Great Reading. Not much specificlly on bonds. Deals with: (1) Money market fund reform, (2) Retirement funding mess, (3) Expected returns going forward, (4) Spitzer and previous fund scandals, (5) Concentration in the fund industry, (6) and, as usual, fund expenses.
I disagree a bit on point #3. I don't view 8% annual return for a large well-managed pension fund as an unreasonable expectation over multi-decade periods going forward. He seems to infer that 5-7% is more likely,
My favorite exchange from the interview:
Phillips: " ... When I look at some of the firms out there, I see more of your DNA in a place like T. Rowe Price or American Funds than I do in some of the upstart, very specialized or leveraged index funds. What would your counsel be to someone: Would you rather have them buy a lower-cost actively managed fund than a high-cost index fund?
-
Bogle: I guess the answer to that, since I believe that cost is the single most important factor, is absolutely yes, provided the [active fund] had reasonable diversification."

I'm coming late to the party (this thread), and it's been a very interesting read. Let me offer a few(?) tangential observations on pensions, IRAs, SS:
RMDs - people tend to think that these are drawdowns. They are only tax events, not investment events. You can take distributions in kind, of course owing taxes but otherwise not changing your investment positions. So I find it better to think of RMDs strictly in terms of forseeable future tax liabilities and not money that needs to be spent. (That is, RMDs simply move investment from traditional IRAs to taxable accounts; the rule of thumb about spending down from taxable accounts first still applies.)
SS: Catch wrote that the couple would "take a chance" on both people surviving to age 70. Once they both hit 70, they begin drawing SS and start reducing the amount they've put at risk by deferring their benefits, but they are still at risk of "losing" some money. The break even point is around age 81-82 (generally true regardless of what age you start benefits). So you "win" only if both spouses live to age 81 or so.
One can push out that break even point a bit by having one spouse (the lower earner) start benefits at full retirement age (FRA), while the higher earner simultaneouslyfiles and suspends. That person can then get spousal benefits (half of the other's amount) for four years, until at age 70 that person starts taking one's own benefits.
So, unless you think there's a good chance of both people living well into their 80s, it might be better to consider starting some benefits earlier. That said, I'm a strong advocate of waiting until 70, as you suggested, because that provides a form of longevity insurance (with inflation adjustments) that makes it much easier to relax without worrying about living too long.
State taxes/Roth conversions - depending on the amount in tax deferred accounts (401K rollover plus traditional IRA), one might want to gradually convert some of the money to Roths over a period of years. In Michigan (current state income tax rate 4.25%) the first $40K of income from pension/IRA is not taxed (for people born between 1/1/46 and 12/31/52). That makes it somewhat cheaper to do the conversions, especially if the pension, along with RMDs, grow to exceed this amount down the road unless the conversions are made over time. (Michigan, like the majority of states, does not tax Social Security benefits.)
On the other hand, if you're planning to leave money to charity, it's better to do it via traditional IRAs, because then the money will never get taxed.
Medicare (hey, I'm on a roll here) - look into Medicare Advantage (Medicare Part C) as an alternative to Medicare (Parts A, B, D) plus Medigap. Here's the Medicare site that will show you all the plans available (of all varieties): https://medicare.gov/find-a-plan/questions/home.aspx. A key feature of Medicare Advantage plans is that they must cap the out of pocket expenses. IMHO, that's the main virtue of Medigap plans, so Medicare Advantage seems to obviate the need for Medigap.
None of this addresses the core question: what to invest in. But I find these are all significant planning issues to consider in conjunction with the investing side.

