Another asset allocation question

[monte1022]

I am going to be very specific about who I would like to respond to this question. If you are excluded, please do not feel left out as your plan is simply different from mine. So here goes!

If you do not mind sharing, what is your asset allocation s/b if you do not have any other source of income other than current or future social security and financial assets ie. your s/b/c portfolio? Please do not respond if you have income producing real estate, a pension, or any income source beyond SS and your portfolio.

To avoid getting too much into the weeds, I am combining the bond and cash components into one category. I also get that funding levels can have a tremendous impact on willingness/need to take on risk so it is hard to account for that fact with a simple question and therefore I will ignore the behavior. For bonds, IF you have taken dollars from your portfolio to create an income stream, then I still consider that bonds and cash. One could argue that taking financial assets to buy rental property should be included in 'bonds,' but I would rather not.

The most obvious assumption is that you did not retire until your financial assets met a minimum acceptable level.

My data:
We are 57/54, 50/50 asset allocation, and only have SS.

 

[mathjak107]

retired , age 71 spending down

three different portfolios used

2 years cash , one of which we live on, the other accumulating interest and dividends towards next year .

an income portfolio with about 7 years spending in a 25% low volatility equity funds and 75% assorted bond funds with short durations

a growth and income portfolio 60/40 with 14 years spending in 5 different funds

all the rest in 100% equity’s in vti and berkshire

plus a small experimental portfolio that is a leveraged risk parity portfolio .just an experiment right now


taken in its entirety its is 55% equities , 35 % bonds and 10% cash for living on.


up to pre retirement all long term money which was the bulk of what we had was 100% equity funds , no bonds for 4 decades

we have social security, a small 22k pension and i work a day a week when we are not traveling

 

[FLSUnFIRE]

I'll eventually have a small pension starting at age 60 but it is insignificant to my needs and doesn't impact my decision so I think I qualify. I have 1.5-2 years spending in cash at the beginning of the year (liquidate a year's worth of spending late in the prior year to fund the next year) and the rest is equity index funds for about 95% stock allocation. I have a long withdrawal period and a fairly low withdrawal rate (slightly less than the earnings yield on the market). If I got nervous/more risk averse, I'd probably stick with cash/T-Bills if I moved things around but I don't see myself doing so to any significant degree -at least for a decade or two.

 

[CyclingInvestor]

65, retired 17 years, 100% dividend stocks since 1993, took SS at 62, no other income.

 

[LateToFIRE]

Just FIRE'd, early 60's, overall AA currently about 75/25 (equities) vs (cash+ bonds). Over next 2 years, as liquidate other assets, such as investment r.e., expect to add significant proceeds to portfolio, and trend towards an 80/20 mix as spend down cash in early years (before SS).

Only other income will be SS and a negligible pension - these will fund a large portion of non-discretionary expenses, and discretionary expenses will largely come from portfolio. Basically, will be relying mostly on portfolio to fund retirement, with SS providing a substantial lift (fortunate to qualify for max SS benefit owing to relatively high income past 30 years).

I'm comfortable with a reasonably high equity mix for the following reasons:

1) SS/pension will cover most of our fixed expenses (when kicks in at age 67 FRA)
2) NW is large enough that most models show us expiring with a lot more than we start with, FIRECalc gives us 90-100% success rate depending on how crazy I get on spending assumptions
3) There is a lot of fluff in our budget - we like to live well, travel, charitable giving, etc., but we could cut waaay back, like up to 50%, if really needed to.
4) Value of our home is significant (+$1M) and will provide a safety-net/cushion for LTC.

 

[mathjak107]

interesting at the high level of equities used , not that there is anything wrong with that .

but it is a big difference from other forums like city data that i used to frequent where many retirees are mostly fixed income.

these people would have every doomsday scenario in their heads as to why one must not go very high and of course i would argue the point with them .

so very different make up here

 

[FREE866]

57. Retired 7+ years.

95-98% stock

all index funds

no income coming in other than dividends from ETFs. I reinvest them in the TIRA and Roth IRA. I take cash payment in taxable account.

