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Is a 50/50 AA too conservative if I RE at 55?
Old 04-20-2019, 06:00 AM   #1
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Is a 50/50 AA too conservative if I RE at 55?

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. Over the last few years I have ratcheted down my AA to 60/40 with a tentative plan to shut down the income machine at the end of this year at age 55. In my case, I will be 100% dependent upon my assets to generate my RE income. The calculators all say I am good and while I am planning on Fat Fire, a significant amount of my planned annual spend/withdrawal is pure discretionary. Like many, this long bull market has me somewhat concerned that I might launch at the beginning of a downturn, but who knows, right. 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?
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Old 04-20-2019, 06:04 AM   #2
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What does FIRECalc at a 50/50 vs a 60/40 allocation tell you? Hint: very little difference.
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Old 04-20-2019, 07:09 AM   #3
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50/50 is my comfort and sleep zone.
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Old 04-20-2019, 07:11 AM   #4
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I agree with REWahoo. I will add one more way to evaluate the decision. If your stash is big enough (low SWR) you have the luxury to reduce stock risk if you choose. I tend to stay more heavily invested in stocks even though we are likely over funded. I prefer the risk of the market to the low returns out of the market, but that is a personal decision. If your assets are adequate, lower stock allocations should work (FWIW, I don't think 50% is particularly low). Congrats on your upcoming FIRE.
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Old 04-20-2019, 07:14 AM   #5
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Well, if you are dependent on using those gains and money to live on, I would say 50/50 is good if you feel comfortable with that %. If you don't need that money I would play harder and at least go 75% >. Just my 2 cents.
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Is a 50/50 AA too conservative if I RE at 55?
Old 04-20-2019, 07:33 AM   #6
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Is a 50/50 AA too conservative if I RE at 55?

Quote:
Originally Posted by REWahoo View Post
What does FIRECalc at a 50/50 vs a 60/40 allocation tell you? Hint: very little difference.


It’s true. Comparing asset allocations on Portfolio Visualizer from 40/60 to 80/20 over a 20+ year period shows remarkably little difference. Because of this, we are still w*rking in our mid 50s but have set our course for semi-FIRE soon with a 50/50 and globally diversified portfolio.
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Old 04-20-2019, 07:39 AM   #7
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I use 50/50. That’s plenty high enough equity exposure for a retiree approaching 60 IMO.

What you are giving up is higher potential long-term return and slightly greater volatility. So ultimately it depends on your goals. If you want a larger portfolio in the long run for various reasons, you might be willing to put up with the higher short-term volatility.
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Old 04-20-2019, 07:54 AM   #8
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You might want to try the "Investigate Changing My Allocation" tab in FIRECalc.

My experimenting with that led me to a nominal 60/40 for my retire-at-55 plan (40-year retirement). But I'm also employing a muted bond tent strategy, so I was below 60/40 at RE and am slowly ramping up. https://www.kitces.com/blog/managing...ment-red-zone/

But as others have said, IRL there is little difference in survivability from 40/60 to 60/40. I recall that much of the SWR research shows only small differences from 30/70 to 70/30.
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Old 04-20-2019, 08:19 AM   #9
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I think it’s 45/55 to 75/25 or a bit higher where survivability is rather flat. There is a noticeable roll-off below 45%.

But there is large difference in terms of the size of the remaining final portfolio - the higher the equity allocation the larger the average remaining portfolio. So folks choosing an AA may wish to take this into account.
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Old 04-20-2019, 08:26 AM   #10
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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%.
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Old 04-20-2019, 08:49 AM   #11
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Quote:
Originally Posted by Aiming_4_55 View Post
So, if someone did go with a 50/50 AA, would a 50% in Vanguard Wellington and 50% Wellesley be reasonable?
That should give you your 50/50 AA, but as to whether or not it would be reasonable, opinions vary. I happen to believe it would as I have more than half of our portfolio invested in these two funds.
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Old 04-20-2019, 09:06 AM   #12
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.

But there is large difference in terms of the size of the remaining final portfolio - the higher the equity’s allocation the larger the average remaining portfolio. So folks choosing an AA may wish to take this into account.
Good point. FireCalc looks at failure rate using one's given yearly spending. It does not worry to much about how much more one can spend or leave to one's heirs. (Unless, you dial in an estate amount.)
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Old 04-20-2019, 09:17 AM   #13
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So, if someone did go with a 50/50 AA, would a 50% in Vanguard Wellington and 50% Wellesley be reasonable?
Should be fine. Wellington is about 65/35 (give or take) and Wellesley about 35/65 (same). Put them together in equal amounts and you would be close to 50/50. If you wanted to stay at that AA you'd need to rebalance occasionally.
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Old 04-20-2019, 09:59 AM   #14
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I've also contemplated going to conservative AA ratio in fat fire with >30 years of planned retirement. I struggle with that though as if truly "fat" then have ability to be in stock market through a crash and enjoy the larger returns over time.

