How much passive/fixed income would you need to get out of equities?

[Earl E Retyre]

I am currently at 24% equities. My fixed income combined with net rental income is enough to pay for all my expenses. Equities provides me with net worth growth in any year that the market is positive and/or provides extra blow-that-dough money. And, this does not include future SS and pension but that is still a long ways out. Granted, I would most likely be better off in the long run if I invested more in equities, but as you put it, if you've won the game, why take the risk? I do not think I would ever go down to 0% equities however so that I always have some diversification and hedge against inflation.

[daylatedollarshort]

When we decided to retire TIPS were at 2% yield + inflation. We added up pensions, Social Security + 2% portfolio return, and decided that was good enough, and our principal would even stay the same in inflation adjusted dollars. TIPS yields trended lower after that but our retirement expenses ended up being lower than planned, and we have some thirty years at the 2% or more, so it has worked out really well for us.

We mainly use the matching strategies style of investing advocated by Bobcat2 over at Bogleheads, so not too much in stocks and inflation accounted for.

[calmloki]

Sold a place 13 years ago and carried the contract at 7%. Sold another in 2012 and 2016 on the same terms. It felt low for some years, but felt good for some other years, so all in all I was good with 7%. If we were getting 7% on everything I'd be real happy collecting that interest and paying those regular income taxes.

[youbet]

Quote:

Originally Posted by ShokWaveRider This is not intended as an investment vs inflation discussion so please try to refrain from bringing it up and making it one.

This qualifier makes any discussion of AA difficult since anticipated inflation is an important factor in AA decisions. No doubt, I'd carry a smaller percentage of equity investments if I could count on inflation being zero or very low forever. But, as it is, I carry approximately a 50 - 50 AA most of the time which I feel is most appropriate for my personal situation which varies substantially from yours.

Also, it's easy to construct a portfolio of fixed investments which is NOT what I'd call low risk. I assume you're primarily in shorter term insured CD's and various treasury obligations free from default and interest rate risk?

[daylatedollarshort]

I don't see a lot published on CDs and inflation but I ran the FIDO calculator using 100% short term and our plan works out well with that as a target asset mix. They don't have a TIPS option but I put that in my spreadsheet and the results are even better.

[MarieIG]

No amount of passive income would make me want to get out of equities completely.

[LARS]

Quote:

Originally Posted by ShokWaveRider I got to thinking (Yes, that is what the noise was), what would make one comfortable enough so as not to take any additional investment risk. This is not intended as an investment vs inflation discussion so please try to refrain from bringing it up and making it one. We (DW & I) as I assume most of us here on ER.ORG, IMHO have a good (to very good) middle class life, we own our own home and live in a nice resort area, there is lots to do, even if we do not always take part in the activities as we enjoy staying at home and enjoying each other's company. We do not spend our days chasing the almighty $$, and are pretty much fixed income investors and have been for the last 25 years. Most of you know that about us anyway. Our Mandatory expenses are about $45k a year and our returns for various investments are approximately about $95k of which 40% is Taxable. We do currently shelter/defer some of the taxable for ACA purposes. We do not budget for discretional spending items, we just fund them as needed/wanted. This does NOT include any SS or pension income that we are eligible for from 3 different sources (Estimated at about $60k when we start taking them). We have chosen NOT to take any at all until DW is eligible for Medicare or something changes in the USA Healthcare system (Unlikely). Or, we move to a country that has proper sensible HC or universal healthcare that truly benefits it's citizens and not the providers or insurance companies (That is a debate for another time though). In our case this is more than enough to last us the next 25 - 30 years (I will not last that long for sure), so we think we can "Still" go without traditional stock market investing. I would be grateful for your thoughts and wonder if anyone else here is like us. We do not have any heirs and when we die ALL our assets will be sold and split evenly between, St. Judes & Shriners hospitals for sick kids, Guide Dogs for the Blind and Guide dogs of America.

Having no pressure to leave an Estate of size gives one tremendous flexibility to dial back risk.

I long ago came to the conclusion that doubling my net worth would, while nice, make very little difference in how we live our lives. A loss of 50% of our Net Worth, on the other hand, would mean a change in lifestyle.

Thus, I manage our investments with that understanding in mind.

So you are not alone in your thinking...

