Investing new $$ when close to retiring

[DawgMan]

I have plans to retire at the end of 2019 (+/- 17 months) at the age of 55 which means I have 2 more working/putting money away/tax years (including this yr) before I shut off the spigot and move to withdrawal mode (100% from my investments). I have ratcheted down my AA over the last few yrs to 60/40 which for now, I plan to ride through RE. Mathematically, my investments are slightly above my previous target number for year-end 2019, however, I have made a decision to move the goal posts slightly again to create a small amount of additional cushion. This additional cushion requires only about a 2% bump between now and the end of 2019. Meanwhile, I will probably add about 2% - 3% this year to the overall kiddie based on projected income so even if the market stays flat for 17 months, I should hit/pass my new target. Of course, I don't control the markets and I, like many others, am very sensitive to hitting a market correction the day I plan to launch. Knowing my short horizon here, should I take any and all new money between now and end of 2019 and go safe, even if it shifts me to say 55/45? Or, do I blindly do my rebalancing? I know there is a good argument for going more conservative right before launching and then perhaps ramping up equities thereafter, but what would you do??

 

[brokrken]

DawgMan, congrats on being so close to the finish line. If you have your AA where you want it, I would stay the course and not take any extraordinary action just because you are close. Let's be honest, what you do with this last 17 months of additional savings isn't going to determine your future. It's the large bucket that you already have saved that will be hit the hardest if a correction occurs. And, you're right. You can't control the markets. So, stay the course and it'll all work out.

 

[Walt34]

Being a firm believer in Murphy's Law (i.e., a pessimist) I'd go conservative.

 

[corn18]

Either 60/40 is the AA you are comfortable with or it isn't.

 

[SumDay]

I'm pulling the plug at the end of the month. I tend to fret about $$, so I did move more into cash than I've ever had. Kind of a bucket strategy thing: How to Build A Retirement Paycheck From Your Investments - The Retirement Manifesto. It's not for everyone, but it helps me sleep.


And this year I cut my 401(k) contributions to the minimum needed to get the ER match. I'm just sitting on (and spending as needed) that money until we both start social security next year. Our tax bill should be pretty tolerable this year since both of us will have no income for 4 months of this year.


Good luck to you! 17 months will be here before you know it!

 

[W2R]

Being a firm believer in Murphy's Law (i.e., a pessimist) I'd go conservative.

+1

 

[DawgMan]

Either 60/40 is the AA you are comfortable with or it isn't.

I hear ya.

I suppose it comes down to making sure I ring the bell at the starting line with the targeted balance and then moving back to my 60/40 thereafter. That said, I can see logic in both paths.

 

[audreyh1]

Just gradually shift to 55/45 with new money and then plan to stay there after retiring.

There really isn’t any glide path benefit unless starting with quite a low equity exposure like 30%.

 

[Dtail]

DawgMan, congrats on being so close to the finish line. If you have your AA where you want it, I would stay the course and not take any extraordinary action just because you are close. Let's be honest, what you do with this last 17 months of additional savings isn't going to determine your future. It's the large bucket that you already have saved that will be hit the hardest if a correction occurs. And, you're right. You can't control the markets. So, stay the course and it'll all work out.

+1
You do worry, but we will all get you through it.

 

[COcheesehead]

55 and FIRE’ ing in 2 years. I went the other route and built a bond tent to ward off sequence of returns risk. I have 100% of my desired yearly income in individual muni/corp bonds until my early 60’s. So I have such a fort built around my assets that all my new money goes into risk assets. Will continue down that road.

 

[OldShooter]

Either 60/40 is the AA you are comfortable with or it isn't.

+1

It is all dollars. The oldest ones and the newest ones are the same. And they are all assets so they are already part of your asset allocation.

Including these dollars, do you have the AA you want or not? If not, change it. If yes, carry on.

