Trade-off...work longer for piece of mind?

[Finance Dave]

One of the things I think of is whether to work a slight bit longer to afford myself the ability to move my asset allocation down....

48 currently, hoping to FIRE around 52-53 depending on the market.

Right now I'm 70% equities, 20% bonds, 10% cash

If I use an historic return average, I can probably FIRE at 52. However, I don't know if I could handle the swings if we have another late '08 event...I wouldn't sleep well. Therefore, I'm considering working just 1-2 more years, and moving my asset allocation down to about 30-40% equities, 20% bonds, and the rest cash.

What does everyone think of this concept? In theory, I could work to about 56 and then be 100% cash...but then I'd be giving up a couple years of "fun".

I'm fairly aggressive in investing now, because I know I have the easy option of working a bit longer....but once retired I think my comfort level will decrease quite a bit and the peace of mind would be worth a lot to me.

Would you make fun of someone who was in 100% cash? That may be me if I decide to work that long.

 

[traineeinvestor]

I'm in a similar position but actually thinking of taking the opposite approach to you.

I hope to (more or less) hit my number in late 2011/early 2012 but am thinking that working for another year or two will enable me to take a less conservative approach to asset allocation.

I would still keep X months of living expenses in cash or near cash form so that I do not have to sell at depressed prices but having the additional safety margin would give me the ability to have a greater proportion of the larger pool of savings in risk assets with growth potential rather than bonds/cash etc which do not have growth potential. With respect to the latter, you have to go a fair distance out along the yield curve to get an interest rate which beats inflation. (YMMV on the last point depending on local CPI, local tax rates and your personal circumstances.)

The main driver for this approach is that, over a (hopefully) long retirement period, I fear the corrosive effects of inflation more than I fear a repeat of a bear market in equities/real estate. I genuinely worry about waking up in my 70s or 80s to the realisation that my lifestyle is no longer sustainable.

Or maybe I just think my risk tolerance is higher than it really is ......

 

[wanaberetiree]

I considered this idea before joining this forum

I don't think it's a good idea now, unless you are planning to have a huge amount of $$$.

I used FIRE calc with ~50/50 stocks/bonds mixture and then tried your suggestion a) 100% in "US LT Treasury" and got success rate of 3.4% and b) 100% in "1 Month Treasury" and got success rate of 0.0%. I calculate over 50 years which is mainly to stay conservative.

Have you tried FIRE calc with your portfolio all in cash?

 

[NW-Bound]

Is working part-time a possibility for you? In my case, the part-time income allows me to avoid spending down my stash, and to let me be a bit more aggressive in my AA. Works out great, as I often like what I do.

If you do not hate your full-time work, I do not think there's anything wrong with sticking it out a few more years. Just be sure to take your nose off the grinding wheel and smell the roses along the way.

 

[Finance Dave]

I'm in a similar position but actually thinking of taking the opposite approach to you.

I hope to (more or less) hit my number in late 2011/early 2012 but am thinking that working for another year or two will enable me to take a less conservative approach to asset allocation.

I would still keep X months of living expenses in cash or near cash form so that I do not have to sell at depressed prices but having the additional safety margin would give me the ability to have a greater proportion of the larger pool of savings in risk assets with growth potential rather than bonds/cash etc which do not have growth potential. With respect to the latter, you have to go a fair distance out along the yield curve to get an interest rate which beats inflation. (YMMV on the last point depending on local CPI, local tax rates and your personal circumstances.)

The main driver for this approach is that, over a (hopefully) long retirement period, I fear the corrosive effects of inflation more than I fear a repeat of a bear market in equities/real estate. I genuinely worry about waking up in my 70s or 80s to the realisation that my lifestyle is no longer sustainable.

Or maybe I just think my risk tolerance is higher than it really is ......

What about TIPS? I don't care about beating inflation, just keeping up with it is enough.

 

[Finance Dave]

I considered this idea before joining this forum

I don't think it's a good idea now, unless you are planning to have a huge amount of $$$.

I used FIRE calc with ~50/50 stocks/bonds mixture and then tried your suggestion a) 100% in "US LT Treasury" and got success rate of 3.4% and b) 100% in "1 Month Treasury" and got success rate of 0.0%. I calculate over 50 years which is mainly to stay conservative.

Have you tried FIRE calc with your portfolio all in cash?

Not yet...but I will. And really I was leaning more towards the 30-40% equities scenario anyway, which I have done in FIRECalc and it says I'd be fine. When you say a "huge amount of $$$", is $2.2M enough?

 

[Finance Dave]

Is working part-time a possibility for you? In my case, the part-time income allows me to avoid spending down my stash, and to let me be a bit more aggressive in my AA. Works out great, as I often like what I do.

If you do not hate your full-time work, I do not think there's anything wrong with sticking it out a few more years. Just be sure to take your nose off the grinding wheel and smell the roses along the way.

I will definitely work part time. I actually call it rehirement rather than retirement. I currently work in the high-stress corporate world of long hours and demanding bosses. I'm envisioning 18 hours a week as a helper in the hardware department of a Lowes or Home Depot store.

Seriously though...the point is that I'll work more for engagement with others and to keep a schedule, but the money will be of nominal importance.

Every time I mention a rehirement job, my wife says "You just have too many plans".

 

[haha]

Would you make fun of someone who was in 100% cash? That may be me if I decide to work that long.

I wouldn't make fun of anyone's investing plan, as s/he would be as likely to be right as I am. There is just too much uncertainty to think that any one plan dominates.

And man, would I feel stupid if I kidded someone about his plan and he cleaned my clock.

