100% Equities Portfolio for very early retirees

[haha]

The poor should probably stick with safe stuff like savings accounts and CDs ...

The poor will stick with what they have since the mid-century-the money of those of us taxpayers who are still not clever enough to offload their expenses onto others.

Ha

 

[haha]

I think a lot of retired folks would push the panic button and may sell their equity position at a loss after a 50% market drop.

Our goal in retirement is to rest, relax, reduce stress and enjoy life. A 50% drop in portfolio value would not achieve this goal. Our allocation is 50/40/10 with annual re balancing. So far life is good......

People are usually quite sanguine about their so called risk tolerance, until something happens. There is an active thread on this board now that illustrates some of the thought processes that can encourage tendencies toward misunderstanding reality. "Glide path"! If there ever was misnomer, this is one. Although a gradual glide can happen, it is just as likely that what happens to ones assets is more similar to a plane being shot down than some sort of controlled landing in a soft recently plowed field.

I am reading 3rd edition of Shiller's Irrational Exuberance. There is a fabulous chapter that shows drawdowns in various non-US countries over the past 2 - 3 decades. He also shows what happened next-did prices pop back up, did the crash continue, did a long lasting stagnation occur? In fact, all of these things have occurred, in some countries at some time or other. Most of what is taken as knowledge about markets often isn't; it's just suppositions about markets that are as likely to wrong as right.

Ha

 

[daylatedollarshort]

People are usually quite sanguine about their so called risk tolerance, until something happens. .....I am reading 3rd edition of Shiller's Irrational Exuberance. There is a fabulous chapter that shows drawdowns in various non-US countries over the past 2 - 3 decades. He also shows what happened next-did prices pop back up, did the crash continue, did a long lasting stagnation occur? In fact, all of these things have occurred, in some countries at some time or other. Most of what is taken as knowledge about markets often isn't; it's just suppositions about markets that are as likely to wrong as right.

Ha

Ha, along the same train of thought, in a previous thread you also brought up Triumph of the Optimists (thanks for that), and I found a good summary here:

http://www.econ.uniurb.it/materiale/2781_triumph_of_the_optimists.pdf

 

[eta2020]

People are usually quite sanguine about their so called risk tolerance, until something happens.
Ha

If you survived 2008-2009 without panicking you have nothing to worry about.

 

[Corporateburnout]

Reading comments from members here back in the dark days of the great recession not many were advocating 100% equity allocation. In fact there were a lot of nervous people on this board.

Since the market has been on a nice run for the last 5 years some people are much more aggressive until something happens......

 

[eta2020]

Reading comments from members here back in the dark days of the great recession not many were advocating 100% equity allocation. In fact there were a lot of nervous people on this board.

Since the market has been on a nice run for the last 5 years some people are much more aggressive until something happens......

To tell you truth I thought we will have to retire at 60 instead of planned 55. Yes it was depressing and disappointing. But I did not panic with 100% in equities.

Today I could retire at 50 .

But I suppose one has to have Plan B and panicking can not be part of such plan.
BTW I would not feel comfortable retiring with 100% equities unless Dividend yield is equal to annual spending.

 

[dallas27]

Reading comments from members here back in the dark days of the great recession not many were advocating 100% equity allocation. In fact there were a lot of nervous people on this board.

Since the market has been on a nice run for the last 5 years some people are much more aggressive until something happens......

I'd be more worried I would try to re-balance incorrectly to take advantage of a 50% downturn. But I would not shift from stocks unless bonds were paying an extraordinary dividend. When government bonds are paying in the 15% range like in the 80's, give me a ring, I'll buy into that crisis, but I'll probably be back out in less than 24 months when the Fed get's it under control.

 

[Corporateburnout]

If you survived 2008-2009 without panicking you have nothing to worry about.

I also survived 2008-2009 and did not panic but I was working and investing 50% of my income buying stocks on sale. A couple of years later I adjusted my allocation to a balanced portfolio to get ready for retirement before pulling the plug last year.

If I was dependent on my portfolio to cover my expenses in retirement I would have been a very nervous and unhappy fellow.

 

[eta2020]

I also survived 2008-2009 and did not panic but I was working and investing 50% of my income buying stocks on sale. A couple of years later I adjusted my allocation to a balanced portfolio to get ready for retirement before pulling the plug last year.

If I was dependent on my portfolio to cover my expenses in retirement I would have been a very nervous and unhappy fellow.

I am with you.

All I am saying is if you need lets say 75k a year and you have Equity portfolio generating 80k a year in dividends you may be 100% in equities. In fact it makes sense to be 100% in equities.

Portfolio that generated 80k in 2007 probably generated 70k in 2008 and 2009. Dividends did not go down 50%. For example VTI index did not decline dividend at all. KO, PEP, PG, CL, MO , PM and lot of other companies increased dividends in 2008 and 2009.

 

[ESRwannabe]

So I have enough that I can switch to part-time work, but not enough to stop working completely, i.e. I can ESR if I want to now.

