How much passive/fixed income would you need to get out of equities?

[imoldernu]

I don't belong on this thread, but in line with the OP, we're happy with our relatively safe government bonds, CD's, a small fixed annuity, Social Security, and a really tiny amount of stocks from which we receive only dividends.

In addition, we haven't had to pay federal or state taxes since 1995. We retired in 1989 at age 53, went through our IRA's 'til age 62, and when we took Social Security.

Now, at 83, we feel safe, if not rich, and currently live comfortably on about 40K to 50K/yr.

The only time we even think of money, is when we go to Aldi's to buy fruits, vegetables and meat... on sale.... and to go to the Salvation Army or Goodwill to buy fun stuff, like fancy clothes, electronics, and the toys that I buy just to find out what they do.

I suppose this qualifies as "passive/fixed".

 

[Winemaker]

While DW and I feel we have won the current game, the purpose of AA is to diversify to mitigate risk from all angles. We have inflation linked rents, fixed pensions, future SS payments that are inflation linked, a portfolio yielding 4% from divvies and interest, and a portfolio linked to any market- inflation- business cycle- growth. But the game changes, by rules, playing field, weather, skill of the player, officiating, point of view and if the ball was properly inflated. It may be different next time.

 

[OldShooter]

I think this is a pretty good discussion, but IMO there is a somewhat confusing factor: What is the "game?"

Game 1: "On the day I die, I want my last check to bounce."
Game 2: "I want to have high confidence that I will not run out of purchasing power, regardless of what happens with inflation. Byond that, I don't care."
Game 3: "I want to (conservatively) maximize my estate for the benefit of my children and other beneficiaries."
Game 4: "To he11 with conservatism; my estate is 100% equities because that is historically proven to have the highest payoff over time."
Game 5: "This is a lot of fun. I don't need the money but I don't want to give up playing and I can afford some risk."

I think a lot of what has been discussed implicitly assumes Game 2. As I pointed out in the distant past (post #2) that may not be everyone's "game." In our case we are somewhere between Game 3 and Game 4.

What is your "game?" (Feel free to add to the list if you're not there.)

 

[ShokWaveRider]

I think this is a pretty good discussion, but IMO there is a somewhat confusing factor: What is the "game?"

Game 1: "On the day I die, I want my last check to bounce."
Game 2: "I want to have high confidence that I will not run out of purchasing power, regardless of what happens with inflation. Byond that, I don't care."
Game 3: "I want to (conservatively) maximize my estate for the benefit of my children and other beneficiaries."
Game 4: "To he11 with conservatism; my estate is 100% equities because that is historically proven to have the highest payoff over time."
Game 5: "This is a lot of fun. I don't need the money but I don't want to give up playing and I can afford some risk."

I think 2 pretty much hits it for us. I will repeat the inflation thingy, for us over the last 10 years of solid accounting our average inflation rate for the 10 - 12 year period cumulatively has been 1% - 2%. Yes inflation has been low in those years, but to us for those years our PERSONAL inflation rate during our early retirement has been basically 0. Mainly Because of DW previous HC subsidies, now finished and ACA, along with us managing our MAGI.

The big variable going forward for US is HC for DW over the next 4 years as she is reliant on it. And, based on the news today of the proposal to completely eliminate the ACA poses some uncertainty. (For discussion in some other post other than this one please, or not at all) If here HC goes up then our inflation rate will too. However, DW has no PECs, so we anticipate, if all is well, her SS at 62 will cover it completely, and we have accounted for that.

My (singular) personal inflation rate did go up a little this year as I am now on Medicare and the premiums along with Supplement G are $3k a year. Still somewhat low. But as we have always had ACA or some other subsidized HC for the last 12 years, this year poses a measurable hit.

 

[RISP]

How about this one then. IF your pensions, SS and other somewhat guaranteed income was $50k..... What would it be then?

80-100% equities. 1), I would need inflation protection and 2), with no portfolio survival risk, why leave money on the table?

 

[NW-Bound]

Though I spent less than 3% the last 12 months with no SS yet, I do not think I have won the race unless my WR is even lower.

And then, I do not see why I should get out of the race. It's fun, and another thing to make life interesting.

... For you and some others maybe, but for me it is a recipe for insomnia. Especially if folks are reasonably well off and happy with their quality of life with fixed income returns...

For me, the risk of stocks is less than the risks of life. We are all faced with sudden discovery of a serious health risk, whose outcome is less certain than that of the market.

Of course, one can also say, then why add the worry about stocks on top of the health worry. And that is fine too. A guy has to do what keeps him happy.

