Asset Allocation in Retirement: 100% in stocks???

[Alan]

I'm not sure where you're getting the 4% and $750k.

In my example, the individual had $2 million in assets and needed $30k per year from assets to hit his $60k total income goal. That's a first year withdrawal rate of 1.5%.

My bad - didn't spot the $2 million in assets

 

[clifp]

This is an interesting discussion. The bottom line to me is that one size doesn't fit all. If you have enough retirement income to support your life style, then why take on extra risk? The response to this question may have been different last August with all of the volatilty. After one of those days when the market fell 400 points it would be hard to suggest 100% equities. Personally I would not assume any more risk then I need too. You might not get a second chance to make it right now that your retired....but I'm conservative.
Two other points:
1. I wouldn't be comfortable moving large chucks of my nest egg into the stock market after the huge run up we just had....I would dollar cost average over a period of time.
2. Although bond rates are historically low and the theory is and has been for years that rates have no where to go but up and that will eat away principle.....I'm conflicted since the Fed is planning on keeping rates a zero until 2014......so bonds may not be as bad as gurus think just yet....but look out when the Fed stops easing.

I completely agree that one size doesn't fit all.
But right now I am more fearful of steady lose of wealth through inflation than the volatility of the market. My car is 8 years old when I first bought I filled up the tank for $25 now it is $50. Now gas prices have risen faster than most prices but even with modest inflation we've had recently it cost $1200 today to buy a $1,000 worth of goods from 2004.

I have no problem with buying bonds in fact right before retiring starting in 1998 and continuing through 2001 I bought a lot of them much more than I have today. Muni GNMAs, and iBonds for my taxable account, and TIPs for my IRAs. I did this for two reason in 99 and 2000 cause I thought stocks were over priced. Even more importantly because the bonds helped me achieve my goals of retiring. The 5-5.5% yields on California Muni and the 3.5-4% real yields on TIPs were more than sufficient to fund my retirement goals and the risk of holding these financial products was very low. (It turns higher than I thought for the California munis)

However currently bonds don't do that now. Right now I have 37x my living expense but not pensions other than SS. Right now if a constructed a 30 year bond ladder I'd be luck to get a 0% real yield. So that gives me 3 choices, die before I am 90, cut back on spending which maybe very difficult when I am older and need more help, or invest in equities.
It seems to me that investing in equities is the lower risk and the higher allocation I have in bonds the more return I need from my equities.

 

[youbet]

But right now I am more fearful of steady lose of wealth through inflation than the volatility of the market.

+1

I agree with you clifp. Taking it a big further, my own opinion is that the biggest risk to our standard of living a decade or more out is a combination of skimpy investment performance coupled with escalating price levels, especially for energy and commodity based products.

 

[Nords]

For further clarification and full disclosure - How many of you 100% in equities have a pension?

I think diversified dividend income counts, too. There are over 300 high-quality dividend-paying stocks who have consistently grown their dividends over the years, and only a few of those went down in flames during 2008-09. The rest of the group's stock prices may have sunk but they still paid out the same number of pennies per share.

I have a military pension now, my spouse will have a military pension in 10 years, and we'll both be able to start collecting Social Security in the 1-2 years after she starts her pension.

In the meantime, we can keep over 90% of our ER portfolio in equities (including a dividend ETF) and a couple years' expenses (8-10%) in cash.

Anyone expecting to dip into the college fund for emergencies may be sorely disappointed if it happens while the little darlings are actually in college.

 

[Animorph]

I'm retired with 100% equities, nominally. SS and small pension in 5 to 10 years I suppose. I'm actually about 12% cash and bonds right now I think. I sell equities for cash when my portfolio is above expectations (last year). I buy equities with cash when my portfolio/the market is down 20% or more (2009). Otherwise I sell equities as needed to meet expenses, hopefully during average markets. A fairly mechanical strategy with no need to guess what the market is going to do.

If a retirement is going to last 30-40 years, I see little sense in carrying a significant amount of generally lower performing bonds or cash for the entire period. Ideally I would capture all of the dynamic rebalancing into and out of cash or bonds but with a long term zero cash/bond balance. Worked quite nicely in 2009, and my portfolio hit new highs in 2010. My biggest concern in 2009 was how to buy more equities and if the market would dip to my next buy trigger level.

I've only been at it for a little over 4 years, and DW is still w*rking though we have a significant negative cash flow with DS still in college. We'll see how it ends up after 30 years or so.

 

[sengsational]

It's an uncomfortable topic, but how do folks feel about a black swan debit crisis affecting all of these plans? I just suffered through 'Endgame' by mauldin, and he makes it sound like the house of cards has got to fall one way or the other. If he's right (and I'm not convinced he is) then all of the rear view mirror stuff we take as the truth might be so much folly. The last time I brought up this book, the folks told me to buy a shotgun and a lot of ammo, hehe. But I don't think it will involve civil unrest, just that the way the points are tallied (ie currencies) might change. To those that don't have many points, it won't make a difference, but to those of us that do, well, could be a surprise.