[youbet]

Quote:

Originally Posted by LARS A loss of 50% of our Net Worth, on the other hand, would mean a change in lifestyle. .

But it's hard to envision how a conservative and diversified portfolio which includes a significant allocation to equities (say 50%) could permanently lose 50%. How do you think that might happen?

Even the Great Recession where I saw a 30% dip in my FIRE portfolio value only lasted a few years during which I never had to adjust my spending a bit thanks to diversification and my FI + cash positions.

Are you thinking of someone with a 100% aggressive and speculative equity allocation where companies go out of business and your holdings literally default permanently to zero and drag your networth down 50% overall? That could happen, of course, if you really dumped the kettle into undiversified, risky,speculative positions and the economy tanked. But it seems like most of the members here don't do that. Simply owning the TSM plus perhaps some international seems much, much more common.

Just wondering what investment strategy and what economic calamity you're envisioning that would result in a permanent (or at least long term) 50% decline in your net worth.

[LARS]

It takes little imagination to my mind to see the next big crisis cause equities to lose half their value; and, equally important the remedy of QE, which managed to dig us out of the 2008 hole, is wholly not effective again. Thus, we're in the crapper.

Add to this discussion that time horizon to rebound becomes more and more important as you age and it doesn’t take a rocket scientist to see a potential risk (real in my eyes).

Thus, I would personally not want to continue my spending (eg lifestyle) on the hope equities rebound in a timely manner.

Obviously I’m speaking to substantial equity position as many still carry here deep into Retirement.

YMMV... but, I, too, fervently subscribe to the "once you've won the game approach". Not to mention there is a liberating feeling going to bed not worried about market gyrations, which, to me personally, is a tremendous mental benefit; and, again, more than offsets the lose of current return.

[daylatedollarshort]

One factor I thought I'd bring up again is inflation. Inflation hurts pensioners with fixed monthly payments. But fixed income in CD ladders isn't really fixed, as the rates change as the ladders mature and renew at the prevailing rates. For CD holders, isn't it real interest rates that matter? If inflation is 10% but real interest rates are 15%, then wouldn't that be a good thing, as long as one has ladders trended towards prevailing rates and not a portfolio of 2%, 30 year bonds?

[Badger]

Quote:

Originally Posted by ERD50 I'd call it as a moot point. If you have enough that you can support yourself on fixed income alone, even through a decade of high inflation, then you also have enough to weather the volatility of some market exposure. -ERD50

So if you are already in the position as described on fixed income then what is the point of risking volatility of some market exposure just because you have enough when it isn't necessary?



Cheers!

[phil1ben]

My allocation is currently:

25% - Individual Stocks
25% - Individual Muni Bonds
25% - Investment real estate (i.e. homes in resort locations that are rented seasonally (in locations where I also own primary/vacation homes) and minority interests in LLCs that own apartment complexes (I was in that business)
25% - Cash (CDs, Money Markets)

I know this is conservative for 59 years old but an important goal is preservation. The muni bond interest covers annual expenditures (not yet at SS age but this never played a part of my planning). However, I will always hold a portion in equities and real estate(low leveraged) to provide potential growth and hedge against inflation.

[ERD50]

Quote:

Originally Posted by Badger So if you are already in the position as described on fixed income then what is the point of risking volatility of some market exposure just because you have enough when it isn't necessary? Cheers!

Because it's not really a risk to your portfolio survival, as defined in this thread. It's been said in the other posts, this isn't a scenario where you would go 100% equities, but keeping 30-40% equities is prudent, based on history. For those w/o heirs, they mostly seem to want to leave some to charity - why not include some equities which have a very high probability of adding to the end balance?

Once again, do not confuse "volatility" with "portfolio survival". Study FIRECalc with the Investigate tab and portfolio success versus AA. You will see that a portfolio with < 30% equities fails more often than one with > 30% equities. So how is that less risky? It's not.

I'll say that again - not including equities is what makes your portfolio more risky, not less. So turn your question around, why wouldn't I include some equities in my portfolio?

And as also pointed out earlier, the caveat in the OP is rather silly - "This is not intended as an investment vs inflation discussion so please try to refrain from bringing it up and making it one." That's a bit like saying "Assuming this stock will only go up, and don't tell me it won't, then why wouldn't I buy it?".