... Also what is the difference if a couple spend say $125k a year and have $5m saved vs having $7m or even $10m. The expenditure does not change. We could have $50m at our age and our life would not really change one iota. Again we do not care about a legacy as we have no heirs.

I would not mind spending 3% WR out of $50M if I had it. It would allow me to do more and help others, better than with the 3% of what I have now.

 

[Koogie]

When Bernstein switched to his “having won the game” point of view, he still said it was OK to invest in equities as long as you had 20 to 25 years income covered by safe fixed income type investments.

Lately I have come around to this viewpoint as well. Our portfolio will provide for about a 30-35 year retirement based on current consumption. Therefore, why risk more to achieve no further levels of utility (as we are obviously happy with our current consumption level) ?

Our allocation is 45/55. Although, we have "only" about 18 years in fixed income safe assets and not his recommended 20-25. Our EQ portion is fully funded at the moment. Any further growth in EQ will be "organic"

As we are nearing the end of our accumulation phase, all new funds will be invested on the FI side.

 

[Winemaker]

Yes, #2 pretty much sums it up. However, it is rewarding to "Blow some dough" every now and then.

 

[pb4uski]

When Bernstein switched to his “having won the game” point of view, he still said it was OK to invest in equities as long as you had 20 to 25 years income covered by safe fixed income type investments.

I find it interesting to approach this backwards.

If I take our gap once SS and pensions are online... spending less SS less 1/2 pension (1/2 because it is fixed rather than COLAed)... and multiply it by 25 years and then divided it by out retirement nestegg I get 31% in safe investments. So at 60/35/5 I'm overly conservative.

I could further adjut it to increase the amount of safe investments to have cash sufficient to replace SS from now until we start SS... I get 45%... so with 40% in safe investments I'm a little aggressive.

In any event, close enough.

 

[daylatedollarshort]

We have a low allocation to equities for a variety of reasons. Mainly we don't like the game. 2008 showed us that. All the comments here and Bogleheads about sleepless nights, white knuckles, gut punches, nerves of steel, etc. had us research alternatives and found the matching strategies ideas on Bogleheads, which do account for inflation. I have modeled high inflation in my spreadsheets and we would likely come out ahead due to our home value, TIPS allocation, low rate fixed mortgage, low overhead, one pension and SS with COLAs, etc. If the market crashed tomorrow we would still be living off half of what we could, even less if we downsized or resurrected our hobby income.

 

[Lawrencewendall]

I guess it's a good thing. I input 0% equities into FIREcalc and it says I still have 100% success rate.

 

[Spock]

I find it interesting to approach this backwards.

If I take our gap once SS and pensions are online... spending less SS less 1/2 pension (1/2 because it is fixed rather than COLAed)... and multiply it by 25 years and then divided it by out retirement nestegg I get 31% in safe investments. So at 60/35/5 I'm overly conservative.

I could further adjut it to increase the amount of safe investments to have cash sufficient to replace SS from now until we start SS... I get 45%... so with 40% in safe investments I'm a little aggressive.

In any event, close enough.

Interesting. But I must not be caffeinated enough.
The smaller the spending gap (smaller numerator), and the bigger the nest egg (larger denominator) makes for a smaller result... shouldn't that result then be the % in riskier vs "safe"??

ETA: the bigger the gap or smaller the nest egg, the more return(risk) needed, right?

SS would cover 90% of our spending (more if we wait) and the math came up with 4.6%.

 

[pb4uski]

I'll try an example with a hypothetical early retiree. Nestegg is $1.5m... annual spending is $75k and SS is $50k.

So their gap/amount needed from portfolio is $25k. $25k * 25 years is $625k... so as I understand it Bernstein would advocate 58/42.... $625k to cover spending (along with SS) and the rest would be ok in equities.

Bernstein would advocate that the bigger the gap the more that is needed in safe investments... his thesis doesn't really consider risk/return... just having what you absolutely need in safe money (bonds and cash).

BTW: I think he's a quack, but the point is that in many common situations that the overall result isn't much different from a conventional AA approach.... ~60/40 in the example above.

 

[sheehs1]

Interesting thread and got me thinking. Everyone's situation is different. Having said that, I am considering going to all Fixed Income. I am currently around 40 to 45% equities-a little lower than in years past. I am adding to this thread since this offers a bit of a different perspective..maybe??

1) I am 64 in April and am not sure I have a 10 year investment horizon. The older I get, the more this thought creeps into my consciousness. I view a shorter investment time frame as a real threat to my investments, particularly if something happens at the end of this window.

2) I am still generating enough income from sources outside of my investments to live on. Point being: any and all income generated from my investments can continue to compound and can be added to my nest egg. Should that situation change, I can adjust.

