Is a 50/50 AA too conservative if I RE at 55?

[ziggy29]

One of the things this thread reminds us of is the fact that if someone has a lot more of a nest egg than they can spend down, they have the luxury of being as conservative or as aggressive as they want to be -- hitting that "sweet spot", while nice, is not likely to bust a retirement if they get the AA wrong. Of course there are other factors, such as what is left in the estate to heirs and all that, but in terms of their own lifetimes, someone can afford to be very risk averse *or* very aggressive.

 

[Oz investor]

you MIGHT assume interest-bearing securities ( including treasuries ) are safe

that is far from the case , in Australia cash deposits are guaranteed by the government for the first $250,000 , the government wouldn't do that unless there is a tiny chance our 'unquestionably strong' banks will fail , the saga in Greece and Cyprus was equally tough on sovereign debt holders ( as well as those holding cash deposits .

sorry bur we are talking comparative risk NOT total safety ( even gold and silver holding can be seized in extreme times , if the government can find it )

i have chosen REITs over interest-bearing securities currently , that seems to be SOME security and adequate reward ( unlike much corporate/bank debt which is basically unsecured junk debt )

interesting times

 

[pb4uski]

.....At the same time, if I want to conservatively plan for a 40 yr RE, is adjusting my AA to 50/50 at the end of this year too conservative to overcome inflation risks? My initial plan was to more or less stay at 60/40 until further notice, but does that 10% tweak in AA move the needle enough one way or another at the end of the day? Curious as to how those of you who are 100% dependent on your assets have adjusted your AAs with a longer horizon?

I retired at 56. Had a 60/40 AA for many years prior to retirement and continue to have a 60/40 AA and suspect that I will for many years to come. I am very comfortable with equity risk since my time horizion for this money is 30 years plus.

As others have said, from a risk of ruin perspective, it is six of one, or a half dozen of another... little difference.

Part of the reason that I'll probably keep with 60/40 and may ultimately even go higher in equities depending on investment results, is because of at some point the reality is that I'm investing that money for our kids, who are currently 30 and 34 and 60/40 or higher is closer to how I would recommend that they invest their money (I would recommend between 100/0 and 90/10 for them at their ages).

FIRECalc with 60% equities and default assumptions:

Here is how your portfolio would have fared in each of the 119 cycles. The lowest and highest portfolio balance at the end of your retirement was $-204,356 to $3,423,674, with an average at the end of $1,062,738. (Note: this is looking at all the possible periods; values are in terms of the dollars as of the beginning of the retirement period for each cycle.)

For our purposes, failure means the portfolio was depleted before the end of the 30 years. FIRECalc found that 5 cycles failed, for a success rate of 95.8%.

FIRECalc with 50% equities and default assumptions:

Here is how your portfolio would have fared in each of the 119 cycles. The lowest and highest portfolio balance at the end of your retirement was $-167,964 to $3,108,798, with an average at the end of $860,085. (Note: this is looking at all the possible periods; values are in terms of the dollars as of the beginning of the retirement period for each cycle.)

For our purposes, failure means the portfolio was depleted before the end of the 30 years. FIRECalc found that 6 cycles failed, for a success rate of 95.0%.

$1,062,738 is better for my heirs than $860,085, and in my opinion the $200k benefit to them is a fair tradeoff for 0.8% higher risk of ruin for me.

 

[OldShooter]

As usual @pb4uski nails it.

... at some point the reality is that I'm investing that money for our kids, who are currently 30 and 34 and 60/40 or higher is closer to how I would recommend that they invest their money (I would recommend between 100/0 and 90/10 for them at their ages). ...

This is exactly why we went from 60/40 a couple of years ago to our current 75/25.

 

[Animorph]

So, if someone did go with a 50/50 AA, would a 50% in Vanguard Wellington and 50% Wellesley be reasonable? As I approach 55 (in 5 years), I was looking more at 60/40 as my AA is 85/15 now but have real estate outside of my AA. I'm thinking I've won the game mindset with a 60/40 AA, then my real estate value/income (about 35% of my net worth). Some would say consider the real estate as a bond, so my equity exposure is below 50%.

