Forbes article. I'm attempting to determine what drew Ms. Flesher to this article to expand(?) her thoughts into this area. How much do these folks receive in payment for such writes??? I don't know and not going to research; but there are numerous relationships (blogs, ad clicks, etc.) that may exist to generate some revenue.
As to @msf and his calculations; I have full faith in his work. Thank you.
In the way back days; our house used a simple calculator attempting to look forward for the "how much money are we going to need?". One constant at the time was a 5% rate of inflation as one of the inputs. Note: for those watching during the late 1970's into the early 80's were witness to "inflation" in its grandest form of "up". So, one does all of the cute math, with annual inflation at 5% (inflation, regardless of positive rate does compound, too), a magical 8% annaulized rate of return on investments and perhaps a 25% tax rate when IRA's have to be cashed out (RMD's). The result is "damn"; better keep our arse in gear to end up on the positve side of monetary into the future. To many variables not included in the articles that likely cause confusion for many; and the fact if "they" have not already saved/invested enough properly that "they" are screwed if that think that they may maintain a "life style".
And age 65 from the article only brings one sure event, in that one starts Medicare.
I've got to stop. I become angered by these often too simplistic articles that probably do more harm than good for too many who are already afraid of and don't understand investments.
One last note for the too many who have not prepared properly for the "after life of retirement". I have an acquaintance with whom I have contact several times a year. She has been saying to me for 30 years, "I need to get with you (your opinion) about what would be some good investments in the market(s) for our retirement." This event stemmed from an observation from me 30 years ago that their adviser had their taxable account invested in a form of tax-free muni bond holding of some sort. The rub was at the time, that their tax bracket was so low, that they would have been better suited with a taxable bond fund paying a higher rate of return and pay the taxes on the return. She last mentioned, "We've got to get together to review our investments" this past March. I always remind her of the loss of compounding over the years. Oh, well. Regards, Catch
Didn't read the Forbes article carefully - just scanned it to see that the advisors were quoted at greater length including some investment suggestions. The PP piece just grabbed a single sentence here and there.
Your use of the word “arithmetic” (while I had referenced mathematical) caused my otherwise idle brain to wonder whether, perhaps, there was an adjective: “arithmetical”. Indeed there is.
For your reading pleasure I’m linking an article on “Arithmatical Reasoning”. One caveat: Seeing as to how the introductory paragraph misspells “quite“ - I’m not too certain of their knowledge level. And, according to Dictionary.com , they’ve also misspelled the word they’re trying to explain. It should actually be “arithmetical”. https://www.dictionary.com/browse/arithmetical
“Introduction - The Reasoning section of every competitive exam includes questions from the topic“Arithmatical Reasoning”. This topic is considered to be quiet important and every year number of questions are asked from this topic. We are providing you different types of questions were asked which will surely help you in the upcoming Exams.“
De-risking your retirement portfolio (plan) for guaranteed income that meets essential expenses primarily and discretionary expenses secondarily.
From these three links:
An important point is that volatile assets are seen as inappropriate for basic needs and the contingency fund. Stated again, the objective of investing in retirement is not to maximize risk-adjusted returns, but first to ensure that basics will be covered in any market environment and then to invest for additional upside. Volatile (and hopefully, but not necessarily, higher returning) assets are suitable for discretionary expenses and legacy, in which there is some flexibility about whether the spending can be achieved.
Asset allocation, therefore, is an output of the analysis, as the entire household balance sheet is used and assets are allocated to match appropriately with the household’s liabilities. Asset-liability matching removes the probability-based concept of safe withdrawal rates from the analysis, since it rejects relying on a diversified portfolio for the entire lifestyle goal.
The idea is to first build a floor of very low-risk guaranteed income sources to serve your basic spending needs in retirement (or, as Moshe Milevsky says, “pensionize your nest egg”). The guaranteed income floor is built with Social Security and any other defined-benefit pensions, and through the use of your financial assets to do things such as building a ladder of TIPS or purchasing an income annuity. Not all of these income sources are inflation-adjusted, and you need to make sure the floor is sufficiently protected from inflation, but this is the basic idea.