 

[DJRR]

Currently 59 and 2-4 years out from retirement. Spouse has had health issues and hits medicare in 2 years, started tracking expenses closely again, then I have a portfolio decision if I am short of $2M.

Was 100% equity until 3 years ago and am now 80/20. Debating SORR and whether I should go to 70/30 or 60/40 by building a bond ladder or just stay the course and take SS if my portfolio is drawn down prior to 70. No other income.

 

[levindb]

My data:
We are 72/74, 67/33 asset allocation, and only have SS.

SS handles 2/3 of our annual spending.

 

[N02L84ER]

Married, retired 18 yrs and 12 yrs, aged 64 and 63, no SS until 70, 63% equities, 37% fixed income.

 

[LateToFIRE]

interesting at the high level of equities used , not that there is anything wrong with that .

but it is a big difference from other forums like city data that i used to frequent where many retirees are mostly fixed income.

these people would have every doomsday scenario in their heads as to why one must not go very high and of course i would argue the point with them .

so very different make up here

My perception is that there are a significant number of folks on this board who would fit into the HNW/VHNW category and/or have a significant amount of expenses funded by SS/pension, hence they have enough cushion in the plan to swing for the fences on AA.

I don't follow the city-data crowd (but now you've made me curious), but guessing maybe they just don't have the same kind of room for error - in other words, maybe they require a sure bet in order for their plan to be successful and/or to sleep well at night - that is what I'd expect from the vast majority of retirees.

 

[mathjak107]

i agree with you but also these are the very same people who need to make efficient use of their money the most .

yet they don’t .

they worked for their money all their life and now that it is time for their money to work for them , they get it a low paying job

the real danger is fixed income alone .

historically that has had negative real returns after taxes more often then not

 

[UpQuark]

My data:
67 yrs old, retired 2 yrs ago, and started with 2 years of cash (per the recommendation of the Fidelity advisor, which turned out to be very good advice given what the economy did as soon as I retired).

I started SS a couple months before I retired (a half yr before FRA).

My AA S/B/C currently is 63/21/16, but I plan to move most of the cash into bonds if Treasuries would (please!) increase coupon rates for long durations (otherwise I might put the money into equities).

My AA had been closer to 80/20, but the 2022 downturn that greeted my retirement plus the nice increase in bond rates (plus having learned on these boards about actually owning the bonds not just bond funds), nudged me toward feeling better about a 60/40 AA (which previously had felt like a waste of 40%).

Other than my investment portfolio I only have SS income, which covers approx half of my budget.

My goal for the future is to only have 1 year of expenses in cash, because bond interest and dividends (which are mostly dependable) would cover almost half my yearly portfolio draw and I have some of my bonds in a 2 yr ladder that has a rung maturing every 3 months, so I could use that money instead of selling stock if the market is down.

The total size of my portfolio is not very big, and for the 'significantly below average' market scenario of the Fidelity retirement tool I can live to age 92 and leave a 100k (today dollars) for my kid to inherit. I don't have any real expectation to living that long but a retirement seminar had said people who didn't have 5 extra years in their plan did not feel comfortable spending even their safe amount.

 

[pb4uski]

.... If you do not mind sharing, what is your asset allocation s/b if you do not have any other source of income other than current or future social security and financial assets ie. your s/b/c portfolio? Please do not respond if you have income producing real estate, a pension, or any income source beyond SS and your portfolio...

Since we are principally dependent on retirement savings and SS other than my small defined benefit pension, I will respond.

Within a wide range of possible asset allocation, believe it or not asset allocation has little impact on success ratios. Generally, from 40/60 to 95/5 the success ratio is pretty similar... 93.5% or better... so your chance of running out of money isn't much different. What are different though are ending assets.

For example, use the default FIRECalc assumptions, go to the Investigate tab and click on the second radio button to show how changing your asset allocation by putting more or less into stocks will impact the results and you'll get the graph below.

