60/40 similar to 40/60? 30/70 is ideal for retirees?

[mistermike40]

I've recently decided to shift my AA from 80/20 to 60/40. Doing a bit of Internet research (not always a wise thing to do), I found that 60/40 historical results aren't much different than 40/60 (8.7% vs 7.8%, not accounting for inflation):

https://www.financialsamurai.com/historical-returns-of-different-stock-bond-portfolio-weightings/

Another article claimed that 30/70 is more of a "sweet spot":

https://www.forbes.com/sites/rickferri/2015/02/06/the-center-of-gravity-for-retirees/#48984ca95dae

I have never considered going below 60/40, but the above articles make me wonder. I'm not asking what everyone's AA is (I'm sure there have been a hundred such polls conducted here)... I'm just curious if you think the above information is accurate.

 

[REWahoo]

FIRECalc says there is not much difference historically in the success of allocations ranging from around 40/60 up to 80/20.

 

[SecondCor521]

Assuming for the sake of argument that the FS numbers are accurate - while intuitively the 0.9% difference doesn't seem like much, compounded over 30 years and a moderate-sized portfolio, the difference in rate of return can result in differences of hundreds of thousands of dollars.

Further, after subtracting inflation from both sets of returns, the 0.9% difference is larger on a relative basis. I think it is always wise to adjust for inflation, risk, and taxes.

The FS article discusses "stocks" and "bonds" without much specificity. I think the article could do a better job of talking about exactly which stocks and which bonds he is referring to. (Yes, there are a couple of specifics, but a lot more general comments.)

The Forbes article makes an argument based on some facts and some assumptions. The assumptions don't apply to me, so I don't concur with the conclusion.

The FIREcalc graph in REWahoo's post changes shape based on a number of factors, including AA, planning horizon, and the historical risk of the chosen SWR. It is generally true that allocations at either end (all bonds or all stocks) are worse than a blend, and low stock allocations tend to do poorly over longer time periods, and the broad middle is usually roughly equally successful.

I do think that whether or not one wants to leave a legacy (to their children or charity) can have a great deal of impact on one's decisions as they retire. For me, the money that I don't need is invested aggressively because I expect it will be inherited by my kids in 30 or 40 years. For someone who doesn't want to leave a legacy, I think they are more likely to take an "I've won the game, now I want to dial risk back as much as possible to preserve" attitude as alluded to in the Forbes article.

 

[triangle]

I read a somewhat similar article comparing the performance of three different simple portfolios supporting a 4% withdrawal rate starting in 1990. An 1) all stock, 2) all treasury, and 3) 50-50 combination portfolio. Showing that the 50-50 combo portfolio had nearly the performance as the all stock, but without the big swings (bad decade of 2000). Of course we don't know what the future will hold.

https://seekingalpha.com/article/43...e-retirement-portfolios-during-last-3-decades

 

[Dtail]

As mentioned in this and other threads, it really depends on how big a legacy one wishes to leave and also how dependent one is on their portfolio for withdrawals.

 

[audreyh1]

It’s simply a trade off between short-term volatility and long-term gains on average.

You have to decide how much short-term volatility you can live with in retirement. If you can reduce short-term volatility and still meet your long term goals, then it’s a perfectly reasonable option. On the other hand, if you prefer to optimize long-term returns so you can pass more on to heirs, and aren’t concerned about living with short-term volatility, that may be a better option for you.

It comes down to personal goals and tolerance.

 

[marko]

I use this a my reference.

 

[kgtest]

I use this a my reference.

View attachment 33220

Would be cool if it went to 2020... it hasn't included the last decade, which is a huge miss in terms of relevant data.

 

[marko]

Would be cool if it went to 2020... it hasn't included the last decade, which is a huge miss in terms of relevant data.

Agreed but it's all I have. But a lot occured during those 40 years including the Great Recession so I view it as fairly robust and somewhat conservative

 

[Dtail]

I use this a my reference.

View attachment 33220

The interesting aspect of this chart is showing almost the same risk of a 60/40 to 100% bonds.
thus the importance of too much conservatism along with keeping up with inflation.

 

[marko]

The interesting aspect of this chart is showing almost the same risk of a 60/40 to 100% bonds.
thus the importance of too much conservatism along with keeping up with inflation.

Exactly. Of course, the key phrase is "over time".

IMO, inflation is one of those sleeper concerns. We fret about expense ratios, taxes and such, inflation can create even more havoc to one's future. Too much in bonds can ruin you, despite the 'safety'.

 

[audreyh1]

I use this a my reference.

View attachment 33220

Yet if you look at those curves by decade, they vary widely and wildly. It usually has a parabolic shape but there are a couple of straight line decades.

