Age Based Asset Allocation for Early Retirees?

[enjoyinglife102]

Here's my simple guideline considering equal failure rates:

70/30: increases the probability of dying rich but also increases the probability of scaling back spending (enjoying life) during the healthiest retirement years waiting for stocks to recover.

30/70: Increases the probability of not worrying about spending during the healthiest retirement years but less will be leftover for others to enjoy.

No brainer for me...

 

[Dtail]

55% Equities for me at age 59.
I am comfortable with a 50% stock loss translating to a net 25% portfolio loss, when including net gains from CD's/Cash.

 

[pb4uski]

Here's my simple guideline considering equal failure rates:

70/30: increases the probability of dying rich but also increases the probability of scaling back spending (enjoying life) during the healthiest retirement years waiting for stocks to recover.

30/70: Increases the probability of not worrying about spending during the healthiest retirement years but less will be leftover for others to enjoy.

No brainer for me...

^^^^ it all depends on the withdrawal rate... with a 2% withdrawal rate both 70/30 and 30/70 are bulletproof.... even at 4% having to scale back spending is a remote probability.

At 70/30 and a 4% WR only 4.2% of trials fail and even those that do fail don't fail until at least 24 years out.... one at 24, 25 and 26 years out and a couple at 30 years.... so you wouldn't know you plan is in trouble for quite a while and could fix it with very modest adjustments to spending.

 

[COcheesehead]

That’s what I’ve been doing, using a Vanguard target date fund to determine what my current stock/bond split should be. It’s easy and takes me out of the decision process. I chose a fund with a date farther out (10+ years) from my actual retirement date which results in a higher percentage of stocks.

Check to make sure of the strategy of the target date fund. Is it TO that date or THROUGH that date? There is a difference.

 

[nancyfrank232]

Here's my simple guideline considering equal failure rates:



70/30: increases the probability of dying rich but also increases the probability of scaling back spending (enjoying life) during the healthiest retirement years waiting for stocks to recover.

30/70: Increases the probability of not worrying about spending during the healthiest retirement years but less will be leftover for others to enjoy.

No brainer for me...

No brainer for me too. Second option sounds like living in poverty. No thanks

 

[steelyman]

Check to make sure of the strategy of the target date fund. Is it TO that date or THROUGH that date? There is a difference.

Thanks, but that's more detailed than I want to get as I'm just looking for rough guidelines (I don't actually invest in the target date fund, just other funds that I've chosen). Vanguard's brief description of the fund (their 2030 fund) doesn't match its current allocation but they broadly say it's meant for people retiring between 2028 and 2032.

I try to contribute to the "YTD Performance" series of threads and include the current allocation/performance of that fund as a benchmark. I like that series of threads because most contributors provide their own (real life) performance data.

 

[FREE866]

No brainer for me too. Second option sounds like living in poverty. No thanks

I think the poster actually meant he/she likes the second option

 

[GravitySucks]

I like to think of how many years do I need the bonds for instead of how old am I.
When I went to 60/40 I did so because it gave me 8 years of bonds to live on at my current burn rate. I figured a greater than 8 year slump is a rare event.
Due to rebalancing to that 60/40 and a friendly market I now have around 10 years in bonds and only 8 1/2 years till max SS. So I'm starting to think I'll let AA creep a bit higher on the equity side.
So 8 years in bonds to cover market volatility, the rest in equities to cover inflation and life style creep worked for me.

 

[Dtail]

I think the poster actually meant he/she likes the second option

+1
She just flipped it around to mean choice #1 based on other posts.

 

[eroscott]

Some down markets last way more than 12-24 months. We just had a “lost decade” recently.

Can you provide some data with date ranges? This will allow more accurate understanding for those determining AA and bucket 1 & 2 amounts.

Here is what I've collected in recent times.

	Previous Market Crashes			
#	Period start	Period end	Days	Years	S&P 500 Decline
1	26-Jul-2019	5-Aug-2019	10	0.03	-6.02%
2	3-May-2019	3-Jun-2019	31	0.09	-6.62%
3	20-Sep-2018	24-Dec-2018	95	0.26	-20.18%
4	29-Apr-2011	3-Oct-2011	157	0.43	-19.42%
5	11-Oct-2007	9-Mar-2009	515	1.41	-56.19%
6	11-Mar-2000	9-Oct-2002	942	2.59	-20.29%

 

[COcheesehead]

Can you provide some data with date ranges? This will allow more accurate understanding for those determining AA and bucket 1 & 2 amounts.

Here is what I've collected in recent times.

	Previous Market Crashes			
#	Period start	Period end	Days	Years	S&P 500 Decline
1	26-Jul-2019	5-Aug-2019	10	0.03	-6.02%
2	3-May-2019	3-Jun-2019	31	0.09	-6.62%
3	20-Sep-2018	24-Dec-2018	95	0.26	-20.18%
4	29-Apr-2011	3-Oct-2011	157	0.43	-19.42%
5	11-Oct-2007	9-Mar-2009	515	1.41	-56.19%
6	11-Mar-2000	9-Oct-2002	942	2.59	-20.29%

From 2000-2009 the market was down almost 10%.

https://seekingalpha.com/article/292862-the-lost-decade-for-the-s-and-p-500

 

[COcheesehead]

Thanks, but that's more detailed than I want to get as I'm just looking for rough guidelines (I don't actually invest in the target date fund, just other funds that I've chosen). Vanguard's brief description of the fund (their 2030 fund) doesn't match its current allocation but they broadly say it's meant for people retiring between 2028 and 2032.