--Dale--

 

[Ed_The_Gypsy]

For further clarification and full disclosure - How many of you 100% in equities have a pension?

In about 6 months, I will start getting a grand total of $400/month in pensions, which was more than I ever expected.

 

[audreyh1]

Maybe the actual number is 105.63...

That's funny! I actually use 105.

 

[Ed_The_Gypsy]

All this discussion, and I didn't see anything about non-us denominated investments? US stocks and bonds seem to have dropped together last time, didn't they? I don't think you can have a complete discussion about asset allocation without saying how much you have outside the US. Unfortunately, the default non-US holding would contain a lot of euro, and that's subject to debit driven implosion. So I've got a lot down under, mate!

I try to have 50/50 US/non-US. Much of the non-US is in certain oil company stocks.

Jim Otar says adding foreign [index funds] equities doesn't do anything for you. I am not of the same opinion. It is said that in this global economy, it is all the same. Except when it isn't , which is why I try for 50/50, to catch the non-correlating times. Bernstein showed that the Efficient Frontier for US/non-US was always about 50/50, even if the ends swapped from time to time. Other sources that influenced me were Sound Investing and Les Antman.

After interest rates rise again, I will look at bond funds again, maybe 50/50 US/non-US, too. Maybe not. 60/40 equities/financial instruments sounds about right to me. I will count Social Security as a non-equity. A CD ladder would also work for me. I started one a few years ago, but I was out of work and had to cash out.

As always, you give yourself safety by not taking too much out. I know the word is that 4.5% or 5% is OK if you only do that in the early years, but 3% or 3.5% makes me more comfortable.

 

[ERhoosier]

I do not favor 100% US equities as RE portfolio, but it really depends on which equities, which alternatives you might consider, & your view of the future.
Diversification is good, but it's best to understand the economic conditions you are trying to hedge against. Bothers me when financial advisers throw around terms that are too broad to be truly useful.
"Equities" and "Bonds" are asset classes with HUGE internally variable volatilities over time. Given future prospect for medium-long term inflation & current artificially low interest rates, long bonds (inc. long bond mutual funds) are not "safe" but could get you hurt bad over next 5-10+yrs. Safer approach for "bond" portion of a portfolio might be laddering 1-2yr investment grade bonds (or CD's) & holding to maturity so if/when inflation hits that portion of your assets will be relatively stable with opportunity to increase income with inflation as ladder is updated. Similarly on equity side, certain 100% equity investments could be disaster. Imagine retiring on 100% investment in NASDAQ (QQQ) in early 2000 (down 40% after 12 yrs). Investing 100% in Dow (DIA) would have been MUCH more stable (up 14% plus 2-3% annual dividends). Dividends provide some income & (hopefully) dividends will rise with inflation (i.e. companies profit & pay-out in inflated $). If you think US world economic position may change, having a diversified position in solid international firms could be useful too. Gold has been great if you got in a few yrs ago, but to me price seems to have run up too far too fast lately. History shows you can get hurt badly buying gold at peaks. Gold spiked to $840/oz in 1980 then gradually leaked down to $260/oz in early 2001 without recovering to $840 again until late 2008 (i.e. under water 28yrs despite some intervening wars!).
Re "black swan" debt crisis- Most developed countries have debt issues. We can only hope US does RELATIVELY better than world at large.
There is no financial security- only trying to hedge your bets.

 

[obgyn65]

This is my view also. The next big crisis will be currency devaluation.

But I don't think it will involve civil unrest, just that the way the points are tallied (ie currencies) might change. To those that don't have many points, it won't make a difference, but to those of us that do, well, could be a surprise.

 

[MichaelB]

We are off track, as this thread is about equity allocation.

My feeling is the higher the allocation, the more important it is to diversify the equity. That is probably easier and less expensive now than any time over the past century.

 

[Gumby]

I've started a new thread and moved the currency related posts there. Please carry on with the equity allocation discussion.

 

[eatingmywords]

The high frequency traders scare the crap out of me. My fear is they greatly increase the likelihood of black swan events. As such, my portfolio is heavily hedged. (ie: the best way to make money is to not lose it)

I'm in my 30s. 60% bond allocation, 25% equities, 15% options. Leverage ratio slightly above 1. We'll see how this works .

 

[brewer12345]

I am 38 and working with 60-something percent equity. Much of the rest is bonds, but most of the bonds are in the form of bank loan funds (junky) and straight out individual junk bonds, so my FI has a hefty flavor of equity. I have even stopped buying junk and will slowly allow cash to pile up awaiting better opportunities.

 

[ESRwannabe]

I still have possibly 25 years to go before I retire (I'm 35), but I will probably be around 70% to 80% in stocks, as I am now. Theoretically I will have social security and pension money. If you factor that in, then the asset allocation would probably look very conservative.

But who knows what will happen in 25 years, or if I will even live that long. It is pointless to give it much thought.

 

[FUEGO]

100% equities and still 4-5 years from FI (I'm 31 now). I'll probably keep piling up the money till I get enough to have a roughly 3%ish withdrawal rate and enough fat in the budget to cut if the equities get hit really hard.

