1MM advice from the wise?

T

tmitchell

Recycles dryer sheets
Joined
Oct 14, 2016
Messages
424
Hi all,

I'm in a bit of a dilemma regarding asset allocation & my future. I turn 50 this year and was hoping for a bit of advice from the wise out there.

I just hit my first $1MM in NW and am still working. I currently have a pretty high-stress (but high-paying) job, and live in a high COL city which would require about 1.6MM @ 4% to support my current lifestyle. If I moved to a cheaper city I could retire now, but psychologically I'm probably a couple years away from pulling the plug or ratcheting down to a more mellow life. That said, I can feel the pull to at LEAST start slowing down due to the stress of my daily grind.

I was still in debt until about 10 years ago, so my nut is relatively new and I'd hate to see my NW fall drastically as I'm so close to FI. I'm currently at 75/20/5 stocks/bonds/cash, but I'm wondering if I shouldn't drop to 65/35 or even lower equities (60/40?). The younger FIRE kids are always talking about keeping stock allocations relatively high in order to finance a longer retirement, but I'm skeptical I need that much risk. Jim Collins says stay in 100% equities until FIRE, then 75/25. Did you all carry this position until you FIRE'd??

BTW, I have no kids so don't have any legacy concerns. While I keep working, I do plan to continue to invest. For all I know I'll work another 10 years if I can find a better work/life balance, but who knows??

Any thoughts would be helpful, thanks!
 
How did you handle 2008-09?

We were still 100% stock at 50, with a bit bigger portfolio (but with two high wage earners). Now, at 57/56 and exiting this year, we have dropped all the way down to 65% equity. (will be inching up from there once we retire, as I've been convinced by reverse glide path analyses)

In your case, there isn't much difference in long-term portfolio survival rate between 60 equity and 75 equity. (Sorry, don't have a link handy...) Given your concerns about not having the floor fall away in the next few years, it may be a good idea to gradually cut back. Could you do it just by allocating new contributions to non-equity?
 
I was 95-100% equities during most of my career. I thought I would retire in 2018, so in 2014 began slowly diversifying my portfolio and moving to a more conservative 75/25 asset allocation. The 25% fixed assets was chosen as it gave me enough to hold out in case of a 3 yr market downturn without selling stocks at firesale prices.

Plans changed and I retired in 2015 so didn't get to 75/25 until after retirement. If we had seen a major market correction, I would have been unhappy selling stocks at lower prices than I wanted. Turned out ok for me but I'd recommend getting to the asset allocation you want well before retirement. Especially now since the market appears over valued. Good time to sell some stocks and lock in gains if you need to move to a more conservative asset allocation.
 
With years away from retirement, I'd keep your current allocation, the key being not to panic and sell after everything has fallen steeply. Just hang on and it will rise again.

Also note if interest rates do go up faster than expected, both stocks and bonds will drop, there is no magic safe place.
 
What are your other sources of income in retirement? If you have a pension or rentals, you can keep a higher percentage of stocks without worrying about depleting your stash in a down turn.
 
I RE in 2 months. Historically my AA was 80-85% but over the last 2-3 years I have been taking some off the table as the current bull market kept extending. Now at 61% equities and may settle out around 55 eventually. I also suggest that you plan for a lower WR. The 4% guideline is based on past returns which I think are optimistic going forward, and also generally on a retirement of 20-25 years. For your (and my) situation, I think 2.5-3% is more prudent.
 
Decide what you want your ultimate AA in retirement to be and then start putting new money (contributions) into fixed income until you reach your goal.. you will gradually gravitate to that ultimate AA target.

Also, why 5% cash while you are still working? Get rid of that lazy money and invest it.
 
I think you answered your own question as you are uncomfortable with your current allocation approaching retirement. So go with 60/40. It has historically supported your planned withdrawal rate and I think it will allow you to sleep better.
 
There's an option in FireCalc to see how different AA's will play out and also what AA you need to achieve a certain level of income. I would start there.
 