I try to contribute to the "YTD Performance" series of threads and include the current allocation/performance of that fund as a benchmark. I like that series of threads because most contributors provide their own (real life) performance data.

Point being if it’s TO that date, it’s more conservative. If it’s THROUGH that date, it usually takes on more of an equity position.

 

[eroscott]

From 2000-2009 the market was down almost 10%.

https://seekingalpha.com/article/292862-the-lost-decade-for-the-s-and-p-500

But my prespective is that the declines are much shorter. Bucket 1 & 2 can handle the short ones and the 'paper losses' then are meaningless as the stocks rise again. This graph clearly show that IMHO.

And then look at the more even keel losses / gains if you use things like:
Van Wellesley Income Fund Admiral Shares VWIAX
Van Wellington Fund Admiral Shares VWENX

 

[mountainsoft]

But my perspective is that the declines are much shorter. Bucket 1 & 2 can handle the short ones and the 'paper losses' then are meaningless as the stocks rise again.

It's not just the length of the decline, it's how long it takes to get back to the original value before the decline. If you have to sell before the value recovers you have lost money.

Using Vanguard's Total Stock Index (VTSAX) as an example, the drop that started in Nov 2007 didn't recover to it's original value until Feb 2012 (hold your mouse pointer over the "i" in the Max Drawdown column). That's over four years:

https://www.portfoliovisualizer.com...ividends=true&symbol1=VTSAX&allocation1_1=100

 

[Rdub]

^^^^ it all depends on the withdrawal rate... with a 2% withdrawal rate both 70/30 and 30/70 are bulletproof.... even at 4% having to scale back spending is a remote probability.

At 70/30 and a 4% WR only 4.2% of trials fail and even those that do fail don't fail until at least 24 years out.... one at 24, 25 and 26 years out and a couple at 30 years.... so you wouldn't know you plan is in trouble for quite a while and could fix it with very modest adjustments to spending.

I agree. I retired at 47 and am 50 now. My target aa is 60/40 with +/-5pts. My wr is ~1.8%. Conservative? Probably, but it works for me. Another thing to keep in mind is your actual spend. If most of your wr is tied up in a mortgage, car payments and healthcare it would be really hard to pare back your spend if/when the market goes sideways. If your wr is going mostly towards vacations, entertainment, dining out and fun hobbies, down markets shouldn’t scare you much. My point is that there isn’t a one size fits all aa by age, but... there are rules of thumb that are good general guidelines.

 

[SlowlySaving]

I was at 100% stocks up until a few months ago. Currently at 80/20. You also have to think that this portfolio has to last you longer than 30 years, quite possibly 40-45 years.

 

[2177V]

I know the ratio of stocks and bonds is basically a personal choice based on your comfort level with risk. However, it can be helpful to have a general guide to start with.

A common answer is to subtract your age from 100 (or 110, or 120) to determine how much you should have in stocks. However, I've never heard if that is based on a specific retirement age? If I was 50 years old and planned to retire at 65, I might be willing to accept a bit more risk. But if I planned to retire at 55, I would probably want to reduce my risk.

Are there any allocation guidelines based on how many years till you retire, instead of how old you are?

I don't know of any. However, you are probably aware that when you retire, your paycheck stops and you are dependent on your nest egg, your pensions (if any), your SS, your rental income (if any), etc. This means you should think about liquidity. Liquidity is overlooked prior to retirement because your paycheck provides liquidity to meet your needs.

I suggest developing a post retirement budget. If it is $3,000 a month, then that is what your nest egg should provide as a minimum. The elephant in the room is a recession. Here is a useful link to review:

https://obliviousinvestor.com/what-happens-to-bonds-in-a-stock-market-crash/

People often assume their bonds provide a soft landing in a recession. However, the link above indicates what "type" of bonds that you have will determine your risk. If you have mostly high yield junk bonds then you may not have a soft landing.

If you have a total bond index fund as an example, I suggest you review the performance of your total bond index fund during the last recession or 2007 to 2009. If it is positive during those years, then you should be OK.

However, if it is negative, then I would suggest creating a "rainy" day cash fund. Some AA can be 50/40/10 which means 50% stock, 40% bonds, 10% cash, CD or treasury. The 10% provides additional liquidity. Be aware that too much liquidity also hurts overall performance. The balance between reward and risk should be up to that individual situation.

 

[RunningBum]

I started a poll asking whether and what age based AA people used. 75% said they didn't use one.
https://www.early-retirement.org/forums/f28/age-based-aa-poll-88258.html

While I don't agree that it's horrendous advice, I'm fairly convinced to ditch my age based plan. It happens that I'm right about where I'd want to be anyway, so I really don't need to decide which way to go for a couple more years, but I'll probably settle in at about 60/40.

