Market timing?

[garyt]

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?

 

[haha]

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

 

[audreyh1]

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.

 

[pb4uski]

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.

 

[sengsational]

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!

 

[ducky911]

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

 

[Sunset]

OP - have you priced out HI ?
Got your spending numbers down solid ?

At 4% withdrawal, you are looking at $36K per year income..

 

[USGrant1962]

...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.

 

[UnrealizedPotential]

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.

 

[GravitySucks]

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.

 

[audreyh1]

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.

 

[hesperus]

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.

 

[YVRRocketSurgery]

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.

 

[garyt]

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

 

[garyt]

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.

 

[garyt]

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.

 

[USGrant1962]

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.

 

[Lsbcal]

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.

 

[Vincenzo Corleone]

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.

 

[target2019]

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

 

[bingybear]

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.

That sure sounds like MT, making an investment based on current data. But there is nothing wrong with that... It is not against the law.

There are many FA on the radio over the past several years noting that have noted that the bull is long in the tooth and you should people brace for a correction. They did not thing 2015 or early 2016 counted.

I've seen people who put 3 to 5 years in cash so they know they will not need to withdraw investments during a down market. I have not data on this, but expect they would most likely do better with most of those dollars invested. At present I'm about 4 to 5% cash/short term (include CDs).

OP, shifting your AA in retirement is common. If you change your AA from what you used in firecalc, rerun with the new AA.

 

[ncbill]

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

From his article "The 60/40 Solution" (over a 75 year period):

"Although the 60/40 portfolio was inevitably affected by the high stock
volatility, the 40 percent in bonds helped the balanced portfolio
come through with a more comfortable spread, ranging
from a 40 percent gain to a 9 percent drop."

So I'm strongly considering his 60/40 recommendation as a permanent AA for me.

 

[Lsbcal]

For me, I look at the potential % decline but then convert that to $’s. Somehow that is more horrifying.

 

[Happyras]

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.

Reality is cash and your suggestion speaks. I went a little further...if you assume you will ride it up another 8% in gain through the Santa Clause rally, and then get a 25% drop in a January correction, you would need to get at least a 23.5% ride up throughout 2018 again to have the same $$$ as you started with today. I have an easier time seeing a small gain in 2018 than another year like 2017. I also have an easier time seeing a correction, than another 12 months of low volatility. So it puts the risk in perspective. I am feeling a little greedy at my current 75/20/5 allocation and will likely take this back to a 65/30/5 once the global Wells admiral funds are off hold. I will use this as an opportunity to re-balance back to where I am more comfortable in risk.

 

[GravitySucks]

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?

I wouldn't consider a change of AA as market timing in your case. I'd consider it lifestyle timing.
You're moving to a new chapter in your life and what was once appropriate for you may no longer be the case.