All,
Simply thought I would post my thoughts on an allocation that I'm close to adopting and would greatly appreciate your thoughts and criticism?
These investments are primarily to fund our retirement which is 20+ years away. There are no immediate income needs from the portfolio nor will we need to take any withdrawals out until retirement. I am a very conservative investor so capital preservation is a priority with an objective of generating returns of inflation plus 3-4% while generating decent upside and downside capture. Targeting a beta of 0.3-0.4.
There are four main categories of the portfolio allocation.
The first consists of Global Asset Allocators. My goal here is to invest in 5 risk conscious managers with varying views and that have great investment flexibility. 40% will be allocated amongst the following:
Wells Fargo Absolute Return (GMO)- WABIX
FPA Crescent-FPACX
PIMCO All Asset All Authority- PAUIX
Ivy Asset- IVAEX
First Eagle- SGIIX
The second category consists of what I term tactical allocation and long-short. A 20% weighting will be allocated to:
Good Harbor US Tactical Core- GHUIX
AQR Managed Futures- AQMIX
Marketfield- MFLDX
The third category consists of flexible bond funds. A 40% weighting to the following:
Scout Unconstrained- SUBFX
Doubleline Total Return- DBLTX
Osterweis Strategic Income- OSTIX
Templeton Global Total Return- TTRZX
Sierra Core Retirement- SIRRX
RiverPark Strategic Income- interested in this fund after it launches
The fourth category is invested outside of my portfolio outlined above. This consists of two direct lending vehicles, Lending Club and a private placement fund that specializes in short term small business loans.
I also plan to reduce the global asset Allocators over time and invest in the following after a 15-20% market decline:
Seafarer Growth & Income- actually might consider now
Yacktman Focused
FMI International or FPA International Value
Thanks
Heather

Reply to @Old_Joe & MJG: The 3 Best Free Retirement Calculators. MJG the objection to the Flexable Retirement Planner.Com using Java is a real problem.
Regards,
Ted
http://www.caniretireyet.com/the-3-best-free-retirement-calculators/

Hi Guys,
A few days ago Catch22 posted a request for a little help in constructing a portfolio for a retiring couple. The response was huge, literally a tidal wave of informed questions and excellent suggestions. That was somewhat surprising given the fact that the profile for the retiring couple indicated that they were relatively well healed, and, for the most part, had pretty much all their ducks in proper alignment.
This was not a problematic assignment, yet the enthusiasm was infectious. Retirement planning occupies every investors planning process at least one time. It is one of the seminal events in a lifetime. The decision itself and the decision making process are stressful but necessary exercises.
Although decision making is more art then science, most retirement planning experts favor examining multiple options and doing “what if” scenario drills. That’s because the future is so uncertain. The decision to finally pull the retirement trigger is often painful. Sometimes analysis paralysis adds to the discomfort. The saving news is that there are some nice resources nearby on the Internet.
The mathematical tool that is specifically designed to address uncertain outcomes is Monte Carlo simulations.
All the major mutual fund houses acknowledge the retirement decision tipping point and the mental anguish it precipitates. They have reacted with free excellent Monte Carlo-like planning tools. That’s good.
I know, I know you’re saying” there he goes again”. That’s true. But within the last month I discovered a “better” Monte Carlo tool. I promise this is the last such posting (well at least for a few weeks).
Some investors are predisposed against statistical analyses, especially Monte Carlo techniques. It is perceived as far too mathematical, too exotic, too sophisticated. Nonsense; you need not know how to build a car to use it. There is financial risk to such ruinous behavior. The mathematics and the random selection of parameters is not conceptually complex; it is quite simple.
If that’s true you might ask, then why is the method not more commonly applied? The answer is that it is, especially since the proliferation of the home computer.
The speed of the modern computer allows the simple procedure to be executed thousands of times while a labor intensive pencil-and-paper approach could only evaluate a single scenario. The particular code that I will recommend does 10,000 random cases for each situation specified. Decision making teachers all endorse multiple option explorations over limited examinations. That’s the beauty and primary advantage of Monte Carlo simulations.
There is a large and constantly growing band of brothers who are recognizing its benefits and applying the Monte Carlo approach. It is a specifically suited tool for exploring uncertain events to estimate probabilities. The expanding field of advocates are found in the Mathematics, Physical Sciences, Computational, Engineering, Business, Financial, and Retirement Planning communities. From its limited World War II era introduction, it is now a ubiquitous tool.
In an uncertain environment, having some formal procedure to estimate the success odds of any project and its options is of paramount importance.
As behavioral researchers Belsky and Gilovich remarked: “Odds are, you don’t know what the odds are”. In some sense, investing is a form of gambling. Award winning economist Paul Samuelson cautioned that “It is not easy to get rich in Las Vegas, at Churchill Downs, or at the local Merrill Lynch office”. However, investing is not a Zero-Sum game. Odds can be tilted to favor the patient, prudent, and informed player.
The recently discovered superior Monte Carlo simulator is from Flexible Retirement Planner. Please consider exploiting this especially useful aid to the retirement decision process:
http://www.flexibleretirementplanner.com/wp/
or more directly to the simulator itself:
http://www.flexibleretirementplanner.com/wp/planner-launch-page/
It is very fast, very flexible, and very worth a visit. This particular Monte Carlo code was written by an experienced, practical, retirement specialist. The calculator’s organization clearly demonstrates the benefits of his hands-on experience.
Monte Carlo analyses are the only investment tool that yields a reasonable estimate of the odds for a successful retirement. It certainly is not perfect, but it is far better than a crystal ball. By using it to explore various retirement and investment options, a candidate retiree can adjust his plans to improve his performance.
Understand that Monte Carlo codes never guarantee 100 % accuracy. That’s impossible in an uncertain world full of unknowable Black Swan happenings.
Many industry specialists suggest that retirement be delayed until Monte Carlo simulations forecast a 95 % success likelihood. That means that there is a 5 % possibility of portfolio bankruptcy. There will always be residual risk in retirement. A parametric Monte Carlo analyses helps a candidate retiree to identify and to minimize that risk, not entirely eliminate it.
In some instances, the stock market will turn sour shortly into retirement. That is unfortunate but not fatal. Those retiring just before 2008 suffered that nightmare. No mechanical tool, no soothsayer could have forecasted that scenario. Don’t indiscriminately scapegoat the analytical tool for the Black Swan physical happening.
Please take advantage of this outstanding resource. It will be both a learning experience and an opportunity to assess your portfolio’s survival odds. Also, I suggest you do a few “what-if” exploratory cases to examine potential pitfalls and improvements. The referenced code makes that an easy chore.
Good luck guys. Some folks might even perceive running these codes as fun.
Anyway, I have fun making the Monte Carlo case. I shall now go quietly and happily into the night.
Best Regards.

