Retiree Asset Allocation

[WilliamG]

Asking folks to share their allocations and rationale has been done before, but it has been a while and perhaps some will participate that haven't before. Very interested in:
1) Retiree's portfolio context; i.e, current age and is it only source of income vs. pension(s)
2) High level stock/non-stock allocation and how do you plan to change this over time
3) Specific asset allocations to demonstrate what extent if any using slice/dice, buckets, etc.

My answers as a start:
1) No pensions for spouse or I, but plan to begin my SS next year at 62; wife eligible 4 yrs later
2) Roughly shooting for 50/50 allocation with no plans at this time to alter as get older. Feel this is conservative enuf for my age but want to have stock to offset inflation. If things going ok will not decrease stock allocation as grow older as would like any excess to be there for children/grand children.
3) Use personalized slice and dice as well as buckets. All funds are Vanguard:
3% Emerging Markets
3% Pacific
4% Europe
10% Small Cap Index
10% REIT Index
15% Asset Allocation Fund
15% Wellesley
10% TIPS Fund
10% GNMA
20% Cash and Reserve (CD ladder, I Bonds)

 

[WilliamG]

OT but I see Vanguard's Asset Allocation Fund just left 100% stock for quite a while as of Jul 31 moving 20% to cash.

 

[hellbender]

1.  Current age:  52.   Do not rely on any portion of portfolio for income.  Will retire at age 55 with inflation-adjusted pension more than adequate to fund living expenses.

2.  Don't own any stocks and don't plan on owning stocks.

3.  50% fixed income.  50% directly held real estate.

 

[Dawg52]

2.  Don't own any stocks and don't plan on owning stocks.

3.  50% fixed income.  50% directly held real estate.

You have got to be John Galt's younger brother. 

 

[haha]

I am retired. Don't yet draw SS, and when I do it won't be real good because I had lots of 0s. No pension.

60% fixed, 40% equities of which 10% is non-US. Only long term fixed is inflation indexed- otherwise nothing longer than 3 years. I would go up to 80% equity if I saw compelling value. I would probably have trouble stopping at 80%, but that would be my plan.

Recently turned 65.

Ha

 

[heyyou]

Age 56 with no-COLA pension. Pension is a little more than pre-retirement budget due to LBOM and maxing 401k and Roth.
Port is 70/30 as an inflation hedge. Hoping to delay SS for higher benefit (longevity insurance) and Roth conversions before RMD.

 

[Spanky]

1. Current age: 52. Do not rely on any portion of portfolio for income. Will retire at age 55 with inflation-adjusted pension more than adequate to fund living expenses.

2. Don't own any stocks and don't plan on owning stocks.

3. 50% fixed income. 50% directly held real estate.

That's more reason to hold more equity when pensions covers all expense.

 

[hellbender]

That's more reason to hold more equity when pensions covers all expense.

Why?  I do not belong to the school of thought which dictates that one should take on as much risk as they can bear at all times.  Equities are risky.  No one need own any unless they have the need, the capability and the desire to do so.  I have the capability but I have neither the need nor the desire to do so.  I don't put my money at risk without a good reason.  I don't have one so I don't own equities.

 

[youbet]

  I don't put my money at risk without a good reason.  I don't have one so I don't own equities.

That logic works for me Hellbender. If, like you, I had a cola'd pension that more than covered all my desires for consumption, I just might do the same thing.  Alas, I don't.  So, I'm about 60% equities, 30% fixed and 10% cash in early ER.

Since all your savings are available for discretionary spending, you're free to spend the time you might have spent managing an equity portfolio on planning your spending for travel, entertainment and those types of things.      Additionally, you might also be giving some thought to charities or causes where having a significant impact would be meaningful to you.   

 

[Nords]

Why?  I do not belong to the school of thought which dictates that one should take on as much risk as they can bear at all times.  Equities are risky.  No one need own any unless they have the need, the capability and the desire to do so.  I have the capability but I have neither the need nor the desire to do so.  I don't put my money at risk without a good reason.  I don't have one so I don't own equities.

"Why?" Inflation, which is why I bet you don't bury your money in tin cans in the back yard, either.

I'm not suggesting that someone who doesn't need their portfolio should plunk it all into leveraged beaver-cheeze futures.

I am suggesting that it's painful to watch a perfectly-safe portfolio get whittled down to pocket change by inflation.

If the pensioner truly doesn't need the money then they could give it away to charity. That's a risk because they might need the money later for medical expenses or long-term care. But if they take zero risk then they lose to inflation AND miss the opportunity to make a big charitable impact on their important issues. So their situation still has other types of risk, but the biggest benefit of their situation is that the downside is rather small while the rewards are quite gratifying.

A middle ground might be TIPS or I bonds. But there's a couple centuries of data on stocks that might be suitable for forecasting their performance over inflation, and these securities don't have a similar track record.

 

[hellbender]

"Why?"  Inflation, which is why I bet you don't bury your money in tin cans in the back yard, either.