+1 on Nun.

I'm currently at roughly 55/45 equities/other, and 'only' 36 years old. I will move higher eventually, but not just now.

Anything between roughly 30% and 70% equities is ok in my book. Where you end up in that range is purely up to the 'sleep at night' factor.

If you are nervous now imagine what a >20% drop will do ...
 
2017ish said:
How did you handle 2008-09?

We were still 100% stock at 50, with a bit bigger portfolio (but with two high wage earners). Now, at 57/56 and exiting this year, we have dropped all the way down to 65% equity. (will be inching up from there once we retire, as I've been convinced by reverse glide path analyses)

In your case, there isn't much difference in long-term portfolio survival rate between 60 equity and 75 equity. (Sorry, don't have a link handy...) Given your concerns about not having the floor fall away in the next few years, it may be a good idea to gradually cut back. Could you do it just by allocating new contributions to non-equity?
Click to expand...

I handled 2008 so so. I was a pretty new investor and I pulled out of the market for about a year once my initial value came back, so I missed some gains. I knew not so sell at the low at least! I'm pretty sure I'd be able to hold tight & buy more this time around and be able to stomach the gyration, but given my fear about losing my nut it might be a good idea to start scaling back a bit on the equities. I always hear that BND should be in 401k...do you hold that in your taxable account? Is it a big deal if so?
 
I was 80/20 most of my working life and lowered to 50/50 when I punched out. Retired at 52 and 2008/09 crash happened soon there after. I found out quickly that my tolerance for volatility was low. Recouped my losses and then some, but today my AA is much more conservative. Most here would not recommend my wuss approach, but I'm fine with it and sleep well.

Below is a link to an article/study of swr's in relation to AA over time. It may give you a better idea what you should allocate to equities in retirement. At a minimum anyway.

https://www.onefpa.org/journal/Pages/Portfolio Success Rates Where to Draw the Line.aspx
 
Last edited:
travelover said:
What are your other sources of income in retirement? If you have a pension or rentals, you can keep a higher percentage of stocks without worrying about depleting your stash in a down turn.
Click to expand...

No pension or rentals at this stage, so I'd be totally reliant on the portfolio.
 
tmitchell said:
No pension or rentals at this stage, so I'd be totally reliant on the portfolio.
Click to expand...
In that case, I'd stick with a more traditional 60/40 to 40/60 range. Bear in mind that the portfolio longevity is at greatest risk when you first retire (sequence risk) and you can, counter intuitively, actually increase your stock exposure as time goes on.
 
travelover said:
In that case, I'd stick with a more traditional 60/40 to 40/60 range. Bear in mind that the portfolio longevity is at greatest risk when you first retire (sequence risk) and you can, counter intuitively, actually increase your stock exposure as time goes on.
Click to expand...

Speaking of sequence risk, what is the recommended AA to avoid sequence risk when you first retire? Is it still in the 40/60 - 60/40 range?
 
tmitchell said:
Hi all,

I'm in a bit of a dilemma regarding asset allocation & my future. I turn 50 this year and was hoping for a bit of advice from the wise out there.

I just hit my first $1MM in NW and am still working. I currently have a pretty high-stress (but high-paying) job, and live in a high COL city which would require about 1.6MM @ 4% to support my current lifestyle. If I moved to a cheaper city I could retire now, but psychologically I'm probably a couple years away from pulling the plug or ratcheting down to a more mellow life. That said, I can feel the pull to at LEAST start slowing down due to the stress of my daily grind.

I was still in debt until about 10 years ago, so my nut is relatively new and I'd hate to see my NW fall drastically as I'm so close to FI. I'm currently at 75/20/5 stocks/bonds/cash, but I'm wondering if I shouldn't drop to 65/35 or even lower equities (60/40?). The younger FIRE kids are always talking about keeping stock allocations relatively high in order to finance a longer retirement, but I'm skeptical I need that much risk. Jim Collins says stay in 100% equities until FIRE, then 75/25. Did you all carry this position until you FIRE'd??