You might benefit from reading a little about Richard Thaler's concept of "mental accounting." https://en.wikipedia.org/wiki/Mental_accounting We all do it, but I think it is useful to understand it and consider whether we should be doing it in particular cases.

 

[stepford]

If you're the sort who (like me) occasionally second guesses your AA then you're going to hate yourself a little bit whatever you decide. In my case I went for a very conservative 50/40/10 AA on retirement at 55. I sleep better at night, but am keenly aware of the money I've effectively left on the table over the last few years of market growth.



Still I think that regret has been easier to deal with than would the corresponding loss had I remained in a more aggressive AA and the market tanked.


Weigh which of these two regrets would bother you more and act accordingly.


On the plus side, run a few simulations comparing results at 60/40 and 55/45 AAs and I'll bet you find the outcomes so close as to make little difference.

 

[corn18]

I hear ya.

I suppose it comes down to making sure I ring the bell at the starting line with the targeted balance and then moving back to my 60/40 thereafter. That said, I can see logic in both paths.

I hide behind a 60/40 AA that is actually 50/50. I keep enough cash to cover college that I am cash flowing, a new car I don't need and an overfunded EF. And I add about $3500 to my cash position each month.

I do have an IPS that covers all this silliness and it will self correct at the end of the year, but don't let me fool you. I'm the biggest wimp out there.

I'm 52 and hopefully retire @ 55.

 

[DawgMan]

55 and FIRE’ ing in 2 years. I went the other route and built a bond tent to ward off sequence of returns risk. I have 100% of my desired yearly income in individual muni/corp bonds until my early 60’s. So I have such a fort built around my assets that all my new money goes into risk assets. Will continue down that road.

So does mean you have chosen a bucket approach or does your 5 (or 3 yr once you retire) bond tent fall outside your AA? What happens at 60... do you continue with a 3 - 5 yr bond tent or does this naturally fall in your bond allocation of your AA? Just curious if this is a short term strategy to get you to your number/ward off sequence of return risk in order to launch or if this is a permanent part of your strategy?

 

[DawgMan]

I hide behind a 60/40 AA that is actually 50/50. I keep enough cash to cover college that I am cash flowing, a new car I don't need and an overfunded EF. And I add about $3500 to my cash position each month.

I do have an IPS that covers all this silliness and it will self correct at the end of the year, but don't let me fool you. I'm the biggest wimp out there.

I'm 52 and hopefully retire @ 55.

Glad to see I am not the only coward...

 

[DawgMan]

If you're the sort who (like me) occasionally second guesses your AA then you're going to hate yourself a little bit whatever you decide. In my case I went for a very conservative 50/40/10 AA on retirement at 55. I sleep better at night, but am keenly aware of the money I've effectively left on the table over the last few years of market growth.



Still I think that regret has been easier to deal with than would the corresponding loss had I remained in a more aggressive AA and the market tanked.


Weigh which of these two regrets would bother you more and act accordingly.


On the plus side, run a few simulations comparing results at 60/40 and 55/45 AAs and I'll bet you find the outcomes so close as to make little difference.

It was hard enough for me to ratchet down to 60/40, but I hear ya on the min difference in historical performance.

 

[DawgMan]

Just gradually shift to 55/45 with new money and then plan to stay there after retiring.

There really isn’t any glide path benefit unless starting with quite a low equity exposure like 30%.

At the end of the day, I suppose I will float between a re-balance between 55/45 - 65/35 using my keen Spidey market timing abilities to move accordingly. How's that for a compromise?!