3) That said, Fixed Income at current levels (CD's at 3%, Corporate Bonds can be had at 4%, Muni-Bonds at 2% to 3%) WILL keep up with "current " inflation IF one does not need to live on it and allows it to add to your investments. If inflation changes, so will the rates on these instruments.

So this morning I ran some calculations. My calculations tell me if I went all Fixed Income I could generate more real income than the income generated from my investments today, which are mostly (but not all) dividend players. I ran these calculations by cherry picking from lists of CD's, Corporate Bonds and Muni's generated for me last week- all with maturity dates between now and 2026. So relatively short term. My calculations didn't include the past "growth" or unrealized gains made the last 10 years - so that would be a "give up" going forward I suppose.
However, For the record I calculated that I can generate more in fixed income over the next 6 years than my unrealized gains + income over the last 10 years. A bit of an eye opener for me, for sure.

At this point, I ask myself, "Do I Care? and/or "Can I be satisfied knowing I can generate "X" with fixed income?"

While I will start moving more to fixed income I probably will not sell the equities in my taxable accounts due to the tax byte. I plan to start with the IRA's.

 

[Doc0]

The notion of the tangent portfolio in modern theory is it is the portfolio that pays for the most return for the least risk. A small equity percentage has a better performance than bonds alone. Bernstein suggests TIPS as an inflation hedge. A tangent portfolio is eaually a good inflation hedge. Bernstein says equities in the case where you have 100% of your monthly retirement need covered. If you have less than 100% covered then your retirement is leveraged and you will need equities to cover the deficit. So if you have 100% covered then I would put the rest into an efficient frontier tangent portfolio. That would give an optimized retirement with a rainy day fund the most return for the least risk. You can figure a tangent portfolio using portfolio manager's efficient frontier module. A total stock total bond tangent is around 20/80.

 

[Perryinva]

Realistically no one should use the last 10 years as any kind of example for the future. High returns, significant Real Estate appreciation with low mortgage rates and low inflation are not the normal historically. I went from essentially zero to millionaire with lots of room to spare in less than those 10 years. I will not fool myself in thinking that it was my sharp acumen that got me there. It was timing, opportunity, and great returns.

 

[24601NoMore]

From history, five years of patience usually gets it back.

Key word in the above post being USUALLY. Check out the period from 1966 - 1981..

The total return in excess of the risk-free rate over that 16 year period was -7.69%, and the total "real" return in excess of inflation as measured by the CPI was -5.54%.

I for one do not want to count on another QE from the Fed bailing us out of the next market meltdown. Sure..it was < 5 years LAST TIME to recover..

Next time?

There comes a point where YOU DO NOT HAVE 16+ years to get back to "even". Heck, I may even be there NOW.

I tried to find the quote (but couldn't) - but think it was Bogle who said something like "you should not have ANY money in the market that you need within the next 10 years".

That said, I still need to update my AA - currently a bit south of 40% equities.

All that said, inflation IS an issue - and the example from the 80s is the flip side of the SWAN strategy with high FI.

Seems there is no easy solution, and you take the risks that you are comfortable with - market drop or inflation are two sides of the same coin.

 

[imoldernu]

Though I've already replied, I'd like to come back to the idea of safety.

I can only wonder what the future will bring in terms of the stock market and inflation. My thinking, as a low risk coward, has two bases.

1. I am too old to be watching the equities market every day and not experienced in investing at all.

2. We bought IBonds from 2000 to 2003. At the time, the idea of inflation adjusted rates sounded good... with the backing of the full faith and trust of the U.S. Government.

Looking back, the compound interest rates over the period, range from 5.2% to 5.7%.

Doubtless following the market would have brought a better return, but we needed safety. No Regrets.

The current composite IBond rate is 2.83%.

FYI... a look at the inflation rate from 1968 to 1982 on the linked chart, gives a picture of what has happened in the past, with the inflation rate. The annual average inflation rate is in the far right hand column.

https://www.usinflationcalculator.com/inflation/consumer-price-index-and-annual-percent-changes-from-1913-to-2008/

while i was doing this, 24601NOMORE beat me to it...

 

[OldShooter]

Key word in the above post being USUALLY. Check out the period from 1966 - 1981..

The total return in excess of the risk-free rate over that 16 year period was -7.69%, and the total "real" return in excess of inflation as measured by the CPI was -5.54%.

I for one do not want to count on another QE from the Fed bailing us out of the next market meltdown. Sure..it was < 5 years LAST TIME to recover..

Next time?

There comes a point where YOU DO NOT HAVE 16+ years to get back to "even". Heck, I may even be there NOW.