At a 3% withdrawal rate, I can just about meet that with dividend yield from a broadly diversified equity portfolio (yield was 2.7-2.8%ish last year). I tentatively plan to remain roughly 100% equities in ER assuming the dividends will mostly cover my expenses. Odds are I will actually carve out a few percent allocation to cash or very short term bonds just as a safety net initially to cover shortfalls in dividend payments or lumpy expenses. Probably 5% max of my portfolio and I'll probably not keep track of it in my portfolio allocations - just call it "cash in my checking account".

I don't really see the value from bonds today since I can get a similar yield from investments plus the high probability of future growth of earnings and hence dividends. Since I am planning on a 5-6 decade retirement, inflation is my biggest enemy, not volatility. The idea is that equities growth over time will lead to a rising stream of dividends (in real terms).

Perhaps some day the bond yield or yield on CD's or cash will get back to the point where it is high enough to justify fixed income investments for me. But I can't bear to invest in something that I expect to lose to inflation every year when I know there are alternatives that have real earnings (at an admittedly much higher volatility of principle).

 

[ERhoosier]

VERY interesting article in today's Wall St Journal re Bill Bengen, author of the "4% Rule" & practicing financial planner. Article outlines a "representative" portfolio for 60yo client. This model portfolio only includes 32% stocks, along with 60% bonds/cash & 8% gold. It appears the 4% Guru would not agree with 100% stock allocation1?!!!

 

[Danmar]

VERY interesting article in today's Wall St Journal re Bill Bengen, author of the "4% Rule" & practicing financial planner. Article outlines a "representative" portfolio for 60yo client. This model portfolio only includes 32% stocks, along with 60% bonds/cash & 8% gold. It appears the 4% Guru would not agree with 100% stock allocation1?!!!

maybe not but he may not have a pension either. He said in one article that the " real" number was more like 4.5%

 

[Ed_The_Gypsy]

+1 What he said.

100% equities and still 4-5 years from FI (I'm 31 now). I'll probably keep piling up the money till I get enough to have a roughly 3%ish withdrawal rate and enough fat in the budget to cut if the equities get hit really hard.

At a 3% withdrawal rate, I can just about meet that with dividend yield from a broadly diversified equity portfolio (yield was 2.7-2.8%ish last year). I tentatively plan to remain roughly 100% equities in ER assuming the dividends will mostly cover my expenses. Odds are I will actually carve out a few percent allocation to cash or very short term bonds just as a safety net initially to cover shortfalls in dividend payments or lumpy expenses. Probably 5% max of my portfolio and I'll probably not keep track of it in my portfolio allocations - just call it "cash in my checking account".

I don't really see the value from bonds today since I can get a similar yield from investments plus the high probability of future growth of earnings and hence dividends. Since I am planning on a 5-6 decade retirement, inflation is my biggest enemy, not volatility. The idea is that equities growth over time will lead to a rising stream of dividends (in real terms).

Perhaps some day the bond yield or yield on CD's or cash will get back to the point where it is high enough to justify fixed income investments for me. But I can't bear to invest in something that I expect to lose to inflation every year when I know there are alternatives that have real earnings (at an admittedly much higher volatility of principle).

 

[pinejake]

Well, I'm the opposite, I'm 54 and got completely out of the market a few months back. I have $2 million in various retirement savings, and can average 4% return with muni bonds, guaranteed funds through 401 k accounts etc. That's $80 K per year. My wife gets a $60K per year pension, and we can easily live off $100K per year pre tax.

So, we make $40 K more than we need every year, which stays in the funds to offset inflation.

Why would I want to be involved in the uncertainty of the stock market? I never really understood it anyway, I felt like a gambler more than an investor...

 

[explanade]

So that you can make more and live large!

Or have more money to leave to heirs!

 

[GrayHare]

If all of us went 100% stocks, it would drive up their prices, particularly if we all bought the same stock, so we'd all be happily FIREd. Just let me know which stock before y'all decide to pile in.

 

[rescueme]

Just to add a reference article to the thread subject, for those that wish to read further on retirement equity holdings, and the reasons why one may wish to hold more/less than is suggested by looking at your "expanded portfolio":

http://www.austinlemoine.com/documents/File36.pdf

While DW/me were in our accumulation years - some 25 years of investing, we kept just over 90% in equities with the remainder in bonds. Cash was only held if it was within a fund. We felt comfortable with a high equity exposure for the simple fact that we did not live on our portfolio, but had two paychecks. Additionally, we didn't start investing for retirement till the age of 34, when our respective pensions (defined benefit) plans were eliminated and replaced with the 401(k) along with starting our respecive IRA's. We took the risk for our future.

Being retired (me 5 years, DW later this month) we went to a 60/40 (equity/bond-cash) mix about three years before I retired and stayed at that level until two years ago, when we went 50/50.

100% equity in retirement? No, we're not that brave ....

 

[pinejake]

So that you can make more and live large!

Or have more money to leave to heirs!

Thanks, I knew I was missing something!