AA too conservative

[Jerry1]

My AA is too conservative. In combining all our accounts, we're at 30% stock, 40% bonds and 30% cash. Note that I put a cash option pension plan and a small annuity in the bonds category so without that, our AA would be 41/19/40. Still, very conservative. I've just retired, but I have a year severance so financially I will be dependent on my portfolio a year from now so I'm working to get everything in order.

In general, DW and I would be pretty conservative anyway, but I think I need to get my AA up closer to 60/40. The question I have it an old one. How best to do this in the current environment? Certainly, it's hard to think about buying stock right now. Bonds seem to have no where to go but down and cash doesn't return much if anything more than inflation.

I could take my lump sum from the pension and just bit the bullet and put that into a stock fund. If I did that, I'd be at about 55/15/30 which doesn't seem too bad, just that it's so hard to buy in at these values. We're talking about $450,000 that I need to shift. Another option that I've read here is to do a dollar cost averaging - put a certain amount in over a certain time frame - Say $100K a year for 4.5 years.

What would you do - all in or phase in. Also, any reason to go any higher than the 15% on the bonds? At 30% cash, I would have 7 years living expenses in cash.

I appreciate the input from this group. I'm going to a meeting with Fidelity on Monday where this will be discussed and while not final decision will be made at that meeting, I'm looking to be as prepared as possible. I'm working two angles. First, DW is not that educated in finances so I need to make sure she understands and is comfortable with what I'm doing and second, I wouldn't be at a meeting with Fidelity if I didn't think they had a perspective to offer, but I'm not going to blindly follow their lead and want to challenge their assumptions/recommendations where appropriate.

 

[Scuba]

There is a lot of research that substantiates that going “all in” will give you the best outcome in the long run if this is long-term money. Personally I’d go all in for this reason. However, ir sounds like your risk tolerance may be lower than mine given your allocation, so there is nothing wrong with going in over time (dollar cost averaging) as long as you realize you may well leave money on the table.

Of course, if the market crashes soon, you may be in better shape vs going “all in” but if we knew when the correction would happen, we wouldn’t need to worry, right?

 

[Midpack]

Every study I’ve read says it’s impossible to predict which will do better short term at any given time, DCA or all in at once. For the long term it won’t make much difference. Some people are just uncomfortable with all in at once, and there’s nothing wrong with systematic DCA as long as you follow through and resist the temptation to erratically time the money in.

There are better studies, but anything from 30:70 to 70:30 seem rational for most retirees. The real returns and relative downsides aren’t that wildly different. I’m a little more equity heavy than I’d like at the moment, but I am always weighing tax impact vs rebalancing so I probably rebalance over wider bands than most here.

 

[alaska55]

55% stock is just fine. Maybe keep 2 years expenses in cd's/cash, 30% short term government bond fund, and the rest in a fidelity total bond fund FTBFX. That would keep your bond duration low for the likey rate increases coming.

 

[gcgang]

Why do you say you're too conservative? Will you not reach your goals unless you invest more aggressively?

 

[Finance Dave]

I'd use DCA, but faster than you suggest...maybe do 1/3 each quarter for 3 quarters. I have no research behind this but I'd feel less likely to buy at a peak or just before a large dip.

I also somewhat agree with gcgang...don't just blindly follow what AA "they" say you should have. If you can reach your goals with 30% in equities and you sleep well at night that way...then no reason to change. Up until I was 50, I was 90% in equities. But I've found that now that the end of my w*rking income is near, I don't stomach market downturns well...so I stay very conservative and only buy when there is a dip of 5% or more and then rebalance a year after that.

 

[atmsmshr]

Jerry1 - congrats on early retirement! We are the same age and I have been doing a lot of pondering about AA. Currently have 70/30 split if pretending pension is a bond fund. About 2 years behind you in ER because I did not fully embrace LBYM.

Some of my thoughts on AA (which have gradually changed thanks to resources provided from this forum):

