Appropriate Asset Allocation for new Retiree?

[SunnyOne]

I am retiring soon, at the end of 2019, at age 59. Divorced, one adult child, living mostly independently.

Retirement assets consist of a mix of broad based stock and bond funds worth approximately $1.8M

Additionally, a pension of $1K/mo and Social Security at earliest age of 62 will be worth $2K/month.

Current employer will provide retiree healthcare, my cost will be about $180/month to start with.

Planning to live on expenses of +/- $70K/year in retirement.

Current Asset Allocation is 50% stock funds/ 50% bond funds

I attempt to not be swayed too heavily by news and news of an impending economic downtown.

Nevertheless, I am concerned and considering changing my AA to 40% stocks/60% funds.

Any thoughts, advice or comments? Thank you!

 

[RunningBum]

Your call. I like to keep my AA the same and not try to predict the markets, but a 10% swing isn't drastic.

Which one would make you more upset:

1) Keeping the 50/50 AA, and seeing the market go down like you knew it would.

2) Switching to 40/60, but seeing the market continue to go up

That will be a good indication of which way you should go.

I think the only way you can really lose is to go to 40/60, watch the market keep going up, give up and go to 50/50, and THEN have the market drop. But even with that, you've only screwed up on 10% of your money.

 

[pb4uski]

At your age, I would stay with 50/50 or even a higher allocation to stocks. I'm 64 and target 60% stocks but am currently more like 52%.

That said, the difference between 40/60 and 70/30 in terms of success rates are very similar... but higher stock allocations result in higher estates over a 30-40 year time horizon even though the success rate is similar.

 

[ducky911]

I'm 60/40 and too think of changing from time to time but the thought of creating a income tax hit keeps me staying the course. And that has work good for me.
i'm not sure there a huge difference, giving time, from 40/60 50/50 60/40.

 

[SnowballCamper]

With $1.8M and $70k expenses you could put five years of expenses (350k) in cash-like assets (CDs, TIPS, etc.) and let the remaining $1.45M ride in a total market index fund.

On up years, move $70k to to cash-like instruments. On down years, wait it out. The recent 'biggest in a lifetime' downturn was 5.5 years for the S&P 500 to get back to previous level.

 

[Midpack]

It's not a big difference between 50:50 and 40:60 as others have noted, I wouldn't worry at all about either.

If you like pictures (like I do), this may help illustrate the small differences in the asset allocations you're considering. I wouldn't necessarily put a lot of weight on the returns shown as they vary considerably (shown), but the relative differences and ranges hold up pretty well over the long run. And in the end, it's a personal decision each of us has to make, there's no universal right answer - some of us are more risk averse than average, others less so. Plus if you have more than adequate assets, you don't need to take any more risk than what's necessary to keep up with inflation, what many refer to as "if you've won the game, why keep playing?"

 

[OldShooter]

It will not be a smooth ride but at your withdrawal rate and reasonable expectations for growth in the porfolio, I think the portfolio will continue to increase.

AA? Well, the first question is "What is the purpose of the portfolio?" If you want to leave a large estate that is one thing and it leads you to more equities. If you want to absolutely, positively, have no financial risk during your lifetime that may lead you to TIPS.

For sure, ignore the stupid formulas relating to your age. The size and purpose of the portfolio should drive your decisions. For reference, we have more money than we will ever spend, so our AA is 75/25.

Finally, as others have said, from backtests anyway, there is not a lot of difference between 60/40,50/50, and 40/60.

 

[FREE866]

Like others have said a 10% difference either way will not affect the success ratio.


I have opted for higher equity--90% because when I run the numbers the success ratio is the same for 60/40 or even 50/50 , but the total balance over 20-30-40 years is substantially higher with higher equity.

 

[HI Bill]

Like others have said a 10% difference either way will not affect the success ratio.


I have opted for higher equity--90% because when I run the numbers the success ratio is the same for 60/40 or even 50/50 , but the total balance over 20-30-40 years is substantially higher with higher equity.

+1. The chart posted above by Midpack includes both historic bond and equities returns. I'm conviced that we'll never see bond returns that revert to levels found in the 1970s, so I think the spread will be larger in the future. Bonds, IMHO, will create a significant drag on one's returns. FWIW.

 

[FREE866]

+1. The chart posted above by Midpack includes both historic bond and equities returns. I'm conviced that we'll never see bond returns that revert to levels found in the 1970s, so I think the spread will be larger in the future. Bonds, IMHO, will create a significant drag on one's returns. FWIW.

