Higher fixed income percentage negate need for bonds?

[Perryinva]

Just want a quick consensus. If a high percentage of your planned retirement income is pensions and SS, say around 75%, with a 2-3% SWR making up the other 25%, is there really a need to carry anywhere near the 40% bonds the 60/40 crowd preaches? I can live off 50% of my total income, so my thinking was for a higher percentage in equities for the nest egg, with some harvesting during strong returns. I doubt I will ever need to take 4%, but did want to use the money when the urge arises. I was thinking maybe 15% bonds max.

[pb4uski]

Yes, I am having the same thoughts... I'll likely just hold off on rebalancing and let the equity % drift up over time. See this thread I started on the subject.

http://www.early-retirement.org/foru...-aa-93951.html

Quote:

I'm thinking of migrating from 60/40 to a much higher equity allocation.... minimum of 80/20 but possibly as high as 100/0 once we have started SS. The higher risk return would somewhat mitigate that we don't have LTC insurance and provide a larger inheritance for the kids. Thoughts? Am I crazy?

Quote:

What I did to think of what my AA target should be was to carve out a SS suppplement fund equal to 3 years of SS since we are 63 and plan to claim at 66. That will be in fixed income. Then I took our gap of 36% of spending once SS starts and divided it by 4% to get the amount needed to fund the gap and split that result 60/40 to be conservative. Any remainder was 100% stocks... saying that the first two funds will provide for our spending so any excess can be invested in higher risk/higher reward similar to what my kids would be investing in at their ages. The overall result would be ~75/25 today and grade to ~80/20 or 85/15 at age 66. Our current target has been 60/40. Still mulling it over and haven't made a final decision, but I think that our current AA is too conservative based on that logic.

Some would suggest that I should go more conservative given that we have "won the game" but I'm dancing with the girl that brought me to this early retirement dance, and her name is Equities.... hopefully our kids and charities will get more as a result, but if they don't they'll never know that I made an educated bet on their behalf and it didn't work out.

[workmyfingerstothebone]

Interesting you bring this up as I asked similar advice on this a few years ago on this site.

Basically, Pensions, SS and rental income will cover our annual expenses.

So we are invested 86% equities and 14% cash/bonds.

The market will go up and down and we'll live with that.



We expect to spend down my 401K from age 80 to 88.
No timeline on when the wife's will be spent down.


Of course, life will throw a few wrenches into are plans, as it always does.

Deal with those as they arise.

[USGrant1962]

At less than 3% WR (not SWR!) your AA can be almost anything. Zero real return (e.g. bank savings accounts) will last 33+ years. 100% equities will most likely be triple what you started with in real dollars, and is extremely unlikely to run out - it never has in U.S. history, and most models show a perpetual withdrawal rate above 3%.

So yes, very high equity allocation is reasonable if most of your spending is covered by other income streams.

[audreyh1]

Quote:

Originally Posted by Perryinva Just want a quick consensus. If a high percentage of your planned retirement income is pensions and SS, say around 75%, with a 2-3% SWR making up the other 25%, is there really a need to carry anywhere near the 40% bonds the 60/40 crowd preaches? I can live off 50% of my total income, so my thinking was for a higher percentage in equities for the nest egg, with some harvesting during strong returns. I doubt I will ever need to take 4%, but did want to use the money when the urge arises. I was thinking maybe 15% bonds max.

Is your pension COLA?

[Perryinva]

Yes, I meant WR, not SWR. One pension is 40% of the 75% & is non COLA. So, 60% of the 75%, or about 50% of total planned income is other pensions & SS, & are COLA and covers all my expenses, taxes, non discretionary and much of my elective expenses. So the other 50% (to start) , ( some non COLA pension and WR, with the WR planned on being COLA, ) is entirely elective travel while young enough (61 now, just retired) expenses, crazy BTD money, late in life whatevers, etc, which I know is a large cushion. I am currently only 30/5/65, for various reasons, but during accumulation I was 75/10/15 and slept fine. There is no planned cost cutting, relocation, change of lifestyle (except up) planned.

Thanks for the other discussion links. I couldn’t find them via search. Helps a lot!!

[RunningBum]

You could do a NPV on your SS+pension and include that as non-equity in your AA, if that helps put it in perspective for you.

[pb4uski]

If you decide to do a value of SS, you can use opensocialsecurity.com to do an expected present value, which combines mortality (the probability of being alive to receive the payments) and the time value of money.

[MarieIG]

I believe I heard a podcast by Wade Pfau stating something to that effect. (In that case the form of the fixed income taking the place of bonds were SPIAs.)