While generally meeting the AA target, this combo would not let you easily sell only bonds or only stocks if that is something you'd want to do. I like the option to sell only bonds when the stock market has tanked and I want to let it ride.

 

[Aiming_4_55]

While generally meeting the AA target, this combo would not let you easily sell only bonds or only stocks if that is something you'd want to do. I like the option to sell only bonds when the stock market has tanked and I want to let it ride.

Agreed, and managing taxes might be more challenging. I'll need to spend time on reviewing AA, index funds, and tax efficiency in the near future.

 

[RobLJ]

I'm at 55-35-10 allocation in my 403b, since I've started withdrawing last year. DW is 67-23-10 since it is 4 years until she can touch her IRAs without penalty. After we start withdrawing from hers, I'll probably balance both around 60-30-10. (Our combined allocation is around 59-30-11. If we get another market run-up I'll probably take some gains off the table.)

 

[ERD50]

...

FIRECalc with 60% equities and default assumptions:


FIRECalc with 50% equities and default assumptions:


$1,062,738 is better for my heirs than $860,085, and in my opinion the $200k benefit to them is a fair tradeoff for 0.8% higher risk of ruin for me.

Is that a "tradeoff"? It looks like the higher equity allocation not only had a higher average, but a higher success rate as well (95.8% for 60/40, 95% for 50/50).

Unless I missed something, the 60/40 is having your cake and eating it too.

-ERD50

 

[pb4uski]

You're right! I botched it.

 

[njhowie]

So it's taken me a number of years, but I have bought into the philosophy of if you have won the game, why keep playing.

If that is your philosophy, then why not play with the numbers adjusting equity to the lowest point where Firecalc gives 100%? If 0/100 gives 100% in Firecalc, then why not?

 

[mrWinter]

Is that a "tradeoff"? It looks like the higher equity allocation not only had a higher average, but a higher success rate as well (95.8% for 60/40, 95% for 50/50).

Unless I missed something, the 60/40 is having your cake and eating it too.

-ERD50

Yeah, that's what I see too, with a simple default scenario in firecalc, any equity allocation between 0 and 100%, the higher the equity allocation, the higher the average ending portfolio and the higher success rate, win-win. I have inquired about this before, and the answers I see as to why to hold bonds are entirely psychological (which may be valid reasons). From a numbers perspective, equities are better than bonds as far as I can tell. I would think in Fat Fire situation that would be even more true, you have the flexibility to spend less when markets are down if you want so the volatility isn't as big a deal.

 

[DogGone]

I am similar, just under 55, and just announced and due to start my journey in July.

I was... cough... cough... almost 95% equities across all accounts and after announcement have managed to minimize tax gains and play with IRAs to get down to 65%... I may go closer to 50% next year when I have no income to avoid tax gain penalties.

I am leaning to the sleep at night and play it safe strategy in the first 5 years to finish college expenses and avoid any regret. Cash Flow improves later with Soc Sec and pensions and will have excess then anyway.

 

[deserat]

it depends on the different streams of income - if you have a pension or other guaranteed payouts of some sort, those act like bonds. Moreover, if those cover your lifestyle costs, you can afford (*if you wish*) to go higher on the stock/equities portion of the AA. If you looked at everything, then your overall AA with a pension might end up being 50/50, 60/ 40, 40/60....etc. I look at it as what are your lifestyle costs, how are those going to be covered, how long can you cover those (with inflation and any other additions you wish) with a certain allocation with a low degree of failure.

I am in awe of those who retire only on their portfolios and probably would be ratcheting back quite a bit the equities exposure when I retired to give some stability to meet my known lifestyle costs so I don't ratchet up my anxiety.

 

[Focus]

I've found some of this thread reassuring, since I entered early retirement with 60/40 and expected to stay there, but with the market run-up I decided (too early, as it turns out) to lock in some of the gains and switch to 50/50.

As much as I like Wellington, I wouldn't pick that as the sole fund in my stock portion, because of the large company focus. I prefer the greater diversification that comes from holding a total stock fund.

