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Appropriate Asset Allocation for new Retiree?
Old 10-22-2019, 11:14 AM   #1
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Appropriate Asset Allocation for new Retiree?

I am retiring soon, at the end of 2019, at age 59. Divorced, one adult child, living mostly independently.

Retirement assets consist of a mix of broad based stock and bond funds worth approximately $1.8M

Additionally, a pension of $1K/mo and Social Security at earliest age of 62 will be worth $2K/month.

Current employer will provide retiree healthcare, my cost will be about $180/month to start with.

Planning to live on expenses of +/- $70K/year in retirement.

Current Asset Allocation is 50% stock funds/ 50% bond funds

I attempt to not be swayed too heavily by news and news of an impending economic downtown.

Nevertheless, I am concerned and considering changing my AA to 40% stocks/60% funds.

Any thoughts, advice or comments? Thank you!
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Old 10-22-2019, 11:22 AM   #2
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Your call. I like to keep my AA the same and not try to predict the markets, but a 10% swing isn't drastic.

Which one would make you more upset:

1) Keeping the 50/50 AA, and seeing the market go down like you knew it would.

2) Switching to 40/60, but seeing the market continue to go up

That will be a good indication of which way you should go.

I think the only way you can really lose is to go to 40/60, watch the market keep going up, give up and go to 50/50, and THEN have the market drop. But even with that, you've only screwed up on 10% of your money.
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Old 10-22-2019, 11:26 AM   #3
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At your age, I would stay with 50/50 or even a higher allocation to stocks. I'm 64 and target 60% stocks but am currently more like 52%.

That said, the difference between 40/60 and 70/30 in terms of success rates are very similar... but higher stock allocations result in higher estates over a 30-40 year time horizon even though the success rate is similar.
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Old 10-22-2019, 11:35 AM   #4
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I'm 60/40 and too think of changing from time to time but the thought of creating a income tax hit keeps me staying the course. And that has work good for me.
i'm not sure there a huge difference, giving time, from 40/60 50/50 60/40.
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Old 10-22-2019, 11:35 AM   #5
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With $1.8M and $70k expenses you could put five years of expenses (350k) in cash-like assets (CDs, TIPS, etc.) and let the remaining $1.45M ride in a total market index fund.

On up years, move $70k to to cash-like instruments. On down years, wait it out. The recent 'biggest in a lifetime' downturn was 5.5 years for the S&P 500 to get back to previous level.
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Old 10-22-2019, 11:45 AM   #6
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It's not a big difference between 50:50 and 40:60 as others have noted, I wouldn't worry at all about either.

If you like pictures (like I do), this may help illustrate the small differences in the asset allocations you're considering. I wouldn't necessarily put a lot of weight on the returns shown as they vary considerably (shown), but the relative differences and ranges hold up pretty well over the long run. And in the end, it's a personal decision each of us has to make, there's no universal right answer - some of us are more risk averse than average, others less so. Plus if you have more than adequate assets, you don't need to take any more risk than what's necessary to keep up with inflation, what many refer to as "if you've won the game, why keep playing?"

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Old 10-22-2019, 12:57 PM   #7
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It will not be a smooth ride but at your withdrawal rate and reasonable expectations for growth in the porfolio, I think the portfolio will continue to increase.

AA? Well, the first question is "What is the purpose of the portfolio?" If you want to leave a large estate that is one thing and it leads you to more equities. If you want to absolutely, positively, have no financial risk during your lifetime that may lead you to TIPS.

For sure, ignore the stupid formulas relating to your age. The size and purpose of the portfolio should drive your decisions. For reference, we have more money than we will ever spend, so our AA is 75/25.

Finally, as others have said, from backtests anyway, there is not a lot of difference between 60/40,50/50, and 40/60.
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Old 10-22-2019, 01:46 PM   #8
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Like others have said a 10% difference either way will not affect the success ratio.


I have opted for higher equity--90% because when I run the numbers the success ratio is the same for 60/40 or even 50/50 , but the total balance over 20-30-40 years is substantially higher with higher equity.
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Old 10-22-2019, 02:10 PM   #9
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Like others have said a 10% difference either way will not affect the success ratio.


I have opted for higher equity--90% because when I run the numbers the success ratio is the same for 60/40 or even 50/50 , but the total balance over 20-30-40 years is substantially higher with higher equity.
+1. The chart posted above by Midpack includes both historic bond and equities returns. I'm conviced that we'll never see bond returns that revert to levels found in the 1970s, so I think the spread will be larger in the future. Bonds, IMHO, will create a significant drag on one's returns. FWIW.
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Old 10-22-2019, 02:26 PM   #10
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+1. The chart posted above by Midpack includes both historic bond and equities returns. I'm conviced that we'll never see bond returns that revert to levels found in the 1970s, so I think the spread will be larger in the future. Bonds, IMHO, will create a significant drag on one's returns. FWIW.