BTW, I have no kids so don't have any legacy concerns. While I keep working, I do plan to continue to invest. For all I know I'll work another 10 years if I can find a better work/life balance, but who knows??

Any thoughts would be helpful, thanks!
Click to expand...

I read this this morning, and have been giving it quite a bit of thought before I reply. Here some of my thoughts:

1. you "could" retire on 1.6 at 4%, and you are "at least a couple of years from pulling the plug"... let me offer you a few quick reality checks:
...you are not going to grow your NW by 60% in 2 years unless you get real risky, which is not what it sounds like you want to do. Y
...the rates of return you've enjoyed in the last 6 years are unlikely to be repeated over the next 6, and with your current AA, it's pretty likely to be reduced because we are riding high now. Nobody knows WHEN the correction will come, but sometime in the next 6-10 years is a pretty solid bet.
....even if you do get to 1.6M in 2 years, you'll be 52, and looking at maybe 40+ years, at 4% WR, that in itself is risky...

So..I think your AA is fine as long as you are OK with extending your working life 5 or 10 years should we have a big correction. Or, you could go with a more conservative AA, and plan on quitting the high-pay/high-stress job in 2 years, not touching the nut for a few years while you work at a lower-pay/lower stress job.
 
HadEnuff said:
I read this this morning, and have been giving it quite a bit of thought before I reply. Here some of my thoughts:

1. you "could" retire on 1.6 at 4%, and you are "at least a couple of years from pulling the plug"... let me offer you a few quick reality checks:
...you are not going to grow your NW by 60% in 2 years unless you get real risky, which is not what it sounds like you want to do. Y
...the rates of return you've enjoyed in the last 6 years are unlikely to be repeated over the next 6, and with your current AA, it's pretty likely to be reduced because we are riding high now. Nobody knows WHEN the correction will come, but sometime in the next 6-10 years is a pretty solid bet.
....even if you do get to 1.6M in 2 years, you'll be 52, and looking at maybe 40+ years, at 4% WR, that in itself is risky...

So..I think your AA is fine as long as you are OK with extending your working life 5 or 10 years should we have a big correction. Or, you could go with a more conservative AA, and plan on quitting the high-pay/high-stress job in 2 years, not touching the nut for a few years while you work at a lower-pay/lower stress job.
Click to expand...

Thanks for this. It makes a lot of sense. Out of curiosity if I went with the last option (quitting high stress job in 2 years & work at lower pay/stress), what would you say about allocation? Would dropping to 60/40 be too conservative? Or better to keep in the 70/30 or 75/25 zone? I'd probably continue to invest some money going along regardless, so I'd want a target along the way to full FIRE.
 
travelover said:
In that case, I'd stick with a more traditional 60/40 to 40/60 range. Bear in mind that the portfolio longevity is at greatest risk when you first retire (sequence risk) and you can, counter intuitively, actually increase your stock exposure as time goes on.
Click to expand...

Yes I've been reading Wade Pfau's work on this subject and it appeals to me, particularly since I've worked so hard to get my nut, all during a bull market. Some correction is coming and it seems like having a more conservative strategy would be smart in order to rebalance into a lower market. Thank you.
 
tmitchell said:
Some correction is coming...
Click to expand...

True.

If it isn't currently underway, some correction is always coming. That's the nature of the market.

The prize predominately goes to those who know how to overcome the temptation to try to do something about it - frequently the wrong thing at the wrong time - and focus on the long-run.
 
tmitchell said:
Thanks for this. It makes a lot of sense. Out of curiosity if I went with the last option (quitting high stress job in 2 years & work at lower pay/stress), what would you say about allocation? Would dropping to 60/40 be too conservative? Or better to keep in the 70/30 or 75/25 zone? I'd probably continue to invest some money going along regardless, so I'd want a target along the way to full FIRE.
Click to expand...

