The author of this article, Charles Ellis is a former director at Vanguard and has written books about investing. He is in my opinion "one of the good guys."
A quick summary of the article as follows:
-Given their superior performance over time, stocks should be the overwhelming asset of choice for ones portfolio. Cash/bonds can be used to fund a large fixed expense such as a child's college tuition.
-Social security and home equity should be included in one's bond allocation.
-A retiree should determine the average of his retirement portfolio (at years end) over the previous five to seven years and withdraw 5% of that amount each year to fund expenses. This calculation is repeated annually.
One may choose to withdraw up to 7-8% if they don't mind seeing their portfolio value decrease over time.
I liked the article as it was easy to understand and the strategy provided would be easy to implement. A simple calculation and five minutes of time would provide an annual withdrawal amount for an entire year.
My only criticism is I'm not sure about placing home equity in the bond catagory as there is no way I can think of to convert home equity into income other than selling your house for a less expensive home or selling and renting.
Here is the article. It is not behind a paywall:
https://www.ft.com/content/9b0cd35b-d10 ... d731e78117
Unfortunately, MPT principles for household investing and retirement planning are inappropriate. MPT is intended for institutional investors such as investment banks, college endowments, philanthropic funds, the Catholic Church, and other such entities. These entities have common attributes that households planning for retirement do not possess. For one thing they have financial planning horizons measured in centuries or, in the case of the Church, millennia. Most household planning for retirement is 50 years or less from the time serious planning begins to the termination of the household. A 45 year planning horizon has much different constraints than a planning horizon that is essentially indistinguishable from infinity.
Another important difference is that institutional investors are typically organizations intending to be both saving and spending over the entire extended planning horizon. Households planning for retirement, OTOH, are in the early years of their plan only savers, and then in the latter years of the plan are only spenders. This is a huge difference.
Trying to fit MPT principles into investment retirement planning for households is like trying to force Cinderella’s glass slipper onto the feet of the ugly sisters. It simply doesn’t work well because it was never intended to be used for that purpose. This is why SWR techniques, save X% of your income every year, 4% type rules, etc., work so poorly. The proponents of such rules are attempting to push MPT ideas into a realm where they don’t belong.
So why don’t financial professors write articles about duration matching for retirement income. I believe it’s mainly because from their perspective this idea is too simple. Bob Merton explains the idea in a few sentences in one paragraph. You can’t get papers published in peer reviewed financial journals on an idea that can be explained in a few sentences without any math.
Here is the paragraph where Merton explains duration matching real bond funds for generating safe retirement income. The context of the paragraph is developing two levels of safe income. Level 1 safe income is annuitized income, preferably inflation-adjusted, from SS, pensions, and life annuities. Level 2 safe income is generated from duration matched TIPS bond funds.Merton is referring to the fact that in the accumulation phase of the LDI strategy the ST & LT TIPS funds are used to create a safe income base at retirement and are duration matched before retirement to have enough safe assets at retirement to provide for both annuitization in retirement as well as income through duration matched funds.Level 2: conservative income
Level 2 type income, like a fixed-time annuity, provides a periodic payout of inflation-protected income, for a fixed time horizon. As a likely default the horizon may be set at the life expectancy of the participant as of the time of retirement. The assets assigned to level 2 income are invested in an inflation-indexed fixed-income portfolio that is duration-matched to the targeted stream of payments, in the same process and in the same funds (plus a shorter duration fund) that are used for the ‘risk-free’ asset replication of the conservative income goal in the Managed DC plan in the accumulation period.
Later Merton points out that annuitized income and income from duration matched assets are complementary ways to generate safe income, and not substitutes. Annuitized income has benefits and drawbacks that are different from income derived from duration matched assets. Annuitized income features longevity insurance and because it is a contingent claim, it also has a mortality credit. Duration matched income has neither longevity insurance nor a mortality credit, but instead offers more flexible income than annuitization and, unlike annuitized income, the assets are available as bequests at the death of the holder.
BobK
BTW DFA's target date funds use special DFA TIPS funds in this way both before and during retirement. Not surprisingly, Merton was the chief developer of these target date funds.
See this thread about DFA retirement strategies -viewtopic.php?f=10&t=219470&p=3384619&h ... e#p3384619
The link takes you to the middle of the thread. Start at the top.
And here is a link to an article on duration matching with bond funds. Unsurprisingly, it's written by an economist.
Link - https://www.forbes.com/sites/wadepfau/2 ... 002f2e7b93
Statistics: Posted by AlwaysLearningMore — Sat May 25, 2024 12:02 am — Replies 45 — Views 4270