My taxable investments that would let me ESR are all individual stocks. The money for ESR would come from the dividends. I also have cash, which I would like to increase.

So my idea of a good early retirement asset allocation would be a few years living expenses in cash (maybe as much as 5 years), a paid off house, and then the rest in dividend paying stocks. I'd be perfectly at ease retiring off of that.

The kinds of stocks I like are domestic focused essential services type companies like: Southern Company (utility), Duke Energy (utility), AT&T (telecom), Verizon (telecom), Sysco (food distribution), Waste Management Inc (landfills), Health Care Properties Inc (nursing homes & hospitals reit), Service Corp International (funeral homes), etc.

Then in addition to that I like some of the old multinational stalwarts like: Coca Cola, Pepsi, Johnson & Johnson, Proctor and Gamble, etc.

I'd feel extremely comfortable retiring off the dividend income from these companies.

 

[audreyh1]

Rebalancing in Jan of 2009 to buy more stocks was one of the hardest things I have ever done. I had already caught the falling knife twice in 2008.

 

[ejman]

If you survived 2008-2009 without panicking you have nothing to worry about.

You really think that another Great Depression is impossible? Maybe I'm one of the few that think that the stars aligned with us ER types in 2008-2009 by having a chairman of the Federal Reserve that had studied deeply the events surrounding that event and knew how to act. And a concurrent political system and officials in place that allowed that action. Not so sure we may be as lucky next time.

 

[eta2020]

You really think that another Great Depression is impossible? Maybe I'm one of the few that think that the stars aligned with us ER types in 2008-2009 by having a chairman of the Federal Reserve that had studied deeply the events surrounding that event and knew how to act. And a concurrent political system and officials in place that allowed that action. Not so sure we may be as lucky next time.

S&P 500 Dividend by Year

During Great Depression dividend of 80k would for 2-3 years decline to 50k and then go back to about 60k for next 10 years....

So in my example I would just readjust my lifestyle and live on 60k income before collecting SS.

And yes now we have better understanding of economy and more checks and balances so I do not expect Great Depression, but I would survive it just fine.

I also think during Great Depression we had 30% deflation so 50k could buy more then 50k before Depression.

 

[ejman]

S&P 500 Dividend by Year

During Great Depression dividend of 80k would for 2-3 years decline to 50k and then go back to about 60k for next 10 years....

So in my example I would just readjust my lifestyle and live on 60k income before collecting SS.

And yes now we have better understanding of economy and more checks and balances so I do not expect Great Depression, but I would survive it just fine.

I think during Great Depression we had deflation so 50k could buy more then 50k before Depression.

Thank you for that link. It's kind of fun to data mine into the past. See for example December 1917 - dividend 11.77. It was below that level - substantially so - for 10 years. the drop for most of that period over 40%. Now I'm not saying that's what's in the cards now but there is nothing certain in any investment approach and living off of dividends is no exception and its certainly not guaranteed.

 

[photoguy]

People are usually quite sanguine about their so called risk tolerance, until something happens.

I keep thinking of the quote from mike tyson: "Everyone has a plan 'till they get punched in the mouth".

If you survived 2008-2009 without panicking you have nothing to worry about.

During the 2008-09 crash I didn't blink and just carried on as normal. It was a little depressing seeing my network plummet but at least I was working, making good $$$ and funneling that into equities. It actually turned out to be beneficial.

However, now that I'm fired, a re-occurence like 2008-9 would be a much more serious test.

 

[eta2020]

Thank you for that link. It's kind of fun to data mine into the past. See for example December 1917 - dividend 11.77. It was below that level - substantially so - for 10 years. the drop for most of that period over 40%. Now I'm not saying that's what's in the cards now but there is nothing certain in any investment approach and living off of dividends is no exception and its certainly not guaranteed.

You are right. 1917 and next 10 years is worst then Great Depression when related to inflation tables.

Historical Inflation Rates: 1914-2015 | US Inflation Calculator

So I think you would not go hungry but in my example you would have to readjust your lifestyle to 40% less income. Though 1916 1917 look like 2 years with spike in yield.

 

[Fred123]

Why the focus on just living off dividend returns as a measure of the survivability of a retirement portfolio? Isn't that just another way of saying that a low SWR greatly increases your chance of success? What am I missing?

 

[nun]

I am with you.

All I am saying is if you need lets say 75k a year and you have Equity portfolio generating 80k a year in dividends you may be 100% in equities. In fact it makes sense to be 100% in equities.

Portfolio that generated 80k in 2007 probably generated 70k in 2008 and 2009. Dividends did not go down 50%. For example VTI index did not decline dividend at all. KO, PEP, PG, CL, MO , PM and lot of other companies increased dividends in 2008 and 2009.

If you have enough to generate income without needing to spend principal you can take a lot more risk. But for those that plan to spend principal a time like 2008 could be difficult. If you need 4% withdrawals you'll be in difficulty, if all you need is 2% then dividends will support that and you are home free.

