I should have said the base coupon rate can never go below 0.125%, even during deflation. So, the CPI-U now is 2.7%. Are you saying the present coupon rate is 2.125%? If you have a $1,000 TIP, after a year your adjusted principal will be $1,027 ($1,000 * 2.7%). Coupon rate 2.125% times $1,027 = $21.82 annual coupon payment. Did I get that right? So your real annual return is 2.18%?
https://www.schwab.com/learn/story/tips-and-inflation-what-to-know-now
Hi @nanosour,
Thank you for sharing your retirement plan!
It looks like you have a solid, basic plan that you've done a great job simplifying, which is great!
If you don't mind sharing some more information, I have a few questions below about your plan that might help identify potential areas for improvement.
Based on the earlier discussions in this thread, it seems that some of the areas most fruitful for identifying improvement opportunities is to dig into the details of your assumptions, which can often go unsaid. In that spirit, these are my questions:
- What are you assuming for planning lifespan for yourself? your spouse?
- What are you assuming for Inflation?
- How much are you adjusting your expenses by life phase? And how much are you spending in Year 1?
- Blanchett found that high net worth individuals adjust more as they age than low net worth individuals, because a higher portion of their spending is discretionary
- What are you assuming for Long-Term Care costs? (How much, how long, starting when)
- Do you have HSAs? If so, what is your withdrawal plan?
I'm sure other smarter people can come up with more, better questions, but that's what I have now off the top of my head.
Very warmly,
Kevin
Kevin @boston-spam-02101gmail-com, thank you for your thoughtful analysis of my plan. I appreciate that you challenged things within my overall methodology, rather than attempting a "meta-critique". I think your remarks do get to the heart of things.
1. Challenging the "Lifetime" TIPS Ladder A 45-year TIPS ladder is a bet that the U.S. stock market will fail to provide a positive real return over nearly half a century. Historically, that has never happened. Since 1950, the market is "underwater" in real terms only about 35-40% of the time.
- Suggestion: Consider a "Rolling 10-Year Ladder." This covers you through almost any historical bear market/recovery cycle. By the time the 10 year bond ladder is used up, equities have historically had a near-100% probability of being higher in real terms. Buying a 45-year ladder has a very high opportunity cost and may be "over-insuring". A 10-year rolling ladder can provide the "bridge" needed to outlast any historical market recovery period without locking up 45 years of cash in low-yield paper. If you want lifetime coverage, keep your eyes open to evaluate purchasing an inflation-adjusted annuity whenever they become available on the US market again. They should be a less expensive alternative to a lifetime TIPS bond ladder because annuities offer longevity insurance and price in discounts for mortality credits.
It's apt you mention this, because that was actually my first attempt to enact a "safety first" approach. I still have the column (that I now ignore out of habit) in my spreadsheet for "next 15 years of essentials" (with the rest of essentials being stored with the risk bucket). I had just read Zvi Brodie, I believe, who came up with that system, based on the longest US downturn of 10-13 years. Here is a graph (of just the essentials bucket) showing how the two compare, and you can imagine the growth that happens to the "orange" (added to the risk bucket) over time. There are about 13 years when stocks would dominate my safety bucket.
My reasons for rejecting this methodology:
- Uncertainties about about longevity: the "blue" would need to shift left 15y if we have average longevity.
- TIPs are at a good yield now. Waiting to buy them until later (when the orange starts to decrease) might have a lower rate.
- With longer and wider history, the longest drawdown is not 10 years. Looking at real dollars, we see, eg: domestically 1929-54 (25 years, not counting dividends; about 20y with dividends), 2000-13 and 1968-82 (13y). And we have the Nikkei, underwater from ~1990-2025 (34 years). What makes here and now special?
- Most of what I'm classifying as essentials are true essentials (groceries, medical, housing, bills)--and therefore fall under almost infinite risk aversion.
We know from statistics that the worst in a sample underestimates the worst in the whole population. Bootstraps and monte carlo show that the inherent nature of stocks will produce worse than we've seen. And I've learned "just because something is unlikely doesn't mean it won't happen." (Bonds down 15% anyone? Fascism here? etc.)
