Go heavy in equities or focus on preserving nest egg

[Retiredmajor]

If I have a nest egg that is large enough to accomplish my retirement goals for the next 30 years, why would I focus on growth as opposed to focusing on preserving my current nest egg? Doesn't it make more sense to pick conservative investment vehicles to conserve my assets? Pascal's Theory would say that I shouldn't risk dollars that I need, in order to gain dollars that I don't need.

What do you think? Major

 

[braumeister]

Inflation is the other kind of risk you need to consider.
You might be planning an X% inflation factor, but encounter a 3X factor.

Ask the folks who retired in the early 70s.

 

[jollystomper]

No reason you cannot balance both with your AA. Invest to preserve some of the nest egg, and to grow the rest. You do not need to hit home runs, just singles.

 

[bloom2708]

Take as much risk as you have to.

30/70, 40/60, or 50/50 stocks to bonds.

If you use low cost, broad based index funds and keep it simple, you should be just fine without chasing growth.

 

[Fedup]

Are you still working? If yes, till toward equities.

 

[YVRRocketSurgery]

+1 with regards to inflation considerations.

Apart from that, I expect to go with a more conservative mix for part of my portfolio in retirement. I'm hoping the core of my retirement income to come from fairly stable dividend growth stocks with additional cashflow coming from the index etf side of my portfolio which I will likely skew more conservatively since I won't necessarily rely on it.

 

[Chuckanut]

If you're like me, you can't earn it back. So... minimize overall risk.

Since inflation is part of the risk a small % in the total stock market might be a good idea. Perhaps 20-30% max?

However, when the next Bear Market hits (and it will at some time unknown to us know) if you are the type who might panic and 'sell low', then maybe it's best to stay out of the market.

 

[samclem]

Too often, people say "risk" when they mean "volatility." They are not the same.

If a stock, asset class, or a portfolio goes up and down a lot in price, then it has high volatility. While the end-of-day value might bounce around a lot, the volatility is insignificant to a long-term investor (i.e. a retiree with a 30 year timeframe). Unless you might be forced to sell your entire portfolio on a day when the value happens to be low (or you are prone to panic and might sell out of fear), volatility ain't very important.

Inflation, on the other hand, is a real risk. If a retiree's "safe" portfolio of CDs (which have very low volatility) loses 2% per year in real spending power due to inflation, then he might be in a very bad situation 20-30 years down the road. Those "low risk" CDs, in truth, really exposed him to much more real risk than a portfolio of, say, 50% stocks and 50% bonds.

 

[RunningBum]

Too often, people say "risk" when they mean "volatility." They are not the same.

If a stock, asset class, or a portfolio goes up and down a lot in price, then it has high volatility. While the end-of-day value might bounce around a lot, the volatility is insignificant to a long-term investor (i.e. a retiree with a 30 year timeframe). Unless you might be forced to sell your entire portfolio on a day when the value happens to be low (or you are prone to panic and might sell out of fear), volatility ain't very important.

Inflation, on the other hand, is a real risk. If a retiree's "safe" portfolio of CDs (which have very low volatility) loses 2% per year in real spending power due to inflation, then he might be in a very bad situation 20-30 years down the road. Those "low risk" CDs, in truth, really exposed him to much more real risk than a portfolio of, say, 50% stocks and 50% bonds.

Agree with all of this. Also, underestimating expenses is another real risk. You may think you've got enough, only to find out that you have some unexpected major expenses, or need more care than you allocated for. Then what do you do?

 

[523HRR]

If I have a nest egg that is large enough to accomplish my retirement goals for the next 30 years, why would I focus on growth as opposed to focusing on preserving my current nest egg? Doesn't it make more sense to pick conservative investment vehicles to conserve my assets? Pascal's Theory would say that I shouldn't risk dollars that I need, in order to gain dollars that I don't need.

What do you think? Major

Just curious which asset class you are thinking of that does not have risk...

 

[daylatedollarshort]

If I have a nest egg that is large enough to accomplish my retirement goals for the next 30 years, why would I focus on growth as opposed to focusing on preserving my current nest egg? Doesn't it make more sense to pick conservative investment vehicles to conserve my assets? Pascal's Theory would say that I shouldn't risk dollars that I need, in order to gain dollars that I don't need.