However, the ending balances are very different.

40/60:

FIRECalc looked at the 123 possible 30 year periods in the available data, starting with a portfolio of $750,000 and spending your specified amounts each year thereafter.

Here is how your portfolio would have fared in each of the 123 cycles. The lowest and highest portfolio balance at the end of your retirement was $-140,801 to $2,813,342, with an average at the end of $683,684. (Note: this is looking at all the possible periods; values are in terms of the dollars as of the beginning of the retirement period for each cycle.)

For our purposes, failure means the portfolio was depleted before the end of the 30 years. FIRECalc found that 8 cycles failed, for a success rate of 93.5%.

95/5:

FIRECalc looked at the 123 possible 30 year periods in the available data, starting with a portfolio of $750,000 and spending your specified amounts each year thereafter.

Here is how your portfolio would have fared in each of the 123 cycles. The lowest and highest portfolio balance at the end of your retirement was $-597,155 to $5,606,749, with an average at the end of $1,938,857. (Note: this is looking at all the possible periods; values are in terms of the dollars as of the beginning of the retirement period for each cycle.)

For our purposes, failure means the portfolio was depleted before the end of the 30 years. FIRECalc found that 8 cycles failed, for a success rate of 93.5%.

So while for both these extremes the success ratio is 93.5%, the average ending balances are very different and are significantly higher with a higher stock allocation.

As for us, we retired when I was 56 and other than SS and a small pension that is 15-20% of our spending all we had was retirement savings. Initially our AA was 60/40 and mostly in index funds. Towards late 2019 I was becoming increasingly concerned about stock valuations and when covid hit I became even more concerned and sold all my stocks and went into capital preservation mode and have been about 100/0 ever since. But even at 100/0 our portfolio puts out as much as we need. Our fixed income portfolio yields 5.43%, which is less than our WR so our portfolio is still growing. More recently, I have ventured back into preferred stocks and corporate bonds based on an investment hypothesis that interest rates have peaked or are close to peaking and will plateau and eventually decline somewhat.

Our WR is low enough that we could be 100/0 or 0/100 and still never run out of money.

If I include the value of our Florida condo that is currently our principal residence that was bought entirely with portfolio funds, our current portfolio is 116% of what it was when I retired in early 2012... and if I include a recent inheritance that wasn't included in the plan then it is 138% and we have 12 less years to fund than we did when I retired, so yes, life is good.

 

[wearefinishedworking]

We are 64 and 63 with only SS as our income. Our investments are at 70/30 along with a bucket of cash equal to 2 years living expenses.

 

[audreyh1]

64, retired almost 25 years. Maintain a 50/50 AA. Started with 60/40 but gradually reduced. Haven’t started SS yet so no other income, live off investments.

The 50% fixed income is made up of cash & very short term investments (<18 months-bills, CDs), short-term bond index fund and intermediate-term bond index fund. I like having a range of durations out but don’t go past intermediate. The cash portion varies between 5% to 10% thereabouts.

I withdraw a fixed % annually from the retirement portfolio to cover spending. That’s what we live off of and I don’t count it in the AA. I usually need to rebalance the retirement portfolio at least a bit after the annual withdrawal to get back to that target AA.

 

[monte1022]

These are all very helpful in informative answers. I've been struggling between Bernstein's 15-25 years safe investments, Pfau's rising equity glide path, and a simple set it and forget it allocation. My first full year in RE will be 2/23/24 and as of today, we are +516k over our RE date total. I guess I'm sort of thinking that I should hoard those extra dollars in safe investments as they seemed to come too easily. I respect this group's opinion which is why I asked the question to help assuage my anxieties. There is an odd feeling of comfort when the market is down 20%+ that I do not have when we are at new highs. All of this is coming from a guy that stayed 100/0 until his early 50s.