Reply to @davidrmoran:
I’m sorry to hear about your forced retirement. We all desire to have some
control over such matters.
I’m comfortable with MJG’s reply and don’t wish to get into another
prolonged exchange with him. He is indeed a very bright guy and
I’ll leave it at that.
“What is to be done? What do you advise and counsel? How are you prepping
for that asteroid? Of course, since you are calling it the Age of Ruin (do you
know any really elderly retirees?), I think I know the answer.”
Sorry, I don’t know what you mean by “do you know any really elderly retirees?”
If this is a serious question, the answer is that over the course of my investment class, I’ve personally meet and discussed retirement investing with perhaps 500 “really elderly retires”, and if it helps, I mean those over the age of 70…
and many more between 60 and 70.
“What is to be done? What do you advise and counsel? How are you prepping
for that asteroid?”
I have explained my simple long-term exit strategy on this board and
Charles was gracious enough to run the numbers and
place his spreadsheet results on this board a month or so ago.
By the way, one doesn’t prep for an asteroid. If I were to think along the lines
of MJG, I would direct you to this site -
http://www.universetoday.com/36398/what-is-the-difference-between-asteroids-and-meteorites/
Best of luck with your retirement,
Flack

A short, fast and worthy read from Mr. Merriman
Paul Merriman, 12 lessons

Hi Bill,
So many areas/sectors were connected with large losses during the 08-09, it is difficult to assess going forward if anything would be different from a similar event. Many index funds would not do well, I suspect. And yes, recovery could be difficult; if the holdings were sold at a wrong time. Sadly, I am sure too many folks in retirement or just moving into retirement were hurt by the market melt; almost 5 years ago.
Take care of you and yours,
Catch

Reply to @catch22:
I don;t have a spouse. At retirement my retirement account had a cash value. My pension payouts are based on a 25% contribution from my retirement account (its cash value) and 75% from my ex-employer. So say I receive $1,000...$250 comes from my cash value. Each pension payment nick my cash value by 25% of the total pension payment. If I pass before I liquidate my account's cash value my beneficiaries receive the remaining balance. My benficiary does not have to be a spouse.

