Reducing risk after reaching retirement goals

[ScottishCanadian]

Here is my query,

How many of you retired folks have reduced your risk in retirement or near retirement once you reach your financial number? If you did what was the result? Does this work in the real world, what is the Psychological benefit?


From my perspective, I can see tracking inflation with a point or so for safety as a viable approach in retirement assuming you have met retirement goals. We could extend this to investors who have almost reached their retirement number and have decided to dial down the risk factor to ensure they reach their goal.

I understand this topic may have been discussed in the past but theories and ideas evolve. So I am hopeful I will get a good response.

I am specifically interested in people who have used this technique and their thoughts.


Thanks,


ScottishCanadian

 

[Meadbh]

Here is my query,

How many of you retired folks have reduced your risk in retirement or near retirement once you reach your financial number? If you did what was the result? Does this work in the real world, what is the Psychological benefit?


From my perspective, I can see tracking inflation with a point or so for safety as a viable approach in retirement assuming you have met retirement goals. We could extend this to investors who have almost reached their retirement number and have decided to dial down the risk factor to ensure they reach their goal.

I understand this topic may have been discussed in the past but theories and ideas evolve. So I am hopeful I will get a good response.

I am specifically interested in people who have used this technique and their thoughts.


Thanks,


ScottishCanadian

There are several techniques that can be used in reducing (financial) risk, including
1. changing one's asset allocation
2. insuring against longevity risk
3. insuring against long term care expenses
4. reducing expenses
5. tax planning
I am using #s 1, 3, 4 and 5 and feeling better about my chances of avoiding cat food. Within #1 I include diversification into real estate and use of alternative products such as target return funds.

 

[youbet]

Here is my query,

How many of you retired folks have reduced your risk in retirement or near retirement once you reach your financial number?

I wonder what kind of risk you're referring to .......

Most folks mean "variability" when they say "risk" in discussions about investments. And reducing variability when you're older and have less time and less opportunity to have other sources of day-to-day income is important IMHO. Therefore my AA has moved from approx 70 - 30 to currently 49 - 51.

But I also worry about "running out of money" risk and therefore will always have some significant exposure to stocks, reits, etc. The "risk" of an all CD or Treasury portfolio involves returns that won't support a planned WR over decades despite the fact that historically these investments have had less variability.

For example, IMHO an all or mostly all CD portfolio is "riskier" than a balanced portfolio when the purpose of the portfolio is to support a retiree over decades. Therefore, if for some reason your portfolio was all CD's at some point and you prudently added equity exposure going into retirement, you'd be reducing "risk" IMHO.

 

[ScottishCanadian]

Relating to risk.

Not talking about diversification just the specific asset.

2 examples,

moving from growth stocks to Bule chip dividend paying stocks.

Moving from corporate bonds to government bonds.

I would also look at moving assets back to my home country so I could keep an eye on the portfolio and economic conditions.


Regarding the risk of outliving the portfolio, I am assuming the original retirement calculations covered longevity risk.

Cost of living increases would be covered by tracking your investments to inflation.


ScottishCanadian

 

[pb4uski]

Since retiring I have reduced the risk of my portfolio somewhat. While my overall target AA is still 60/40, when I was working the 40 was totally in bonds. Over the last year or so the 40 has become ~28 bonds and ~12 cash/short term bonds. This is mostly because the market has done so well over the last year as I have periodically rebalanced I have gone toward cash/short term bonds because I am concerned about interest rate risk of bonds in the near term (next 5 years).

I also moved from a mix of government and corporate bonds to all corporate bonds because the yields are more attractive and the additional credit risk isn't of particular concern to me given how strong corporate balance sheets are today.

My assumed rate of return is 5.5% nominal/2.5% real, which I consider to be quite conservative for a 60/40 AA.

 

[FIREd]

Relating to risk.

Not talking about diversification just the specific asset.

2 examples,

moving from growth stocks to Bule chip dividend paying stocks.

Moving from corporate bonds to government bonds.

I would also look at moving assets back to my home country so I could keep an eye on the portfolio and economic conditions.


Regarding the risk of outliving the portfolio, I am assuming the original retirement calculations covered longevity risk.

Cost of living increases would be covered by tracking your investments to inflation.


ScottishCanadian

I haven't reduced risk in that way. On the bond side, treasuries are really not that attractive. And on the stock side, I was never a growth stock kinda guy. But I did reduce my target equity allocation somewhat as my portfolio grew in value.