 

[FREE866]

These are all very helpful in informative answers. I've been struggling between Bernstein's 15-25 years safe investments, Pfau's rising equity glide path, and a simple set it and forget it allocation. My first full year in RE will be 2/23/24 and as of today, we are +516k over our RE date total. I guess I'm sort of thinking that I should hoard those extra dollars in safe investments as they seemed to come too easily. I respect this group's opinion which is why I asked the question to help assuage my anxieties. There is an odd feeling of comfort when the market is down 20%+ that I do not have when we are at new highs. All of this is coming from a guy that stayed 100/0 until his early 50s.

Unless something cataclysmic happens Bernstein's suggestion of keeping 20+ years of expenses in cash equivalents is absolutely insane! I equate that on the same level of absurdness as Dave Ramsey telling people it's okay to withdraw 8% of your portfolio every year!

 

[mathjak107]

Unless something cataclysmic happens Bernstein's suggestion of keeping 20+ years of expenses in cash equivalents is absolutely insane! I equate that on the same level of absurdness as Dave Ramsey telling people it's okay to withdraw 8% of your portfolio every year!

bernstein can be as bizarre as ramsey at times that’s for sure .

i have never bought in to any of bernstein concepts ever.

his early books were fine but over the years i just found his advice changing and not for the better

 

[mathjak107]

64, retired almost 25 years. Maintain a 50/50 AA. Started with 60/40 but gradually reduced. Haven’t started SS yet so no other income, live off investments.

The 50% fixed income is made up of cash & very short term investments (<18 months-bills, CDs), short-term bond index fund and intermediate-term bond index fund. I like having a range of durations out but don’t go past intermediate. The cash portion varies between 5% to 10% thereabouts.

I withdraw a fixed % annually from the retirement portfolio to cover spending. That’s what we live off of and I don’t count it in the AA. I usually need to rebalance the retirement portfolio at least a bit after the annual withdrawal to get back to that target AA.

we set spending goal posts each year using the 95/5 method of withdrawal.

i like it because we are rewarded immediately each up year .

we took a cut in 2022 but even with that cut our allowable draw was still higher then we would have with the conventional 4% swr .

without a system of raises in place , the odds are way to high one will die with to much money unspent using the conventional method of calculating withdrawals .

as our portfolio grew larger and larger despite our spending , we don’t need our portfolio total capabilities anymore to live .

so every 4-5 years we buy a new car .

 

[audreyh1]

we set spending goal posts each year using the 95/5 method of withdrawal.

i like it because we are rewarded immediately each up year .

we took a cut in 2022 but even with that cut our allowable draw was still higher then we would have with the conventional 4% swr .

without a system of raises in place , the odds are way to high one will die with to much money unspent using the conventional method of calculating withdrawals .

as our portfolio grew larger and larger despite our spending , we don’t need our portfolio total capabilities anymore to live .

so every 4-5 years we buy a new car .

I use the % remaining portfolio method which means our annual income goes up and down each year depending on portfolio performance. So yes we are immediately rewarded or take a pay cut. We’ve been lucky in that we overall experienced a very long bull market in spite of the tough start 2000-2009 with two very nasty bear markets. So yes our income has grown to exceed our spending too. We’ve become more aggressive about gifting over the years, we travel as much as we can, and we did buy a very fancy car while we could still enjoy it. Knock on wood!

 

[FLSUnFIRE]

Within a wide range of possible asset allocation, believe it or not asset allocation has little impact on success ratios. Generally, from 40/60 to 95/5 the success ratio is pretty similar... 93.5% or better... so your chance of running out of money isn't much different. What are different though are ending assets.

This is basically my opinion/understanding of facts. pb4uski just sits on the other end of the spectrum in his choices than me. I'm still 100% safe at my current WDR (that I expect to grow over time with a fair amount of volatility: back to that ending portfolio balance). I'm still (barely) in my 40s so I have a long horizion and inflation is my biggest risk and IMO equities are the best hedge against that risk. The cash I hold is more for tax management/liquidity than for AA purposes.