Once there is a sufficient floor in place, you can focus on upside potential. With any remaining assets, you can invest and spend as you wish. Since this extra spending (such as for nice restaurants, extra vacations, etc.) is discretionary, it won’t be the end of the world if you must reduce spending at some point. You still have your guaranteed income floor in place to meet your basic needs no matter what happens. With this sort of approach, withdrawal rates hardly matter.
correction: Also ar·ith·met·i·cal. of or relating to arithmetic.
Thanks @Crash - I did get around to catching their error. Was editing while you posted. Geez - Not too certain I’d want one of those guys prepping my kid for an exam.
First, JohnN seems to come up with some unusual reads. Love the title - “Paradise Post” at the top of page.
I don’t know who the author is - and she cites some unknown / unnamed “experts” for her piece. So as to the article’s reliability, I’d have to rate it low. But it does get into a lot of things we routinely discuss here about retirement planning - and than she throws a real monkey wrench into the equation: That being the assumption that a “boom market” requires some type of different approach. She tightens the nut a little more by mentioning that interest rates are near historical lows and likely to rise.
Yikes - You could write a couple books on this and still not answer it fully.
The first part is a bit easier. Plan ahead for retirement. Everybody’s needs and situations are different. Most, I think, would agree that in the earlier years of retirement you should remain fairly aggressively invested in equities. If you took TRP’s retirement funds as models*, they’d probably have a retired 60-65 year old in a fund with maybe 60-70% equities and 30-40% assorted bonds (variety of credit risks and maturities). In 10 more years (age 70-75) they’d probably have the same individual at near a 50/50 mix - probably skewed a bit toward bonds. And by 80-85 the mix would be heavily skewed in favor of lower risk bonds, but maintaining some limited exposure to equities. (just my best guesses).
The second part (boom market) - That’s currently a source of some contention here. My assessment is that the preponderance of board opinions is that you shouldn’t let perceived market conditions affect your asset allocation. For those folks it’s full steam ahead - and they’ve been right for a long time now. And, markets do go up more than they go down over the long term. I’m in the minority who feel that it’s prudent to attempt to gage market valuations and euphoria a bit and and vary risk exposure accordingly. Admittedly: (1) It’s a hard trick to pull off (some would say impossible) and (2) It will diminish your long term returns. There’s no free lunch. Lower risk usually translates into lower return.
The third part (interest rates) - That’s a tough one. So much depends on where the global economy goes. The U.S. is doing fine, and consequently, the Fed is raising rates. But in parts of Europe and Japan, economic activity is still subdued. Those countries are by no means out of the woods - and could slip back into recession. Other than staying with shorter duration bonds (a perfectly reasonable option), I’d say take a look at some of the hedge-like funds that are being rolled out. There’s a reason Price introduced RPGAX nearly a decade ago. They anticipated rising rates and wanted a balanced fund that’s not 40% into bonds. By allocating 10% of that fund to an outsourced hedge fund, they reduced the bond component to only 30%. Recently, they’ve rolled out their own hedgefund-like vehicle TMSRX. This is sure to become a widely misunderstood fund. It’s not designed to beat the market, or even keep pace with equity markets. Their intent is that the fund will to do a little better than a diversified bond fund would do over time - with roughly the same amount of risk. Expenses are high, so don’t expect to make a lot with it. But, if you want income-like returns and are frightened by the prospect of rising rates, that’s one option - from a bunch of guys who know their business.
* TRRAX (Retirement 2010) is designed for someone who retired in 2010 (and is now nearing 10 years into retirement). No age is stipulated, but assuming retirement at age 65, the fund would be appropriate, in T. Rowe's opinion, for someone now nearing age 75. Currently the fund is invested in just under 40% equities, (domestic and foreign), 40% domestic bonds, and 20% scattered among foreign bonds, cash, preferred stocks and convertibles. Hope this helps. Of course, one size does not fit all.
I thought the site might be punning on arithmetic + mathematical reasoning, but it's just a spelling error repeated in the URL. On the home page, it's spelled correctly as: (5) Arithmetical. https://sites.google.com/view/penpaperexam/home
The "Rs" on the page is for rupees, suggesting that the site is to help prepare for Indian exams. Took a while for that to dawn on me.