So I guess the answer to your point is: Indeed I am giving up a lot, "paying a lot for that insurance"--but I can't afford not to. I am already living meagerly (Buffet style), driving beat up old cars, rarely taking trips, cooking most of our meals, public education, public transportation and biking and walking, cheap hobbies, bronze (catastrophic) health plan, keeping thermostat low, with a wife of similar lifestyle. Having eaten out of trash cans when younger, I can honestly say our "essentials" can't really be decreased all that much with any semblance of dignity as we age. Granted, the odds are strongly in your favor. (@Pizzaman posted a good article by Carlson about that, a few posts up.) But with essentials I simply can't afford to be wrong. Or put another way, I'd rather take my risk in the discretionary bucket: I take some comfort from the fact my essentials at most will only constitute 33% of my total wealth (at age 82), leaving plenty of room for stocks in my risk bucket.
However, looking at the opportunity cost of all that "orange", I do think I owe myself to model exactly how much I'm giving up by my "safety first"! (Probably by a monte carlo.) And I owe you that, since I'd rejected the shorter ladder without this kind of full analysis. Thank you!
A possibility I hadn't considered (not mentioned by you but sparked by your comment): Keep the money beyond 15y not in the discretionary bucket but in a third bucket with an AA somewhere > 0%. Even, e.g. 20% stocks might give me considerable upside compared to my extremely conservative approach. I don't like the complexity of three buckets; but greed may overcome that.
Since your Essential Expenses + "Dignity Floor" is 100% secured by SS, Pensions, and TIPS, your discretionary bucket has a massive "risk capacity." However, your 60-70% AA and 3.1% discount rate suggests you are invested quite conservatively here in your discretionary bucket too.
- Suggestion: If the "essentials" are truly covered, then your discretionary bucket can afford to be 80–100% equities. This maximizes the legacy for your son or the impact of your charitable giving. If that bucket is 60/40 or 70/30, you are essentially paying for "bear-market insurance" twice. You are being conservative in your "safe" asset bucket AND your "risk" asset bucket, which leads to significant under-performance over a 45-year retirement
My 3.1% is based on my very low stock expectations: a 70% AA with the expected returns stocks of stocks at 3.5% cagr (=5.1% real average), and bonds 2.1% cagr (=2.4% average). Going 100% would only raise expected returns to 3.5% from 3.1%. But I do take your point. I'm thinking that monte carlo is probably the best way to determine my optimal AA for the discretionary bucket. It comes down to: how low am I willing to have my discretionary allowance go if luck is against me in the 5th percentile of history? Do note that since valuations are at record highs, it is likely that expected returns will rise over the 42 years of the plan, and that 3.1% is more of a minimum discount rate than an average. (If I use your expected returns, that 70% would be over 4%.) A straight out historical analysis (like Jaske or Pralana) is another way I might explore what is optimal. TPAW's scaled bootstrap (but used only on my discretionary portfolio) or Maxifi's "full risk" monte carlo is probably the best way to set my AA for this bucket.
I am also flirting with using the "Merton Share" to determine the AA, which is based purely on relative valuation between stocks and bonds rather than history or monte carlo. The Merton share is designed to tell you how much "risk" is rational given an equity premium ep (with a known sd). It is very close the Kelly Criterion in gambling. The Merton share equation is Rational AA of equity = Equity premium / (equity variance * risk aversion). So with a pretty aggresive risk aversion of e.g. 1.6 and an equity premium of 3% (based on my valuations), Merton share would recommend only about 60% AA. A nice thing about the merton share is that one can maintain their risk tolerance across different regimes of equity and bond prices (and if expected returns of stocks rise, so does your equity allocation).
Thank you for pressing me for more analysis before making a decision. To be continued.
Because you are implementing a conservative liability-matching strategy, you have a unique mathematical advantage: your lifestyle is already "insured" against a market crash.
- Suggestion: Consider explicitly making a "Tranche-Based Equity Glidepath" part of your plan, using the 30-40% "ballast" within your Discretionary Bucket to buy additional equities in tranches if the market drops 20%, 30%, or 40%. If you decide to make Roth conversions part of your basic plan, then also accelerate Roth conversions during bear markets/recoveries.