 

[Meadbh]

Relating to risk.
Moving from corporate bonds to government bonds.

That depends on which governments, and which corporations, you mean. There are now many governments around the world whose bonds are no better than junk.

 

[ScottishCanadian]

Canadian gov bonds for me. But any G7 bonds would work if they are from home country. I like the idea of knowing the conditions you invest in.

I mitigate int risk by laddering my bonds in a laddered ETF with duration just over 2 years.

Great responses thanks

ScottishCanadian

 

[HighRoller]

Here's how I responded to a similar question earlier this year.

During the bulk of my working years I invested 70 to 80% of my investable income in stocks. In the 5 to 8 years before I retired, I changed that to >90% CD's/bonds and cash. I'm happy with my AA (and so are my spreadsheets and FireCal)

 

[scrabbler1]

I can't say I adjusted my AA as I was nearing my ER date. But the process of ERing had me changing my overall AA in a big way because I cashed in my company stock and bought into a bond fund with its proceeds. This represented about 1/3 of my portfolio.

But recently, and this probably better addresses the OP's question, I changed the AA in my Rollover IRA (only) from its historical 55/45 stock/bond ratio down to 50/50, mainly due to my aging (I am nearly 50).

 

[foxfirev5]

Good discussion here. I would add that the question about managing risk while approaching retirement is more debatable. I plan to suck it up and stick to my present allocation of 45% equities /40 % bonds and 15% cash through early retirement.
The key to my plan is to accumulate enough to weather any potential storm for the first few years. For me the AA I have selected is right for my situation. Your situation may vary.

 

[haha]

I think that the idea of reducing risk in retirement is predicated on a somewhat stable world, which we do not have. I am 71 now, and I still allocate how I always did: according to my reading of what the risks and rewards at a given time are. One might be wrong about his reading, but he will rarely be damagingly wrong in the way that a blanket assumption that the future will closely resemble the past can be, at a point of discontinuity.


Right now I have a 60:40 allocation, but it is actually less stock heavy than that because I have some hedges in place. I have not figured out how to accurately use those hedge details to modify my raw equity:fixed allocation, so I don't really try.

My fixed allocation has a short duration, maybe 2 years. It has lost a little money recently, but so far the interest is just about balancing the erosion of quoted value.

I am uncomfortable having a lot of money in bonds, when the whole developed world seems to be trying to create inflation. And the developing world pretty much always has it.always has it. I basically believe in owning assets, not lending to others who do own them.

Ha

 

[Swamp Fox]

I rebalanced my assets last week, going into about 90% cash and 10% Stocks. Took the immediate stress of having so much in a stock market making multi-year highs. Feels good, but new stress what do I do now?

 

[Zathras]

I view inflation as the biggest risk to my portfolio.
As such I have been and remain in solid dividend payers. In the last 5 years the income stream has kept well ahead of inflation.
I have found virtually no CDs that will do likewise, much less allow the principal to grow. Mutual funds right now seem to have their own set of risks which look very hazardous right now.

 

[er33]

I rebalanced my assets last week, going into about 90% cash and 10% Stocks. Took the immediate stress of having so much in a stock market making multi-year highs. Feels good, but new stress what do I do now?

Are you retiring or retired ? Doing this rebalance otherwise seems to be well risky otherwise.

 

[haha]

I love the way market timing is scrubbed to make it acceptable as "rebalancing".

C'mon people, many of us do market timing, why be afraid to call it by it's name?

The real trouble with euphimisms is not that they confuse others (after all that is the point), but that they eventually confuse the writer.

Ha

 

[Swamp Fox]

Are you retiring or retired ? Doing this rebalance otherwise seems to be well risky otherwise.

I will retire next year. got back all I lost in the last big correction and made some very nice profits on top of it to boot. Used trailing stop losses to take the emotion out of it.

 

[Helen]

I have a large percent of my portfolio in one company (inheritence). I need to reduce my risk by selling some of it and buying into the total stock market index fund. I've told myself that I can't retire until I pull the trigger. I have 9 weeks before I retire so I need to do it soon.

 

[unclemick]

I love the way market timing is scrubbed to make it acceptable as "rebalancing".

C'mon people, many of us do market timing, why be afraid to call it by it's name?