 

[Markola]

Me, too. Wellington and Wellesley have impressive records but they are, nevertheless, actively managed funds with manager risk. The total # of securities in each is very low compared to total stock and total bond index funds, so they are much less diversified. The fees are a little higher. Finally, their investment styles have worked out well recently but have not always performed well in all conditions, like times of rising interest rates or international outperformance.

 

[Jeb-NY]

No great advice, just where I am at. Wife and I are 70. Retired at 57 and reduce our AA to 50:50 (felt good in 2008), was at about 90:10 till around 55 then started shifting with FIRE in sight. We have about 175% of what we had when we retired. Waited to 70 for SS and are now taking mandatory distributions. Those equal nearly double what we need for day to day expenses so we have plenty of discretionary money for our life style (we have lived below our means most of our marriage). I lucked out and rebalanced AA back to 50:50 before the last drop and was waiting for a bigger drop to dump the money back in to equities and it didn't happen. Been debating about rebalancing again (currently 53:47) but have been thinking about letting AA drift up. This discussion has helped some, still don't know what I will do. Been comfortable at 50:50 for 13 years, I sleep well.

 

[pb4uski]

If that is your philosophy, then why not play with the numbers adjusting equity to the lowest point where Firecalc gives 100%? If 0/100 gives 100% in Firecalc, then why not?

Or use the Investigate tab, second radio button... How will changing the allocation.... affect the results?

 

[2177V]

My 2 cents on the correct AA.

I suggest reviewing all the bear markets and stock market crashes and recovery times. The best link that I found for this information is at

https://www.cnbc.com/2018/12/24/whats-a-bear-market-and-how-long-do-they-usually-last-.html

The very worst bear market was Jan 73 which had a duration of 21 months and a recovery time of 69 month for a total of 90 months. All other bear markets had a shorter duration and recovery time and this is based from 1946 to 2019.

Let's assume you are 65 and your life expectancy is 85 which is 240 months of income that you need.

Your portfolio should have a "rainy day" fund of 90 months. 90 months is 38% of 240 months.

This mean your AA should be 38% bonds and 62% stock. During a crash or bear market, your stock portfolio loses liquidity since you can't sell low. You are forced to live on your 38% bonds which is equal to 90 months.

The type of bond fund must maintain its value during a bear market or crash....such as VFSTX short term corporate bond or treasury bonds or CDs. The type of bonds that you have may be more critical than your AA because certain bond funds can lose it value during a bear market as well.

Please note that your stock portion will likely earn money so that your portfolio will likely last past your age 85. Reverse mortgage is also an option since banks will give a relatively large monthly payment if your age is older than 85.

If you have a 50/50 portfolio, then you are super conservative since the 50% bond fund will outlast the historical bear markets and crashes and recovery times since 1946.

 

[COcheesehead]

My 2 cents on the correct AA.

I suggest reviewing all the bear markets and stock market crashes and recovery times. The best link that I found for this information is at

https://www.cnbc.com/2018/12/24/whats-a-bear-market-and-how-long-do-they-usually-last-.html

The very worst bear market was Jan 73 which had a duration of 21 months and a recovery time of 69 month for a total of 90 months. All other bear markets had a shorter duration and recovery time and this is based from 1946 to 2019.

Let's assume you are 65 and your life expectancy is 85 which is 240 months of income that you need.

Your portfolio should have a "rainy day" fund of 90 months. 90 months is 38% of 240 months.

This mean your AA should be 38% bonds and 62% stock. During a crash or bear market, your stock portfolio loses liquidity since you can't sell low. You are forced to live on your 38% bonds which is equal to 90 months.

The type of bond fund must maintain its value during a bear market or crash....such as VFSTX short term corporate bond or treasury bonds or CDs. The type of bonds that you have may be more critical than your AA because certain bond funds can lose it value during a bear market as well.

Please note that your stock portion will likely earn money so that your portfolio will likely last past your age 85. Reverse mortgage is also an option since banks will give a relatively large monthly payment if your age is older than 85.

