Asset Allocation Opinion Please

[moguls]

I have been ER’d since 2004. My current asset allocation is 65% equities / 35% fixed income ( 29% cash, CDs MM funds, and 6% bonds). From this total portfolio I’m withdrawing about 3.5% / yr for living expenses. I’ve done a cash flow analysis and my cash assets will cover my expenses for about 7 years.

Since I have a lot of Vanguard funds I took advantage of their free financial planning service. The planner is advising me to move more assets from equities into bonds.

Interestingly, I agree with most of his analysis. I would like to move to a heavier weight in bonds overall, but I’m not comfortable moving money into bonds right now. With interest rates at record lows, they have no where to go but up, and as a result I feel there’s an almost certainty of loss of principle.

I’d appreciate your thoughts.

 

[audreyh1]

Have you no concerns about loss of principal on your equities?

What about the relative degree of loss of principal? Do you think you are likely to lose a higher percentage on the equities or the bonds?

I see you are favoring cash over bonds in your fixed income portion. That's interesting. You really are worried about bonds aren't you to the extent that you are willing to put up with super low rates on cash. But how long will you be holding a fixed income allocation? Do you not believe that long term there will be recovery from short-term gyrations in bond valuations?

It all comes down to how well you sleep at night. If you were able to live through 2008-2009 with that equity exposure and maintain your AA, then you'll probably be fine going forward, especially with your 3.5% withdrawal rate.

I don't know your age, but I'm curious as to how you chose 65% equities. What was your goal?

Audrey

 

[moguls]

I'm 60yrs old. With family history for long life, I've tried to keep equities higher than normal, since I could need withdrawals for another 35 - 40 yrs.

 

[moguls]

Also over half of the cash is in older CDs that are maturing over the next couple of years yielding around 7 - 7.5%.

 

[ksr]

If you are concerned about inflation, have you considered putting a portion of your bond allocation into TIPs or TIP funds? TIPs are tax-inefficient (when you buy TIPs outright, as opposed to a fund, you pay taxes on the "phantom" inflation income that you won't receive until they mature), so you'd want to put them into a nontaxable retirement account. TIP funds are somewhat better in this respect, since they actually pay you that inflation component each year (you're still taxed on it, but at least you receive it).

The income from TIPs is usually not subject to state tax, BTW.

 

[audreyh1]

I'm guessing then that your higher allocation to equities for your age is because you want good protection from inflation over a long time period.

I am younger than you. I am 50 and have been retired for 10 years. I started with 60% equities and am now at 55%, and I imagine when I reach 60 years old, I'll be at most at a 50% equities allocation. Again - it all has to do with how much volatility you can live with in the portfolio short-term versus long-term inflation protection and gains.

I have 35% in bond funds. I don't worry about the short-term gyrations of bonds since I have and will hold them for a long time. If bonds get hurt in the short term, I'll simply add more to them from equities whenever I rebalance the portfolio. I've already been through this cycle before.

The problem with timing bonds, is that you never know when that short-term "hit" might come. All the time you are waiting, you might have already made enough in interest to overcome some temporary hit. And in the long-run it doesn't really matter anyway. So I simply don't see interest rates as a concern.

Simply sharing my point of view.

Audrey

 

[Xman]

Seems like an aggressive equity % to me, but I relate to the dilemma of lack of alternatives (as cash yields nothing and bonds seems likely to go down as the economy recovers and/or inflation picks up).

Is your equity % excluding real estate from the denominator? This is something I wrestle with. At 50 years old, I have 60% equity, excluding real estate. Including real estate, I'm at 40 something %. I have 2 high end paid off properties, so while I agree that some real estate allocated amount should be set aside and regarded as non-portfolio, since you need to live somewhere, I don't think my 60% equity exposure is as risky as it sounds.