Money Article about asset allocation

[tlg501]

The attached Money article recommends about 50% in stocks at the start of retirement. I agree with that, but their methodology to arrive at that conclusion is confusing. Don't they leave out the possibility that you could be putting your money in stocks right before the market drops 50% like it did in 2000?

thanks for any input,

************************************************** *******************************
Why It Pays to Put More Stock in Retirement


Contents
Understand the Real Payoff.
MORE STOCKS, MORE SECURITY

With more pop in your portfolio, you create a cushion for medical bills, emergencies and, yes, a little fun

It's an accepted tenet of retirement planning: You need to stay invested in stocks--keeping, say, 30% or more of your investments in equities--if you want your savings to last the three decades or more you may need it for income once you stop working. And that's sound advice, to be sure--but not just for the reason experts usually give.

As it turns out, putting a substantial stake in stocks doesn't necessarily make your money last longer, but it does add mightily to your financial security. That's because the higher returns typical of a heavier stock mix help maintain your savings at a higher level, which gives you greater flexibility in spending and a bigger cushion against misfortune as you age.

Understand the Real Payoff.

Say you retire with a $500,000 portfolio, from which you plan to withdraw 4% to start and up that amount by 3% a year for inflation. As the chart shows, the chances that your savings will last 30 years are virtually the same whether you invest 20% of your money in stocks or 50%.

Pumping up the volume on equities, however, does make a big difference to the total amount of money you have. With half your assets in stocks, you have a 75% chance that your portfolio will be worth $190,000 after 30 years. With 20% in stocks, you're likely to have just $90,000.

Consider the "What Ifs." One obvious advantage to having the larger stash is that you'll still have enough money to support yourself if your retirement exceeds 30 years. That's a distinct possibility if you retire early or live well beyond your life expectancy.

But there's another big benefit. A larger pool of assets amounts to an insurance policy of sorts that can, for instance, help pay your medical expenses later in life--a huge plus given the rampant inflation in health-care costs over the past decade and the sharp drop in the number of employers offering retiree medical coverage. A financial cushion can also reduce your chances of having to seek financial help from your kids or other family members-a major fear among retirees, according to a survey from global bank HSBC.

And if nothing else, a nice reserve would give you some wiggle room if you ended up spending more in retirement than you'd anticipated, and could even allow you to indulge in the occasional splurge.

Don't Overdo It. But beware: Investing too heavily in stocks can backfire. Since share prices can be decimated in severe or sustained market downturns, the chance that an all-stock or nearly-all-stock portfolio will last 30 or so years is actually lower than for a portfolio just half committed to stocks.

The right balance, according to Ned Notzon, chairman of T. Rowe Price's asset-allocation committee, is to start off with 40% to 60% of your portfolio in stocks at retirement. Then, as you age, gradually ratchet down your stockholdings until they represent 20% to 30% of your assets by the time you're in your eighties.

In short, take the Goldilocks approach: not too light on stocks, but not too heavy either. That way your money should last a lifetime, with enough left to cover unforeseen expenses and, if you wish, to leave some dough to your undoubtedly deserving heirs as well.

Sign up for Updegrave's weekly e-mail newsletter at money.com/expert. E-mail him at longview@moneymail.com.
MORE STOCKS, MORE SECURITY

An equity-light portfolio and one split between stocks and bonds should each last 30 years, but the fifty-fifty mix provides a larger cash cushion as you age.

START WITH $500,000 INVESTED LIKE THIS:
--------------------------------------
20% stocks
80% bonds and cash

ODDS MONEY WILL LAST 30 YEARS:
-----------------------------
92%

AMOUNT YOU'LL LIKELY HAVE LEFT AFTER
------------------------------------
20 years: 30 years:
$245,000 $90,000


START WITH $500,000 INVESTED LIKE THIS:
--------------------------------------
50% stocks
50% bonds and cash

ODDS MONEY WILL LAST 30 YEARS:
-----------------------------
92%

AMOUNT YOU'LL LIKELY HAVE LEFT AFTER
------------------------------------
20 years: 30 years:
$305,000 $190,000

PHOTO (COLOR)

[ESRBob]

You'll always have that problem as you move to a saner asset allocation -- if you are worried about it, go slower, but you'll never be sure when the market is going to tank, or head up by 20% or so.

Split up the amount you need to move into 2 or 3 chunks, and move one now, on in 3 or 6 months and one in a year if that makes you feel better. But not doing anything, while you wait for the perfect moment to wade into the market, is actually the riskiest approach of all. In investing, doing nothing is actually an investment decision itself.

[unclemick]

Hmmm

Or you could buy the appropriate Vanguard Target Retirement Series for your ER age/situation so you don't need to read Money - even the free copies in waiting rooms.

And then, and then - one could do worse than - psst Wellesley.

And that's why post count is irrelavant - some of us repeat ourselves - A LOT.