 

[Oz investor]

Being a firm believer in Murphy's Law (i.e., a pessimist) I'd go conservative.

it is a little known fact ' Murphy ' was an optimist ( but also a realist )

one plan i was starting ( before prematurely being retired ) was only PARTIALLY participating in dividend reinvestment plans

that is ( say ) 50% cash 50% shares ( where a reinvestment plan was available )

the logic being the dividends reinvested would help defend against inflation but the cash flow would remind me i was going to have to live on the cash income generated from the retirement fund ( as a primary income source )

indeed i miss out on some of the magic of compounding but the time for reality was approaching ( and quicker than i expected ) and i needed to rationalize that budget not just rely on being a frugal person .

this might work for someone , fate decreed i use this plan without proper testing

 

[COcheesehead]

So does mean you have chosen a bucket approach or does your 5 (or 3 yr once you retire) bond tent fall outside your AA? What happens at 60... do you continue with a 3 - 5 yr bond tent or does this naturally fall in your bond allocation of your AA? Just curious if this is a short term strategy to get you to your number/ward off sequence of return risk in order to launch or if this is a permanent part of your strategy?

It depends on how you look at it. A bucket strategy is just a mnemonic for managing/rebalancing an asset allocation. I simply manage off my AA and my bond ladder is part of my chosen AA. I will continue to use a bond ladder as part of my AA because I love the predictability of it, but as bonds mature, the AA will naturally skew more towards equities. I am going to let that play out for awhile and revisit in my 60's based on what my spending needs are. I don't need a 60/40 to have my plan work. I might go 50/50, but probably never higher in equities than that. I just don' t need the risk to have my numbers work.

 

[pb4uski]

You might want to consider adding a cash component to your AA.

When I was working we didn't have any cash component at all since we had a nice steady income coming in. The first year that I was retired we were 60/40/0 but I found it a nuisance to manage trading, so I decided to add a 5% cash component... so we are not 60/35/5.

Each year, usually in December, I replenish the 5% cash from sales proceed of domestic equities in our taxable accounts.... during the year, I have a monthly automatic transfer from cash to the local credit union account that I use to pay our bills... my monthly "paycheck"... I do additional special transfers if/as needed. Our 5% cash is in a high yield online savings account so the cost of holding 5% cash is not very significant.. currently about 6 basis points +/-.

For some reason, having a little stash of cash that has no credit or interest rate risk and is totally liquid adds some peace of mind to my otherwise risk accepting appetite.

 

[audreyh1]

At the end of the day, I suppose I will float between a re-balance between 55/45 - 65/35 using my keen Spidey market timing abilities to move accordingly. How's that for a compromise?!

Fair enough - I have transitioned to using a 50/50 to 60/40 AA range depending on the value of CAPE10 when I rebalance.

I also have a pretty good pile of cash outside my portfolio that had accumulated over the years. I like it being there.

Belts and suspenders.....

 

[OldShooter]

Fair enough - I have transitioned to using a 50/50 to 60/40 AA range depending on the value of CAPE10 when I rebalance.

I also have a pretty good pile of cash outside my portfolio that had accumulated over the years. I like it being there.

Belts and suspenders.....

So your AA really isn't 50/50 or 60/40?

 

[audreyh1]

So your AA really isn't 50/50 or 60/40?

I only have a target asset allocation for my retirement portfolio. That's the only part I withdraw from annually and rebalance. I don't worry about the AA of my remaining assets since I don't rebalance them.

 

[Dtail]

I only have a target asset allocation for my retirement portfolio. That's the only part I withdraw from annually and rebalance. I don't worry about the AA of my remaining assets since I don't rebalance them.

+1 exactly as you.
But you know we have been down this theoretical difference of opinion road many times before in this forum.

 

[OldShooter]

I only have a target asset allocation for my retirement portfolio. That's the only part I withdraw from annually and rebalance. I don't worry about the AA of my remaining assets since I don't rebalance them.

Well, everyone gets to do their arithmetic any way they want.

But is it not the case that the norm here when people are talking about AA that they are talking about a ratio of total investable assets? It seems like that is the only option if posts are to be comparable.

IOW if you have a million$ in cash or a kilo of gold that you're not including in your AA, then reporting 50/50 or whatever is at best meaningless and at worst misleading to the OP and the rest of us.

Just curious: If you do include your not-included stash, what is your AA range? Is it materially different from what you reported?