[joeea]

Quote:

Originally Posted by Perryinva Just want a quick consensus. If a high percentage of your planned retirement income is pensions and SS, say around 75%, with a 2-3% SWR making up the other 25%, is there really a need to carry anywhere near the 40% bonds the 60/40 crowd preaches? I can live off 50% of my total income, so my thinking was for a higher percentage in equities for the nest egg, with some harvesting during strong returns. I doubt I will ever need to take 4%, but did want to use the money when the urge arises. I was thinking maybe 15% bonds max.

Why? What is our goal in this - just because you can?

[Jerry1]

As pb4uski indicated, I think I will increase my percentage of equities as time goes by probably by not rebalancing. Time will tell and circumstances will dictate. As audreyh1 indicates, my pension is not COLA, so inflation is the biggest hole that my portfolio need to cover so that’s what I’ll be keeping an eye on when it comes to how conservative I’ll be in the future. Not my main goal, but if I can leave a good amount to my heirs, that would be nice.

[jimandthom]

Quote:

Originally Posted by pb4uski Yes, I am having the same thoughts... I'll likely just hold off on rebalancing and let the equity % drift up over time. See this thread I started on the subject. http://www.early-retirement.org/foru...-aa-93951.html Some would suggest that I should go more conservative given that we have "won the game" but I'm dancing with the girl that brought me to this early retirement dance, and her name is Equities.... hopefully our kids and charities will get more as a result, but if they don't they'll never know that I made an educated bet on their behalf and it didn't work out.

Thanks for the highlighted.

The little downdraft in the 4th quarter--didn't cause any butterflies. Because of that my thoughts have been to do as you have considered.

With 1 Cola'd pension, 1 SS and 1 non-Cola'd small pension that's about 85% of our somewhat inflated desired income.

[candrew]

Quote:

Originally Posted by pb4uski I'm dancing with the girl that brought me to this early retirement dance, and her name is Equities.

Is that girl Equities still dancing at the club with her friends Mystique, Aura and Destiny?

[audreyh1]

Quote:

Originally Posted by candrew Is that girl Equities still dancing at the club with her friends Mystique, Aura and Destiny?

Yeah - I’m all for reasonable equity exposure for long term inflation protection and some growth, but I’m under no illusions about the fidelity of equities to keep partying like it’s 1999.

[HadEnuff]

the way I approached this question was to imagine the worst case scenario that I could find in the last 100 years of equities performance, and see what equities % in my AA would still let me survive that ordeal without diminishing my lifestyle.

To me, the situation that scared me the most was the bear market from about 1999- 2009 or so, where the S&P dropped, and the didn't return to pre-bear levels for over 10 years. (There were dividends to be had, I know)...

For me, that equities AA is around 25-30%. That's my "sleep at night" number, right now. If there is a large correction, I will probably increase it, but for now, that's where I'm at. I'm not suggesting that's the number that would be right for anyone else, just explaining how I got to my AA.

[REWahoo]

Quote:

Originally Posted by HadEnuff the way I approached this question was to imagine the worst case scenario that I could find in the last 100 years of equities performance, and see what equities % in my AA would still let me survive that ordeal without diminishing my lifestyle.

FIREcalc...

[Perryinva]

Quote:

Originally Posted by joeea Why? What is our goal in this - just because you can?

You know, that’s a good question. Greed comes to mind. Maximum inflation protection, I suppose. Perhaps that is the better question. Seems I’m still in the accumulation mindset. Some more thought is warranted.

[jollystomper]

Quote:

Originally Posted by Perryinva Just want a quick consensus. If a high percentage of your planned retirement income is pensions and SS, say around 75%, with a 2-3% SWR making up the other 25%, is there really a need to carry anywhere near the 40% bonds the 60/40 crowd preaches? I can live off 50% of my total income, so my thinking was for a higher percentage in equities for the nest egg, with some harvesting during strong returns. I doubt I will ever need to take 4%, but did want to use the money when the urge arises. I was thinking maybe 15% bonds max.

It really all comes down to your "sleep well at night regardless of the market" index.

With a pension my current target SWR is just about 2% (in reality it has been less in these first 10 months of retirement). When SS hits (as early as age 64 for me) All of our normal expenses will be covered by that and the pension. But I do not feel the need to accumulate much more, so I plan to just let my current AA "drift" based on the market, around 38-43% stocks. Sure I could take a lot more risk, but I am not driven to accumulate much more.

[pb4uski]

Quote:

Originally Posted by joeea Why? What is our goal in this - just because you can?

For me the goal would be to maximize the inheritance to our kids and charities.

[RunningBum]

Quote:

Originally Posted by pb4uski For me the goal would be to maximize the inheritance to our kids and charities.

Me too, with the additional goal to be more bullet proof against the unknown large expense, and to have more luxuries later in life if I want them, like living in a nicer retirement community for example.