As you note my essentials bucket wouldn't change after a market crash (assuming little change in long term interest rates). My discretionary withdrawal would react in two ways to a market crash, based on the amortization equation pmt(discount%, years remaining, ,-npv discretionary bucket,0,1):
- the discretionary bucket would fall dramatically, since it's stock heavy;
- the discount rate would rise dramatically, as valuations plummet.
Note that these two temper each other: my discretionary bucket crashes e.g. 70%X-60%; but the larger discount rate will mean a larger "chunk" can now be taken out each year. Since my estimates returns are based on a mix of cape-based valuation and yield & growth predictions: both of these will soar after a crash. So a 60% crash might result in only a 30% reduction of discretionary withdrawal. (Jeske also has great historical analysis of "CAPE & x% drop from SP500 high".)
I think this ends up with the same results as a "tranche-based equity glidepath"? I do worry about the fact that my bucket approach has me decreasing AA when stocks are cheapest, which is the reverse of what is optimal. (There are studies proving this, e.g. Estrada on hypothetical Buckets in 21 countries 1900-2014.) Either way, I do need to figure out how to "buy when cheap" in a rigorous, rule-governed manner. (How would I do that?) Thank you for pressing it.
Your $200k PV for Long Term Care is lean but reasonable if you view selling your home as the backstop.
- Suggestion: Since you plan to downsize or rent, that $340k in home equity is actually your most potent LTC insurance policy. Try modeling a "Home Sale at age 80" in Pralana to see how that liquidity spike offsets the 10th percentile LTC risk.
That is a good point, thank you. After thinking about this a bit, I think either of two ways of treating this is internally-consistent:
- Count the home sale as part of my funded ratio but also count the "full" cost of LTC (the 3 years each: $700k total, discounted to today's dollars), since, as you put it, its sale is a "backstop" to the other , OR
- Don't count my home in my funded ratio, but then only use the much lower 10th percentile costs of LTC (from the Vanguard calculator=~$150k, discounted to today's dollars). In this case, the house is more of an insurance policy. And it's a good thing to pass on to my son if not needed, or to use as an emergency fund if disaster strikes like cancer.
The second way of viewing it makes more sense IMO. I won't count my home in my calculations; but will keep it to use "if needed". It's still pretty unlikely we'll need that much (9/10 "Vanguard clients like us" don't spend at that 10th percentile). But we have a contingency plan if we do, without gutting our discretionary pleasures.
You noted that Pralana isn't recommending conversions, but for a surviving spouse (who will eventually file as "Single" and lose the 12% bracket), the Roth can be a lifeline. Check to confirm that the software is A) unconstrained and free to suggest large up-front conversions, and B) Pralana is modeling your lifetime spending as a fixed value between optimization trials. I like to switch the spending strategy from "actuarial spending" to "specified expenses" when calculating Roth conversions for this reason, with total expenses based on the affordable expenses determined through consumption smoothing.
I was as surprised as you. But when I look into the Pralana monte carlo I see my wife is still at 12% bracket even after my passing. But I need to stress test this., given i am assuming very low returns for stocks, which keeps taxes low too. (For instance if I double my low expected returns of 3.5% equities, she indeed goes up to 22% in widowhood.) At the moment I am still not seeing a huge difference even so with conversions, maybe $400-$900 per year more in discretionary. See my discussion with Rick, above, who is continuing to press me on this issue. There is some subjectivity about whether a 1% increase in yearly discretionary allowance is worth all the trouble and risk.
I should have said the base coupon rate can never go below 0.125%, even during deflation. So, the CPI-U now is 2.7%. Are you saying the present coupon rate is 2.125%? If you have a $1,000 TIP, after a year your adjusted principal will be $1,027 ($1,000 * 2.7%). Coupon rate 2.125% times $1,027 = $21.82 annual coupon payment. Did I get that right? So your real annual return is 2.18%?
Approximately, though I should have said the yield on the 20y TIP was 2.35%, so the coupon might be slightly lower, and you'd need to reinvest your dividends at the same rate. And a true ladder might be smaller still, since it would include e.g. 10y TIPs. But in any case, 2%+ is nothing to blink at: A $100k expense 20 years from now gets reduced to $67k by that amount.
