The Myth of the Liability Matching Portfolio

In my previous post on Liability Matching Portfolios I talked about how it is a fool’s errand to pretend you are “matching” liabilities that are 20–30 years out. (Or more, if you don’t plan on dying at 95!) Today here’s a micro-example to drive home that point.

Over at, Maddy Martin has some data on average maintenance costs for cars. Some of it is not exactly surprising: German cars are expensive to maintain; Japanese cars are not. But this is exactly the kind of the data that I’m pretty sure retirees are not taking into account when figuring out their future “liabilities”.

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Assuming you buy a brand new car at the start of retirement, this means that your “auto maintenance liability” in Year 5 Of Retirement will be around $600 but in Year 10 Of Retirement will be $1,400; over double.

Do you think anyone actually buys an extra $700 of TIPS in Year 10 of their TIPS ladder for this liability? And then $720 in Year 11 and $740 in Year 12…and so on? I don’t.

Here’s another way to look at it. Your Mechanic also calculated 10-year maintenance costs for various types of cars.

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The difference between #1 and #20 on the list is almost $6,000, which works out to $600 a year. When a retiree is car shopping, how many of them say, “Well, 15-years ago I bought a TIPS ladder in order to match a liability of $11,500 of maintenance costs for my next car. And this particular car has maintenance costs of $15,600 so I won’t buy it.”

My guess is none.

I don’t think retirees “match liabilities”. I think they do what pre-retirees do: they change their lifestyle to fit within whatever income stream they currently have.

“Matching liabilities” is a good marketing name and makes it sound like you’re being financially prudent but isn’t reflective of what real people do in the real world.

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