Reply to @AKAFlack:
Hi AKAFlack,
It’s good that you still participate on this forum. Your views are always respected.
You are spot on-target that accumulated portfolio value is pathway dependent. We would all hate to experience a significant down year immediately after our retirement date. Depending on the magnitude of the downturn, immediate action might be necessary. More on this later.
However, your Monte Carlo calculations are deeply flawed. It is not that the simulations themselves are wrong; it is that you corrupted the analyses by conflating a single probability analysis event into a double probabilistic sequence of events.
Your starting conditions were distorted by the combination of events that you postulated. In essence, you unwittingly created a Conditional Probability problem and contrasted it against a single Monte Carlo series.
A simple analogy that illustrates this error is that you initially generated the likelihood of the birth of a girl and then contrasted it with the probability of a blond girl being born. Adding constraints always reduces the combined probability.
If you propose to estimate the likelihood of Event A and Event B both happening, the probabilities of each must be multiplied together to get an overall probability. You failed to do so.
To again illustrate, let’s examine your T. Rowe Price Monte Carlo-based analysis in a little more detail.
By assuming a first year 30 % loss in the retirement portfolio, you dramatically changed the initial conditions of the problem Instead of retiring with a portfolio nest egg at the $750,000 level, the actual probabilistic assessment started a year later at the 0.7 X 750000. = $ 525,000 level. That’s not a fair comparison of equals.
By assuming a 30 % downdraft, you postulated a very unlikely event A. How unlikely?
Scanning the S&P 500 data from 1928 onward, only 3 equity annual return losses exceeded that horrendous performance. Using the historical data to establish a Black Swan Base Rate, that magnitude drop has about a 3.6 % likelihood of happening. Therefore, your scenario of a first year loss of 30 % followed by a conventional Monte Carlo simulation has a combined likelihood of under 3.6 %. The final result is dominated by the high, rare loss that you postulated as a given.
Personally, I will not develop white knuckles worrying over such an improbable investment series. By definition, Black Swans are unpredictable. I recall that you teach finance/investing at the Junior College level. I do worry about this type of faulty analysis finding its way onto the curriculum; it is a common mistake. Please do not make it in the classroom.
Now, there are simple but not always easy steps to protect against unhealthy equity surprises. A diversified portfolio mix of equities and bonds dampens the impact of a large equity downfall.
Proper asset allocation can reduce portfolio volatility (standard deviation) by about a factor of two without compromising expected annual returns. The lower portfolio standard deviation reduces the frequency of negative annual returns while mitigating the overall impact of a negative equity period. A 30 % equity loss might only mean a 12 % portfolio value reduction with bonds serving to cushion the whirlwind.
Finally, a retiree must always be flexible to adjust his withdrawal schedule. If returns fall short of expectations, simply pass on the inflation increase usually included in any competent retirement withdrawal plan.
If the downturn persists, the retiree has the option to again pass on the inflation adjustment and, if needed, modestly reduce the basic withdrawal rate. Sometimes hard times demand hard measures and a little sacrifice. Old soldiers understand the need for sacrifice.
I have done numerous Monte Carlo simulations that conclusively demonstrate that these modest drawdown devices greatly enhance the survival prospects of a portfolio during retirement.
I recognize that you know most of what I said. In haste, sometimes there is a disconnect between the brain and the keyboard. I am well aware of that disconnect.
Best Wishes.

davidrmoran,
It's like asking what they do if the asteroid strikes near Michigan. What's the point
of the question?
Here's your asteroid.
You say “…there is nothing to be done (except buy) other than to hang on.”
Do you understand the Sequence of Return Risk as it relates to
the shortened time period of retirement?
Example One -
You retire and the first year of that retirement the market rises 27%.
The next year it rises 7%. The next year it drops 13%.
The average annualized return is 7%.
The Age of Ruin (age at which you run out of money) is 94.9.
Example Two –
The first year of retirement the market drops 12%.
The next year it rises 8% and the next year it rises 28%.
The average annualized return is 8% - higher than Example One.
But the Age of Ruin is 83.5. That’s a difference of more than eleven years.
What caused this significant difference?
Another example – this one from T. Rowe Price Money calculator.
Retire at 65 with a $750,000 nest egg.
Withdraw $4,400 a month and receive $26,499 in SS.
Chances of money lasting 30 years is 90%.
Same scenario except that the market experiences a 30% drop during
the first year of retirement.
The result is that there is now only a 50% chance of the money lasting 30 years.
It’s the Sequence of Return Risk that makes the “hang on” strategy
a potential failure.