De Gaul and the Norwegian widow wish you well.

heh heh heh heh.

[JPatrick]

<<<<<<<<<<<<The attached Money article recommends about 50% in stocks at the start of retirement. *I agree with that, but their methodology to arrive at that conclusion is confusing. *Don't they leave out the possibility that you could be putting your money in stocks right before the market drops 50% like it did in 2000?>>>>>>

++++++++++++++++++++++++++++++++++++++++++++++++
These projections always use backward looking data and assume history will repeat.
Of course as you note, history contains some nasty falls.
Bottom line is, if you arrive at ER date with say 500K which represents* your absolute minimum to succeed and you take a 25% hit on year one- - You are basically screwed, at least as far as that plan goes.
However, as ESRBob notes, doing nothing may lead to the same brickwall.
Meanwhile, *be careful in that crosswalk tomorrow. *

[Nords]

Originally Posted by tlg501

The attached Money article recommends about 50% in stocks at the start of retirement.* I agree with that, but their methodology to arrive at that conclusion is confusing.* Don't they leave out the possibility that you could be putting your money in stocks right before the market drops 50% like it did in 2000?

Well, they do say "Don't Overdo It. But beware: Investing too heavily in stocks can backfire. Since share prices can be decimated in severe or sustained market downturns, the chance that an all-stock or nearly-all-stock portfolio will last 30 or so years is actually lower than for a portfolio just half committed to stocks.
The right balance, according to Ned Notzon, chairman of T. Rowe Price's asset-allocation committee, is to start off with 40% to 60% of your portfolio in stocks at retirement. Then, as you age, gradually ratchet down your stockholdings until they represent 20% to 30% of your assets by the time you're in your eighties.
In short, take the Goldilocks approach: not too light on stocks, but not too heavy either. That way your money should last a lifetime, with enough left to cover unforeseen expenses and, if you wish, to leave some dough to your undoubtedly deserving heirs as well."

What they don't say is that they're taking a long-term approach-- 30 years or longer. *From that perspective 2000 is just a blip on the radar screen, especially when you consider that the money "lost" since then would have recovered by now. *And by lightening up on stocks as you age, the risk of a big portfolio whack drops with each year.

The worst scenario an ER could confront is a retirement like you postulate-- withdrawing your 4% SWR just to watch the remaining stock portion of your portfolio drop by half. *However if you're properly diversified your total portfolio drop will be nowhere near as severe as that-- more like 15%-- and odds are that your portfolio will survive. *If your FIRECalc portfolio survives the Great Depression then it'll handle just about anything else.

IMO the worst fear should be a portfolio that doesn't survive three or four decades of inflation.

[unclemick]

Hmmm

If I buy Wellesley as of last Friday - I get 4.28% current yield out of can - who cares if Mr Market dips the portfolio value 25%.

That's the Norwegian widow agrument. The debate then centers on how well a value oriented managed portoflio (Wellesley) will hold up over the stretch.

40/60 stocks/bonds - hand picked - reasonbly long track record to review and cogitate on.

If you exceed the current yield - then you are into slice and dice land and the question becomes how well can your porfolio damp SD while maintaining effective growth to combat inflation as you take out money in retirement.

Actually I do a mish mash - 15% dividend stocks, 75% Vanguard Target Retirement 2015 and 10% in Roth Vanguard 60/40ish Lifestrategy in case I don't croak in precisely 22.6 yrs.

A tad above 3% current yield altogether. Giving up frugal - looking at 4% payout while still young in my 60's and 70's and throtling back perhaps later - not in $ no.'s but relative to inflation.

Although being a cheap bastard the first 12 years of ER was kinda fun.

heh heh heh

P.S. My worst one quarter dip post 2000 was -16.5% holding Lifestragey moderate (60/40ish) - more in $ no.'s than I retired with in 1993.

There is more than one way to do a portfolio - as long as you understand yourself/investment style. Low cost, diversification and not exceeding takeout guidelines - FOR THE PORTFOLIO YOU HAVE SET UP.

[mathjak107]

the 4% or so yield you get is not like bank interest..the price of your shares drops respectively ...thats no different then pulling out
4% of your balance...a drop is a drop until and unless it comes back again...

[cute fuzzy bunny]

Its a yield, not an interest rate. So if the price of the shares drops, the yield goes up. Dividend stays the same. That 4.xx% will 'wander' a litle as the investment mix is changed over time, but if you buy into wellesley now and take just the dividends while leaving the principal alone, chances are very very good that 5, 10, 20, 40, 60 years you'll still be getting in the vicinity of 4%, inflation adjusted, dropped in your lap every year.

Drastic runaway inflation that persists for decades is about the only thing that would screw that up.

The fund has a 30-something year run of producing ~ 4% in dividends while the principal improves by a rate exceeding the average inflation seen over the past 30-something years. Same stock and bond pickers who have produced good results in mutual funds since the 1920's.