Yeah, whenever I roll over my treasury bill I'm like ugh whats the point lol
But then again if market goes down 50% treasury bills will look good. My rationale is that I will only be in trouble if stock market goes down 40-50% and then stays there for a number of years.

 

[HI Bill]

Yeah, whenever I roll over my treasury bill I'm like ugh whats the point lol
But then again if market goes down 50% treasury bills will look good. My rationale is that I will only be in trouble if stock market goes down 40-50% and then stays there for a number of years.

Yes, that's why I have 19% of my portfolio in bonds and money market accounts.

 

[COcheesehead]

+1. The chart posted above by Midpack includes both historic bond and equities returns. I'm conviced that we'll never see bond returns that revert to levels found in the 1970s, so I think the spread will be larger in the future. Bonds, IMHO, will create a significant drag on one's returns. FWIW.

I think "income" instead of bonds. So I use multi sector funds, closed end funds, a bond ladder, etc to create a cash generation machine to sit opposite my pure equity plays. I am still getting over 4% in today's environment with income investments.

 

[Dtail]

I think "income" instead of bonds. So I use multi sector funds, closed end funds, a bond ladder, etc to create a cash generation machine to sit opposite my pure equity plays. I am still getting over 4% in today's environment with income investments.

Yeah seems to make more sense in this environment with I assume you are holding the bonds to maturity.
Don't really think we will see the inflation levels of the 70's.

 

[Focus]

Up until a couple of years ago, I was at 60/40 and expected to stick to it forever. However, political instability and perceived overvaluing of stocks made me switch to 50/50.

Although the market has continued to go up, I haven't regretted the change. At this stage of my retirement, there's something comfortable about having it be half and half. (By the way, I retired five years ago and I'm your age now.)

 

[JustCurious]

Don't really think we will see the inflation levels of the 70's.

Do you think people in the 60's expected to see the inflation levels of the 70's?

 

[SunnyOne]

Thank you for the helpful comments.

<<AA? Well, the first question is "What is the purpose of the portfolio?" If you want to leave a large estate that is one thing and it leads you to more equities. If you want to absolutely, positively, have no financial risk during your lifetime that may lead you to TIPS.>>

The purpose of the portfolio is to provide an income for me only, for the rest of my life. Leaving a legacy is of no interest to me. I am not familiar with TIPS, looks like I should be. Sounds like an annuity-like strategy. Thank you for pointing this out.

 

[gwraigty]

The purpose of the portfolio is to provide an income for me only, for the rest of my life. Leaving a legacy is of no interest to me. I am not familiar with TIPS, looks like I should be. Sounds like an annuity-like strategy. Thank you for pointing this out.

You can do a search for ETFs/mutual funds at your financial firm. Sort by SEC yield, high to low. Do not necessarily jump at the highest yielding options. I use a variety of ETFs in the realm of long term corporate bonds, preferred stock, high yield common stock. Some good conservative choices might be an all-in-one bond ETF or corporate bond ETF that spans short, intermediate, and long term maturities, or a dividend growth stock fund.

 

[Spanky]

Like others have said a 10% difference either way will not affect the success ratio.


I have opted for higher equity--90% because when I run the numbers the success ratio is the same for 60/40 or even 50/50 , but the total balance over 20-30-40 years is substantially higher with higher equity.

It appears that your risk tolerance is very high. 90% The end balance may be a lot higher, but the volatility will be substantially higher in comparison to a more moderate allocation, say 50%. Keep in mind that estimated "success factor" from any retirement calculator is based on historical data. A higher ratio means the chance of running out of money is lower. Attaining a higher end balance over a long period is not relevant unless one plans to leave a legacy.

 

[FREE866]

It appears that your risk tolerance is very high. 90% The end balance may be a lot higher, but the volatility will be substantially higher in comparison to a more moderate allocation, say 50%. Keep in mind that estimated "success factor" from any retirement calculator is based on historical data. A higher ratio means the chance of running out of money is lower. Attaining a higher end balance over a long period is not relevant unless one plans to leave a legacy.

I hear you and I agree with everything you said. In terms of history , we have had a tremendous bond market the last 20 years so moving a big amount into bonds isn't necessarily going to "save the portfolio" either if the next 10 or 20 arent so great. Inflation and withdrawals could easily eat away at that portion.

 

[OldShooter]

It appears that your risk tolerance is very high. ... the volatility will be substantially higher ...

The professors make this equivalence all the time so they can play their mathematical games with Gaussian distributions, but I think we delude ourselves if we channel our thinking to believe that there is no risk except volatility. That is clearly nonsense.