Here is a question to ask yourself: For essentials: At what return rate ___% if over 10 years in real dollars (guaranteed by US govt at maturity, in real inflation adjusted dollars) would you no longer take a chance on 10y of stocks? How about for discretionary? At what guaranteed return would you no longer take a risk on stocks at all? For me, it comes close to 1.5-2% real return for essentials, maybe 2.5%-3% for discretionary. In economics this is called "certainty equivalence", and I find it quite useful mental exercise.
@jkandell Interesting, but I still am having difficulty understanding TIPS. I am more of a "How many actual greenbacks will I have in my wallet at the end of the year?? The yield on 5 Year TIPS Yield eased to 1.42% on January 20, 2026. The current coupon rate on a 5-year Treasury Inflation-Protected Security (TIPS) is 3.625%.
So, the CPI-U now is 2.7%, present coupon rate is 3.625%? If you have a $1,000 5-year TIP, after one year your adjusted principal will be $1,027 ($1,000 * 2.7%). Coupon rate 3.625% times $1,027 = $37.23 annual coupon payment. So your annual rate of return on that investment is 3.72%? I will have $37.23 in cold hard cash in my wallet?? Is that how it works?? Where does the Yield of 1.42% come in?? How is the annual return a full 1% higher then CPI inflation?? 🤔 🤔 🤔
@nanosour I like your basic retirement plan. Your basic process seems efficient and sound. Given you have 100% success in your monte carlos, I doubt you even need to buy Pralana. 🙂 Mission accomplished.
A couple questions:
- You've "stress tested" your wife not having your pension. Have you stress-tested longevity in general?
For instance, using Longevity Illustrator, what is the 10th percentile of either partner surviving? How about if you combine that total age for your wife with your own 75%th longevity (i.e. you die early) in a monte carlo and historical scenario? Is it still 100%? - Have you tested a 23% cut in social security?
- Have you also run historical analysis?
- Have you tested lower stock returns that some "big names" predict? For instance, Vanguard predicts the FBLAX will produce a median of 2.4% real over the next ten years--and that means half the time it will be even lower! And Research Affiliates predicts FBLAX will produce returns of 2.4% real as well
- Are you building in extra-inflation for certain categories like medical (e.g. 3% rise in Medicare premiums is what the SSA itself assumes) and LTC? (Come to think of it: What are your LTC plans?)
- Out of curiosity, why FBLAX (ER=0.43) over Vanguard Lifestrategy Moderate (ER=-0.24)?
- What is your funded ratio? (Your total income over course of the plan from ss + pensions + your current portfolio / your total core expenses. You could get these from a Pralana download or Maxifi lifetime balance sheet.)
- Since you mention Maxifi, does it give you roughly the same consumption smoothed discretionary as Pralana? If you use 60/40 in its "full risk monte carlo" what does the 5th percentile trajectory look like?
@jkandell I like the comments by Kevin @boston-spam-02101gmail-com about your retirement plan. Smart guy🤗. In terms of when/how to buy equities when low, it's not a good idea to just have cash lying around waiting for a big stock market drop, that could take many many years. What I do is ROTH conversions when stocks drop more than 20% or so. No cash just lying around. Last time a 20% happened was 2020 and before that 2008.
I am unsure how to broach another thought. I am sure that everybody who posts on the PRC forum has the best intentions and just wants to help each other with our retirement plan. @jkandell you have done very well for yourself and family and should be very proud! My grand parents all lived through the great depression of the 1930's. As a result they were very reluctant to spend money for the rest of their lives, in may cases needlessly. I guess my thought is don't let past life challenges cloud your future enjoyment. Life isn't much fun if you are always looking over your shoulder for the next great challenge that will likely not happen. I will be in my home office and my wife walks in and asks me what I am doing. I respond that I am posting to the PRC forum. Her response? "Again, are we in danger of running out of money in retirement?" I say no. She says "then turn off that computer and let go play pickleball". My personal anthem is the song "Don't Worry, Be Happy" by Bobby McFerrin https://www.youtube.com/watch?v=AxFsPvd5A6k
I love that song!! Hopefully I have not crossed any lines.
Hi @nanosour,
Thank you for sharing your retirement plan!
It looks like you have a solid, basic plan that you've done a great job simplifying, which is great!