What do you think? Major

That is what we focus on. For inflation protection we use ideas based on matching strategies: https://www.bogleheads.org/wiki/Matching_strategy

Bogleheads also has some interesting posts and polls on the best inflation hedges, like this one: https://www.bogleheads.org/forum/viewtopic.php?t=61965

 

[DrRoy]

Inflation is the other kind of risk you need to consider.
You might be planning an X% inflation factor, but encounter a 3X factor.

Ask the folks who retired in the early 70s.

+1

 

[MikeTN]

No man is an island. If you have no family to leave assets to, think of the people who have helped you over time. There is probably a teacher or friend. If you were not so fortunate to have such help, you were still helped by others. The people who funded and contributed to your college, for example. The government which provided you an opportunity to live well compared to the rest of the world. The Red Cross which will help you if you are faced with a disaster. For all these reasons I think it makes sense to invest in things that grow, even if I will not be around to use the proceeds.

 

[dallas27]

Too often, people say "risk" when they mean "volatility." They are not the same.

If a stock, asset class, or a portfolio goes up and down a lot in price, then it has high volatility. While the end-of-day value might bounce around a lot, the volatility is insignificant to a long-term investor (i.e. a retiree with a 30 year timeframe). Unless you might be forced to sell your entire portfolio on a day when the value happens to be low (or you are prone to panic and might sell out of fear), volatility ain't very important.

Inflation, on the other hand, is a real risk. If a retiree's "safe" portfolio of CDs (which have very low volatility) loses 2% per year in real spending power due to inflation, then he might be in a very bad situation 20-30 years down the road. Those "low risk" CDs, in truth, really exposed him to much more real risk than a portfolio of, say, 50% stocks and 50% bonds.

And most basic finance defines risk as the volatilty (st dev). It's a proxy, and a pretty decent one all things considered.

 

[samclem]

And most basic finance defines risk as the volatilty (st dev). It's a proxy, and a pretty decent one all things considered.

"Risk" is approximately synonymous with "volatility" if we are in a situation where the balance of the account might need to be cashed out at an unpredictable moment's notice. Maybe it makes sense in a general academic sense. But this is not the scenario for most portfolios maintained by people reading this board. If we use the word "risk" in the most common way, historically the biggest financial "risks" a retiree faces are:
A portfolio that loses real purchasing power over time
Expenses that exceed expectations over time

Neither of these risks are significantly affected by annual volatility in portfolio balances.

Now, a high volatility portfolio can increase sequence-of-return risk, a by-product of an unplanned shorter-than-expected investment horizon. So, until those early years are in the rear-view mirror and the portfolio has safely established a value well above the "min safe" zone, taking prudent steps to limit volatility (e.g with a somewhat higher allocation to bonds or CDs, etc) make a lot of sense.

 

[OldShooter]

Just curious which asset class you are thinking of that does not have risk...

I don't know what the OP thinks, but our near-zero-risk asset is a wad of TIPS sufficient to meet our future needs, though maybe at a slightly lower withdrawal rate than we now enjoy.

We can play around with the balance (75%) of the portfolio all we want, and the TIPS will still be there. I calculate them in my AA but my real view of them is as an insurance policy.

 

[OldShooter]

I agree with @samclem. Volatility is a poor proxy for risk. Academia loves measuring volatility with SD because it also falsely believes that life and stock prices are Gaussian. That makes the math is neat and easy. Garbage in, gospel out.

I would define "risk" for a retiree slightly differently, though: Risk is running out of money. If purchasing power declines (virtually guaranteed) and expenses are higher than plan, neither really matters if there is enough money to last until the end.

 

[traineeinvestor]

Inflation is the other kind of risk you need to consider.
You might be planning an X% inflation factor, but encounter a 3X factor.

Ask the folks who retired in the early 70s.

Another +1

If your time horizon is long enough, I view equities as less risky than bonds/bank deposits because of the impact of inflation.

Risk for me is the potential for my retirement lifestyle to be adversely affected by investment returns - if we have enough to survive off the income generated from our investments and are not dependent on drawing down assets, then volatility is of only limited concern compared to inflation.