For our investments we do not even consider volatility to be risk. It would be part of risk (aka sequence of returns) if we did not have a non-equity tranche that is more than adequate. Since we can draw on that we really don't care how much fun the market averages have or don't have over any short term period.

 

[Spanky]

I hear you and I agree with everything you said. In terms of history , we have had a tremendous bond market the last 20 years so moving a big amount into bonds isn't necessarily going to "save the portfolio" either if the next 10 or 20 arent so great. Inflation and withdrawals could easily eat away at that portion.

You are right about the bond market. The same thing can be said about the equity market, however.

 

[FREE866]

You are right about the bond market. The same thing can be said about the equity market, however.

True. However, stocks have out performed bonds 100% of the time if you look back at any 20 year time frame. Even 10 year time frames stocks outperform bonds 84% of the time.

 

[Finance Dave]

Sometimes I use this thinking....not sure if it helps you. It's more of a rule of thumb.

The percentage you have in equities, multiplied by the percentage of drop during a downturn, equals the amount you could "lose".

For example, if you have 50% in equities and the market drops 50%, then you'd lose 25% of your value. 40% equity position with a 50% drop results in 20% loss in value.

One of the largest drops we've had in the markets was in 2008-2009 (recent history). IIRC, the S&P dropped about 35% during that timeframe. So if you had a 50% equity position at that time, you'd have lost 17.5% of your value.

I'd determine the value of loss where you'd start losing sleep, determine the largest drop you think we'd ever see in a downturn, and then gauge where you want to be on equities.

During my *orking years, I had a high risk tolerance....could always work more if I lost money in the market. I was 90% invested in equities most of my working life. But now that I'm FIREd, I'm extremely risk averse...to the point where we "oversaved" so that we could safely have a lower equity position. Yes, I miss out when the market goes up...but I sleep really well when the market drops.

Related motto..."You only have to get rich once"

 

[bmcgonig]

Sometimes I use this thinking....not sure if it helps you. It's more of a rule of thumb.

The percentage you have in equities, multiplied by the percentage of drop during a downturn, equals the amount you could "lose".

For example, if you have 50% in equities and the market drops 50%, then you'd lose 25% of your value. 40% equity position with a 50% drop results in 20% loss in value.

One of the largest drops we've had in the markets was in 2008-2009 (recent history). IIRC, the S&P dropped about 35% during that timeframe. So if you had a 50% equity position at that time, you'd have lost 17.5% of your value.

I'd determine the value of loss where you'd start losing sleep, determine the largest drop you think we'd ever see in a downturn, and then gauge where you want to be on equities.

During my *orking years, I had a high risk tolerance....could always work more if I lost money in the market. I was 90% invested in equities most of my working life. But now that I'm FIREd, I'm extremely risk averse...to the point where we "oversaved" so that we could safely have a lower equity position. Yes, I miss out when the market goes up...but I sleep really well when the market drops.

Related motto..."You only have to get rich once"

100% the above.

Also another way that I personally look at it:

If you have guaranteed income such as SS or pensions then even with a large drop in equities your "income" doesn't have to change that much if you're taking % of portfolio withdrawals.

Eg let's say that pensions and SS make up 50% of your yearly income and you are taking a 4% (or whatever) from your 50/50 stocks and bonds. If the market drops 30%, your yearly income will only drop by 1/4 of that or less, ie 7.5%. Probably less since we hope bonds will rise on such occasions. So if you have enough discretionary spending to handle a 7% drop in income, you're fine.

 

[Focus]

One of the largest drops we've had in the markets was in 2008-2009 (recent history). IIRC, the S&P dropped about 35% during that timeframe. So if you had a 50% equity position at that time, you'd have lost 17.5% of your value.

I'd determine the value of loss where you'd start losing sleep, determine the largest drop you think we'd ever see in a downturn, and then gauge where you want to be on equities.

Eg let's say that pensions and SS make up 50% of your yearly income and you are taking a 4% (or whatever) from your 50/50 stocks and bonds. If the market drops 30%, your yearly income will only drop by 1/4 of that or less, ie 7.5%. Probably less since we hope bonds will rise on such occasions. So if you have enough discretionary spending to handle a 7% drop in income, you're fine.

I find these different ways of looking at it to be very helpful. It's all about what makes each of us feel secure. I've ended up spending less in retirement than I expected (so far). Some people in the same position might decide to increase their possible upside by tilting strongly toward stocks. In my case, however, it's led me to think I can stay fairly conservative in my allocation (50/50) and not have to worry so much about stock appreciation.