If you don't mind sharing some more information, I have a few questions below about your plan that might help identify potential areas for improvement.Based on the earlier discussions in this thread, it seems that some of the areas most fruitful for identifying improvement opportunities is to dig into the details of your assumptions, which can often go unsaid. In that spirit, these are my questions:
- What are you assuming for planning lifespan for yourself? your spouse?
- What are you assuming for Inflation?
- How much are you adjusting your expenses by life phase? And how much are you spending in Year 1?
- Blanchett found that high net worth individuals adjust more as they age than low net worth individuals, because a higher portion of their spending is discretionary
- What are you assuming for Long-Term Care costs? (How much, how long, starting when)
- Do you have HSAs? If so, what is your withdrawal plan?
I'm sure other smarter people can come up with more, better questions, but that's what I have now off the top of my head.
Very warmly,
Kevin
Thanks for you reply Kevin. Here's my best at answering your questions
- What are you assuming for planning lifespan for yourself? your spouse? Both lifespans set at 94. Both our grandmothers lived to 94. My GF 89.
- What are you assuming for Inflation? Using 2.5% inflation
- How much are you adjusting your expenses by life phase? And how much are you spending in Year 1?
- Go-Go (60-70) Spending is X
- Slow-Go (71-80) is 0.81X
- No-Go (81-EOP) is .41X
- Blanchett found that high net worth individuals adjust more as they age than low net worth individuals, because a higher portion of their spending is discretionary
- What are you assuming for Long-Term Care costs? (How much, how long, starting when) Self funding LTC
- Do you have HSAs? If so, what is your withdrawal plan? No HSA. Both are very healthy at this stage with projected life expectancies in the mid to upper 90s according to some calculators.
@jkandell Interesting, but I still am having difficulty understanding TIPS. I am more of a "How many actual greenbacks will I have in my wallet at the end of the year?? The yield on 5 Year TIPS Yield eased to 1.42% on January 20, 2026. The current coupon rate on a 5-year Treasury Inflation-Protected Security (TIPS) is 3.625%.So, the CPI-U now is 2.7%, present coupon rate is 3.625%? If you have a $1,000 5-year TIP, after one year your adjusted principal will be $1,027 ($1,000 * 2.7%). Coupon rate 3.625% times $1,027 = $37.23 annual coupon payment. So your annual rate of return on that investment is 3.72%? I will have $37.23 in cold hard cash in my wallet?? Is that how it works?? Where does the Yield of 1.42% come in?? How is the annual return a full 1% higher then CPI inflation??
The yield (to maturity) incorporates that you buy treasury bonds at auction, and they usually are sold at a price above or below par 100. So, e.g. if the auction price is below par price, since you get the 100 (inflation adjusted) back at maturity, you have a higher actual return than the coupon itself. (You make money on the coupon, and also on the discounted initial price of the principal.) And vice versa for TIPs selling at a premium. A nice thing about buying new bonds at auction is the fed gives the small individual investor the same auction price that the big meta-companies get. There is no difference between a nominal and inflation protected treasury bond in this regard, by the way. (And they are different from the zero-coupon bonds you are used to, where you buy the bond at a huge discount and all of its gain is in the principal when mature since there are no coupons along the way.)
Taking the recent treasury auctions for example, you can see the 5y TIP sold at a discount, so its yield was higher than it's coupon. But the 10y sold at a premium, so its total yield was less than its coupon.
| TIPS | Reopening | CUSIP | Issue Date | High Yield | Interest Rate | Price per $100 |
|---|---|---|---|---|---|---|
| 5-Year | Yes | 91282CPH8 | 12/31/2025 | 1.433% | 1.125% | $99.222140 |
| 10-Year | Yes | 91282CNS6 | 11/28/2025 | 1.843% | 1.875% | $101.409692 |
Treasury direct publishes a list of inflation adjustments (multiplier) for every TIP for every day. Here's the one for that five year TIP through end of February: https://www.treasurydirect.gov/auctions/announcements-data-results/tips-cpi-data/tips-cpi-detail/?cusip=91282CPH8 .
In terms of "greenbacks in your wallet", every six months you'll get
half the annual coupon rate X the inflation multiplier for that date X your principal.