For now, I intend to ensure I have 3+ years conservatively accessible and the rest invested in stocks.
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Old 04-20-2019, 10:28 AM   #15
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One size fits none.

First, 50% of what? An AA for $100K is going to be much different than an AA for $10M.

Second, where are you going? Do you want your last check to bounce or are you building funds for children or charity?

In our case, at 71 we are 75/25 with the expectation that most or all of the 75 will end up with charities and in a couple of trusts for our sons. IOW it's long term money. We were at about 60/40 until a year or two ago when we took a hard look at the situation.

Frankly, I think much of the AA discussion around here is kind of silly because it rarely begins with the question "X% of what?" and it does not include discussion of goals.
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Old 04-20-2019, 10:40 AM   #16
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OldShooter makes a great point - depends on your overall assets and goals. For us, we are not concerned with leaving assets to others and our #1 goal is to have enough income to fund a reasonable lifestyle for the rest of our natural lives. I still expect there will be "something" left to pass on, but the goal is not to run up the scoreboard as high as we can get it with all the inherent volatility that approach would have - but instead, to have a plan that generates enough income for us to live comfortably for the rest of our days. So, to that end..we're roughly 25/75 in ER @ 55 with a heavy emphasis on dividends to pay the bills. (I know that's not a popular position here or even moreso on Bogleheads where you can be flogged for saying the "d" word and get into long debates about how money is "fungible" and that total return is "all" that matters, but dividends off CDs and bond funds are a lot safer in my book that taking equity risk, so YMMV). Basically, I also follow Bernstein's "when you've won the game - stop playing" approach..or at least don't play as aggressively if you don't need to..

Rick Ferri wrote a very insightful and well presented article saying the "center of gravity" for pre-retirees or retirees is ~30/70. Here's a great & pertinent quote from the article and it's well worth the read..

The 60/40 mix is a solid starting point for a discussion about asset allocation for investors who are accumulating assets for retirement. However, it may not be the right starting point for someone living off their savings because the returns can be too volatile.

I happen to agree, but there are many on our forum who are much heavier (60-75%+) stocks even in retirement. For me, that's WAY too much risk - and if I can meet our goals without taking that risk, that's our plan..
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Old 04-20-2019, 10:42 AM   #17
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I guess my IRA allocation is much more aggressive than all of you (82, 78 yo). 75% of our retirement investments are in Fid Balanced (50/50) and Vanguard Wellington (50-70 equity)... but ~ 25% in Verizon (which I watch like a hawk).

I have seen several market 'crashes' in my investment lifetime. My response has been to bail on stocks when it gets frothy and wait to buy at a lower price point. I don't view this as 'market timing'. VZ would give me flexability to do that. Balanced and Wellington would be my ballast and I would sail with them through downturns.
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Old 04-20-2019, 10:42 AM   #18
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[QUOTE=OldShooter;2225032]One size fits none.

First, 50% of what? An AA for $100K is going to be much different than an AA for $10M.

.....[QUOTE]

Agreed, end goal should be considered along with other income, i.e. social security, pension, rentals, etc. Also, annual expense budget is important. A 90k annual expense budget might have more discretionary % to trim in lean times than a $30k annual budget.

I would hope someone with $100k invested does not feel they "won the game", however they might feel that way if annual expenses were $50k and secured income like pension, social security, etc. were bringing in $120k a year with survivor's benefit and inflation protection. As always, devil in the details.
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Old 04-20-2019, 10:51 AM   #19
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Rick Ferri wrote a very insightful and well presented article saying the "center of gravity" for pre-retirees or retirees is ~30/70. I happen to agree, but there are many on our forum who are much heavier (60-75%+) stocks even in retirement. For me, that's WAY too much risk - and if I can meet our goals without taking that risk, that's our plan..
I agree somewhat, but it depends on other secured income(s) like social security, pension, other income and annual expenses and ultimately what they want to leave behind for kids/family and charities. More risk could be ok to the person if they don't depend on it for daily needs.

Majority of my annual expenses are covered with some form of rental or real estate related income, then my invested AA is in taxable and retirement accounts is gravy in some sense, but I'm still thinking 60/40 or 50/50 AA is fine for me. Majority of this will probably be left for kids and charities, so one might argue 50/50 AA is to conservative. I'm thinking if it's fairly balanced, it could be easier on my spouse or kids to address in the event something happens to me.
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Old 04-20-2019, 11:03 AM   #20
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At age 63/62 we're currently 40/60. Our expenses are covered without touching principal so hopefully we're on a rising equity glidepath. Our tIRA's are comprised of CD's, dividend ETF's and bond funds which provide income. A little more than a third of our investments are Roth accounts comprised of 100% broad market equity mutual funds. Currently these are not touched which should lead to a higher equity allocation in the future. However, probably no higher than 55% in any case. The Roths are set aside either for LT care or the kids.
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