Age Based Asset Allocation for Early Retirees?

[mountainsoft]

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?

 

[pb4uski]

The success rates between 70/30 and 30/70 are so similiar that it doesn't matter much... IOW the risk of failure is similar, but higher stock allocation commonly result in higher terminal values.

 

[eroscott]

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

Stay "aggressive" but diversified (500, total market, intl, emer mrk).
Down markets are usually 12-24 months so even if retired make sure
your 'bucket 1' & 'bucket 2' has enough to cover that before the rebound.
Buckets:
https://www.theretirementmanifesto.com/how-to-manage-the-bucket-strategy/
https://www.theretirementmanifesto.com/how-to-build-a-retirement-paycheck/

Via: https://www.financialsamurai.com/the-proper-asset-allocation-of-stocks-and-bonds-by-age/

 

[audreyh1]

I was very high equities until a year or so to retire. As long as I was working, I didn’t need to worry about the volatility of my retirement portfolio.

 

[CardsFan]

The success rates between 70/30 and 30/70 are so similiar that it doesn't matter much... IOW the risk of failure is similar, but higher stock allocation commonly result in higher terminal values.

And the higher stock allocation can result in higher volatility.

To OP: So you also need to work within your comfort zone. I have talked with people who "lost a lot" in the most recent big down turn. The problem is, they only lost because they panicked and sold near the bottom, and got back in too late (if ever). If you go with a higher equity allocation, you still need to ride it out. FWIW, my comfort level, at almost age 65, is 55/45.

 

[FREE866]

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?

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.

 

[braumeister]

I was very high equities until a year or so to retire. As long as I was working, I didn’t need to worry about the volatility of my retirement portfolio.

Same here, as in over 95% equities. Have been gradually reducing it over the last decade's bull market, and currently in the 50% range. To the OP's question, I don't think following any guideline is a good idea because everyone's risk tolerance is different.

 

[COcheesehead]

Stay "aggressive" but diversified (500, total market, intl, emer mrk).
Down markets are usually 12-24 months so even if retired make sure
your 'bucket 1' & 'bucket 2' has enough to cover that before the rebound.
Buckets:
https://www.theretirementmanifesto.com/how-to-manage-the-bucket-strategy/
https://www.theretirementmanifesto.com/how-to-build-a-retirement-paycheck/

Via: https://www.financialsamurai.com/the-proper-asset-allocation-of-stocks-and-bonds-by-age/

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

 

[OldShooter]

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.

+1 For every complex problem, there is a simple solution, usually wrong.

One big consideration that doesn't often get mentioned directly is total assets. If I will only need 10% of my assets to get through the rest of my life I can be quite aggressive with the balance, as I am basically managing my estate. OTOH, if I need every dime I must be much more conservative.

 

[capjak]

asset allocation is specific to the financial details.
If you have 25xs expenses vs 50x expenses etc....

Need to take more risk, ability to take more risk and willingness to take risk.

If you have 50x expense you do not need to take risk but you have the ability but may or may not have the willingness.

Some state that 60/40 is the base case for early or standard 65 retirement.

If you have 100x expenses than you could probably be 0/100.

John Bogle stated something like 50/50 was a good compromise between wishing you had more stock when it is going up and less when it going down (i.e. 1/2 the time your happy/sad dependent on what is going on with investments....)

Another source for general rule is to look at target date retirement funds and see how they glide to a certain stock/bond allocation as retirement gets closer and after in retirement....

 

[RobbieB]

I'll be 65 this year and have 80% equities. Needless to say I'm not a "chart" guy and I'm smiling a lot too -

 

[FREE866]

I'll be 65 this year and have 80% equities. Needless to say I'm not a "chart" guy and I'm smiling a lot too -

well done!

 

[GenXguy]

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

Thank you. I was going to respond in the same way. And since we're preparing for worst case scenarios, I would never assume all future down markets will take place and recover within two years.

I don't really care for any of the guidelines. There are too many factors to consider.

I might retire by 55, like the OP, and I've dropped from 80% to 42% equities over the last year+ as my stash has already surpassed my target. About 6 months ago, that percentage gave me the best results in FireCalc as well, which allows me to add in future SS benefits the mix.

 

[COcheesehead]

Thank you. I was going to respond in the same way. And since we're preparing for worst case scenarios, I would never assume all future down markets will take place and recover within two years.

I don't really care for any of the guidelines. There are too many factors to consider.

I might retire by 55, like the OP, and I've dropped from 80% to 42% equities over the last year+ as my stash has already surpassed my target. About 6 months ago, that percentage gave me the best results in FireCalc as well, which allows me to add in future SS benefits the mix.

Same boat. Retiring in 5 months at 57. I went with the Kitces’ rising equity glide path model. I participate in the market as much as I need , but sleep well at night too

 

[mountainsoft]

Some state that 60/40 is the base case for early or standard 65 retirement.

John Bogle stated something like 50/50 was a good compromise between wishing you had more stock when it is going up and less when it going down

I have been at 60/40 for years, but recently backed that down to 50/50. As retirement gets closer, I find myself less tolerant of wild market swings. The first five years or so before SS kicks in will be the most critical in our retirement plan.