I'm not suggesting that someone who doesn't need their portfolio should plunk it all into leveraged beaver-cheeze futures.

I am suggesting that it's painful to watch a perfectly-safe portfolio get whittled down to pocket change by inflation. 

If the pensioner truly doesn't need the money then they could give it away to charity.  That's a risk because they might need the money later for medical expenses or long-term care.  But if they take zero risk then they lose to inflation AND miss the opportunity to make a big charitable impact on their important issues.  So their situation still has other types of risk, but the biggest benefit of their situation is that the downside is rather small while the rewards are quite gratifying.

A middle ground might be TIPS or I bonds.  But there's a couple centuries of data on stocks that might be suitable for forecasting their performance over inflation, and these securities don't have a similar track record.

Nope, I am not planning on burying the money in the back yard.  But I could if I wanted to and it would not threaten my retirement.    Since my pension is substantially greater than my living expenses, even if the inflation adjustments don't quite keep up with inflation, it will be decades before I even have to think about dipping into savings.   In the meantime I will continue to save the excess and invest the portfolio that I have accumulated over a working lifetime.

I agree that it would be painful to watch a perfectly safe portfolio completely eroded by inflation.  I don't agree however that owning equities is the only way to prevent that from happening and I don't believe that owning equities is a guarantee that it won't.   Over the years I have consistently outperformed the equities markets with both my pension and my real estate investments, so I think I will continue to do what has gotten me this far and what has rewarded me richly over the last 30 years.   I don't need to do this.  I just enjoy it.  I have always said that it is just as easy to enjoy a hobby that puts money in your pocket as one that takes it out.

 

[Scrooge]

"Why?"  Inflation, which is why I bet you don't bury your money in tin cans in the back yard, either.
...
I am suggesting that it's painful to watch a perfectly-safe portfolio get whittled down to pocket change by inflation.

The problem with keeping your money in cash or cash equivalents (which describes me, BTW) is threefold.

First, we don't know what the real interest rate (i.e. the nominal interest rate minus inflation) will be. It was 4.75% in 1981-1990, 2.75% in 1991-2000 and went negative in the early 2000s for a while when the Fed was trying to drag the economy out of the last recession.

Second, we don't know what our personal rate of inflation will be, which can differ considerably from the CPI/PPI numbers that you usually see.

Third, we don't know what the tax situation will be in the future and cash accounts are harder to protect against taxes than many other types of investment. And, of course, taxes are levied on the nominal rate of return, which has obvious implications in a high inflation environment.

What, me worry?

 

[danm]

There goes a wise man ... it takes strength to ignore the modern 'cult of the stocks'.

Stocks are hardly an inflation hedge - they got clobbered during the 70's. They didn't take off until after the bloodletting during a long period of disinflation. Oh and so did bonds by the way. A single portfolio of Treasury Zero's beat the S&P from 1980-2000 by a factor of 5 or so.

Why? I do not belong to the school of thought which dictates that one should take on as much risk as they can bear at all times. Equities are risky. No one need own any unless they have the need, the capability and the desire to do so. I have the capability but I have neither the need nor the desire to do so. I don't put my money at risk without a good reason. I don't have one so I don't own equities.

 

[Nords]

Stocks are hardly an inflation hedge - they got clobbered during the 70's. They didn't take off until after the bloodletting during a long period of disinflation. Oh and so did bonds by the way. A single portfolio of Treasury Zero's beat the S&P from 1980-2000 by a factor of 5 or so.

Go ahead, mine your short-term data to suit your conclusions.

Or read Dimson's "Triumph of the Optimists".

Whatever works for you. History & math don't care what either of us think.

 

[brewer12345]

I guess I think retirees should probably have some exposure to everything: bonds, stocks, commodities, currencies, real estate, maybe some arb stuff like MERFX, etc. Doesn't seem like any single asset class was the silver bullet in all historical time periods.

 

[danm]

Neither, but suit yourself

Go ahead, mine your short-term data to suit your conclusions.

Or read Dimson's "Triumph of the Optimists".

Whatever works for you. History & math don't care what either of us think.

 

[Meadbh]

Asset Allocation at end of FY 05-06:

Cash 8%
Fixed Income 28%
Canadian Equities 34%
US Equities 8%
International Equities 10%
Real Estate 12%

Total equities 52% including private equity, seg funds, no load mutual funds, stocks
Real Estate includes primary residence and vacation home
Age 49
Years to ER 7

Since then, have skewed sllightly to fixed income. Looking at Japan again......

 

[hellbender]

There goes a wise man ... it takes strength to ignore the modern 'cult of the stocks'.

Thanks.  There is an interesting thread over at Vanguard Diehards which discusses this very issue. 

See:
Larry Swedroe's Need To Take Risk 
http://socialize.morningstar.com/Ne...F100000015&convSeqNumber=52619&mrr=1156078380


Swedroe's response:

"1) I have no need to take risk and my marginal utility of wealth is very low--the pain of a loss is far greater than value of similar upside

2)The strategies to get rich and to stay rich are COMPLETELY different.
The strategy to get rich is to work hard and to take risk (concentrate it too).
The strategy to stay rich is to AOVID/MINIMIZE risk and to not spend too much

Once you have reached the point where the marginal utility of wealth gets low, then it is not prudent to take more risk than you need to simply maintain a desired lifestyle.