As I've mentioned before, one thing that makes me feel comfortable with almost all equities is that my current WDR is slightly less than the earnings yield on the market. So I'm basically spending the earnings of the companies I own and not touching principle. If valuations change in the market (higher discount rate/risk premium driven by forces other than the earnings of the underlying companies) then that yield would go up as the divisor in the pricing increased so as my portfolio value went down and my WDR went up so would the earnings yield. There could be a big economic collapse that destroys earnings but that would impact almost anyone not in 100 "safe" investments as well as me. One lesson I took away from COVID is how fast the market can recover from a catastrophic event and Firecalc figures in all those long recoveries that have happened historically. Kind of the way I mentally view it at this time.



After all my blabbing, I think the take away is that there is no right or wrong answer but a lot of justifiably right AA depending on what variable you want to try to optimize.

 

[mathjak107]

there really is no such thing as not spending principal simply because all dividends and distributions from funds are handing you back your own money and are withdrawals.

what keeps us even or our portfolio growing while spending down is the fact we are appreciating more then we spend.

so it isn’t coming from company earnings as companies pay out even when they lose money , it is simply share appreciation being more then the draw.

shares can appreciate even when earnings stink or lose money if the loss isn’t as great as markets thought it would be

a withdrawal is a withdrawal and it’s your money (principal) that is withdrawn in all cases.

we just hope share appreciation keeps our balance at least stable .

 

[FLSUnFIRE]

there really is no such thing as not spending principal simply because all dividends and distributions from funds are handing you back your own money .

what keeps us even or our portfolio growing while spending down is the fact we are appreciating more then we spend.

so it isn’t coming from company earnings as companies pay out even when they lose money , it is simply share appreciation being more then the draw.

shares can appreciate even when earnings stink or lose money if the loss isn’t as great as markets thought it would be

a withdrawal is a withdrawal and it’s your money (principal) that is withdrawn in all cases

If not earnings/profit, what drives the appreciation? Invest in beanie babies then... all a stock is is shares in a company and people invest in companies based off of anticipated earnings which in the long term will drive the price. Sure, there are many that just buy the market (me) or speculating but they are not the ones setting the prices of the underlying stocks and those that do certainly consider earnings (ignoring day-traders/speculators who don't set long term valuations). Companies with no/low earnings have market value due to expectations of future earnings and bankrupt companies have zero value as all assets are sold off -including goodwill. I never implied a 100% correlation between price and earnings. The market price is simply the collective valuation of the decisions of millions of investors that certainly consider earnings.


https://www.investopedia.com/articles/fundamental-analysis/11/choosing-valuation-methods.asp

 

[mathjak107]

If not earnings/profit, what drives the appreciation? Invest in beanie babies then... all a stock is is shares in a company and people invest in companies based off of anticipated earnings which in the long term will drive the price. Sure, there are many that just buy the market (me) or speculating but they are not the ones setting the prices of the underlying stocks and those that do certainly consider earnings (ignoring day-traders/speculators who don't set long term valuations). Companies with no/low earnings have market value due to expectations of future earnings and bankrupt companies have zero value as all assets are sold off -including goodwill. I never implied a 100% correlation between price and earnings. The market price is simply the collective valuation of the decisions of millions of investors that certainly consider earnings.


https://www.investopedia.com/articles/fundamental-analysis/11/choosing-valuation-methods.asp

glad you asked


markets and growth and corporate profits have never been linked .

as much as we think higher profits lead to higher stock prices it really does not work like that .

markets are based on greed ,fear and perception not the here and now .

gains and corporate profits don't flow together more ofton than not.

in the book a random walk down wall street 548 nyse issues were tracked and analyed over 5 year periods and the results were the performance had no relationship between the technical and fundemental signals and the actual stock performance ..

ned davis research took another look at the relationship and going as far back as 1927 they found when profits rose more than:

20% the s&p returned a mere 1.3% in gains

10 to 20% saw 5.8% in gains

(-10% to + 10% in profits saw a 9.3% jump in gains

(-10%) to (-25%) drop in profits saw 28.6% gains

(-25%) and lower saw a -28% drop in share price.