-ERD50

[easysurfer]

When you sleep well at night, that is the proper amount .

[ShokWaveRider]

Here is another way of putting it. At least for me. If my portfolio lost 25-45% in a matter of a week, I would definitely not sleep or a year, maybe more. The 25 - 45% reduction in income would make quite a difference in our lifestyle, even if it was just me going into ultra frugal mode for a while till it came back.

If one can afford to lose up to 50% of one's stash and not batt an eyelid, lose any sleep or change one's standard of living, that is great, good on you. But for the rest of us, me especially, that is not the case.

[Dtail]

I can go down to 15% equities with 100% survival according to Firecalc. Nevertheless, I will remain at 55/35/10 for now, as need to offset the cash (used for ACA management) and the calculations are counting on SS at 100% payout. We also have 5 children between us.
I also wish to keep minimal risk on the bond side, so 55% works for me at this early stage of retirement.

[ERD50]

Quote:

Originally Posted by ShokWaveRider Here is another way of putting it. At least for me. If my portfolio lost 25-45% in a matter of a week, I would definitely not sleep or a year, maybe more. The 25 - 45% reduction in income would make quite a difference in our lifestyle, even if it was just me going into ultra frugal mode for a while till it came back. If one can afford to lose up to 50% of one's stash and not batt an eyelid, lose any sleep or change one's standard of living, that is great, good on you. But for the rest of us, me especially, that is not the case.

But knowing you will almost certainly be losing 25% or more to inflation over 10 years is something you can just ignore? That's just 3% inflation over 10 years ( 100 ⋅ (1 − (0.97^10)) ≈ 26.26% drop. And inflation from 1980 to 1990 was.... wait for it.... 58.6%! Note, in case you missed it - that's greater than the 50% portfolio drop you use as a knock against equities.

https://www.usinflationcalculator.com/

Also, a drop in a portfolio is not equated to a drop in income. I have a fairly aggressive portfolio, I dropped a lot in the last crash. My income did not change one bit, I kept withdrawing what I always did.

Do as you wish, it's your money, your life. But I don't like to see misinformation or twisted views presented on this forum w/o challenge. Some people may get the wrong idea about some of this.


-ERD50

[ShokWaveRider]

Here is a post where folks can rant about inflation. Please observe those who calculated their own Personal Inflation Rates. This post is not intended to comment on inflation, we do not ignore it, just discuss it in other posts such as the one below. Please respect that.

http://www.early-retirement.org/foru...lks-96928.html

[ERD50]

Quote:

Originally Posted by ShokWaveRider Here is a post where folks can rant about inflation. Please observe those who calculated their own Personal Inflation Rates. This post is not intended to comment on inflation, we do not ignore it, just discuss it in other posts such as the one below. Please respect that. http://www.early-retirement.org/foru...lks-96928.html

To not discuss inflation in this thread is to put your head in the sand. It's really senseless. And dangerous. Why do you want to do that? I'm guessing it is because you have made up your mind, and do not want to be confused by the facts. Have fun with that if you want, but I don't want to see other readers led astray with this nonsense.

Quote:

Originally Posted by ShokWaveRider Here is another way of putting it. At least for me. If my portfolio lost 25-45% in a matter of a week, I would definitely not sleep or a year, maybe more. ....

When did the market lose 45% in a week? And a conservative portfolio would likely be along the lines of 40/60, so even a 45% market drop would only be an 18% portfolio drop. And divs from the stocks and bonds would keep pouring in, if you need an extra 1% for expenses, you sell from the bond fund, and could do that for decades.

You seem to making up straw-man scenarios to fit your world view. I prefer reality, because in the long run, it always wins.

Good luck.

-ERD50

[EarlyBirdly]

" We do not spend our days chasing the almighty $$ *, and are pretty much fixed income investors and have been for the last 25 years. Most of you know that about us anyway. Our Mandatory expenses are about $45k a year and our returns for various investments are approximately about $95k.."

You have done this for a considerable amount of time, and continue to produce more than 2x the money you need annually. You also have income sources you are not even tapping as of yet.

Q: WHAT ARE YOU TRYING TO ACCOMPLISH ?

IMHO-You do not fix that which is not even remotely ( or by any standards, in your case) broke. (!)





* - Why start now?