 

[Animorph]

FIRECalc says there is not much difference historically in the success of allocations ranging from around 40/60 up to 80/20.

Except the average remaining portfolio at the "end" of retirement is significantly larger with more stocks in the AA.

Given that 40/60 to 80/20 are roughly equivalent in success rates, I'd prefer the chance to have a large stash at the end. More options, or leave more.

 

[Lsbcal]

It is simply a matter of how stocks will perform versus bonds over the time frame you are considering.

I've always been heavy in stocks so that is my preference but others here will differ. How do I live with the risk? Well it is not for everyone but I use a trend following method that hasn't sold stocks since 2007. Nice backtests but the future will be .... interesting.

If anyone else is interested I'd recommend this very long thread in Bogleheads. It is not my technique but one of many. Plenty of back and forth discussing the wisdom of this approach:
https://www.bogleheads.org/forum/viewtopic.php?f=10&t=270035

 

[foxfirev5]

I'm all set with my 40/60 AA. However only 4 years into retirement I plan for a rising equity glide path (hopefully). Since I take the dividends this may be a very gradual slope given future projections. VTSAX (Total Stock Mkt) current yield 1.8% taken from a total return of Throw in 30% Int'l and who knows?

To be completely honest I'm not a big fan of percentages. All I really care about is the absolute dollars my portfolio kicks out each year. If it covers my discretionary expenses I'm happy. I'll leave the rest for the kids to fight over.

 

[fosterscik]

Yet if you look at those curves by decade, they vary widely and wildly. It usually has a parabolic shape but there are a couple of straight line decades.

The long term efficient frontier graphs do look great but as Audrey says, shorter time periods (by decade are much less clear cut)
The efficient frontier fails the test of time

 

[audreyh1]

I don’t think the Efficient Frontier fails the test of time. I just think the investor needs to understand that the graph is quite dynamic, and AA relative performance really depends on the overall time period. And we even had a couple of decades where high equity allocations underperformed 100% bonds. Unusual, but it can happen.

In general anywhere from 30% to 50% equities is going to have higher return with same or less volatility than 100% bonds. But actual optimal AA (minimal volatility sweet spot) and relative return outperformance moves around quite a bit.

 

[GenXguy]

I've recently decided to shift my AA from 80/20 to 60/40. Doing a bit of Internet research (not always a wise thing to do), I found that 60/40 historical results aren't much different than 40/60 (8.7% vs 7.8%, not accounting for inflation):.

You left out a very important part of your question. You mentioned allocations, retirement, and historical, but you didn't mention how many years you have to retirement or the number of years you need to live off the stash.

So, for example, I'm close to FIRE, and I'll have about 10 years that I need to live off my stash 100% before other retirement income kicks in to cover half of my spending, so in my case, 42% equities gave me the highest success rate in FIREcalc. I made that change from 80% to 42% over the last year and a half moving most of that into a 3% stable value fund. I had already hit my target stash, so maintaining value was more important that building upon it.

If I was in my 30's and didn't have to be concerned about a quickly approaching 10 year window, I would have stuck with a much higher equities allocation, because a higher equity allocation does better in the long term.

During the 10 year window in early retirement, I may also increase equities using the rising equity glide path, which some refer to as a bond tent.

 

[24601NoMore]

It’s simply a trade off between short-term volatility and long-term gains on average.

You have to decide how much short-term volatility you can live with in retirement. If you can reduce short-term volatility and still meet your long term goals, then it’s a perfectly reasonable option. On the other hand, if you prefer to optimize long-term returns so you can pass more on to heirs, and aren’t concerned about living with short-term volatility, that may be a better option for you.

It comes down to personal goals and tolerance.

Spot on. It all depends on your goals and risk tolerance.

For our situation (both ER'd in 2019 - me, mid 50s, DW early 60s), it's all about keeping as much of what we have while still being able to pay the bills.

I've split our assets into two buckets - one generates income to pay (most) of the bills, and there's a second for growth. If I were to look at both combined, we're roughly 25% stocks, 75% fixed income. That AA has an average return since 1926 of ~6.9% with the "worst year" ~-12%. I can live with that. Whole lot better than the worst year of -26% for 60/40. # of years with a loss are a lot better at the lower stock AA also.

At that AA, we keep up with inflation, pay the bills, and never run out of money. We also avoid big parts of the gut wrenching market drops and potentially long recovery period, which helps us SWAN. That said, I don't focus on leaving assets to heirs or others, and the entire plan is built around keeping volatility at a minimum while still having enough $$ to live through age 95+..

YMMV but that's what works for us.