So @wallace471 , after us going totally into the weeds, what real inputs do you use for PRC, stocks, bonds, money market, general inflation, healthcare inflation, tax rates going back up in 2026, SS income going down after 2033 ???? Do you use more than one time frame (first 10 years then change inputs)? I am very curious 🤓.
I am still working, with a year or two to retirement. And I am sure my assumptions/modelling are less rigorous than most on this forum. My input numbers have not changed that much from the prior post. I am still playing with the assumptions, but here are the current values:
General inflation assumption=3.0%
Healthcare inflation assumption=2.0% (=5%=3%+2%)
College inflation (grandchildren 529)=5.0% (=8%=3%+5%)
Tax rates revert to pre-TCJA in 2025
SS income reduction by 23% in 2033 as a stress test. Otherwise, 0% SS reduction
Horizon age: 90-95
| Regular | Your Tax-Deferred | Spouse Tax-Deferred | Roth | ||||
| Management Expenses >> | 0.25% | 0.25% | 0.25% | 0.25% | |||
| Period 1 | 2023 | Aggregate Real ROR's for each time period for each account are shown in the table to the right. | 2.62% | 4.25% | 3.50% | 4.70% | |
| Period 2 | 2025 | 2.62% | 4.18% | 3.28% | 4.70% | ||
| Period 3 | 2030 | 2.62% | 4.18% | 3.28% | 4.70% | ||
| Period 4 | 2040 | 2.62% | 4.18% | 3.28% | 4.70% | ||
| Asset Classes | Real ROR | Allocations per Account | |||||
| Period 1 | 2023 | Money Market | -0.20% | 40% | 0% | 0% | 0% |
| Stocks | 5.0% | 50% | 75% | 50% | 90% | ||
| Bonds | 2.0% | 10% | 25% | 50% | 10% | ||
| Period 2 | 2025 | Money Market | -0.20% | 40% | 10% | 10% | 0% |
| Stocks | 5.0% | 50% | 80% | 50% | 90% | ||
| Bonds | 2.0% | 10% | 10% | 40% | 10% | ||
| Period 3 | 2030 | Money Market | -0.20% | 40% | 10% | 10% | 0% |
| Stocks | 5.0% | 50% | 80% | 50% | 90% | ||
| Bonds | 2.0% | 10% | 10% | 40% | 10% | ||
| Period 4 | 2040 | Money Market | -0.20% | 40% | 10% | 10% | 0% |
| Stocks | 5.0% | 50% | 80% | 50% | 90% | ||
| Bonds | 2.0% | 10% | 10% | 40% | 10% | ||
I use these standard deviations:
| Asset Allocation Mode 1 | ||
| Asset Classes | Std Dev | |
| Money Market | 1.00% | |
| Stocks | 17.50% | |
| Bonds | 7.5% | |
Spending strategy: CAPE rules
| CAPE a | 1.75% | |
| CAPE b | 0.50 |
GMO Real Return Prediction updates through 8/31/23.
@wallace471 Any body know why GMO is always so negative compared to others?
Grantham has shared his view of the market (relatively) recently:
https://www.gmo.com/americas/research-library/after-a-timeout-back-to-the-meat-grinder_viewpoints/
https://www.gmo.com/americas/research-library/jeremy-grantham-on-rosenberg-research_video/
Generally a rather negative outlook due to current overvalue in his opinion. Presumably, he still has influence on GMO forecasts.
And here is a look at the Q2 GMO Capital portfolio: https://seekingalpha.com/article/4630170-tracking-jeremy-granthams-gmo-capital-portfolio-q2-2023-update
Interesting article entitled "Predictions are Pointless - Why You Shouldn't Listen to Gurus" by Lance Roberts of Real Investment Advice,
OK, I did it 😋. I just completed buying 6 years worth of Zero Coupon US Treasuries with annual maturity dates going from Jan 2030 to February 2035. Interest rates go from 4.707% to 4.818%. This will cover our living expenses during those years. Talk about sleeping well at night 😴. And talk about being lucky. I sold mutual funds last week to pay for the Treasuries, on the day the S&P 500 hit 4,500 🤩. These will be in an IRA so no added tax (not until I withdraw the money from the IRA, no change there) and no fees to buy the Treasuries as I bought them on the secondary market through Fidelity.
https://www.businessinsider.com/personal-finance/what-is-a-zero-coupon-bond?op=1
https://www.investopedia.com/articles/investing/062513/all-about-zero-coupon-bonds.asp
Now that I have completed my big change with US Treasuries (years 6-11), and short term brokered CDs and US Treasuries (years 1-5) our next 11 years of living expenses are basicly 100% save and the ROR on them is fixed through maturity😊. So, how do I model this in Monte Carlo and Historical analyses for years 1-11?? I don't want my bond allocation to be randomized in Monte Carlo and don't want to follow historical returns, as I know exactly what my ROR will be. Thoughts?? 🤔
@wallace471 I'm not sure about the 8% in education cost rising, but it's good to be conservative I guess. Last I checked they weren't rising as much as expected. The big corporate university profit machine is seeing more kids taking a pass and opting for other choices. Supply and demand. I'm using a lower value for that lately. As well, I have a whole chapter in my book on not paying for college, tech, and trade school at all. The hacks start as early as 7th grade.
Also FYI you want to put 2026 in that field on the home page for the TCJA expiration at the end of 12/31/2025. Just making sure you have 2026 and not 2025. It's asking what year the changes will revert to pre-TCJA.