 

[kcowan]

I don't know what your AA is now. In my case, my kids want some protections against inflation so I am keeping my AA the same for them. I have kept most of the dividends in short term vehicles since 2007 just in case but I will be reinvesting them all over the next several years in equities. I am hoping for a sale.

 

[FIREd_2015]

If I have a nest egg that is large enough to accomplish my retirement goals for the next 30 years, why would I focus on growth as opposed to focusing on preserving my current nest egg? Doesn't it make more sense to pick conservative investment vehicles to conserve my assets? Pascal's Theory would say that I shouldn't risk dollars that I need, in order to gain dollars that I don't need.

What do you think? Major

I'd have to agree with Pascal's theory but it really depends on each individual's situation. The official CPI for 2016 was 2.1% but a person renting a place in San Francisco experienced quite a bit higher personal inflation rate compared to someone with a fixed mortgage or someone with no mortgage. If my understanding of CPI is correct, the largest component of CPI is housing so a person with no mortgage will have a much lower personal inflation rate.

The other factor is the size of one's portfolio and annual expenses. If a portfolio is large enough such that a CD ladder or other low risk investments generates more income than annual expenses then it wouldn't make sense to risk dollars chasing larger returns. That's my long winded answer. The short answer is the devil is in the details.

 

[Dawg52]

The other factor is the size of one's portfolio and annual expenses. If a portfolio is large enough such that a CD ladder or other low risk investments generates more income than annual expenses then it wouldn't make sense to risk dollars chasing larger returns. That's my long winded answer. The short answer is the devil is in the details.

Agree....the devil is in the details.

 

[samclem]

. . . why would I focus on growth as opposed to focusing on preserving my current nest egg?

1) To "preserve the current nest egg" requires investments that, over time, provide enough growth to match inflation plus the withdrawal rate.

2) If we assume a 3% (or so) withdrawal rate, no available non-volatile investments can do this (oh, I wish we'd see those 3% real interest I-Bonds again! Back up the truck!). Historically, a mix of stocks and bonds have been able to do this.

If your investments aren't providing enough total return to match your withdrawals + inflation, then you aren't preserving your nest egg.

 

[Retiredmajor]

Thanks for all the responses.....you guys are awesome! Right now I'm 80/20 with approx 85% of our portfolio. The other 15% is about 50/50. The 80/20 seemed right because I wanted to be aggressive while still working and it has worked out well for us, over time. I will be retiring in the next few months just before I turn 61. I'm switched to part-time right now. As that approaches, I want to be a little more conservative, hence all my reading and analyzing (over analyzing?). I found Pascal's Theory interesting, but I also feel it's too conservative. Inflation has not hit us hard. We have a 15 year, fixed mortgage with a very low interest rate, no other debt, and we live in the midwest. I'm reading and re-reading all the responses here. Lots of knowledge. Thank you!

 

[pb4uski]

I think that inflation risk and sequence of returns risk are the two biggest risks to early retirees.

I address inflation risk by holding equities (60/35/5 in my case).

I address sequence of returns risk by having 40% of my holding in bonds and cash to weather a bear market. Even if I had a 4% WR and equity dividends dip down to 1.0% my 40% of stable value assets could carry us for 13 years. That said, I think I would probably rebalance or at least partially rebalance in the event of a persistent bear market since we have a lot of flexibility in our expenses if needed.

 

[OldShooter]

... Inflation has not hit us hard. ...

Be Very Careful with this line of thinking. Google yourself a few graphs of inflation over the past 50 or 100 years. In recent times, inflation has been very tame vs historical averages. Also, human psychology overweights recent history when predicting the future.

You're a military guy, right? I'd be willing to bet that you've never been killed by a hand grenade. But are you careful when handling them?

Here's a quotation that applies, I think:

"But in all my experience, I have never been in any accident … of any sort worth speaking about. I have seen but one vessel in distress in all my years at sea. I never saw a wreck and never have been wrecked nor was I ever in any predicament that threatened to end in disaster of any sort." -- E. J. Smith, 1907, Captain, RMS Titanic