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 http://www.yourmechanic.com, 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”.
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.
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.