Asset Allocation if Future Retirement Date is Four to Fourteen Years Away?

[nico08]

Currently, my asset allocation is set to 80% stocks and 20% bonds. Assume that my years before FIRE, could be anywhere between 4 (I will be 45) and 14 (I will be 55) years in the future. I understand that there is a significant amount of time between what could be my "earliest" and "latest" retirement dates. There are a number of variables at play which prevent me from being able to more accurately identify a future specific retirement date.

Based on this information, however, what would you say is an appropriate asset allocation for me today and moving forward into the future on a yearly basis? I imagine that 80% stocks and 20% bonds will be deemed an allocation for me that is too heavily weighted on stocks. If so, then I would like you to suggest a recommended asset allocation.

Thank you for your advice.

 

[Rambler]

I personally like 60/40 as my target AA. I'm a minimum of 1.5 years away, with a probable 1-3 year transition/slow-down/semi-retirement after that. I would probably begin adding more to fixed and less to equity over the period of time I reasonably expected to continue working (or a nearer target if you really do expect 14 more years). That said, some people are comfortable with 75/25 or 70/30 or 65/35. Same concept applies I think, just DCA into your bond positions over time.

R

 

[rescueme]

During the period of 1982-2005, my/DW's combined AA target was 90/10 (90% equity; 10% bond-cash). We were both employed at the time.

In preparation for retirement in 2007 (for both of us), I started "cashing out" our equity gains over a two year period, creating a cash bucket (included taxes due on tax deferred investments) for each of us, to equal 3-4 years of retirement income - primarily to cover extended period down market periods and to keep away from having to sell at a loss. Beyond the cash buckets, I also reallocated equity to bond funds.

When I started retirement in early 2007 (DW was to retire at the same time, but decided to stay employed) our joint target AA was set at 60/40 (60% equity; 40% bond-cash) and stayed that way for the first three years of retirement.

After being in retirement a few years and becoming comfortable with the draw-down process, I also realized that we did not need to have such a high exposure to equities (primarily driven by the 2008/early '09 period) so we reduced it to a 50/50 mix - where it remains today.

Over the next 6-7 years as our other retirement income streams start (two small pensions for DW, SS for both of us - DW at 66 and me at 70, and my 50% SS claim against DW at her FRA age which will provide me additional income from ages 66-69), we will again be reducing our equity exposure downward.

So for us, it was a multi-step process, and will continue to be so when we reduce our equity exposure as our additional income starts.

One thing to remember about having a high equity exposure while still employed; that is market downturns are not as much a direct impact to your day-to-day income needs (you have a paycheck). However after retirement, you quickly understand that "cash flow is everything" (especially if you don't have SS or a pension on day one of retirment) and you need to make adjustments to your plan in whatever make sense in your personal situation and acceptance of risk.

Just our story...

 

[Jamtin34]

In the range of 50/50 to 60/40 seems nicely balanced for my needs

 

[mystang52]

Depending on the size of your portfolio, a major consideration is that 80/20 may prevent you from retiring in 4 years in event of a significant market downturn at the wrong time.

 

[panhead]

midnighter: I am in a similar situation to you, including age. I just started a new thread (return of I'll show you mine and you show me yours). I'm asking this same question but with more detail. I'm currently thinking 70/30 but I have rental houses that provide income, and when they are sold I may increase my bond exposure at that time.

 

[Animorph]

Given that you have flexibility in when you retire I'd stay with your current allocation. If your portfolio loses value you stay unretired. When your portfolio reaches your retirement target then retire and adjust your allocation. No problem shifting to additional cash or bonds at the time you retire since the equities driving your portfolio have probably just reached new highs to achieve your target. Good time to rebalance.

You only need to start getting conservative before retirement if you have a specific date in mind or a serious risk of involuntary retirement.

 

[W2R]

A lot depends on your own risk tolerance. Four years before I retired, I had 100% stock funds. I moved to a more conservative allocation (75:25) three and a half years before I retired, and continued moving into more and more conservative AA from that time forward.

If I had it to do over again, I don't know if I would be comfortable with such risky AA's but at that time I felt it was necessary.

 

[DblDoc]

Given that you have flexibility in when you retire I'd stay with your current allocation. If your portfolio loses value you stay unretired. When your portfolio reaches your retirement target then retire and adjust your allocation. No problem shifting to additional cash or bonds at the time you retire since the equities driving your portfolio have probably just reached new highs to achieve your target. Good time to rebalance.

You only need to start getting conservative before retirement if you have a specific date in mind or a serious risk of involuntary retirement.

Many potential retirees were caught out by this strategy in our Great Recession. As your portfolio approaches your target your need to take risk declines. You should be adjusting accordingly - not wait until the day you hit that magic number.

DD

 

[urn2bfree]

just to confuse matters has everyone read this:
http://www.bobsfinancialwebsite.com/pdfs/Is_Rebalancing_a_Portfolio_During_Retirement_Necessary.pdf

 

[clifp]

just to confuse matters has everyone read this:
http://www.bobsfinancialwebsite.com/pdfs/Is_Rebalancing_a_Portfolio_During_Retirement_Necessary.pdf

We had discussion about this paper when it first appeared in June 07 near the top of the market. If I recall several of us had reaction to it. Logically if you withdraw money first from a lower performing assets i.e. bonds (especially if you ignore the 2008-09 period) you will end up with more money than if you take money first from stocks. So rebalancing into a worse performing asset can't help. I don't think they did a good job of looking at portfolio survivability.

 

[urn2bfree]

We had discussion about this paper when it first appeared in June 07 near the top of the market. If I recall several of us had reaction to it. Logically if you withdraw money first from a lower performing assets i.e. bonds (especially if you ignore the 2008-09 period) you will end up with more money than if you take money first from stocks. So rebalancing into a worse performing asset can't help. I don't think they did a good job of looking at portfolio survivability.

I don't like that it only tested against 30 years timeframe- BUT I also am open to the idea that strategies that work in an accumulation phase may not necessarily play out the same way in a withdrawing scenario--it may be that in a scenario wherein money is going down you have to accept MORE RISK to maintain survivability than you would in a scenario where cash infusions make up for lower overall returns.

 

[accountingsucks]

I am about that far away from retirement and right now I have 10% bond allocation and plan to increase that by 2% each year with a corresponding decrease of 2% in equities. By the time i`m 45 I believe I will reach my desired 65 - 35 stock to equity split

 

[ItDontMeanAThing]

Depending on the size of your portfolio, a major consideration is that 80/20 may prevent you from retiring in 4 years in event of a significant market downturn at the wrong time.

Recovering from a substantial drop in asset value right before or in the first few years of retiring may be anywhere from painful to impossible. Hence, the classic advice to increase one's percentage of bonds. I'm sure glad I did before the global economic meltdown.

But the meltdown isn't finished. Who's to say that both stocks and bonds aren't going to drop like stones at the same time? I know that I don't know, so my defensive asset allocation is 40% stocks, 40% bonds and the rest spread between REITS, gold mining stocks, stocks in economies that didn't have a credit orgy. Yes, I know the last 20% is all in stocks, but they are in sectors the have low correlation with most of what we think of as the market and I'm not in a position to own real estate or hold gold.