Reply to @catch22: I have multiple engineer friends from the Big 10. Some of my closest friends went to Wisconsin, Michigan, Michigan State, Penn State. My son and his family now live in Columbus, so I've seen the total obsession with the Buckeyes. I've seen plenty of "friendly" rivalries over the years.
Good luck in retirement.

Hi MikeM,
I agree. But still looking for some observations/comments for such a portfolio; and I don't know a better starting place, than here at MFO. Yes, the whole mix of retirement planning is more than an investment portfolio. This is not an attempt at a full estate plan or related.
As to Ohio, and for our house; the leaning has always been towards Michigan State. Both Michigan teams and Ohio always have "fun" in sports. As a side note and to the lite side of life; back in the day of paper maps being produced by a State (still done today for the tourist trade), found the following on a 1973 Michigan map issued by the state: Most state maps have portions of nearby states shown; and the 1973 map had two small towns listed on the map, east and south of Toledo, OH. One was "MgoBlu" and the other was something like "OhioBluit". Someone at a state office had some fun.
Thank you for your thoughts.
Take care,
Catch

All the added questions show how complicated this would be. I would go to a fee only financial advisor, lay out all this information and work on a total retirement plan. All you will get here is an assortment of favorite-fund portfolios that most likely won't fit you and your needs.
I personally enjoy the mutual fund portfolio game, but I know that the portfolio has to match everything else mentioned above. A fiduciary working personally for you is always a good investment, even if the meeting is a one time process. In fact, take a visit to the buckeye state and give BobC a call. Or is that blasphemy for a true "Blue" Michigan guy :)

Hi BobC,
You noted:
So are these people going to need any dollars from their investments?
>>> Not at this point in time. Their "net, after tax" pensions will cover their living needs with monies remaining.
Their pension income will cover the cash flow needs for now, but for how long? Regularly, once in a while? What is the percentage of withdrawal needed on a regular basis in the future? That number has a huge impact on allocation strategies.
>>> Their pensions, as is common, do not have a C.O.L.A. adjustments based upon CPI or similar. They are aware of purchase power loss from inflation from this circumstance.
Six to seven years forward will find both of them to begin the required minimum distributions from their "traditional" IRA monies, which will be 90% of their tax sheltered monies. The remaining 10%, more or less; is in Roth IRA's. Caluclations indicate that the RMD rates on IRA's are about 3.6% of the IRA values for the first year and increases slightly in percentage terms, going forward. Five years forward will also allow them to maximize their social security withdrawal amounts at age 70, versus any withdrawals prior to this age.
What is the maximum drawdown target?
>>> Their drawdown maximum would be near 5%; but the RMD (in 6 years) from the IRA's would include about 3.6% of this amount.
Do these people have long-term care insurance in place?
>>> This has been discussed, too. LTC insurance is not in place at this time; and the facts of the skyrocketing costs, insurers leaving the market place and existing contracts being adjusted for some folks will be investigated further. Although not LTC insurance, they will purchase supplemental insurance with their Medicare coverage; as well as drug prescription insurance. Their health background is very good; as well as that of their parents and family.
Are there any after-tax investment accounts, or is everything pre-tax?
>>> All monies to be invested is either traditional or Roth IRA's.
A brief summary would conclude that this couple have always been prudent with their monies, controlled their household budget/expenses and maintained a watch upon their invested monies. They have a good grasp of knowledge and overview of various investment styles and/or sectors to the point of understanding the variances. They understand the differences among the various equity or bond types/styles, be they domestic or international. They are not novice investors; and would be capable of asking very good questions, if having a discussion with an investment advisor. Other family members have stable employment and not likely to "move back home" to be supported and/or need financial help. Some monies from this couple will be placed towards 529 accounts for college.
Their good money habits over many years has allowed them to be at a most positive monetary point at this time in their lives. Although their pension monies will have much less purchasing power in 20 years, they will have income flow from SS (likely, with some form of CPI adjustments) and the RMD monies from the IRA's.
This couple has arrangements in place related to their estate settlement, upon their deaths.
They will enjoy their retirement time with some travel and not be sitting on their butts, at home, in the recliner chair.
Thank you, Bob. Hopefully, the above information provides a better overall view for consideration of their investments going forward.
Take care,
Catch

