Asset allocation to keep up with inflation.

[ranchoparque]

I'm a conservative investor and I've been keeping just under 40% in diversified vanguard equity funds with the rest (except for about 5% cash) in diversified bond funds.
Just wondering what others think would be a minimal stock allocation to keep up with inflation? Inflation has been running about 1.7% the past year.

When I enter my number in Firecalc and Vanguard's retirement "nest egg" calculator my numbers seem good.

My bonds are a mix of the bonds in Target date funds, muni bond funds, short term bond funds and international bonds. I use the five year average when I enter the bonds into Firecalc.

 

[REWahoo]

I have an AA similar to yours, based not on inflation, but on what FIRECalc shows is the minimum equity allocation for survival of a 30 year withdrawal, which is between 35% and 80%. Of course the fact that is the minimum historically needed for portfolio survival is closely linked to keeping up with inflation.

 

[97guns]

Zero stocks here but my rental income keeps pace with inflation real good

 

[Koolau]

I'm still at about 30% equities 12 years in. So far, my portfolio continues to grow though I have rarely stressed it with the full WDR that it would supposedly support. My guess is that I may need more equities, but I just can't get motivated to buy into the current market. I do have a number of backups if inflation shows signs of taking off. At 70, it seems unlikely I'll actually need my port to last 30 years, but you never know. YMMV

 

[friar1610]

I'm still at about 30% equities 12 years in. So far, my portfolio continues to grow though I have rarely stressed it with the full WDR that it would supposedly support. My guess is that I may need more equities, but I just can't get motivated to buy into the current market. I do have a number of backups if inflation shows signs of taking off. At 70, it seems unlikely I'll actually need my port to last 30 years, but you never know. YMMV

This is consistent with Rick Ferri's oft-cited article on the "Center of Gravity for Retirees." In that article, which you can easily find by Googling, he suggests that 30/70 is a good starting point for retirees with deviations in either direction dependent on personal circumstances. At 72/70 with no immediate need to tap the port (but a requirement that we take RMDs), we are between 40% - 45% equities.

 

[Jerry1]

Wouldn't one want to move out of bonds and into some cash given the expected rise in interest rates? Maybe something like - 30% stocks, 50% bonds and 20% cash? I guess very short term bonds aren't much different than cash, but I would think some cash would be in the portfolio. Asking, not suggesting.

 

[Totoro]

Most models and simulations end up at maintaining at least 30% in equities if you want to keep with inflation.

That's for a classic bond/equities portfolio.

 

[euro]

Wouldn't one want to move out of bonds and into some cash given the expected rise in interest rates? Maybe something like - 30% stocks, 50% bonds and 20% cash? I guess very short term bonds aren't much different than cash, but I would think some cash would be in the portfolio. Asking, not suggesting.

I have been doing that - alas, I have access to a Stable Value fund through my ex-mega that still pays 3% guaranteed income (down from 3.5% last year).

 

[Earl E Retyre]

25% equities + 15% real estate rental which is keeping up nicely with inflation.

 

[mathjak107]

46% equity /45% bonds /9% cash.

i keep part in a dedicated income and capital preservation model optimized for up to 6 years income or so , the rest in a growth and income model

 

[mathjak107]

I'm a conservative investor and I've been keeping just under 40% in diversified vanguard equity funds with the rest (except for about 5% cash) in diversified bond funds.
Just wondering what others think would be a minimal stock allocation to keep up with inflation? Inflation has been running about 1.7% the past year.

When I enter my number in Firecalc and Vanguard's retirement "nest egg" calculator my numbers seem good.

My bonds are a mix of the bonds in Target date funds, muni bond funds, short term bond funds and international bonds. I use the five year average when I enter the bonds into Firecalc.

to support 4% inflation adjusted you need about a 2% real return average over the first 15 years of a 30 year retirement . there may not be much left though after that point without a better real return average .

 

[RobLJ]

Your allocation is very similar to mine, only I have about 14% of the bond allocation in cash.
I've been considering moving some of the cash/bonds to a TIP fund and, longterm, a REIT fund should provide inflation protection, if you want to tweak things to reduce the stock allocation. I think a minimum of 35-40% equities is wise, unless your SWD is less than 3%. Peeps withdrawing 2.5% should be good despite inflation.

 

[ranchoparque]

Firecalc gives me a 99.1% success rate for 30 years which would take me to about age 93 with a 3.7% withdrawal rate at my current 38 equity exposure (with the rest entered as 5 year treasuries.)
With my pension and DW's Soc. Sec. and part time work I hope to not draw down savings until around age 70 or so ....in which case I would think that my SWR would be more like 4.5 percent because of a shorter time horizon.

 

[Doc0]

For some inflation "protection" I have some in DFA LTIPS, my cash in a short term Muni fund, and 5% in gold. My bond mix is also on the short side. All of these should act as ballast against inflation.

Best

 

[foxfirev5]

Likewise my equities are in the 40-42% range. CD's and a few bond funds make up the rest. Since I'm living on interest and dividends i don't plan to rebalance until RMDs kick in. If I'm lucky that will result in a rising equity glidepath to keep up with inflation.

 

[ranchoparque]

For some inflation "protection" I have some in DFA LTIPS, my cash in a short term Muni fund, and 5% in gold. My bond mix is also on the short side. All of these should act as ballast against inflation.

Best

Don't know much about how those type of funds work....I see that Vanguard has VIPSX which might be similar (perhaps there is a thread on the topic of inflation protected securities funds that someone can link me to). I notice that the Vanugard fund has not grown much since 2013. What are the pros and cons of that type of fund?