• No swinging for the fences after retirement. Select an AA with best chance of not running out of money in the 5 - 10% failure range for a couple living 35 years. Factoring in mortality brings the failure range to 2 -5%. I will manage this small chance with flexible spending.
• Spending down the portfolio. Took awhile to get my head wrapped around not planning for a legacy - but odds are that with this type of planning a handsome inheritance will remain for the kids.
• Pension. I have gone from the take the lump and run camp to safety first. Influencing factors: Megacorp will give a moderate non-cola pension with about ten choices on the menu. I am leaning for 100% joint life SPIA which is just over 6% IRR. An unmatched value compared to any annuity SPIA. More initially than the 4% rule for the classic 60/40 portfolio. I can also select auto withdrawal for DW's retiree health option. This pension has been the most overfunded in America for over ten years so it is as safe as it gets outside of the feds. Assets vary between 140 - 170% of liabilities. I will match this income stream against my mortgage of equal amount but 3.125% interest. Once I lock in the annuity option, this money will no longer count in my AA.
• Sequence of Returns Risk. This boogeyman is the evil twin of overspending early in retirement. Pfau and Kitces have great articles on this topic. They postulate that retiring into a bear market is the tail event leading to portfolio failure. Pfau advocates a safe floor of income for essential expenses to navigate SORR, and Kites pushes an unquantified V shaped bond tent with low point in equities on retirement date. Both advocate a rising equity glide path. (Roughly your age in stocks when retired). Basic idea is to ensure near term income and long term growth. My twist is to keep the 401k all in stocks until reaching the Very Comfortable Number and then dialing back to 50/50. Risky? Yes, but almost there and have a very stable job if the markets tank. Until then, riding the bull quite nicely thank you.
• Diversification. Books like Random Walk and Four Pillars of Investing made me get serious about not letting it all ride in S&P index fund. The ride is much less bumpy now. Portfoliocharts is an extraordinary resource with links to other thoughts and views on optimizing portfolios to match your risk tolerance.
• Social Security. Different for everyone, but for DW and I the optimum age to collect is 67. That means we need an 8 year bridge to SS. This money will be fenced in with TIPs and medium term bonds. Safety first, no swinging for the fence. The bridge money will count in my AA and proved a natural spend down to increase my AA to stocks over time.
• Retirement spending. Reading the positions from Ty Berneke and others, I am convinced that a constant income will not be necessary for us. Watching parents and inlaws as they age into their 80's confirms this line of reasoning. IORP calc is a fabulous online tool to using in spending model optimization for higher spending when remaining health is the best.
• IORP also gives Monte Carlo, 3-Peat, Roth tax planning and other variables that Firecalc does not have. Interesting, pulling out a non-cola pension gives overall higher spending. Likely because the rest of the portfolio has to maintain the difference for inflation, but with liability matching this does not matter.
• Financial advisors. We know a very nice couple - one was a stock broker and the other a financial advisor. They are multi millionaires. Goody for them. But there is no fricking way I am going to pay some one 1% of my investible assets each year to 'manage my money'.

YMMV

Atom

 

[bingybear]

Does your current AA work for your retirement plans? If so, it may not be too conservative. You got to this allocation some way. Maybe you are sleep better with a very conservative AA. Now if your AA won't support your retirement needs, then you do have many things to think about.

 

[Senator]

You are basically 30/70. Way too conservative. Especially coming into a raising rate environment, with higher inflation. Have you run any calculators with a 5% inflation rate?

Will you have any cash flow streams other than your investments? Any pensions in addition to SS?

Get up to 70/25/5. Do it over 6 months, not years.

 

[Dawg52]

Does your current AA work for your retirement plans? If so, it may not be too conservative. You got to this allocation some way. Maybe you are sleep better with a very conservative AA. Now if your AA won't support your retirement needs, then you do have many things to think about.

Agree. If the OP's AA supports his retirement needs, why change? A conservative approach does the job for me and I sleep well.

 

[Mr._Graybeard]

There are better studies, but anything from 30:70 to 70:30 seem rational for most retirees. The real returns and relative downsides aren’t that wildly different. I’m a little more equity heavy than I’d like at the moment, but I am always weighing tax impact vs rebalancing so I probably rebalance over wider bands than most here.

+1. DW and I are at about 45% equities at the moment, but only because of the big 2017 runup in the market. We've been comfortable with equities in the 35%-40% range since we got totally out of the rat race in 2013. Thirty percent in stocks doesn't seem that far out of line to me.

 

[OldShooter]

Agree. If the OP's AA supports his retirement needs, why change? A conservative approach does the job for me and I sleep well.

More broadly, these ratios are just numbers. The "rules" concerning them are OWTs really. One size definitely does not fit all.

For example, a 70 YO widow whose parents lived until their 90s and who has only $100K in savings will have a wildly different AA than she would have if she had $10M. Any formula based solely on her age is completely irrelevant.

Since the OP does not say what his total assets are and does not say what his goals are for his investments (i.e., spend all the money, provide a maximum estate for his beneficiaries, etc.) there is no way to say whether his AA is conservative or aggressive. And even then, factors like sleeping well affect individual choices.

 

[Danmar]

To a large extent it depends on your risk appetite. The factors that may affect your risk appetite include past experience of losses, overall wealth level, whether your spending is flexible (both up and down), legacy objective.etc. So it’s a personal thing for you to decide. Why do you think your AA is too conservative?

