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Check my head - investing autopilot
Old 08-01-2013, 03:30 AM   #1
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Check my head - investing autopilot

Good evening.



I think I have everything in the plan and AA adjusted to my liking. Commentary from the seasoned and experienced here would be most welcome.

Age 39
Working: No
Would work again : right project - likely part time / consulting
Married: no
Children: no

AA:

Stocks (all VG index admiral shares)

US Large Cap 34%
US mid-small cap 15%
International 21%

Total 70%

Bonds (VG admiral shares)

US short term 9%
US intermediate term 10%
US long term 5%
International bonds 6%

Total 30%

Out of the total cash 100% 95% is invested as above. I keep 5% on hand with the intend to only spend 3-3.5% (if I work I will roll back into the investments on annual rebalancing)

The 3.5% spend level starting year one is 175-185% of my current base living expenses.

I intend to spend 3-3.5% of the actual value per annum - appreciate market gains, and since I am relying on it for income spend 5% less in years where 3-3.5% is less than previous years % (95% rule)

Firecalc gives me 100% success rating with high chance for growth.
CFA calc gives me 100% and Vanguard calc has me at 100% success (success meaning not running out of money for 60 years up to age 95.

One worst case scenario has my ending balance at 47% of starting balance when I reach age 95.

is 70% too loaded for stocks? Clearly I can make cuts in my spending in down years, an even seemingly at a comfortable level using the 95% rule.

Im fine long term holding so no issues there. I wont need to nor will I need to make sudden withdraws so having 5 years cash in the bonds seems reasonable and should keep me stable during 20-40% stock market drops until recovery.

The 95% reduction spending rule seems reasonable as well. 4 years in losses has me cutting back 20% total gradually.

Am I flying or dying?

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Old 08-01-2013, 03:47 AM   #2
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Looks fine for me, and the 95% reduction would be what use if I used a fixed withdrawal rate.

AA is fine.

I retired at 39 with intended AA of 75/25 it has varied from as low as 65/35 in early 2000, to as high as 80% stocks 7% bonds 7% rental real estate and 6% cash today
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Old 08-01-2013, 06:09 PM   #3
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Thanks for that
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Old 08-01-2013, 06:13 PM   #4
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70% allocation to stocks is probably fine in your situation, but you may want to run some Firecalc calculations to see how things would change if you reduced your holdings to 60%, and then 50%. My recollection in doing so is that my returns varied minimally in that entire range, and so I decided to drop down to 60% equities. It helps me sleep a little better, and knowing it doesn't really drop my overall returns by much (at least historically), it seems like a reasonable tradeoff relative to the benefit of risk reduction.
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Old 08-01-2013, 06:47 PM   #5
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At 39 70% in stocks is fine. As you get to your 60's and maybe late 50's you might want to start ratcheting back.
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Old 08-01-2013, 07:00 PM   #6
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Originally Posted by RockyMtn View Post
At 39 70% in stocks is fine. As you get to your 60's and maybe late 50's you might want to start ratcheting back.
I'm not sure I would completely agree with that, but that's why we like lots of input from different people on this forum, so we can have lots of opinions.

I will expand a bit on my thought process though. If I was 39, and I was planning on working for another 10-20 years, and I was dollar cost averaging my investments on a routine (monthly, quarterly, etc) basis, I would have no problem keeping 70% of my assets in equities.

If I was 39, and was ready to ER, and live off my nest egg, and was not planning on earning any additional income that I could invest to take advantage of DCA, I would not be comfortable with 70% in equities, even if I was planning on a 40+ year time horizon due to my young age. There is too much risk of a severe drop happening early on that would deplete my savings, and if I needed to withdraw some of it to live on, it would be that much more difficult to bounce back when the markets recovered.

Most people hear "39 years old" and think of a person fairly early on in their career, with many years to go earning income. However, this is the "Early Retirement" forum, and so the thought process for those of us retiring at a very young age may not completely align with the general public.
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Old 08-02-2013, 01:08 AM   #7
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The default FIRECalc AA is 75%/25% for a reason it, produces the highest survival rates although it looks like 72% is the highest rate for 30 year retirement. The highest survival rate for 40 year retirement much more appropriate for 39 year old is 100% equities. Even with 3.5% instead of 4% withdrawal rate the highest survival rate appears to be 68% equities.
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Old 08-02-2013, 04:03 AM   #8
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I am ER as of now.

Even if I have room for flexibility in spending 70/30 is too aggressive?

Vanguard CFP specifically told me it puts my survival rate at +100%. Survival was much lower when they suggested 40/60 initially when I told them I was ER. They said 70/30 is only agressive if I can't hold for 2-3 years even in a down market - hence having 5 years of base expenses in bonds. Vanguard CFP felt like the difference is discipline.

I think the key is how flexible you are in spend and how much of your SWR are your core living expenses.
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Old 08-02-2013, 05:18 AM   #9
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I think the key is how flexible you are in spend and how much of your SWR are your core living expenses.
I agree the only reason to reduce equities exposure is because you can't sleep at night. If you didn't panic and sell in near the bottom 2008/9, than odds are you've weather the worst you are going to see in your lifetime.

I think there is roughly equal chances that bonds or stocks will lose 20% real return over the next say 3 years, and slim chance stocks will see 40% loss. But I also think there is almost no chance bonds will gain 20% real over the next 3 years, while I can easily see stocks gaining 20% and even 40%
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Old 08-02-2013, 09:37 AM   #10
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You're flying, not dying IMO. I think 70% stocks is perfect given your young age and the analysis and testing that you have done confirms that. The other reason that I would be comfortable with 70% is because your living expenses are substantially lower than your withdrawals, so if we had some bad times you could scale back your withdrawals if you need to. On top of all that, you keep cash available for ~ 2 years of living costs, so I think you are in great shape.
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Old 08-02-2013, 11:06 AM   #11
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Yeah, OK.

I think long bonds are a mistake at this time, but it is a classic AA. I think you would be better with cash and maturities no longer than 5 years.

I am a lot older than you and I am almost 100% equities (excepting a bit of Wellesley).

The issue is, how much volatility can you stand? You can survive it much better than I can, but your AA is very conservative. The conundrum of youth.
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Old 08-02-2013, 02:33 PM   #12
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is 70% too loaded for stocks?
No. At 39 you should be 100% in stocks, and no bonds.
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Old 08-02-2013, 03:05 PM   #13
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I am a lot older than you and I am almost 100% equities (excepting a bit of Wellesley).
Another data point, along with a plug for Wellesley. I'm 39 and decided on a 75/25 mix. But I can't bring myself to buys bonds, so my target allocation for fixed income is 15% Wellesley and 10% total bond fund.

I know that some would argue that I'm not 75/25, but that doesn't bother me (I'm actually around 80/20 when I break out Wellesley in my AA). The way I look at it, Wellesley has a better yield than bonds and sure the principal can fluctuate, but I'm guessing this won't be any worse than a bond fund at this point.

I should also add that even with my fixed income targets, I'm still not at 25%. The recent run up and my lack of excitement for bonds has kept my total bond fund around 7%, but I'm still saving, so every paycheck buys a little bit more of this fund. Not really that excited buying a bond fund right now, but I figure I'm at least DCA into the fund. Plus the amounts are relatively small.
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