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Market timing?
Old 10-22-2017, 08:57 AM   #1
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Market timing?

I am planning to retire next May. I'll be 61, my wife will work another year, she's 57. We have about $900K, no pension, no paid HI in retirement. Anyway, every firecalc type program says we'll be fine but I do worry about sequence of returns going bad due to the market's high level at this time. Would you consider taking some money off the table for awhile into more cash? I guess this would be market timing and that's not my thing. I've been 95% invested in stocks my entire life and am now about 75% equities. Would it make sense to drop down to 60% equities for a year or so?
I guess then, if the market doesn't correct you're losing possible gains which affect your firecalc numbers, also. Being that my wife will still be working and we can cover all our expenses on her salary, plus I'll have worked 5 months, we'll be fine the first year. She can always continue to work and I can go back if there's a crash.
What would you do?
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Old 10-22-2017, 09:16 AM   #2
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Originally Posted by garyt View Post
I am planning to retire next May. I'll be 61, my wife will work another year, she's 57. We have about $900K, no pension, no paid HI in retirement. Anyway, every firecalc type program says we'll be fine but I do worry about sequence of returns going bad due to the market's high level at this time. Would you consider taking some money off the table for awhile into more cash? I guess this would be market timing and that's not my thing. I've been 95% invested in stocks my entire life and am now about 75% equities. Would it make sense to drop down to 60% equities for a year or so?
I guess then, if the market doesn't correct you're losing possible gains which affect your firecalc numbers, also. Being that my wife will still be working and we can cover all our expenses on her salary, plus I'll have worked 5 months, we'll be fine the first year. She can always continue to work and I can go back if there's a crash.
What would you do?
Asking that question here is tricky, especially since you have already said "that would be market timing and that is not my thing". You seem to be saying that this is not your thing. So don't do it.

Ha
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Old 10-22-2017, 09:26 AM   #3
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Originally Posted by garyt View Post
I am planning to retire next May. I'll be 61, my wife will work another year, she's 57. We have about $900K, no pension, no paid HI in retirement. Anyway, every firecalc type program says we'll be fine but I do worry about sequence of returns going bad due to the market's high level at this time. Would you consider taking some money off the table for awhile into more cash? I guess this would be market timing and that's not my thing. I've been 95% invested in stocks my entire life and am now about 75% equities. Would it make sense to drop down to 60% equities for a year or so?
I guess then, if the market doesn't correct you're losing possible gains which affect your firecalc numbers, also. Being that my wife will still be working and we can cover all our expenses on her salary, plus I'll have worked 5 months, we'll be fine the first year. She can always continue to work and I can go back if there's a crash.
What would you do?
You could drop it down to 60% and just leave it there. 75% is still very aggressive for a retiree. It depends on how much you will rely on your investments in retirement. With your wife still working I guess you're covered.
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Old 10-22-2017, 09:46 AM   #4
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I was having similar thoughts but wondered if I was biased because I chose 60/35/5.

75 is high for an early retiree IMO. I guess the way I got to 60 is knowing that success rates are about the same for 55/45 to 90/10 so 60/40 seemed comfortable to me.

If OP changes contributions and income reinvestment to fixed income then that would help gravitate to a lower AA.
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Old 10-22-2017, 09:51 AM   #5
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What would you do?
What I did when the CAPE ratio got so high was go for a more conservative allocation, so exactly what you're proposing for yourself. Call me a DMT, but that's what I did. After the crash, I'm going back to my normal allocation. DMT's unite!
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Old 10-22-2017, 10:57 AM   #6
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I retired at 59 (wife 56) seven years ago. Health insurance cost was a big eye opener. Of coarse it may change but I bet it will be between 20 to 30 percent of your spending.

I agree with take it to 60%...I just adjusted mine from 60 to 55% a month ago
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Old 10-22-2017, 11:18 AM   #7
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OP - have you priced out HI ?
Got your spending numbers down solid ?

At 4% withdrawal, you are looking at $36K per year income..
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Old 10-22-2017, 12:21 PM   #8
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...Anyway, every firecalc type program says we'll be fine but I do worry about sequence of returns going bad due to the market's high level at this time. Would you consider taking some money off the table for awhile into more cash? I guess this would be market timing and that's not my thing. I've been 95% invested in stocks my entire life and am now about 75% equities. Would it make sense to drop down to 60% equities for a year or so?...
If you play with "Investigate changing my allocation" in FIRECalc you will find that in most cases between 40% and 60% equities has the highest success rate. If you go higher than about 65% you will generally see slightly diminished success rates - so you are not "losing possible gains which affect your firecalc numbers" with a 60/40 AA.

After 25+ years at 100% equities I just last week completed rebalancing to 55/45. The equity allocation feels low to me, but with CAPE at 31+ I'm good.

Lastly, the limiting cases in FIRECalc and the 4% rule studies are mostly poor sequence of return scenarios already. The good sequence cases are the ones where your heirs are very happy.

So yes, going to 60/40 is probably smart for a number of reasons.
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Old 10-22-2017, 12:35 PM   #9
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I'm holding about 9% cash right now, not because I am trying to time the market , but because I don't like the prices Mr. Market is offering me right now. I prefer to wait . Plus, 9% is not a lot in cash , but it is more than I have ever had. I am used to being fully invested.