 

[Doc0]

VIPSX looks similar. My muni bond fund is VWSUX a short term maturity low cost fund.

The idea is to have something which grows at a rate consistent with inflation if it hits. It adds diversity and protection to the whole portfolio. In a low inflation environment it isn't going to do much but it's typically better than cash which isn't doing much either, but in a high inflation environment it will tend to keep up better than cash. The idea is when it comes time to sell something to live on in a storm, sell some of the winner, and to do that you need a winner. Gold is similar in it's nature in my portfolio's diversity.

Gold TIPS and short term muni's (tax advantage) are more like holding cash (as opposed to LT bonds or equities for example) in terms of yield, but they do have a little yield and are pretty safe as far as risk.

I keep the GLD and TIPS in an IRA and the muni's outside my IRA

Best

 

[ranchoparque]

VIPSX looks similar. .

I keep the GLD and TIPS in an IRA and the muni's outside my IRA

Best

Thanks, this is helpful. I could put Roth Ira contributions into TIPS as I can still make contributions due to part time income. By "GLD" do you mean a gold fund? I have a small amount (less than 1%) in VGPMX (precious metals)

 

[Doc0]

GLD is the gold etf. You can also get exposure with a "gold miners" etf but they are more volatile and I own these for inflation protection and not appreciation. If I want volatility I'll buy QQQ or Bit Coin (but BTC I bet is a pretty good inflation hedge as well). My exposure to GLD is about 5%, I got rid of the rest of my commodity holdings. I also hold some REITS (about 3%) for portfolio diversity and they tend to work as an inflation hedge as well, also held in a IRA. Mine is DFGEX which are global REITS. If I could, I'd own the VIX (nirvana) but there is no way to do that efficiently. So a few percent here of this and a few percent there of that gives you some rational exposure to inflation protection without inflicting much damage on overall portfolio appreciation.

A book I would recommend that takes a look at modern portfolio theory is:

Yes you can supercharge your portfolio by DeMuth and Stein (2009) easy to read and understand. It's not the end all but a good primer.

Best

 

[Dash man]

The problem with gold ETFs and funds is they are allowed to sell many more paper shares than they hold of real gold, plus they charge you fees. If the financial system has a major crash that creates a run on gold and people try to cash in, there is no guarantee you will receive your money back. Owning gold bullion is the only safe way to hold gold if you are concerned about a major crisis. For ETFs and funds, buyer beware.

 

[GrayHare]

Utility stocks can be a good choice for a conservative investor. They generally keep up with inflation plus pay a nice dividend. They also weather tough markets nicely. A utility-heavy portfolio barely noticed the 2008-2009 downturn.

 

[sengsational]

Utility stocks are were I've got my mom. Well, I should say that's mostly where my dad left my mom. She had 3 positions and when I showed her the 2008 2009 graphs, she picked the only non-utility to sell for spending. I see utility stocks are the best middle ground on ones way to bonds.

 

[Doc0]

Dash Man I'm not hedged against Armageddon. I doubt your going to get anything close to the "value" of your bullion in a government melt down despite what William DeVane says. A better choice in that scenario is a safe full of Glocks and boxes of 9mm bullets, or .22 or .223 cal equivalent systems

My goal is to be hedged to some extent against inflation which is one very real threat to a passive retirement. I went with the LTIPS fund based on some research I read by some people I consider to be very smart, that TIPS were felt to be the best hedge against inflation for the "cash like" part of a portfolio. Inflation will eat this part of your portfolio. Stagflation will eat this part AND the capital appreciation part. I have other parts of my portfolio (bonds stocks etc) which provide appreciation, and other parts (pre-tax funds, post tax funds, muni bonds, long term cap loss, manipulation of the basis) that provides tax efficiency, and a means to estimate diversity.

I am a believer in modern portfolio theory. I believe diversity correctly applied is the only free lunch when it comes to portfolios. If you have a portfolio that drops 50% it takes 100% to get back to zero, If you drop 33% you only need 66% to get back to zero. In the accumulation phase of a portfolio (when you're trying to make the most return) you may be able to stand that kind of volatility, but I read a paper that suggest you should transition over 10 years from a pre-retirement accumulation phase to a post retirement distribution phase. 5 years into this 10 year period is actual retirement. As you enter you want things to be getting conservative, peaking in conservatism at retirement and then gradually liberalizing as you reach 5 years into retirement, so there is a shift between accumulation to preservation, to distribution over a 10 year period. I'm presently in the preservation phase so TIPS fit my phase. 5 years from now I'll re-evaluate my risk profile vs the economy. This scheme is supposed to give the best protection against early portfolio failure. The problem is your bad choices today tends to play out as failure 20 years after the fact.

Best

 

[tuckeverlasting]

My AA is 40/60, up from 30/70 a few years ago. Mostly index funds. I am 67. So far, so good--"keep it simple" works for me.

 

[Blue Collar Guy]

Dash Man I'm not hedged against Armageddon.

Best

+1
Knowing what I know now, Not only would I have left work 5 years earlier, I now realize It was stupid of me trying to worry about most what ifs. I dont know anyone personally, that said "omg inflation was 2 % last year Im really needing 2 % more income or Ill starve". This whole keeping pace with inflation thing is overblown. I didnt know that at the time. I thought I would always buy Clorox bleach at 2.99 when I can get a gallon for a buck from Joe blows store. You just adapt. This might not apply to the folks that are already about to eat cat food, but the majority of the members here are too excess to worry about this stuff.