Yeah, whenever I roll over my treasury bill I'm like ugh whats the point lol
But then again if market goes down 50% treasury bills will look good. My rationale is that I will only be in trouble if stock market goes down 40-50% and then stays there for a number of years.
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Old 10-22-2019, 02:37 PM   #11
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Yeah, whenever I roll over my treasury bill I'm like ugh whats the point lol
But then again if market goes down 50% treasury bills will look good. My rationale is that I will only be in trouble if stock market goes down 40-50% and then stays there for a number of years.
Yes, that's why I have 19% of my portfolio in bonds and money market accounts.
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Old 10-22-2019, 03:28 PM   #12
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+1. The chart posted above by Midpack includes both historic bond and equities returns. I'm conviced that we'll never see bond returns that revert to levels found in the 1970s, so I think the spread will be larger in the future. Bonds, IMHO, will create a significant drag on one's returns. FWIW.
I think "income" instead of bonds. So I use multi sector funds, closed end funds, a bond ladder, etc to create a cash generation machine to sit opposite my pure equity plays. I am still getting over 4% in today's environment with income investments.
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Old 10-22-2019, 07:38 PM   #13
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I think "income" instead of bonds. So I use multi sector funds, closed end funds, a bond ladder, etc to create a cash generation machine to sit opposite my pure equity plays. I am still getting over 4% in today's environment with income investments.
Yeah seems to make more sense in this environment with I assume you are holding the bonds to maturity.
Don't really think we will see the inflation levels of the 70's.
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Old 10-23-2019, 05:32 AM   #14
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Up until a couple of years ago, I was at 60/40 and expected to stick to it forever. However, political instability and perceived overvaluing of stocks made me switch to 50/50.

Although the market has continued to go up, I haven't regretted the change. At this stage of my retirement, there's something comfortable about having it be half and half. (By the way, I retired five years ago and I'm your age now.)
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Old 10-23-2019, 07:24 AM   #15
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Don't really think we will see the inflation levels of the 70's.
Do you think people in the 60's expected to see the inflation levels of the 70's?
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Old 10-27-2019, 06:02 AM   #16
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Thank you for the helpful comments.

<<AA? Well, the first question is "What is the purpose of the portfolio?" If you want to leave a large estate that is one thing and it leads you to more equities. If you want to absolutely, positively, have no financial risk during your lifetime that may lead you to TIPS.>>

The purpose of the portfolio is to provide an income for me only, for the rest of my life. Leaving a legacy is of no interest to me. I am not familiar with TIPS, looks like I should be. Sounds like an annuity-like strategy. Thank you for pointing this out.
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Old 10-27-2019, 11:09 AM   #17
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The purpose of the portfolio is to provide an income for me only, for the rest of my life. Leaving a legacy is of no interest to me. I am not familiar with TIPS, looks like I should be. Sounds like an annuity-like strategy. Thank you for pointing this out.
You can do a search for ETFs/mutual funds at your financial firm. Sort by SEC yield, high to low. Do not necessarily jump at the highest yielding options. I use a variety of ETFs in the realm of long term corporate bonds, preferred stock, high yield common stock. Some good conservative choices might be an all-in-one bond ETF or corporate bond ETF that spans short, intermediate, and long term maturities, or a dividend growth stock fund.
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Old 10-27-2019, 04:11 PM   #18
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Like others have said a 10% difference either way will not affect the success ratio.


I have opted for higher equity--90% because when I run the numbers the success ratio is the same for 60/40 or even 50/50 , but the total balance over 20-30-40 years is substantially higher with higher equity.
It appears that your risk tolerance is very high. 90% The end balance may be a lot higher, but the volatility will be substantially higher in comparison to a more moderate allocation, say 50%. Keep in mind that estimated "success factor" from any retirement calculator is based on historical data. A higher ratio means the chance of running out of money is lower. Attaining a higher end balance over a long period is not relevant unless one plans to leave a legacy.
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Old 10-27-2019, 06:47 PM   #19
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It appears that your risk tolerance is very high. 90% The end balance may be a lot higher, but the volatility will be substantially higher in comparison to a more moderate allocation, say 50%. Keep in mind that estimated "success factor" from any retirement calculator is based on historical data. A higher ratio means the chance of running out of money is lower. Attaining a higher end balance over a long period is not relevant unless one plans to leave a legacy.

I hear you and I agree with everything you said. In terms of history , we have had a tremendous bond market the last 20 years so moving a big amount into bonds isn't necessarily going to "save the portfolio" either if the next 10 or 20 arent so great. Inflation and withdrawals could easily eat away at that portion.
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Old 10-27-2019, 06:54 PM   #20
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It appears that your risk tolerance is very high. ... the volatility will be substantially higher ...
The professors make this equivalence all the time so they can play their mathematical games with Gaussian distributions, but I think we delude ourselves if we channel our thinking to believe that there is no risk except volatility. That is clearly nonsense.

For our investments we do not even consider volatility to be risk. It would be part of risk (aka sequence of returns) if we did not have a non-equity tranche that is more than adequate. Since we can draw on that we really don't care how much fun the market averages have or don't have over any short term period.
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