I have known Phil DeMuth for a number of years and I admire his common sense and views on many topics. Phil authored the recently-published book The Affluent Investor that fills a need in the crowded shelves of investment books. As a financial advisor to high-net-worth families, Phil brings valuable perspective to investors who have built substantial portfolios and seek to protect and grow their wealth effectively. Continue reading
Guest post by Contributing Editor, John Graves.
Editor’s Note: John Graves has been an independent financial advisor for 26 years. He is one of the two owners of The Renaissance Group, a Registered Investment Advisor based in Ventura, CA. John’s book, The 7% Solution: You Can Afford a Comfortable Retirement, was published in 2012. When I read this book, I was impressed with John’s approach and thinking and I recommend it as a good read. I contacted John and asked if he would consider contributing to this blog. After we bounced around some possible topics, he sent me the following piece that describes his process for designing income plans for retirees. Continue reading
In a recent post, I presented a list of the ‘core asset classes’ that investors need in order to build portfolios that fully exploit available diversification opportunities. That article focused on portfolios designed for total return potential, the combined return from price appreciation and income generated by the assets in the portfolio. For investors focusing on building income-generating portfolios, the core asset classes are somewhat different. In this article, I present a proposed set of core asset classes for income-focused investors, along with examples of representative funds. Continue reading
One of the most-discussed issues in long-term investing is whether to focus on income generation or simply to think in term of total return (price gains plus income). The discussion of this topic often focuses on whether investors should seek out stocks that pay dividends vs. simply planning to sell a fraction of their portfolio periodically to provide income. I recently wrote a long article on this topic, which has been cited in a very interesting discussion of this theme going on at Bogleheads. One of the most active participants in the debate on the Bogleheads forum and elsewhere is Larry Swedroe, a well-known advisor and author. As I read the Bogleheads discussion thread, it strikes me that there is considerable confusion around this topic, so I thought I would add a few more thoughts. Continue reading
Generating Income: Part Four of Our Special Five Part Series
During their working years, investors focus on saving and investing with a goal of building wealth. As they enter retirement, either by ceasing paid employment entirely or by scaling back paid employment, investors shift their focus to using their portfolios to provide a reliable long-term stream of income. This transition from building wealth to income generation is the subject of a great deal of research in retirement planning. Once investors are at or near retirement, the most significant financial challenge is using their accumulated savings to provide substantial income for their retirement years. Continue reading
Figuring Out Whether You Are On Track: Part Two of Our Special Five Part Series
Fidelity just came out with a study that estimates that people will need about eight times their final salary level, assuming they work until age sixty seven, to be able to retire and subsequently to have 85% of their pre-retirement income provided from retirement savings plus social security. Fidelity also helpfully provides estimates of what they believe people need to have acquired at different ages. Continue reading
In Part I of this article, I explained why I have issues with the traditional idea that individuals should provide for their required level of retirement income (beyond what is provided by Social Security and any pensions) entirely with assets with zero risk of loss of principal (e.g. Treasury bonds). In Part II, I discuss the alternative approaches.
There are two investments that have zero loss of principal: traditional Treasury bonds and Treasury Inflation-Protected Securities (TIPS), which are Treasury bonds with embedded protection against inflation.
I agree with the notion that people need to save and invest so as to be able to provide a very reliable and consistent income stream in retirement. Zvi Bodie has presented a compelling argument that investments in stocks do not become less risky as you hold them for longer periods, so that investors cannot rely on stocks as part of their required income stream. I have performed detailed analysis of Bodie’s argument and I agree with his argument: the magnitude of loss that you can face with an equity-heavy portfolio increases the longer you hold the portfolio. As I noted in Part I, William Bernstein has recently advocated for a portfolio in which all of your required income is provided by Treasuries and annuities, largely consistent with Bodie. Continue reading
Guest post by Contributing Editor, Matthew Amster-Burton, Mint.com.
Every once in a while, I receive a stack of paper in the mail from Vanguard addressed to “Plan Administrator,” which gives me an undeserved sense of self-importance.
No, I didn’t select “Plan Administrator” from a drop-down list of salutations that also included “Dr.,” “Lord,” and “Marquis”; I am actually the administrator of a 401(k) plan. The plan has one participant. Guess who? Continue reading
Guest post by Contributing Editor, Lowell Herr, ITA Wealth Management. Lowell is a subscriber to the Portfolioist and his investment philosophy is similar to ours. Enjoy.
The Golden Rule of Investing is simply, “Save as much as you can as early as you can.” The operative word is early. William J. Bernstein lays it out in stark language in his book, “The Investor’s Manifesto“ when he writes, “Each dollar you do not save at 25 will mean two inflation-adjusted dollars that you will need to save if you start at age 35, four if you begin at 45, and eight if you start at 55. In practice, if you lack substantial savings at 45, you are in serious trouble. Since a 25-year-old should be saving at least 10 percent of his or her salary, this means that a 45-year-old will need to save nearly half of his or her salary. Most 45-year-olds will find this nearly impossible, if for no other reason than the necessity of paying living expenses, payroll taxes, and income taxes.” Continue reading
Portfolio Income: The Trouble With Treasury Bonds
The current economic environment is making it very hard for investors to generate reasonable levels of income through traditional means such as bond ladders. While it is always dangerous to suggest that ‘it’s different this time,’ I believe that we are facing some unprecedented conditions that require new approaches. Income-seeking investors with low risk tolerance—those who have traditionally favored government bonds—are in the most difficult situation.
The problem of low savings and investment rates in the U.S. is huge. I have written about this in the past, along with many others. Every study on retirement savings notes that Americans need to save more. Having the ability to support yourself from a portfolio of savings is not, however, just about the amount that you save. There is also the issue of how much income you can derive from each dollar in your portfolio. Today, with historically low yields on government bonds, retirees and others seeking to live on the income from low-risk investments are faced with an enormous challenge that compounds the savings rate problem. To be able to live on the income provided by very low-risk investments, the necessary savings rates increase dramatically relative to savings rates when investors are willing to bear some risk. Continue reading