If you have a 50/50 portfolio, then you are super conservative since the 50% bond fund will outlast the historical bear markets and crashes and recovery times since 1946.

You can shorten your rebound time by rebalancing from bonds into equities, but if you need all your bonds to live on... So having a little extra in bonds during good times, actually helps you get out of the bad times quicker.

 

[ERD50]

My 2 cents on the correct AA. ....

A couple questions on your assumptions:

... Let's assume you are 65 and your life expectancy is 85 which is 240 months of income that you need. ...

How can you set a life expectancy of 85 at age 65? Over 40% of age 65 males live beyond age 85.

https://personal.vanguard.com/us/insights/retirement/plan-for-a-long-retirement-tool?lang=en

...

Let's assume you are 65 and your life expectancy is 85 which is 240 months of income that you need.

Your portfolio should have a "rainy day" fund of 90 months. 90 months is 38% of 240 months.

This mean your AA should be 38% bonds and 62% stock. During a crash or bear market, your stock portfolio loses liquidity since you can't sell low. You are forced to live on your 38% bonds which is equal to 90 months.
...

Aren't you ignoring that a 38 bond / 62 stock portfolio will also be kicking off dividends? Roughly 2% from stocks, maybe 3% from the bonds? So roughly 2.4%? If your WR is 3.5%, you only need to sell off ~ 1.1% per year. so 38% bonds should last 34 years ( ~ 414 months) before you would need to sell any stocks.

That's an approximation, but it gets the point across. As you sell of bonds, the 1.1% would be a larger percent of total, depleting it a bit faster and also cutting the dividend payout a bit each year. But these sorts of extended bear markets come after a run up, so if you started with 3.5% WR, you would likely be lower than that as a percent of portfolio after a run up. So it's a decent approximation, I think.

-ERD50

 

[Sunset]

My 2 cents on the correct AA.

I suggest reviewing all the bear markets and stock market crashes and recovery times. The best link that I found for this information is at

https://www.cnbc.com/2018/12/24/whats-a-bear-market-and-how-long-do-they-usually-last-.html

....
If you have a 50/50 portfolio, then you are super conservative since the 50% bond fund will outlast the historical bear markets and crashes and recovery times since 1946.

But aren't they conveniently ignoring some reality by cherry picking the dates and not starting at 1928

 

[24601NoMore]

But aren't they conveniently ignoring some reality by cherry picking the dates and not starting at 1928

This chart may be helpful / enlightening..longest "total return" recovery times for the S&P 500, since 1900.

As the chart shows, there are three periods where it took > 20 years to get back to "even". Even the most recent dip (starting ~2000) took SIXTEEN YEARS to get back to even.

I've long been of the opinion there is far more risk in stocks than is commonly realized..and as someone who ER'd early this year, I sure don't want to find myself in a 16-20+ year period waiting for the equity part of my portfolio to get back to "even" in real terms..because I may not even HAVE 20+ years left on this earth. So, even at < 30% equities, it feels very risky (to me).

ETA - the chart obviously shows "from peak" recovery times..but with the market at all time highs..who's to say we're not already in or at least near a peak?

 

[2177V]

A couple questions on your assumptions:

How can you set a life expectancy of 85 at age 65? Over 40% of age 65 males live beyond age 85.

-ERD50

You missed my point in my original 2 cents quote that (1) the stock portfolio will earn money. This earning should extend the portfolio beyond age 85. (2) Reverse Mortgage option is available and therefore a 50%/50% portfolio may be too conservative.

Everybody's risk tolerance is different. For some people, a 50%/50% portfolio is acceptable. For other people, it may be too conservative. To understand my way of thinking. click the following link on model portfolio returns...
https://personal.vanguard.com/us/insights/saving-investing/model-portfolio-allocations?lang=en

A 50%/50% portfolio average yearly return is 8.4%
A 60% stock/40% portfolio average yearly return is 8.8%
The difference is only 0.4%.

However if your portfolio is $1M, this difference is $4,000 a year or $40,000 over 10 years. Now you can do an "objective" a risk versus reward decision. I prefer not to make a "subjective" risk versus reward decision but some people do a subjective decision making without doing any objective calculations at all.

