Firecalc Equity and Fixed Income Percentage Recommendation

[nico08]

I occcassionally revisit Firecalc to reassess my early retirement plan. I have thus far maintained a 60 percent stock 40 percent bond investment allocation, or at least that is the general goal. I noticed a statement in Firecalc that is different from what I remember being there. Here is the statement (it is in the Your Porfolio section)-

Percentage of your portfolio that is in equities, versus fixed income? Research seems to suggest about 50% for a 10 year term, almost 70% for a 20 year term, and around 85% for a 60 year term.

Is there a reference for the research that suggests these percentages? My early retirement is somewhere between a 20 year term and a 60 year term, but my allocation to equities is not at 70 percent or higher. So I am trying to determine if I should allocate more of my portfolio to equity.

Thank you for your insight.

 

[Major Tom]

My gosh, a 60 year retirement? There are one or two people here who retired in their 30's, and could possibly achieve that. I think most of use would be happy with 30 or 40 years!

 

[nico08]

Yes, based on average life expectancy, my remaining early retirement would be about 25 years. If I live a long time, it could be about 45 years. Do you think 60 percent equity allocation is an appropriate amount based on those lengths of early retirement?

 

[Dtail]

There is a large range of similar success rates in Firecalc for a 30+ year retirement. Going to between 70 and 85% equity allocation does not unto itself result in higher success rates, although it does typically result in higher ending balances.

 

[Major Tom]

Yes, based on average life expectancy, my remaining early retirement would be about 25 years. If I live a long time, it could be about 45 years. Do you think 60 percent equity allocation is an appropriate amount based on those lengths of early retirement?

What is appropriate depends partially on how much market volatility you are able to handle, without climbing the walls and being tempted to sell at the worst possible time. Only you can know this. For instance, we have a small number of retirees here who are quite advanced in years, who have 90% and more in equities.

There are various rules of thumb that can help gauge an "appropriate" asset allocation but they are, at best, just rules of thumb. For instance, one such guideline says that you should have your age in bonds i.e., if you are 30, then 30% of your portfolio should be in bonds. If you're 60, that figure rises to 60%. I think such guidelines are OK for anyone who doesn't yet have a sense of this, and needs to do something. At some point though, you're better off making your own determination. Some things to consider -

1) How much volatility can you stomach? Holding the majority of your portfolio in equities holds the potential for greater growth, but it could be a wild ride on the way up.

2) Some folk who have large portfolios think of this as a reason to have a large equity allocation. The reasoning is that their withdrawal rate is so low, that even a 50% or greater decline in their portfolio wouldn't affect their standard of living.

3) Other folk with equally large portfolios see it differently. They have so much money, that they have already "won the game". They don't need much growth in order to stay solvent for the rest of their lives, so what would be the point of holding a lot of equities?

The above list is by no means exhaustive, but my main point is, "it's up to you, as you are the only one who can make the determination of what is an appropriate asset allocation for you."