@hines202 Thanks Bill. On the college inflation...I am using the inflation analysis by Mark Perry ( https://www.aei.org/carpe-diem/) which relies on BLS numbers. The most recent results I could find were from his July 2022 blog (Figure attached). Fitting (linear) the "College Tuition and Fees" curve since 2000, I get about an 8% inflation rate, although perhaps it is closer to 7% as the curve rolls over slightly.
@wallace471 Is he projecting that over a long timeframe though? It's important to remember that PRC will apply your stated inflation rate to education expenses starting this year and each year going forward. So, for example, if someone's kids are around 8, you'll start paying for college in about ten years and for about four years after that. So you want to look at long-term *average* inflation rates on education for now through that time period to get as accurate a prediction of costs as possible. I can see how recent/near-term inflation might be very high, along with everything else, but as general inflation comes down, so should the level of education inflation.
@hines202 : Perry's data was taken directly from the BLS, as I understand it - no projections. The relative inflation rates of the various categories are a dramatic example of the impact of inflation, and one reason why his plots were very popular and intriguing. A flat line would reflect 0% relative inflation (like clothing, new cars, household furnishings), while a positive slope exceeds it. There are also categories with negative slopes - that is, deflation. TVs are a classic example of deflation due to highly efficient manufacturing, off shoring, etc.
I fit the data in his graph (which starts at 2000) to come up with the projected inflation rate through 2022 - just a simple linear fit. I would interpret that fitted line slope as the as the average inflation rate for the particular category. For the tuition and fees, it is something like 170% over 22 years = about 7.8% per year, so I call it 8%. I think the graph demonstrates that higher education tuition and fees (and hospital services) have greatly exceeded inflation for a long time. Perhaps that trend will change in the future, but there is no evidence that this has substantially happened yet. There also still seems to be no incentive to drastically reduce spending.
Perry notes that in 2022, the overall inflation since 2000 was 74.4%, so that would suggest a rate of 3.4% over those 22 years with a simple linear fit. Thus education inflation exceeds overall inflation by about 5% over that period. From what I see, education is still quite labor intensive (that is, payroll dominates their budget) and this "business" is relatively inefficient compared to manufacturing goods. So we should expect a much high rate than the overall inflation rate. This perception applies to health care as well, I suppose.
Other projected inflation rate results from his graph that I get are (rough numbers):
Hospital services: 9.7%
Medical care services: 5.5%
Child care: 5.0%
Average hourly wages: 4.0%
Housing: 3.2% (roughly keeps up with overall inflation @ 3.4%)
The post COVID phenomenon would likely add noise to these plots, but remember that these are upward trends over 2 recent decades. "Hard to abruptly change the direction of a supertanker..."
Not that I am looking for a name for my retirement planning/investing style, but if I were, I'd like "Goals-Based Approach to Retirement Investing" :
Long-Horizon Investing, Part 4: Real-Life Applications in Retirement
https://www.advisorperspectives.com/articles/2023/10/16/horizon-investing-life-applications-retirement-nathan-dutzmann?hsid=28216572&utm_campaign=AP Newsletters&utm_medium=email&_hsmi=279060301&_hsenc=p2ANqtz-_N5ZaXmTm7E00XYwlI2QREIq9zKGZVEn0y42jpF6qyeGdCQxZ_m-z2ss4oH_V57E4Ndg7Nc1eJAcUEFcu1YxpxmplXdA&utm_content=279060301&utm_source=hs_email
Notably, the substantial foundation of safety built into a TIPS ladder (plus Social Security) increases the risk capacity of remaining assets. Especially for clients with sizable, guaranteed income (SS, TIPS, pensions, annuities), I may recommend that this total-return income layer be funded with a portfolio with up to 80% stocks. I won’t typically go riskier with this sub-portfolio (or “layer” as we call it), because the volatility dampening feature of bonds can help prevent a guardrails strategy’s year-to-year income from varying more wildly than most clients can stomach.8
The above chart shows the evolution of each sub-portfolio. In this example, TIPS are over 45% of total assets initially, but they are consumed to zero over 25 years. The “DIG” portfolio balances income and portfolio stability in a median outcome. The non-income portfolios start as 23% of the total, but in many random trials they become the dominant element (especially the growth portfolio) as clients age, due to the equity risk premium and to the fact that the growth portfolio is not tapped for income or expenses.
Replace TIPS ladder with Zero coupon US Treasuries and that's kinda me.
@hines202 - More data on college tuition and fees:
From a recent VettaFi article by Jenifer Nash on the CPI components, the college tuition and fees curves (from BLS) with time look similar to those in Perry's chart:
However, it is noted in the article that the curve may be "overly dramatic". The thinking appears to be that BLS uses college "sticker prices" - which student's rarely pay due to financial aid. There are also significant differences between private and public institutions, of course. (The value is, of course, a separate matter.)
Nash cites the College Board report as a source of alternative data on the college costs.
https://research.collegeboard.org/media/pdf/trends-in-college-pricing-student-aid-2022.pdf
https://research.collegeboard.org/media/pdf/trends-college-pricing-presentation-2022.pdf
From slide 5 of the attached College Board presentation (which is inflation adjusted and anchors costs in 1992-93 as "1.0"), I would eyeball the costs from 2000 - 2022 to have roughly doubled (average of private vs public). Based on the chart, it looks like the index around 2000 (to compare with the Perry chart) is about "1.2". So a back-of-the-envelope estimate of the inflation for college tuition and fees from 2000 to 2022 could be 2/1.2/22 = 7.6% per year, slightly less than the 3%+5%=8% per year I assumed. (As noted above, my input into PRC is 5% for these costs and the 3% overall inflation I assumed for a 25-30 year time horizon). In that context, it would seem 8% is a conservative overestimate, but I plan to stay with it for now.
Thoughts?