 

[NW-Bound]

I keep thinking of the quote from mike tyson: "Everyone has a plan 'till they get punched in the mouth".

During the 2008-09 crash I didn't blink and just carried on as normal. It was a little depressing seeing my network plummet but at least I was working, making good $$$ and funneling that into equities. It actually turned out to be beneficial.

However, now that I'm fired, a re-occurence like 2008-9 would be a much more serious test.

I will reiterate here that an annual camping permit in New Mexico which still costs only $225 will allow you to camp in any of NM state parks. All you need is a used motorhome, then you do not have to live under a bridge.

For electricity hook up to run the A/C or heater as needed, it will cost a mere additional $4/day. The stay is limited to 14 days, so you will need to drive to another park every 2 weeks.

Think of a motorhome as a tiny house on wheels, and it is even self-propelled. Party on!

 

[eta2020]

Why the focus on just living off dividend returns as a measure of the survivability of a retirement portfolio? Isn't that just another way of saying that a low SWR greatly increases your chance of success? What am I missing?

Perhaps that 100% equity portfolio will over a long term grow much faster then conservative portfolio.
Maybe that 100% equity portfolio has natural build in Inflation protection. That is different then withdrawing 2% from 60-40 portfolio.

But surely historically we can find 10-15 year periods where this is not a case.

 

[ejman]

You are right. 1917 and next 10 years is worst then Great Depression when related to inflation tables.

Historical Inflation Rates: 1914-2015 | US Inflation Calculator

So I think you would not go hungry but in my example you would have to readjust your lifestyle to 40% less income. Though 1916 1917 look like 2 years with spike in yield.

Looking at the table it looks like right now is the highest spike ever. But I don't really know how the table is constructed.

 

[eta2020]

Looking at the table it looks like right now is the highest spike ever. But I don't really know how the table is constructed.

The percentage of profit (Dividend payout ratio) that is distributed to stock holders is actually historical very very low for US companies. This is not the case for European and Japanese equites.

US companies can very easily grow dividend. I do not know historical tables... you can google that up.

IE http://seekingalpha.com/article/2351185-low-dividend-payout-ratios-in-the-s-and-p-500

 

[nun]

To tell you truth I thought we will have to retire at 60 instead of planned 55. Yes it was depressing and disappointing. But I did not panic with 100% in equities.

Today I could retire at 50 .

But I suppose one has to have Plan B and panicking can not be part of such plan.
BTW I would not feel comfortable retiring with 100% equities unless Dividend yield is equal to annual spending.

Going through 2008 was tough even while working and getting a paycheck. Facing a 50% stock market decline as a retiree would be gut wrenching and if capital gains or principal are required as well as dividends to generate income the hit to the portfolio could be even worse. So this is where some sort of cash/fixed income buffer is useful and why the "buckets" way of looking at things is popular. Most people need more than dividends, but if your savings-to-expenses ratio is 50 rather than 25 you can probably go with 100% equities.

When calculate my savings-to-expense ratio I could probably go with 100% equities, but I've taken another option. I annuitized a bit under 20% of my savings to provide lifetime income and I now expect the draw from my remaining savings to be 0%. I'm now around 75/25 with what's left and on an upwards glide path. If I can get 1% better return from my smaller, but higher equites AA, portfolio than from my pre-annuity 50/50 portfolio, then I should have a higher networth in 10 year's time, at 65. Also I don't think I've increased the overall risk of my portfolio because the higher equity allocation is offset by the guaranteed income from the annuity.

 

[clifp]

I think it is important not to look at AA in a vacuum.

When I retired/rebalance in early 2000, CA Muni bonds were 5-5.5% and 10 year TIPs were 3.75-3.95% and even IBonds were over 3.0% real yields. In the context of trying to sustain a SWR of 3.5% or so it was very easy to see how the bond portion of the portfolio would support this objective.

So my AA was around 60-65/35-40 during my early retirement years.
My AA gradually drifted to 75/25 around 2006/2007. I deliberately reduced my AA in 2009 to take advantage of the low stock prices. I have continued to reduce bonds until now I am done to 7%.

I think if I was 40, my bond AA would be approximately 0.

However, the one thing I did learn during the 2009, is that if I think stocks are bargain, I'll happily exhaust all my cash buying them. In my case because the market came back so quickly everything worked out well.
Life would have been different if the bear market or even a flat market last for a couple more years.

I took advantage of the Pen Fed CD deal of the last few years and have stuck a 3 (now down to 2) year of living expense in CDs. What happens in 2021 when the CD mature and rates are still awful I am not sure, but I'll figure it out if I need to. So I think a 100% equities is ok as long as you have very low risk reserves in some form.

 

[eta2020]

In spite of being huge fan of equities we are now building CD ladder

I am 5 years away from ER and I do not think money that I will need/want in 6 years belongs into equities.

We will not be able to touch 401k and IRAs plus being younger we will spend more hence that money goes to CDs.