I thought the site might be punning on arithmetic + mathematical reasoning, but it's just a spelling error repeated in the URL. On the home page, it's spelled correctly as: (5) Arithmetical. https://sites.google.com/view/penpaperexam/home
The "Rs" on the page is for rupees, suggesting that the site is to help prepare for Indian exams. Took a while for that to dawn on me.
Thanks. Most interesting. Yep - I clicked on the link provided and they have it right there.
I still don’t fully understand how that error could have happened. But, coupled with the misspelling of quite, I’d say somebody somewhere (perhaps a typist transposing) was having a very bad day. Reminds me of a joke a lecturer on the Spitzer Space Telescope made on NASA TV recently. He commented that they had purchased an “unusually reliable set of lenses” for the device before launch. “They were manufactured on a Wednesday.” The implication, of course, is that workers are most alert and attentive mid-week.
Comments
"It is easy to recommend allocating a large percentage of your retirement investment portfolio to “safe” investments. To be honest, for those giving the advice and for those receiving it, it just feels all warm and fuzzy.
It is much harder to take into consideration the long-term impact of inflation, taxes and the often low yields of fixed income investments. Watch your expenses. Invest for the long-term. And never, ever forget about the insidious effect of inflation. That’s my “expert” advice."
https://www.forbes.com/sites/kerrizane/2018/08/14/what-the-experts-say-you-need-to-retire-in-2018/#79328c8c52cd
The inflation rate "has wobbled a bit, but it has been steadily rising." Hmm.
How about: filtering out short term noise, there's a clear upward long term trend? Not at all steady, but unmistakable.
She writes that you'd need $246K in an IRA to draw enough to spend $1K/mo. The only way I see getting $246K is if I assume 0% return (not the 6.5% she assumed), and no taxes (not her 25%). Then, $246K/$12K (per year) = 20.5 years. That takes a 65 year old to 85.5, which just happens to be the average expectancy she gave (84.3 male, 86.7 female = 85.5 average). Coincidence? You decide.
Worse, she simply doesn't get IRAs. She writes that "I assumed a 6.5 percent pre-tax return, a 25 percent combined federal and state income tax rate yielding a 4.875 percent after-tax return."
That's the effective after tax yield in a taxable account. When the income is taxed annually, you just subtract off the tax rate from the investment rate of return to get the annual return rate that compounds (assuming you don't withdraw all the money).
It's not so simple in a tax-sheltered account. There, you don't pay taxes until you withdraw the money. For example, here's how to compute the effective rate of return on $100 that is left in the IRA for ten years:
Start: $100
After 10 years: $100 x (1 + 6.5%) ^ 10 = $187.71
Gain: $87.71
Tax on gain: 25% x $87.71 = $21.93
Net gain: $65.78 (65.78%)
Annualized after-tax gain: 5.18%
If it had come out the same as in a taxable account, there would be no point using an IRA. Of course there's tax owed on the original $100 as well, but that doesn't play into the effective rate of growth.
The right way to compute amortization in an IRA is to start with how much you want to draw after tax annually, use the tax rate to figure out how much that is in pre-tax dollars, and use that as your annual "payment" from the IRA. Then you use the rate of growth (here, 6.5%) as the "interest" rate. Plug that into an amortization calculator to see how long your starting amount lasts.
For example, I used $100,000 as a starting value ("loan amount"), 6.5% as the interest rate, and $10,000 (pre-tax) as the annual payment in this calculator:
https://financial-calculators.com/amortization-schedule
With annual "payments" (withdrawals) and compounding, payments starting a year after the beginning of the "loan", it computes that this will last almost 17 years. After one year, the balance in the "loan" (IRA) is $96,500. That's right, because after that year, the $100K has grown to $106.5K, and you draw out $10K. It keeps going from there.
