Asset Allocation in retirement

[Chuckanut]

I am sure this has been discussed many times before, but I can't seem to find it on the forums so I thought I would ask.

I am planning on retiring at age 62. I expect to live into my 90's since my parents did. What asset allocation should I choose? I had been thinking of a simple 50/50 split between a US TOTAL STOCK INDEX and a BOND INDEX. Some people have suggested adding about 10% INTERNATIONAL STOCK INDEX and others a 5% REIT fund.

Above and beyond the money I invest above, I plan to keep two years of spending cash in short term CD's at the local bank. In case of a Bear market, I can spend that cash rather than sell stocks at a very low price.

Comments?

 

[Chuckanut]

Oh, about 1/4 of my income will come from Social Security, 1/4 from a pension, and 1/2 from my IRA and 401K investments.

 

[W2R]

I think your plans for asset allocation sound just fine.

Different people have different risk tolerances, of course, so they may have different asset allocations in your situation. However, yours sounds like a very reasonable, middle of the road asset allocation for your retirement and age.

I retired at just 7 months short of age 62, and have not yet claimed social security. Like you, I am planning for a lifespan well into my 90's. I am conservative when it comes to my money, and a "worrier" by nature. Like you, most of my investments are in index funds, though I do have 30% in Vanguard's Wellesley Income fund which is actively managed.

I chose an asset allocation of 45:55 (equities:fixed), which includes about 13% in an international stock index fund, and no REIT. I am perfectly happy with it. To me, it seems like you are "in the ballpark", and you can always tweak your asset allocation a little after you retire if you don't feel comfortable with it.

Here is a good list of books on investing, and I would suggest reading some if you haven't already.

 

[mickeyd]

Comments?

I suggest that you curl up with a few financial planning books (Bogle, Ferri, Swedrow, Laramore, Bernstein (W)) and learn about investing and retirement planning. It's not that difficult. Try your local public library first, they probably have books by these authors.

 

[Koolau]

Chuckanut, it sounds like you have a workable plan - especially if that 1/2 from your portfolio is within the "4% safe withdrawal rule" - and is flexible as well.

Some would suggest that with 1/2 of your income from "guaranteed" sources (pension and SS) you could afford to take more risk in your portfolio. I would not be one of those folks. If you don't need to take the risks to meet your spending goals, why shoot for more return? Personally, I've kept my equities below 50% since I don't need the returns to make my plan work. YMMV of course.

Good luck!

 

[Chuckanut]

Another option in the even of a bear market is to simply spend less. !!!!

I have considered reducing the stock exposure to say 35% but I still have to deal with my long lived ancestors. I will need inflation protection and, frankly, I don't trust our government when it comes to the public debt. I suspect they will try and inflate their way out of the huge, multi-trillion dollar debt we are building up.

 

[Chuckanut]

Koolua mentioned that a pension is "guaranteed". I wonder how others feel about that. It seems to me that pensions are 'fair game' to many corporate types who are looking to fatten their wallets. I know several hard working public employeess who are afraid their city or state my reduce their pension benefits to help with budget problems. They can't go back in time and redo their decisions, they have been contributing anywhere from 5 to 8 percent of their earnings to the pension for 20-30 years, yet they are treated like the economic problems we are experienceing are their fault. These are not the guys who retire after 20 years with 120% of their salary and full medical benefits. These are people who retire after 30 years with maybe 60% of their salary at best, no medical benefits (other than medicare), and a modest inflation adjustment at most.

 

[rescueme]

Koolua mentioned that a pension is "guaranteed". I wonder how others feel about that.

My late FIL was retired for over 10 years when his former company (in business 100+ years) was shut down and his pension plan was taken over by the PBGC. In his case (being older - in his mid/late 70's and having sufficient assets) it was not a big impact to his retirement lifestyle, but he did regret losing the income he was "promised".

The same thing happened to my BIL except that he was just a few years away from planned retirement, at a different company. His pension (also taken over by the PBGC) was also greatly reduced. The problem of being much younger and not having sufficient retirement savings keeps him wor*ing three days a week, in his late 60's, with no announced plans to stop.

As previously mentioned, the Feds can crank up the printing press to support federal pensions but I see a problem on the state/local government side. Years ago the idea was any pension or bond issues were "safe", since the state/local government had taxing authority, but you can now see where that does not seem to be as safe, these days.

So no, I don't feel that a pension is guaranteed. In a way I'm glad I never had one. Saving/investing on my own certainly has market risk, but at least I was not as shocked (as my FIL/BIL certainly were) when part of their own long planned for retirement income "evaporated" into thin air.

 

[Ed_The_Gypsy]

Following the path of others before me, I equate SS and pension (what little there is) as the equivalent of an annuity. Almost everything else is in equities, 50/50 US/foreign, focusing on dividends.

Run Firecalc to see what the results are. Play with the AA. Have fun.