For me I was a combat infantryman, I ride a motorcycle, etc and I was taught "never make decisions based on fear". By being aggressive over the last 40 years, I earned a lot more money than if i was less aggressive. Sure I felt sick after a crash, but it is not like being killed in combat or in a motorcycle accident.

Finally, I have a problem using stock market data before I was even born. This is because investors were so reckless in those days that they jumped out of the building after a crash. The fear was at record high because they had no safety nets such as bond investments to balance their investments. There was no government insurance on CD bank deposits. There were bank runs. There were very little balanced portfolio, no 401K which uses a buy and hold strategy, no certified financial advisors, no government interventions, etc, etc.

Until I start seeing a bunch of people jump out of a building after a crash, I decided to become more aggressive than most people simply because I have 90 months of VFSTX funding to hold me over.

 

[2177V]

This chart may be helpful / enlightening..longest "total return" recovery times for the S&P 500, since 1900.

As the chart shows, there are three periods where it took > 20 years to get back to "even". Even the most recent dip (starting ~2000) took SIXTEEN YEARS to get back to even.

I've long been of the opinion there is far more risk in stocks than is commonly realized..and as someone who ER'd early this year, I sure don't want to find myself in a 16-20+ year period waiting for the equity part of my portfolio to get back to "even" in real terms..because I may not even HAVE 20+ years left on this earth. So, even at < 30% equities, it feels very risky (to me).

ETA - the chart obviously shows "from peak" recovery times..but with the market at all time highs..who's to say we're not already in or at least near a peak?

Let's call my previous comment my "4 cent" comment and this comment below my "6 cent" comment to supplement my original "2 cent" comment.

According to https://fourpillarfreedom.com/heres...has-historically-taken-to-recover-from-drops/

.....the 2000 crash and recover of 16 years actually involved a double dip of 8 years followed by a 7 year dip. It appears that your graph is somewhat misleading in that it involved a single dip of 16 years and recovery. Most people should have re-allocated after the first dip....if they were pro-active.

Also, these graphs all assume S&P500 investment.

Investors should be diversified into their other stock investment such as small caps, mid caps, energy, real estate, health sector, etc and not put all their eggs into the S&P500 basket. The dips and recovery times for these different stock investments sector may be different from S&P500. For example, the health sector did very well because the revenues from the health sector was more stable than the the S&P 500 because people still needed to take their medication after the crash versus the high tech sector which people delayed buying a new PC after the crash.

The power of diversification: You can select which stock asset class to liquidate. If one stock asset class is relatively higher than the other stock asset class, then that asset class is the one that should be liquidated. Remember to "buy low and sell high" and be "diversified" to reduce your risk.

Of course if your stock portfolio is 100% S&P 500 with no other stock asset class then your risk is greater and people would conclude that the risk is too high by your graph of the S&P500.

However, my stock portfolio consists of many different stock asset class to spread my risk and increase my liquidity.

BTW, I hate balanced funds and target portfolio funds because these funds co-mingle different asset classes. They are OK before retirement but they are not OK after retirement. This is because I personally need to have the flexibility of which asset class to liquidate.

Even if I ran out of money after liquidating 90 months of my bond funds, I simply select the stock asset class to liquidate that had recovered better than the other stock asset class. This minimize any potential losses.

"Never make decisions based on fear"
"Greed is good"

 

[53anddone]

I retired at 56 and am at 55 Equity, 30 CD, 10 Muni, 5 Cash. Fortunately I have enough assets where this mix is generating enough income I don't need to touch the principle for living expenses. The equities are a mix of 30 blue chip dividend payers (Coke, JNJ, etc.) that I feel its pretty conservative even if it is in equities.

I do feel a bit extended in stocks but I also feel I could easily ride out any stock storm.

The challenge I feel at the moment is that CD/Bonds pay such miserable rates I would be hard pressed to feel good about a large AA in that area. I am hoping that rising rates will correspond with my moving my AA more in that direction i the coming years.....

Near term goal is to get stocks down to 50% or so by the time I turn 60.