Keep in mind that the above explanation is probably the answer (IMO) to the question of the equity risk premium puzzle--why have stock returns been so high--

The answer IMO is that the very wealthy are the ones that own the vast majority of equities--and they have no need to take risk. Thus to entice them to take it the market must price equities to have very high returns--one of the great ironies is that the very people that can afford to take risk have no need to do so!!!

Life as a game is not won [by he] that dies with the most toys---Poor Donald has not figured that one out yet."

 

[Nords]

Swedroe's response:
"1) I have no need to take risk and my marginal utility of wealth is very low--the pain of a loss is far greater than value of similar upside
2)The strategies to get rich and to stay rich are COMPLETELY different.
The strategy to get rich is to work hard and to take risk (concentrate it too).
The strategy to stay rich is to AOVID/MINIMIZE risk and to not spend too much

Larry shouldn't speak or write without an editor. I'm amazed at the difference between his nearly incomprehensible Diehard posts and his books. Great guy, great thoughts, but his brain's speed clearly exceeds his finger coordination. Then when Rick Ferri starts taunting him...

Larry has the best argument against investing in stocks that I've ever seen, and he's very quick to point out that there are many better things to do in life than to tweak one's portfolio.

But the problem here is his lack of definition of the word "risk". Too many investors mis-interpret his words to equate "risk" with "volatility", so they completely overlook the dangers of inflation, diworsification, poor asset allocation, loss of principal, a lack of liquidity, and other problems. Everyone understands the risk of losing money in Enron (or at least by now they should) yet few understand the long-term risk of losing money to inflation.

I think we'd find that Larry's retirement portfolio is diversified to provide income in all market conditions, keeping up with inflation, less volatile than the total stock market, and highly liquid. You can't do all of that in TIPS, and you can't do that without accepting some form of the "risk" concept.

I would say that if a portion of an investor's portfolio is completely unecessary to support their lifestyle then they should feel free to take outrageous risks with it. It keeps people from wondering "What if?", it satisfies the male testosterone-poisoning interest in risky investments, and it'll keep people from messing with the portion of their portfolio that's required to avoid living under highway overpasses. If they're not going to try to at least beat inflation with it, then they might as well give it to charity.

 

[wabmester]

I think we'd find that Larry's retirement portfolio is diversified to provide income in all market conditions, keeping up with inflation, less volatile than the total stock market, and highly liquid.  You can't do all of that in TIPS, and you can't do that without accepting some form of the "risk" concept.

Diversified?   I believe he's 20% stocks (all ScV IIRC), and the rest is in TIPS and munis.    A high stock allocation makes a lot of sense during accumulation.   During retirement (or after you've accumulated "enough"), you generally want preservation of capital, consistent income, and low volatility, as well as an inflation hedge.

 

[WilliamG]

Lazy Portfolios

Concerning allocations, Charles Farrell recently published relative performance of the "lazy portfolios" he follows. Fyi,

http://www.marketwatch.com/News/Story/Story.aspx?guid={DB2FE1FE-444D-4D59-AF7B-3BF006881A2E}&siteid=mktw&dist=

 

[Spanky]

Re: Lazy Portfolios

Concerning allocations, Charles Farrell recently published relative performance of the "lazy portfolios" he follows. Fyi,

http://www.marketwatch.com/News/Story/Story.aspx?guid={DB2FE1FE-444D-4D59-AF7B-3BF006881A2E}&siteid=mktw&dist=

I think it is Paul Farrell (instead of Charles) who also predicted that a recession is inminent.

 

[mathjak107]

i always say planning for retirement is no longer about getting richer, but about not getting poorer....
  its all about matching your risk to your needs....if i had enough dough id throw it all in treasuries and call it a day....but since there is always to much month left at the end of the money i still need it to grow and to grow more than treasuries will allow....at least at this point 7% is my magic number and a 50% stock ,50% all the the other crap does it for me.....

 

[mathjak107]

after taxes and inflation most of the time cd's,money markets and bonds are a guaranteed loss over time...you thought you were playing it safe and secure but you guarrantee yourself a loss and you didnt bet on a thing.....

 

[audreyh1]

2)The strategies to get rich and to stay rich are COMPLETELY different.
The strategy to get rich is to work hard and to take risk (concentrate it too).
The strategy to stay rich is to AOVID/MINIMIZE risk and to not spend too much

That's definitely has been my approach. I took a risky approach to accumulating enough to retire. As soon as I retired, I cashed enough out of my risky investments to fund my retirement portfolio and put these in much more conservative investments, although in my case 55% in stock mutual funds seems to be a minimum to protect against several decades of future inflation.

Kind of funny how once there was "enough", there was a total flip-flop in point of view.

Audrey