Ha

 

[Finance Dave]

I wouldn't make fun of anyone's investing plan, as s/he would be as likely to be right as I am. There is just too much uncertainty to think that any one plan dominates.

And man, would I feel stupid if I kidded someone about his plan and he cleaned my clock.

Ha

I'm actually leaning towards about a 30% equity plan with about 20% bonds and 50% cash...but we'll see how things turn out. I have a few years to figure things out.

As you can see, I'm not a frequent poster...but I do stop in and get caught up every few months. I really enjoy the attitudes most of you have, and talking to like-minded people is good for me.

I do have a couple vices that I exercise...I like high performance cars and craft beers, both of which consume a fair amount of my income...but then I don't have fancy house, fancy clothes, watches, etc. My everyday car is a Honda so that I can spend money on my race/show cars.

P.S. I always save in advance for the cars and pay cash...unless I can get a 0.0% loan of course.

 

[wanaberetiree]

When you say a "huge amount of $$$", is $2.2M enough?

and what about annual spending need? and for how long 30 or 40 years?

 

[traineeinvestor]

What about TIPS? I don't care about beating inflation, just keeping up with it is enough.

I looked into TIPS but I have two issues with them:

1. while TIPS adjust for CPI (I think?), it does not follow that CPI will be a proxy for my own personal cost of living - given that retirement expenses will be weighted towards things like health costs, travel, school fees (I have 2 young children), utilities and several other items which have a habit of increasing faster than CPI, my expectation is that CPI will understate my personal rate of inflation. In addition, TIPS follow US CPI. I live in HK where the CPI figures are higher (3.0% YOY in August 2010); and

2. as a non-resident I am subject to witholding taxes on some US investments. Getting a straight answer out of anyone (including the IRS) on what payments are subject to witholding taxes has proven to be extremely difficult - it was hard enough to get the answer on dividends and normal interest payments. The answers I have received on investing in US ETFs have been conflicting. Whatever the answer, there is also the potential for new/increased witholding taxes being levied at some point in the future. From my perspective if a chunk of the payments gets lost due to tax, then the investment has not matched even CPI. I need to do more homework on this issue.

As an aside, I am not saying that TIPS are a bad investment, only that I am not convinced that they work for me in my present and anticipated circumstances and I need to get confirmation that there will be no witholding taxes.

 

[haha]

I looked into TIPS but I have two issues with them:<>

2. as a non-resident I am subject to witholding taxes on some US investments. Getting a straight answer out of anyone (including the IRS) on what payments are subject to witholding taxes has proven to be extremely difficult - it was hard enough to get the answer on dividends and normal interest payments. The answers I have received on investing in US ETFs have been conflicting. Whatever the answer, there is also the potential for new/increased witholding taxes being levied at some point in the future. From my perspective if a chunk of the payments gets lost due to tax, then the investment has not matched even CPI. I need to do more homework on this issue.

As an aside, I am not saying that TIPS are a bad investment, only that I am not convinced that they work for me in my present and anticipated circumstances and I need to get confirmation that there will be no witholding taxes.

If you are a US taxpayer, while it is nicer to not have witholding, any TIPS you might have outside of a retirement account will be a big tax problem no matter where you live and without regard to presence or absence of withholding. The way they work is that the face value is adjusted upward to account for CPI increases, and the interest payment is the stated coupon multiplied by this adjusted face value. The rub is that this upward adjustment is taxable income in the year that it occurs, not when you sell the bond or when it reaches maturity.

I like TIPS when the coupon is decent, but they are much better suited to an account like a Roth.

Ha

 

[wanaberetiree]

If you are a US taxpayer, while it is nicer to not have witholding, any TIPS youk might have outside of a retirement account will be a big tax problem no matter where you live. The way they work is that the face value is adjusted upward to account for CPI increases, and the interest payment is the stated coupon multiplied by this adjusted face value. The rub is that this upward adjustment is taxable income in the year that it occurs, not when you sell the bond or when it reaches maturity.

I like TIPS when the coupon is decent, but they are much better suited to an account like a Roth.

Ha

I am curious about TIPs taxation. Do you know how this gets enforced and/or reported by brokerage co's? And one more question - will tax software like TurboTax help with this?

 

[Finance Dave]

and what about annual spending need? and for how long 30 or 40 years?

$82k for 30 years or so.

 

[wanaberetiree]

$82k for 30 years or so.

Look for yourself (add SS if needed) -

FIRECalc: A different kind of retirement calculator

 

[traineeinvestor]

If you are a US taxpayer, while it is nicer to not have witholding, any TIPS you might have outside of a retirement account will be a big tax problem no matter where you live and without regard to presence or absence of withholding. The way they work is that the face value is adjusted upward to account for CPI increases, and the interest payment is the stated coupon multiplied by this adjusted face value. The rub is that this upward adjustment is taxable income in the year that it occurs, not when you sell the bond or when it reaches maturity.

I like TIPS when the coupon is decent, but they are much better suited to an account like a Roth.

Ha

Thanks - that's very helpful.

I am not a US resident or citizen (I do pay US taxes on income derived from a US parternship but that will cease after I retire).

According to the IRS, 30% witholding is deducted on interest payments made to me (there is no double tax treaty with Hong Kong). If the upward adjustment and the coupon are both subject to the 30% witholding AND the HK CPI is generally higher than the US CPI, then TIPS are very unlikely to deliver a return which matches the inflation that I am likely to experience. In effect, whatever their benefits, TIPS will not protect me from inflation.

The more time I spend looking into the tax implications of investing in the US, the more I appreciate the simplicity of Hong Kong's regime.