Do they plan on leaving any money for( kids) or have a really good time in retirement?

Reply to @catch22:
Thanks Catch,
As investors we also need to gauge and remind ourselves what we are trying to accomplish. What is our goal with all this?
Someone here at MFO shared Ben Graham's quote on successful investing:
"safety of principal and satisfactory return."
As investors we all should be acutely aware of "safety of principal". This is what we have sweated over and saved. The "satisfactory return" piece is relative to our age, our time horizon, our risk tolerance, or our place along the economic continuum, as well as many other factors.
If an individual can achieve a "satisfactory 7% yearly return" they can double their principal in ten years. This, to me, now becomes the new principal. In another 10 years the new principal doubles again. In a 40 year accumulation time horizon this doubling happens 4 times and turns "X" principal into 16"X" principal. The power of compounding.
So, say a 25 year old could muster up $10,000 it would compound over 35 years and equate to $160,000 at age 60. Additionally, this worker might saved another $10,000 over the next 5 years and so on. Each subsequent principal investment would go through fewer double intervals as this worker aged, but in total it would look something like this:
Eight $10,000 "principal" contributions every 5 years invested at an average 7% return would equal about $525,000 at age 65. I would consider the entire amount ($525,000) now "principal" and at this point in life add an additional phrase to Ben Graham's quote:
"safety of principal and a satisfactory return to help fund a comfortable retirement"

"With that in mind, Mr. Wren is using this pullback as an opportunity to move clients into stocks.
“We have lots of clients with a lot of cash who have missed a lot of this run,” Mr. Wren said. “We'd love to see the market pull back a little more, and then we'll be in there pounding the table.”
...yup. Which is why I'm standing pat. Anyhow, the vast majority of my stuff is in retirement accounts. I don't want to be paying taxes on any of that for as long as I'm able. Reinvest. That's the 11th Commandment.

Hi msf,
You have me digging through more stuff. :)
1993 FCNTX data: has the 3% front load, except retirement accts., asset base now $6.2 billion from $86 million in 1987, ER moved up from .83% in 1987 to 1.13%
Back to my chores.
Take care,
Catch

Reply to @catch22:
I'm really reaching into the deep recesses of my memory, and I may be imagining this, but I have the vaguest recollection of Fidelity adding a load to one or more funds - usually they were dropping them, but they may have added it to Contra post 1988. (I can find prospectuses from 1994 showing the 3% load, and the links I posted state that Contra had a load in 1992.)
That would be consistent with your papers and my more certain memory that I too looked at Contra some time back then (I wouldn't have considered a fund with a load). Like Mark, I took note of the stated mandate to look for beaten down stocks. Mark was attracted to this - I, being quite naive back then, was not. My thinking at the time (and on this point I'm quite clear) was: how arrogant, for Fidelity to think that it can find value that the market doesn't.
Contrarian investing is more subtle than that - it's not finding value that no one else sees, but finding value that few see yet. That is, buying while a stock is still losing favor, but when there is a glimmer of hope.
The first Fidelity fund I picked for my IRA (again naively, because Fidelity was the land of Lynch) was then called Freedom Fund, later called Fidelity Retirement Growth, and now Fidelity Independence. So now you know why its ticker is FDFFX. I picked it because it was supposed to be a go anywhere fund like Magellan, but without the load; also tailored for retirement accounts (it wouldn't pay any attention to tax consequences).
Finally (and I'm pretty confident of my memory here), Fidelity tended to put 3% loads on its growth funds (except for older clunkers like Trend), while it put 2% front end plus 1% back end on its growth and income funds.