Overall, if held to maturity, including the coupon payments and return of the principal, it will come out to the real yield to maturity stated when you purchased it. (The nominal yield will have depended on inflation along the way.) This page explains the nuts and bolts in your wallet pretty well I think: this and this.
You're not the first person to be overwhelmed by individual TIPs or bonds in general. That is why ETF Bonds funds were invented. 🙂 I can't use those though, since I use TIPs for essentials and there is too much additional risk for me for that purpose with an ETF as I discovered in 2022.
Curious about your answer to the certainty equivalent question: At what 100% guaranteed fixed real rate for 10y would you no longer buy stocks because the risk wouldn't be worth it? There's no right or wrong answer, it's totally subjective.
@nanosour Your basic process seems efficient and sound. Given you have 100% success in your monte carlos, I doubt you even need to buy Pralana. 🙂 Mission accomplished.
A couple questions:
- You've "stress tested" your wife not having your pension. Have you stress-tested longevity in general?
For instance, using Longevity Illustrator, what is the 10th percentile of either partner surviving? How about if you combine that total age for your wife with your own 75%th longevity (i.e. you die early) in a monte carlo and historical scenario? Is it still 100%?- Have you tested a 23% cut in social security?
- Have you also run historical analysis?
- Have you tested lower stock returns that some "big names" predict? For instance, Vanguard predicts the FBLAX will produce a median of 2.4% real over the next ten years--and that means half the time it will be even lower! And Research Affiliates predicts FBLAX will produce returns of 2.4% real as well
- Are you building in extra-inflation for certain categories like medical (e.g. 3% rise in Medicare premiums is what the SSA itself assumes) and LTC? (Come to think of it: What are your LTC plans?)
- Out of curiosity, why FBLAX (ER=0.43) over Vanguard Lifestrategy Moderate (ER=-0.24)?
- What is your funded ratio? (Your total income over course of the plan from ss + pensions + your current portfolio / your total core expenses. You could get these from a Pralana download or Maxifi lifetime balance sheet.)
- Since you mention Maxifi, does it give you roughly the same consumption smoothed discretionary as Pralana? If you use 60/40 in its "full risk monte carlo" what does the 5th percentile trajectory look like?
- You've "stress tested" your wife not having your pension. Have you stress-tested longevity in general? To 94
For instance, using Longevity Illustrator, what is the 10th percentile of either partner surviving? How about if you combine that total age for your wife with your own 75%th longevity (i.e. you die early) in a monte carlo and historical scenario? Is it still 100%? - Have you tested a 23% cut in social security? Yes.
- Have you also run historical analysis? Can't run Historical analysis due to everything being in FBALX. No data.
- Have you tested lower stock returns that some "big names" predict? For instance, Vanguard predicts the FBLAX will produce a median of 2.4% real over the next ten years--and that means half the time it will be even lower! And Research Affiliates predicts FBLAX will produce returns of 2.4% real as well I'm aware of the expected lower US market returns over the next decade. I'm using Scenario 3 to evaluate a 0% real return with 12% Std Dev. Results are 81% MC success. Plenty of discretionary room to cut back if needed.
- Are you building in extra-inflation for certain categories like medical (e.g. 3% rise in Medicare premiums is what the SSA itself assumes) and LTC? (Come to think of it: What are your LTC plans?) 2% extra on medical
- Out of curiosity, why FBLAX (ER=0.43) over Vanguard Lifestrategy Moderate (ER=-0.24)? Here's why https://testfol.io/?s=cqcgP9BxhiD
- What is your funded ratio? (Your total income over course of the plan from ss + pensions + your current portfolio / your total core expenses. You could get these from a Pralana download or Maxifi lifetime balance sheet.). Funded ratio before SS @70 is .28%; after SS it .84%, then 1.6% during the No-Go years.
- Since you mention Maxifi, does it give you roughly the same consumption smoothed discretionary as Pralana? If you use 60/40 in its "full risk monte carlo" what does the 5th percentile trajectory look like? Haven't used MaxiFi in 3 years.