Not sure what to do right now with my extra cash, so I am holding it until I can come up with an idea or an opportunity comes up.
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Old 10-22-2017, 02:11 PM   #10
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After a couple of knocks in the equity market I moved down to a 60/40 and am comfortable there.
CD and bond ladder covering essential expenses helps me think I'm doing something about SoR risk, but of course an inflation bump could screw that up.
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Old 10-22-2017, 02:34 PM   #11
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Originally Posted by USGrant1962 View Post
If you play with "Investigate changing my allocation" in FIRECalc you will find that in most cases between 40% and 60% equities has the highest success rate. If you go higher than about 65% you will generally see slightly diminished success rates - so you are not "losing possible gains which affect your firecalc numbers" with a 60/40 AA.

After 25+ years at 100% equities I just last week completed rebalancing to 55/45. The equity allocation feels low to me, but with CAPE at 31+ I'm good.

Lastly, the limiting cases in FIRECalc and the 4% rule studies are mostly poor sequence of return scenarios already. The good sequence cases are the ones where your heirs are very happy.

So yes, going to 60/40 is probably smart for a number of reasons.
On average with FIRECALC you will see higher gains and higher end portfolio values for higher equity exposure, but your survival rate does drop slightly for the higher end of the range 70-80% equities. And the retiree will experience more volatility.

So you are trading off higher portfolio end values (more gains on average) against lower success rates and more year-to-year volatility. This is something a retiree needs to choose.
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Old 10-22-2017, 03:02 PM   #12
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As an option to 'timing', if you have debt, now may be a good time to take some gains off the table and pay that off. You could look at the vanquished debt interest rate as 'guaranteed' return.
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Old 10-22-2017, 03:16 PM   #13
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I think one of the method Wade Pfau talks about in reducing risk is starting with a lower, more conservative equity allocation and gradually increasing it in retirement, which is kind of counter-intuitive to the 100-age type allocation.
Another idea, is doing some kind of 5yr CD ladder for your core expenses on top of your retirement portfolio.
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Old 10-22-2017, 03:32 PM   #14
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As an option to 'timing', if you have debt, now may be a good time to take some gains off the table and pay that off. You could look at the vanquished debt interest rate as 'guaranteed' return.
Zero debt here
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Old 10-22-2017, 03:34 PM   #15
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I think one of the method Wade Pfau talks about in reducing risk is starting with a lower, more conservative equity allocation and gradually increasing it in retirement, which is kind of counter-intuitive to the 100-age type allocation.
Another idea, is doing some kind of 5yr CD ladder for your core expenses on top of your retirement portfolio.
That's what I was considering. Cut to 55-60% and slowly get back to 70-75%.
I don't have the huge amount saved that many here do, so I feel I need the higher returns. Some posts here have me reconsidering that.
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Old 10-22-2017, 03:41 PM   #16
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OP - have you priced out HI ?
Got your spending numbers down solid ?

At 4% withdrawal, you are looking at $36K per year income..
Right now we can manipulate income enough to get the largest subsidy, if not even Medicaid till 65. But who knows how long that will last. That's why my wife will continue to work one to two years. I'll be on her plan.
"Essential only" spending is $17,500 a year. Add in a soon needed car and it's $20K. This is not including HI, which we will have through my wife's job for 1-2 more years. I'll collect SS in a year and a half at 62, about $14K.
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Old 10-22-2017, 08:11 PM   #17
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Originally Posted by YVRRocketSurgery View Post
I think one of the method Wade Pfau talks about in reducing risk is starting with a lower, more conservative equity allocation and gradually increasing it in retirement, which is kind of counter-intuitive to the 100-age type allocation.
Another idea, is doing some kind of 5yr CD ladder for your core expenses on top of your retirement portfolio.
Based on Pfau and Kitces I'm seriously considering age in stocks as an AA approach (rising glidepath). As an early retiree at 55 years old, and having just gotten my AA down to 55% equities, my thinking is that I'm fairly conservative in the current high valuation environment, and can buy back in to the stock market over time. Especially as my SS horizon becomes closer.
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Old 10-22-2017, 08:13 PM   #18
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Write down how your assets will change if we have a 25% slide. Do it in dollars.

This sudden change happened in 1962, 1987, 1998, and 2011. Remember that you are spending from assets now, not as much income to cushion falls.
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Old 10-23-2017, 05:14 AM   #19
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For whatever it's worth, I did the same thing - thinking that the market has had a really nice run and that it can't go on forever. In DW's and my case (52 & 50 Y. O.), we had 90%+ in stocks. So adjusting our AA to be more 70/30 (which is probably still too heavy in stocks) seemed like the right thing to do. I don't think of it as market timing but rather adjusting our AA to something more sane for us.
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Old 10-23-2017, 06:26 AM   #20
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for reference:
Max Equity Allocation Exposure Max loss
20% 5%
30% 10%
40% 15%
50% 20%
60% 25%
70% 30%
80% 35%
90% 40%
100% 50%
from The Intelligent Asset Allocator
By William J. Bernstein
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