Having said that I can offer my experience. I wouldn’t cash out the pension unless the deal is so good you can’t refuse it, or the payer is so weak you can’t trust it. Having a safe annuity backstop is a very good thing. Every month I am very happy to see that deposit go in to my bank account. I think it’s important to include your pension in your AA. Otherwise you are not comparable to the “rule of thumb” that people use when describing their AA. When I include my pension my AA is about 65/35. Age 67 retired 11 years. I don’t include my operating cash in my AA as this is used for regular cash management and not available for investing activity.

As others have said, if you decide to increase your equity component use DCA and get it done over a reasonable period, say a year (18 months at most?). Do what makes you feel most comfortable.

 

[Danmar]

You are basically 30/70. Way too conservative.

Get up to 70/25/5. Do it over 6 months, not years.

Good advice for you perhaps. I think the OP may have a different risk appetite than you and this will determine what’s best for him.

 

[Jerry1]

Thanks for the input. I will check my calculations to answer the question on weather my plan works with this allocation and also plug in a higher inflation rate. I think it will. My main tool is the Fidelity RIP and I set it at a worse than average market return scenario and my plan works. I need to see if I overrode my current AA in that program but I don't think so.

Thanks for the question - "Does your current AA work for your retirement plans? If so, it may not be too conservative." I've looked at the gross AA (30/70 versus 60/40) and concluded it's too conservative. But DW and I are both risk adverse and it's a good perspective to have that if I can make it on a more conservative number, maybe I should. Beyond checking the model, I'll do some soul searching on that with DW.

Atmsmshr - thanks for the lengthy/complete reply. One thing that I appreciate is your paragraph on the annuity. I too have the option to get an annuity instead of taking the lump sum. My company is fully funded and I feel little risk in taking it. It is also better than anything I can get in the market and it throws off about 5.5%. That is definitely an option but of course, not one recommended by the good folks in this forum too often.

 

[RenoJay]

I know any form of market timing is anathema, BUT, the earnings for the S&P 500 in 2007, right before a 60% stock price crash, was nearly where it was in 2017 despite the fact that the market price was nearly double in 2017. And bonds...oy. After 30 years of falling rates, it’s easy to see some inflationary pressure on the horizon with full employment, huge deficits and possible infrastructure spending which all put upward pressure on yields. My thought is there’s a reason the OP found himself with such a conservative AA ten years into a bull market. My vote is slow dollar cost averaging with a speed up every time we hit a biggish correction of 20% or more. I’ve been approached by a number of my non financial type friends in the past couple weeks wanting to know how to “get in” to the action, make money quick, etc. Sure feels like FOMO to me. Obviously I have no crystal ball, but from my memory of past market cycles, I’m personally betting there will be a much better entry point in the future than today and suggest the OP doesn’t make any drastic moves right now.

 

[OldShooter]

... But DW and I are both risk adverse and it's a good perspective to have that if I can make it on a more conservative number, maybe I should. ...

Yes. This is a variation on the strategy that says "If you've won the game, stop playing."

But playing is such fun!

 

[Al18]

Your idea of DCA over 5 years sounds good. Setup a 5 year CD ladder. On renewal, you can decide if you want to cash all or some out and where to put it. I'm a fan of blended funds such as FBALX, FPURX or similar funds from Vanguard.

 

[pb4uski]

There is a lot of research that substantiates that going “all in” will give you the best outcome in the long run if this is long-term money. Personally I’d go all in for this reason. However, ir sounds like your risk tolerance may be lower than mine given your allocation, so there is nothing wrong with going in over time (dollar cost averaging) as long as you realize you may well leave money on the table.

Of course, if the market crashes soon, you may be in better shape vs going “all in” but if we knew when the correction would happen, we wouldn’t need to worry, right?

While I agree that there are a lot of studies that suggest that all in at once is typically best, I can understand the OP's discomfort.

If OP decides to get in over time, I prefer value averaging to DCA. Let's say that you want to value average in over 18 months. The first month, you invest $25k. A month later, add whatever you need to to increase the value to $50k. A month later, add whatever you need to to increase the value to $75k. Repeat each month until you reach your AA goal for stock. With this approach, you'll buy/invest more when the market is is relatively undervalued and you'll buy/invest less when the market is relatively overvalued.

Obviously, you can do it over a shorter or longer period if you prefer.

 

[audreyh1]

So you are about to retire. You can use the Kitces rising glide path. Just pull from your fixed income for the next several years until your stock allocation meets your goal. If there is a bear market in the next few years use that as an opportunity to change to a higher stock allocation, otherwise let it happen gradually.