 

[ut2sua]

Approaching RE, I have just discovered that my tolerance for volatility has gone down significantly comparing to a few years ago. The test I created for myself was this: I stared at my account numbers, then imagine losing 1/2, 1/3, or 1/4 of that amount. 1/2 loss tolerance would translate to 100/0 stock/bond AA in my mind; 1/4 loss would translate to 50/50 in a "worst case" stock drop (imagine 50% drop). In other words, if I can take a 50% loss at any time, I can tolerate up to having a 100% stock AA.

 

[Navigator]

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.

+1

The “100-age in stock” strategy fully exposes you to sequence of return risk at the beginning of retirement, when stock holdings are highest. As time goes on, stock holdings are reduced, preventing you from being able to recover from a market crash early in retirement. Before I retired, I used actual market data to model different investment strategies. This was the single worst one I looked at.

 

[REWahoo]

Approaching RE, I have just discovered that my tolerance for volatility has gone down significantly comparing to a few years ago. The test I created for myself was this: I stared at my account numbers, then imagine losing 1/2, 1/3, or 1/4 of that amount. 1/2 loss tolerance would translate to 100/0 stock/bond AA in my mind; 1/4 loss would translate to 50/50 in a "worst case" stock drop (imagine 50% drop). In other words, if I can take a 50% loss at any time, I can tolerate up to having a 100% stock AA.

When I retired I used similar strategies to determine my AA/risk tolerance and felt confident I could handle a substantial drop in equity prices without too much worry. Then along came the "market unpleasantness" of 08/09 and I got a real education. What I learned was this:

- You don't really know what your risk tolerance is until it isn't a drill, until it's the real thing.

- Your tolerance level isn't determined simply by the amount of decline, the speed of the decline can also play a major role.

Case in point - see attached.

The first arrow shows the S&P 500 was around 1,200 when I retired in mid 2005. We had no pension or other source of income and were living entirely off our portfolio when the big hurt came along in late 2008. The red arrow indicates when the S&P 500 fell to 899 on 10/10/2008, a decline of 350 points over a period of three weeks (15 trading days with a loss almost every day). Prior to this drop the market had already declined 300 points from the 2007 high. But It wasn't just the fact the market had suddenly declined by another 350 points (28%), it was how quickly that decline happened - and the fact nothing appeared to stand in the way of that drop continuing.

That red arrow day was the day 1) I clearly understood I had severely misjudged my risk tolerance and 2) I completed my online application for SS (so much for waiting to 70!) to attempt to reduce the drain on my portfolio.

Fortunately I didn't make any rash portfolio changes, just held on until things started to turn around in the Spring of 2009. I did do some adjusting on my AA after the recovery got going, reducing my equity allocation by about 15 points, to a level I now think I can weather without too much worry when the next big, sustained decline comes along.

But I won't know until it happens - and neither will most folks posting here.

 

[ut2sua]

- You don't really know what your risk tolerance is until it isn't a drill, until it's the real thing.

- Your tolerance level isn't determined simply by the amount of decline, the speed of the decline can also play a major role.

Thanks for sharing. Can't agree with you more.

 

[tmitchell]

I kept a fairly high allocation to stocks up until I hit my 25x number, at which point I started dialing down to 60/40. I use a Vanguard advisor because I don’t trust myself in emergencies and she told me Vanguard’s research would keep me at 60/40 until I’m 80.

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).

 

[wanderingwheelz]

For more than 10 years I was a financial advisor and I can say without hesitation that most people think they have the perfect allocation to stocks until there’s a major sell-off.

My allocation to stocks is what I think I could tolerate in a major long-term bear market and then 10% less than that. No asset allocation is any good if it’s not adhered to when things go sideways. And they will.

An allocation of anywhere between 80/20 and 40/60 will be fine for 9 out of 10 investors with substantial assets who are broadly diversified with low cost index funds.

 

[USGrant1962]

+1 For every complex problem, there is a simple solution, usually wrong.

One big consideration that doesn't often get mentioned directly is total assets. If I will only need 10% of my assets to get through the rest of my life I can be quite aggressive with the balance, as I am basically managing my estate. OTOH, if I need every dime I must be much more conservative.

+1

But many here will tell you that net worth is a useless number, and will leave a bunch of real stuff of value out of it.

But to OP, IMO folks should be 90-100% equities until within 10 years or so of retirement (early or not). Then they can ramp down to 60/40, 50/50 or whatever. As others have said, ER is a choice and if things don't go well you can delay a bit, but a higher equity allocation during accumulation will more than likely get you there sooner with a larger portfolio.

 

[1-31-18]

Thanks for sharing. Can't agree with you more.

+1

Everyone has a plan until they get punched in the face. — Mike Tyson

 

[nancyfrank232]

I’ve always had a heavy 90%+ US equity allocation. Since I’ve never dialed that down over the last 3 decades I now have people tell me that the reason I don’t need to trim equities is because my portfolio is large

Um, being equity-heavy for decades is how I got here in the first place

People who go light on US equities for decades now wonder why they can’t afford to be heavy in equities

Um, being equity-light for decades is how you got here in the first place

You reap what you sow

Enjoy it

I am

 

[steelyman]

Another source for general rule is to look at target date retirement funds and see how they glide to a certain stock/bond allocation as retirement gets closer and after in retirement....

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.