---Contributor
Kerri Zane
I'm an Emmy award-winning television executive producer and development expert with 20+ years of experience. Take the right spin and every reality show idea can get greenlit! Love connecting with readers through my personal finance & travel posts. Wrote a saucy Lifetime-like beach read called, "My Lover's Keeper." It's Amazon-purchasable. A big supporter of single mom's. Wrote the bestseller, "It Takes All 5: A Single Mom's Guide to Finding the REAL One. Made media friends with appearances on KTLA Morning News, The Wendy Williams Show, and Huff Post Live. I have an M.A. in Spiritual Psychology from USM and a B.A. in Sociology from UCLA. Connect with me www.kerrizane.com Follow me on Twitter: kerrizane & Instagram @kzloveslife
AND the ParadisePost author is:
---Lori Flesher has been a Certified Financial Planner™ professional since 1989. Investment advisory services offered through Lori Flesher, CFP® a fee-only Registered Investment Advisor. She can be reached at 877-2244 or via email at [email protected].
>>>An IMHO view.....
There are numerous folks here who can provide valuable "a real investor's experience in the markets for 'x' number of years" that would provide more quality and evidence based knowledge, versus the Forbes article. I'm attempting to determine what drew Ms. Flesher to this article to expand(?) her thoughts into this area. How much do these folks receive in payment for such writes??? I don't know and not going to research; but there are numerous relationships (blogs, ad clicks, etc.) that may exist to generate some revenue.
As to @msf and his calculations; I have full faith in his work. Thank you.
In the way back days; our house used a simple calculator attempting to look forward for the "how much money are we going to need?". One constant at the time was a 5% rate of inflation as one of the inputs. Note: for those watching during the late 1970's into the early 80's were witness to "inflation" in its grandest form of "up".
So, one does all of the cute math, with annual inflation at 5% (inflation, regardless of positive rate does compound, too), a magical 8% annaulized
rate of return on investments and perhaps a 25% tax rate when IRA's have to be cashed out (RMD's). The result is "damn"; better keep our arse in gear to end up on the positve side of monetary into the future.
To many variables not included in the articles that likely cause confusion for many; and the fact if "they" have not already saved/invested enough properly that "they" are screwed if that think that they may maintain a "life style".
And age 65 from the article only brings one sure event, in that one starts Medicare.
I've got to stop. I become angered by these often too simplistic articles that probably do more harm than good for too many who are already afraid of and don't understand investments.
One last note for the too many who have not prepared properly for the "after life of retirement". I have an acquaintance with whom I have contact several times a year. She has been saying to me for 30 years, "I need to get with you (your opinion) about what would be some good investments in the market(s) for our retirement." This event stemmed from an observation from me 30 years ago that their adviser had their taxable account invested in a form of tax-free muni bond holding of some sort. The rub was at the time, that their tax bracket was so low, that they would have been better suited with a taxable bond fund paying a higher rate of return and pay the taxes on the return. She last mentioned, "We've got to get together to review our investments" this past March. I always remind her of the loss of compounding over the years. Oh, well.
Regards,
Catch
Ditto: The guy’s a mathematical wiz. (And, unlike some here, when he makes a mistake readily admits it.)
jeez louise, I gotta return to freelance writing
Didn't read the Forbes article carefully - just scanned it to see that the advisors were quoted at greater length including some investment suggestions. The PP piece just grabbed a single sentence here and there.
Regarding my arithmetic: trust but verify
Your use of the word “arithmetic” (while I had referenced mathematical) caused my otherwise idle brain to wonder whether, perhaps, there was an adjective: “arithmetical”. Indeed there is.
For your reading pleasure I’m linking an article on “Arithmatical Reasoning”. One caveat: Seeing as to how the introductory paragraph misspells “quite“ - I’m not too certain of their knowledge level. And, according to Dictionary.com , they’ve also misspelled the word they’re trying to explain. It should actually be “arithmetical”. https://www.dictionary.com/browse/arithmetical
“Introduction - The Reasoning section of every competitive exam includes questions from the topic“Arithmatical Reasoning”. This topic is considered to be quiet important and every year number of questions are asked from this topic. We are providing you different types of questions were asked which will surely help you in the upcoming Exams.“
https://sites.google.com/view/penpaperexam/types-of-reasoning/arithmatical-reasoning
From these three links: Sources:
understanding-funded-ratio
what-does-your-funded-ratio-score-mean
what-is-a-safety-first-retirement-plan
Thanks @Crash - I did get around to catching their error. Was editing while you posted. Geez - Not too certain I’d want one of those guys prepping my kid for an exam.