The real trouble with euphimisms is not that they confuse others (after all that is the point), but that they eventually confuse the writer.

Ha

Yep. Guilty as charged. 60/40 in 1970. About 60/40 in 2013 give or take a tad.

Early retired 1993 age 49.

Risk reduction as follows: CUT EXPENSES! Ie pretty much keep core living expenses such as food, shelter, utilities under an umbrella of 'cash flow' for want of a better term. Early on -rental RE, dividend stocks and a pile of cash plus interest which I slowly whittled down each year aiming toward 59 1/2. I let my 401k/IRA sit at 60/40.

Now age 69. Took early non cola pension at 55 and early SS at 62. Hindsight says should made possibly other choices - but there you have it.

I can live off SS and pension and 'party' off my 60/40 (Vanguard Lifecyle index fund). Party being loosely defined as adult toys(guy cars),remodeling, travel, and entertainment, etc. And can vary withdrawal based on my belly button assesment of the economic environment. Otherwise my index fund is full auto with assest mix sliding as I age.

Heh heh heh - hindsight being a wonderful thing I should have Rothed more and spent more, etc - next year when I turn 70 1/2 I get an offer I can't refuse - pay a lot of taxes and take out(RMD) way more money than my cheap personality wants to spend.

 

[Swamp Fox]

Learning to spend after a lifetime if saving and investing is often not easy

 

[Free To Canoe]

I love the way market timing is scrubbed to make it acceptable as "rebalancing".

C'mon people, many of us do market timing, why be afraid to call it by it's name?

The real trouble with euphimisms is not that they confuse others (after all that is the point), but that they eventually confuse the writer.

Ha

+1

 

[Swamp Fox]

Market timing and re-balancing are separate and distinct for me. I trade and do market timing frequently with my short term stock portfolio, and re-balance my long term multi-asset portfolio about once a year.

 

[ERD50]

I love the way market timing is scrubbed to make it acceptable as "rebalancing".

C'mon people, many of us do market timing, why be afraid to call it by it's name?

The real trouble with euphimisms is not that they confuse others (after all that is the point), but that they eventually confuse the writer.

Ha

Sure, there are some ( a lot of?) commonalities between re-balancing and market timing, but I don't think people are trying to 'hide' market timing tendencies by calling it re-balancing. And I don't think it's confusing.

Re-balancing to maintain a selected AA is just that. A buy/sell (or maybe just 'where do I draw from') is done based on their AA getting out of whack. And they chose that AA, probably for a balance of comfort and risk/reward (whether they are reasonable assumptions or not is another story). There is no evaluation that the market is expensive or cheap, just that it has gone up/down enough to throw off their AA. Yes, you can relate that to a value judgement, but I don't see that as a primary motivator

I think a true market timer is less worried about their AA, and is really trying to evaluate whether the market is 'cheap' or 'expensive'. They probably change their AA based on that evaluation, maybe even go 'all in' or 'all out'.

I think the terms are actually add clarity rather than confusion, but maybe that's just me.

-ERD50

 

[haha]

I think a true market timer is less worried about their AA, and is really trying to evaluate whether the market is 'cheap' or 'expensive'. They probably change their AA based on that evaluation, maybe even go 'all in' or 'all out'.

I think the terms are actually add clarity rather than confusion, but maybe that's just me.

-ERD50

Well, how about the guy above who "rebalanced" to 90% cash. Do you suppose that this is his long term, stable asset allocation?

Seems unlikely. So in this case, I would say that confusion is added, or if it is clarity it's a murky form of clarity.

I realize that the terms are conceptually different, but in reading the board I think there is also an element of using an acceptable term for an activity that is thought to be unacceptable.

IMO, asset allocation and rebalancing is only that when you are always going to a stable, unchanging allocation, sensitive only to your age or perhaps job/retirement status.

What I do is "dynamic rebalancing", which in fact is market timing. I can go and have gone from 100% equity to 100% cash, sensitive only to valuations and my tax position. I always have a margin account if I need emergency cash when I have a high equity allocation. I think at this time in my life, I would likely always make my low duration fixed aloction at no lower than 15-20%.

Ha

 

[Swamp Fox]

To answer an earlier question, I as I got older, I reduced the amount of growth stocks and invested more in stocks that paid out something, usually about 3%. I also stressed better quality stocks with a long history of payouts.