 

[24601NoMore]

I haven’t retired yet but having built a nest egg bigger than I ever imagined I’d have makes me feel skittish. I don’t have kids and legacy is unimportant to me so my main goal is to get to the grave with as little drama possible. I have considered dropping to 55/45 or even 50/50 once I do pull the trigger (hopefully around 55–I’m 52 now).

Given that you don't have kids (same here), don't care about legacy (ditto) and want to get to the grave with as little drama as possible (ditto again), you might want to look at whether an even lower equity allocation would still meet your financial needs.

I ER'd at 55 and am roughly 25% equities. Instead, I rely heavily on generating income through CDs, bond fund dividends, stock dividends, etc to cover a good chunk of our living expenses. The equities are solely for LONG-TERM (10+ year) growth and future expenses, and I hope to never have to sell from the equity portion of our portfolio in a down market. (As is often said, you should never have money in the market that you need in the next 10 years..so all these equity heavy portfolios I see people talk about so regularly here is definitely not for me..)

That said, even 25% makes me nervous because a 50% market drop would mean a 12.5% drop in my net worth - and at this point in life when I've turned off the W2 streams for good..that'd be something I'm not particularly comfortable with. I also know from my experience in 2008 that I would stress in a big way even with a 12.5% drop in my overall net worth, so invest accordingly..

Rick Ferri wrote a great article some time back that was posted in Forbes that says the "center of gravity" for an Early Retiree is ~30% equities. He made a pretty good case for that with some hard data as well. Here's the article if you're interested..

https://www.forbes.com/sites/rickferri/2015/02/06/the-center-of-gravity-for-retirees/#659a32be5dae

 

[24601NoMore]

From 2000-2009 the market was down almost 10%.

https://seekingalpha.com/article/292862-the-lost-decade-for-the-s-and-p-500

There have also been periods where it's taken the market > 15 years to recover from "peak" (albeit, inflation-adjusted). Those include stretches of 16, 23, 26 and 29 (!) years.

Here's an article that might provide some additional perspective..

https://seekingalpha.com/article/4200284-longest-bull-market-in-history-and-what-happens-next

 

[2177V]

I started a poll asking whether and what age based AA people used. 75% said they didn't use one.
https://www.early-retirement.org/forums/f28/age-based-aa-poll-88258.html

While I don't agree that it's horrendous advice, I'm fairly convinced to ditch my age based plan. It happens that I'm right about where I'd want to be anyway, so I really don't need to decide which way to go for a couple more years, but I'll probably settle in at about 60/40.

I agree that the age based AA is just a guide. I personally did not use it.

I was 100% stock from age 25 to age 50 for my IRA because I knew my IRA is something I cannot withdraw until age 65. I was an aggressive investor for my IRA but I was rewarded for it. After age 50 I started thinking bonds but I started using bonds to exchange my bonds to stocks during a 10% market correction.

When I retired at 65, I was 60/40 but now that I am close to 70, I am now nearly 100% treasury bonds. Looking back... I went from super aggressive during my working years to super conservative during my retirement years. I am now in an asset preservation mode to protect the assets that I earned during my aggressive investment years.

I totally agree with your personally statement "I am right where I want to be". Ditto for me. Everyone is different.

 

[GenXguy]

There have also been periods where it's taken the market > 15 years to recover from "peak" (albeit, inflation-adjusted). Those include stretches of 16, 23, 26 and 29 (!) years.

Here's an article that might provide some additional perspective..

https://seekingalpha.com/article/4200284-longest-bull-market-in-history-and-what-happens-next

You need to factor in dividend reinvestment, and it's not as bad as the numbers above.

 

[FREE866]

There have also been periods where it's taken the market > 15 years to recover from "peak" (albeit, inflation-adjusted). Those include stretches of 16, 23, 26 and 29 (!) years.

Here's an article that might provide some additional perspective..

https://seekingalpha.com/article/4200284-longest-bull-market-in-history-and-what-happens-next

Lance Roberts has been a permabear his whole career. The fact that people follow that guy is mind boggling. When I backtest a 100% equity portfolio from 2001-2010 ( 2 bear markets) the numbers aren't as bleak as this article leads us to think.

 

[gayl]

That whole "subtract your age from 100 and put that in stocks" mantra is such horrendous advice.

The main consideration is time horizon, cash flow needs, and your own ability to deal with volatility.

^This

Personally still at 80/20 despite being 68. Getting conservative. Was 100% stock when I retired in 2004

 

[OldShooter]

... Here's an article that might provide some additional perspective..

https://seekingalpha.com/article/4200284-longest-bull-market-in-history-and-what-happens-next

Sorry. SeekingAlpha's authors are there to hawk their investment newsletters or to generate clicks on their web sites.

If any of them could make reliable predictions they would not be living such a miserable existence. They would be off on a private yacht or a private tropical island. The mere fact that they are writing for SeekingAlpha is proof that they have judged their own predictions to be useless.