First, JohnN seems to come up with some unusual reads. Love the title - “Paradise Post” at the top of page.
I don’t know who the author is - and she cites some unknown / unnamed “experts” for her piece. So as to the article’s reliability, I’d have to rate it low. But it does get into a lot of things we routinely discuss here about retirement planning - and than she throws a real monkey wrench into the equation: That being the assumption that a “boom market” requires some type of different approach. She tightens the nut a little more by mentioning that interest rates are near historical lows and likely to rise.
Yikes - You could write a couple books on this and still not answer it fully.
The first part is a bit easier. Plan ahead for retirement. Everybody’s needs and situations are different. Most, I think, would agree that in the earlier years of retirement you should remain fairly aggressively invested in equities. If you took TRP’s retirement funds as models*, they’d probably have a retired 60-65 year old in a fund with maybe 60-70% equities and 30-40% assorted bonds (variety of credit risks and maturities). In 10 more years (age 70-75) they’d probably have the same individual at near a 50/50 mix - probably skewed a bit toward bonds. And by 80-85 the mix would be heavily skewed in favor of lower risk bonds, but maintaining some limited exposure to equities. (just my best guesses).
The second part (boom market) - That’s currently a source of some contention here. My assessment is that the preponderance of board opinions is that you shouldn’t let perceived market conditions affect your asset allocation. For those folks it’s full steam ahead - and they’ve been right for a long time now. And, markets do go up more than they go down over the long term. I’m in the minority who feel that it’s prudent to attempt to gage market valuations and euphoria a bit and and vary risk exposure accordingly. Admittedly: (1) It’s a hard trick to pull off (some would say impossible) and (2) It will diminish your long term returns. There’s no free lunch. Lower risk usually translates into lower return.
The third part (interest rates) - That’s a tough one. So much depends on where the global economy goes. The U.S. is doing fine, and consequently, the Fed is raising rates. But in parts of Europe and Japan, economic activity is still subdued. Those countries are by no means out of the woods - and could slip back into recession. Other than staying with shorter duration bonds (a perfectly reasonable option), I’d say take a look at some of the hedge-like funds that are being rolled out. There’s a reason Price introduced RPGAX nearly a decade ago. They anticipated rising rates and wanted a balanced fund that’s not 40% into bonds. By allocating 10% of that fund to an outsourced hedge fund, they reduced the bond component to only 30%. Recently, they’ve rolled out their own hedgefund-like vehicle TMSRX. This is sure to become a widely misunderstood fund. It’s not designed to beat the market, or even keep pace with equity markets. Their intent is that the fund will to do a little better than a diversified bond fund would do over time - with roughly the same amount of risk. Expenses are high, so don’t expect to make a lot with it. But, if you want income-like returns and are frightened by the prospect of rising rates, that’s one option - from a bunch of guys who know their business.
* TRRAX (Retirement 2010) is designed for someone who retired in 2010 (and is now nearing 10 years into retirement). No age is stipulated, but assuming retirement at age 65, the fund would be appropriate, in T. Rowe's opinion, for someone now nearing age 75. Currently the fund is invested in just under 40% equities, (domestic and foreign), 40% domestic bonds, and 20% scattered among foreign bonds, cash, preferred stocks and convertibles. Hope this helps. Of course, one size does not fit all.
https://sites.google.com/view/penpaperexam/home
The "Rs" on the page is for rupees, suggesting that the site is to help prepare for Indian exams. Took a while for that to dawn on me.
I still don’t fully understand how that error could have happened. But, coupled with the misspelling of quite, I’d say somebody somewhere (perhaps a typist transposing) was having a very bad day. Reminds me of a joke a lecturer on the Spitzer Space Telescope made on NASA TV recently. He commented that they had purchased an “unusually reliable set of lenses” for the device before launch. “They were manufactured on a Wednesday.” The implication, of course, is that workers are most alert and attentive mid-week.
https://www.nytimes.com/2018/08/23/opinion/obamacare-medicare-social-security-midterms-republicans.html