I think this is a very difficult question to answer for somebody else. I personally do not think 60-40 is too conservative. In fact, I'm more like 40-55-5, BUT...I'm older than you (63).
At some point I stopped looking at it from the standpoint of trying to maximize my returns over a long period of time, and recognizing that I have enough as long as I don't screw up.
When I was your age I was 60-40, but I knew I would work another 10-15 years. I may have been a bit too conservative, looking back. Or not. It worked out for me. I didn't lose as much in the 07-08 meltdown, but I didn't make as much in the recovery either. it's a crapshoot.

Being able to continue to work, if isn't too onerous, is a great insurance policy IMO. Not a popular viewpoint on a FIRE forum I suppose.
 
HadEnuff said:
I think this is a very difficult question to answer for somebody else. I personally do not think 60-40 is too conservative. In fact, I'm more like 40-55-5, BUT...I'm older than you (63).
At some point I stopped looking at it from the standpoint of trying to maximize my returns over a long period of time, and recognizing that I have enough as long as I don't screw up.
When I was your age I was 60-40, but I knew I would work another 10-15 years. I may have been a bit too conservative, looking back. Or not. It worked out for me. I didn't lose as much in the 07-08 meltdown, but I didn't make as much in the recovery either. it's a crapshoot.

Being able to continue to work, if isn't too onerous, is a great insurance policy IMO. Not a popular viewpoint on a FIRE forum I suppose.
Click to expand...

Ya, I seem to be erring on the more conservative side in the FIRE community and, like you, less interested in maximizing returns and more interested in making sure I have enough.

I was thinking about this another way today: given that I have about 300k in savings/bonds, that would last me a number of years in the worst bear market. I wonder if instead of AA it isn't better to think of it that way. "I have x years of safety to retreat to, after which I can afford to put the rest in stocks."

Maybe that's already implicit in the model, but I don't really hear people talking about it that way. Anyway, thanks for your thoughts.
 
tmitchell said:
...........I was thinking about this another way today: given that I have about 300k in savings/bonds, that would last me a number of years in the worst bear market. I wonder if instead of AA it isn't better to think of it that way. "I have x years of safety to retreat to, after which I can afford to put the rest in stocks." ............
Click to expand...
I think this logic is valid. I have a retired relative that was 100% in stocks when the crash happened in 2009. He had to get a home equity loan to supplement dividends in order to not sell stocks at such a beating. My pension covered my expenses, plus I was at about 20% bonds, so I didn't break a sweat, knowing as you point out, that I could wait out any likely extended downturn.
 
tmitchell said:
Ya, I seem to be erring on the more conservative side in the FIRE community and, like you, less interested in maximizing returns and more interested in making sure I have enough.

I was thinking about this another way today: given that I have about 300k in savings/bonds, that would last me a number of years in the worst bear market. I wonder if instead of AA it isn't better to think of it that way. "I have x years of safety to retreat to, after which I can afford to put the rest in stocks."

Maybe that's already implicit in the model, but I don't really hear people talking about it that way. Anyway, thanks for your thoughts.
Click to expand...

That 300K of which you speak is part of the 1M net worth, correct? I think that's a fine plan, as long as you aren't stretched too thin in retirement, needing 4% of whatever your NW is on retirement day. 4% is, IMO too high for a 50 something, and if you have a correction, with a slow recovery, that 4% might look more like 6%, which would scare me even more.
I'm probably a lot more conservative than the ERs ,which is why I waited until I was 62 before I retired. This afforded me a lower WR (more like 3%), and fewer years to live (hopefully not a whole bunch fewer, but who knows?)

When I was in my 50s I was probably not as far along in my NW as you are now. I was far enough along, with kid gone, etc to ease back on my work, and put it into a more palatable "Work-Play" balance. I made less, saved more because of fewer expenses. Didn't have to touch the nut, actually still added to it.
But for me, work wasn't THAT horrible. The idea of running out of money, or worrying about it due to factors I couldn't control (i.e. the markets) was much more horrible to me.
 
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