Kitces Equity Rising Glidepath. You can take 30 years to go from 30% equities to 70% equities and do quite well! It is particularly good for protecting against sequence risk (a bad early sequence of market returns). https://www.kitces.com/blog/should-...is-a-rising-equity-glidepath-actually-better/

 

[audreyh1]

Why do you say you're too conservative? Will you not reach your goals unless you invest more aggressively?

Sounds like he’s already met his goals and is getting ready to retire?

 

[Jerry1]

Sounds like he’s already met his goals and is getting ready to retire?

I am retired. I did, however, receive a one year severance so in a financial sense, I'm at OMY. In that year, I'm working to get my financial plan set up and implemented. Up until now, been focused on accumulating and now I'm shifting to the maintenance of the portfolio and the spend down. Not looking to leave a legacy, but if it's there, there's two daughters that would appreciate it. Main goal is not to financially burden them rather than worry about leaving anything.

Others have asked. I'm just over $2M and expect about an $80K annual expense including taxes. Necessities number is closer to $60K.

Dealing with the AA for the future and how to handle my pension are my biggest financial concerns. When to take SS is right after those two concerns. Without much real thought, just a gut check, I would take the annuity (instead of the lump sum) from my pension ($24K non-COLA). Take SS at FRA (67) which would mean I'd have to live off of about $1.5M for the next 10 years and hopefully have some left. SS at FRA for DW and I is $59K so with the pension annuity, I'd be looking at $83K from 67 on. Also, these are conservative numbers because for the 10 years, I will be receiving the $24K plus, DW hits FRA in 4 years at which time her SS will be $25K.

 

[Senator]

Good advice for you perhaps. I think the OP may have a different risk appetite than you and this will determine what’s best for him.

He asked for opinions. If all he wanted was a bunch of "Yes Men", there would be no need to post at all.

Bonds are headed for a flat return after inflation, at best. Inflation is starting, it's just a matter of how much and when.

 

[HadEnuff]

Thanks for the input. I will check my calculations to answer the question on weather my plan works with this allocation and also plug in a higher inflation rate. I think it will. My main tool is the Fidelity RIP and I set it at a worse than average market return scenario and my plan works. I need to see if I overrode my current AA in that program but I don't think so.

Thanks for the question - "Does your current AA work for your retirement plans? If so, it may not be too conservative." I've looked at the gross AA (30/70 versus 60/40) and concluded it's too conservative. But DW and I are both risk adverse and it's a good perspective to have that if I can make it on a more conservative number, maybe I should. Beyond checking the model, I'll do some soul searching on that with DW.

Atmsmshr - thanks for the lengthy/complete reply. One thing that I appreciate is your paragraph on the annuity. I too have the option to get an annuity instead of taking the lump sum. My company is fully funded and I feel little risk in taking it. It is also better than anything I can get in the market and it throws off about 5.5%. That is definitely an option but of course, not one recommended by the good folks in this forum too often.

I tried to imagine what a reasonable "worst case scenario" would be for market returns for a decade or so. Then I tried to figure out what % of my nut I could have allocated in equities, and be OK, should that scenario occur. That would be my maximum equity allocation.

Then I tried to imagine what a "best case scenario" might look like, and what my equities allocation would need to be to get enough out of it to be OK, and that would represent my minimum equities %.

I think many people feel that if there is a strong equities bull market, and they are not maximally allocated, they missed an opportunity. I look at it somewhat differently. If the market is "over producing" and I'm OK with my AA, then I am avoiding needless risk. For me it's not about maximizing return, it's about securing, as well as I possibly can, an acceptable outcome.

If you don't have to aim for the moon, you can enjoy restful nights knowing you can survive a bull, or a bear. It's a sweet feeling.

 

[pb4uski]

You are basically 30/70. Way too conservative. Especially coming into a raising rate environment, with higher inflation. Have you run any calculators with a 5% inflation rate?

Will you have any cash flow streams other than your investments? Any pensions in addition to SS?

Get up to 70/25/5. Do it over 6 months, not years.

Good advice for you perhaps. I think the OP may have a different risk appetite than you and this will determine what’s best for him.

He asked for opinions. If all he wanted was a bunch of "Yes Men", there would be no need to post at all.

Bonds are headed for a flat return after inflation, at best. Inflation is starting, it's just a matter of how much and when.

+1 with Danmar.... the OP was not looking for AA advice and his proclaimed target of 60/40 is quite sensible... and he already realizes that his AA is too conservative hence the thread title.... the OP was looking for advice on how to get from current state to 60/40 and whether it is better to do it all at once or over time.