We got Anna. "Hello Joe and Al, I love your funny and thoughtful podcast." Well, thank
you, Anna. "I'm a teacher in my mid-40s at a state school. I opted out of the underfunded
pension system when I started the job a decade ago. Instead, I contribute to a defined contribution
plan and various supplemental retirement accounts. Unfortunately, in my state, I'm ineligible
to contribute to Social Security, so no pension and no Social Security. However, I do live
in a LCOL, low cost of living area, and I'm recently able to save more than I spend - $40K
per year into retirement accounts - and I'm thinking about adjusting my portfolio to take
the lack of Social Security or pension into account. What do you think are the pros and
cons of these ideas? All right, Anna. She's saving $40,000 a year?
Yeah that's excellent.
Solid. Mid-40's? She's gonna be just fine. What, why you rolling your eyes at me?
I didn't roll my eyes, I smiled and then I'm looking at the rest of her question.
Got it, whatever. (laughs) Okay. "Take a chunk of my savings each year, $10k, and put it
into I-Bonds creating a safe inflation-protected bond ladder." Number one, what do you think
about that idea?
What's an I-Bond? Inflation?
An I-Bond? It's like a double-E bond. It's just a government bond.
Never heard of an I-Bond?
I have, I just can't answer the question without knowing exactly what is. (laughs)
Got it. Or maybe it could put it in "1," bonds creating a safe inflation... but I believe
it's I-Bonds.
I think it's I-Bonds.
Yeah that's what it looks like, I-Bonds, so I do believe, Anna, you should have some of
your money in bonds. I don't know that you necessarily need to buy a bond. I might buy
a bond fund, and I might stay shorter-term just because when you look at the long-term
rates of bonds versus stocks, you don't get much extra benefit, much extra income for
a longer-term bond and you have a lot more risk. But I do agree with putting some in
bonds, and whether it's $10,000, that's about 25%. That could be about right.
I disagree with that. You're mid 40s, Anna, so you're a little bit older than me.
(laughs) Not much.
You got 20 years of work left. I think as you get closer to retirement you're going
to need as much capital as you possibly can to accumulate. So I get what you're doing
here is you're saying I need a supplement for my pension and Social Security, so let
me put $10,000 a year in I-Bonds. I-Bonds are paying, what, 2 percent? In 20 years,
I don't think that's a good idea. I think you want to continue to save the $40,000 in
a globally diversified portfolio and don't segment it. Don't try to bucketize this thing.
You look for a target rate of return over 20 years, let's say, what do you think, Al?
Globally diversified portfolio, 20 years, call it six and a half percent?
Are you fine with that?
Yeah I would be fine with that.
Okay. And then if she does that, she's got $1.5 million. I'm assuming she has money already
saved. So that's if she started today and she saved $40,000, and she got six and a half
percent return on that $40,000 savings per year. At the end of 20 years, she's got that.
And if I take a 4 percent distribution from that, that's $62,000. As a teacher I'm guessing,
what do you make as a teacher - $80,000?
$60, 70, 80.
$80,000? I mean some administrators might make $100,000 and some.
Kinda depends on where you are in the country too. And we don't know what state she's in.
So I don't know, $62,000. That's, of course, the future value of that... (Joe calculates)
It's always good to do calculations on the air, isn't it?
(laughs) Yeah it is, here we can see it.
Uh-huh. It's about $42,000. Can you live off of $42,000? If you're good then you're all
set and keep doing what you're doing and have a global diversified - don't try to segment.
Yeah and that was assuming you don't have anything saved now.
But she's in our mid-40s and she's cranking $40,000? She probably has some cash there.
Number two question. "Use my tax-deferred retirement accounts and combined short term
TIP funds and long term TIP funds to create a sort of liability matching strategy." Anna!
Are you a pension hedge fund manager?? No, I would not do that. She's trying to - this
is what like big pensions do, and they match ladders with liabilities, and the liability,
in her case, would be an income stream or income payment. I disagree with that strategy
as well. I like the TIPS though, what a TIP is is a treasury inflated protected security Alan.
Yes, that I knew.
Okay. Any other comments on that strategy?
No. Agreed. Okay. Her third comment is "more is better."
"Stick with the total return portfolio but perhaps choose a more conservative allocation,
say move to 50 fixed income 50 stocks to substitute for Social Security. Cheers and thank you
for all your work." All right Anna.
Yeah. Now you're on the right track. But that's too conservative. And that's assuming you
have a 20-year threshold.
Yeah, Anna, if you're retiring in the next five years, well then all bets are off. Then
just ignore everything that I just said. But if you're retiring at 65, let's say. Because
you're looking for a supplement of Social Security. I love the fact that you're concerned
of saying you know what, I don't have Social Security, I'm not going to have a pension,
but I have all these supplemental retirement accounts that let me put $40,000 in a year.
If you continue to do that, I think you'll be fine. And it sounds like she lives in,
what did she say? A low cost of living area.
LCOL? FMO...?
What are you trying to say, Joe? (laughs)
I dunno. FOMO?
Fear of missing out?
Yeah that's what I meant to say.
Okay. FOMO.
Loco?
Let me just say. if you do have 20 years, I would go at a minimum 60% stocks. I might
do 70 percent stocks, I might even do 80 percent if I could handle the fluctuations.
Volatility. Yeah. I have roughly the same time horizon. My portfolio is 100 percent
stocks. So there you go. All right Anna I hope that helps. Good luck with everything.
Keep pumping away, keep saving.