I tried to find the quote (but couldn't) - but think it was Bogle who said something like "you should not have ANY money in the market that you need within the next 10 years".

That said, I still need to update my AA - currently a bit south of 40% equities.

All that said, inflation IS an issue - and the example from the 80s is the flip side of the SWAN strategy with high FI.

Seems there is no easy solution, and you take the risks that you are comfortable with - market drop or inflation are two sides of the same coin.

Not sure what your point is. My statement "From history, five years of patience usually gets it back." is accurate.

I think maybe you are hung up on "even." Mr. Market has no idea whether you are "even" or not, nor does he care. It's a nice little emotional benchmark for us humans but it really doesn't mean anything. Mental accounting, again.

If one has to sell some equities before he/she is "even" that's just a statistical blip; it doesn't change the fact that it is equities over the long haul that have maximized purchasing power growth. It's like paying a vending machine and getting no product. It happens, but it doesn't stop us from using vending machines.

 

[pb4uski]

Interesting thread and got me thinking. Everyone's situation is different. Having said that, I am considering going to all Fixed Income. I am currently around 40 to 45% equities-a little lower than in years past. I am adding to this thread since this offers a bit of a different perspective..maybe?? ....

Certainly is a school of thought that since you've won the game why keep playing? The other side is that if reliable sources of income more than cover expenses that one can easily afford to keep playing or even put more at risk.

For us we'll keep playing for the benefit of our kids and charities... while based on history it is likey to work out to their benefit if it doesn't then ces't la vie.

 

[RobLJ]

Audrey anticipated my post. If you have a sufficient margin of safety, all fixed income doesn't sound problematic, particularly if you don't intend to leave an estate.

I'm at 59-25-16 right now, and will put a bit of the cash back in fixed income since I don't think the Fed is going to raise much if at all from this point. If I had 50% more in the portfolio, then going all fixed income probably would work fine, but I don't.

I realize the OP wants to ignore inflation, but just as an inflation hedge I can't see dropping below 25-30% equities. Unless you have a yuge extra margin to run out the clock, which sounds like the case of the OP. That said, pure demographics don't indicate we'll see anything like 70's/early 80's inflation that was driven by the boomers and Vietnam. Japan is a more likely scenario, given our demographics.

When Bernstein switched to his “having won the game” point of view, he still said it was OK to invest in equities as long as you had 20 to 25 years income covered by safe fixed income type investments.

 

[JJpop]

Really?

There is no guarantee on how much stocks will protect you during inflation.
We have no stocks.
We do have IBonds.
We do have SS which has some inflation protection.
Older retired people who have no debt are not hurt by inflation as much as a couple with 3 kids in grade school but no one ever mentions this.
Our SS will pay all of our basic expenses,easily,and we will have about 50K in yearly fixed income from investments in a few years when I turn 70.
We do not need stocks and will still leave a nice inheritance.
If the stock market really tanks big time like 2008 or close to that,I will buy and go up to 25 % equities.Other than that,no thanks.

 

[NC 57]

I moved to Vanguard in 2015 and set portfolio at 40% equity, 50% fixed income, 10% cash. No debt, house equity is 10% of financial portfolio value. Income from portfolio covers 120% of annual living expenses. At age 65 (next year) begin drawing megacorp pension (not indexed for inflation) that will cover 50% of current annual living expenses. Firecalc with 3% inflation assumption projects portfolio value at 2X current level at age 92. Most of portfolio is in Vanguard index funds except some DRIP stocks I've accumulated over 4 decades and don't want to sell at once due to taxes on the large capital gain. Each year I selectively sell some stocks and reinvest in index funds.

Current allocation works for us. We sleep comfortably. A 50% drop in the market will reduce portfolio value by 20%. History tells me I'll have it back in 5 years or less if I stay the course.

 

[clifp]

For me I'd get out of equities under one condition. If Government bonds, not just the US, but a portfolio of major developed countries, Germany, France, UK, etc had a yield of say 12% while inflation was only 2%. That would be higher than the expected return for equities and would certainly be a good reason to avoid the volatility of equities.

Needless to say I'm not waiting for this day to come anytime soon. Probably not even in my lifetime.

 

[Dtail]

For me I'd get out of equities under one condition. If Government bonds, not just the US, but a portfolio of major developed countries, Germany, France, UK, etc had a yield of say 12% while inflation was only 2%. That would be higher than the expected return for equities and would certainly be a good reason to avoid the volatility of equities.

Needless to say I'm not waiting for this day to come anytime soon. Probably not even in my lifetime.

Too much correlation to inflation to have that kind of spread, so sadly agree not in our lifetime.