@jkandell I like the comments by Kevin @boston-spam-02101gmail-com about your retirement plan. Smart guy🤗. In terms of when/how to buy equities when low, it's not a good idea to just have cash lying around waiting for a big stock market drop, that could take many many years. What I do is ROTH conversions when stocks drop more than 20% or so. No cash just lying around. Last time a 20% happened was 2020 and before that 2008.
This is why I don't keep cash lying around waiting for a stock market crash: my TIPs are reserved for essentials, not for circling like a hawk for a stock crash.
The 70/30 (or higher, as Kevin argues) of my discretionary bucket is also not "waiting around" for a stock crash: it will be rebalanced to buy when high and sell when low.
My grand parents all lived through the great depression of the 1930's. As a result they were very reluctant to spend money for the rest of their lives, in may cases needlessly. I guess my thought is don't let past life challenges cloud your future enjoyment.
I hear you, and appreciate the caution. This tendency you describe (once "poor" always "poor") is exactly why for me (and I don't generalize) a disciplined actuarial method is so important: it forces me to withdraw an even share beyond essentials whether I feel like it or not. And my wife is even worse than I in this regard. Otherwise we'll die with a bunch of money in the bank.
- You've "stress tested" your wife not having your pension. Have you stress-tested longevity in general? To 94
For instance, using Longevity Illustrator, what is the 10th percentile of either partner surviving? How about if you combine that total age for your wife with your own 75%th longevity (i.e. you die early) in a monte carlo and historical scenario? Is it still 100%?
May I suggest exploring the link? Your chances of living to the 10th percentile are quite small, but possible; your 10th percentile for either of you still being alive is likely to go till about 100 for average health or 104 with excellent health.
- Have you also run historical analysis? Can't run Historical analysis due to everything being in FBALX. No data.
You could simulate it by mixing 70% stock with 30% bond. That combo has had about .98 correlation with FBALX since its start in 2006.
- Have you tested lower stock returns that some "big names" predict? For instance, Vanguard predicts the FBLAX will produce a median of 2.4% real over the next ten years--and that means half the time it will be even lower! And Research Affiliates predicts FBLAX will produce returns of 2.4% real as well I'm aware of the expected lower US market returns over the next decade. I'm using Scenario 3 to evaluate a 0% real return with 12% Std Dev. Results are 81% MC success. Plenty of discretionary room to cut back if needed.
Wow! You have 81% success with zero return! I don't think with those stats that you need Pralana, my friend. As you say, lots of cushion. You could use the Y Ching to buy random britney spears bitcoins and still have an 8/10 of thriving. Well done.
- Out of curiosity, why FBLAX (ER=0.43) over Vanguard Lifestrategy Moderate (ER=-0.24)? Here's why https://testfol.io/?s=cqcgP9BxhiD
Aha! The difference in past returns is because FBLAX is closer to 70% equity (compared to 60%) and because it only holds 4% international and VSMGX is 25% international stock. I trust you've asked yourself: do I expect this difference to continue for the next 30 years? Plenty of smart people (like @pizzaman) say "yes!". Plenty of others say "no, diversify so all your eggs aren't in the American basket." But I have a hunch you've carefully thought through this part of your plan.
@jkandell Here is a question to ask yourself: For essentials: At what return rate ___% if over 10 years in real dollars (guaranteed by US govt at maturity, in real inflation adjusted dollars) would you no longer take a chance on 10y of stocks? How about for discretionary? At what guaranteed return would you no longer take a risk on stocks at all? For me, it comes close to 1.5-2% real return for essentials, maybe 2.5%-3% for discretionary. In economics this is called "certainty equivalence", and I find it quite useful mental exercise.
Easy one, the average annual return of the S&P 500 since 1926, including dividends, is approximately 10.4%. The average inflation rate in the U.S. since 1926 is approximately 3% per year.
Answer is 7.4%
I don't really separate out essential and discretionary costs. I just take the past 5 year average of how much money we spend and plug that into PRC. The bond ladder I put together generates that amount each year.
@jkandell What if you just input into PRC all historical averages (inflation, ROI on stocks, bonds, cash, 2% more for healthcare, etc) and used an AA of 60/40. How far off would that be to the plan you are currently using. Just curious.
@pizzaman So if you had a guarantee of 6.5% (guaranteed bonds), you'd still choose stocks at 7.4%?
