Best AA?

[Dtail]

Yes he does. He changed to say to have 20 to 25x income needs in cash, cash equivalents and very high quality fixed income. Only funds above that should be invested in stocks. So someone seeking to retire with typical 25x needs is looking at a 100% conservative fixed income portfolio or is advised to retire with a much larger pile if they want some stock exposure.

And there is the issue. If one wishes to draw 4% of current portfolio for example, current non equity instruments will not provide that 4% return without taking on high yield risk, etc.

 

[mrWinter]

The risk we are talking about is not risk of low market returns tanking a portfolio, it's a risk that you as the investor will make poor choices

A lot of people had won the game before the [2008] crisis happened: They had pretty much saved enough for retirement, and they were continuing to take risk by investing in equities.
Afterward, many of them sold either at or near the bottom and never bought back into it. And those people have irretrievably damaged themselves.
I began to understand this point 10 or 15 years ago, but now I’m convinced: When you’ve won the game, why keep playing it?
How risky stocks are to a given investor depends upon which part of the life cycle he or she is in. For a younger investor, stocks aren’t as risky as they seem. For the middle-aged, they’re pretty risky. And for a retired person, they can be nuclear-level toxic.​

This class of risk is an entire different beast than what people normally call risk. I'm not going to pretend at my young age that I'm some kind of super rational entity that would never make such a mistake myself, but I think it's worth noting that when we are talking about holding a lower equity allocation we are talking about protecting ourselves not from the market, but from ourselves.


Also it's worth nothing that this protection only exists in the earlier portion of retirement, it's like sequence of return risk. After a decade, a 100% equities portfolio drawing 4% a year is on average 1.74 times as big as a 100% bond portfolio doing the same, meaning the equity scenario could at that time withstand a 42% drop, and you could then sell all equities for fixed income, and you'd be no worse off than if you had been in the bond scenario the entire time. And of course if you don't sell at the bottom you are in a much better position.



Also, those people who 'won the game' by 2008 but were high in equities then, got to that winning position by being in equities. (unless someone had been sitting on fixed income their whole life then sold for equities in 2007). So arguing that they should have not been in equities anymore as of 2008, I don't see how that's not just arguing for market timing. Unless these people were supposed to have crossed an imaginary portfolio number, and then switched AA drastically down to more fixed income because they hit their number, there was nothing significantly different from their perspective going in to 2007 and going in to 2008. It's very easy in hindsight to say people should have had more fixed income in 2008, but is it as easy to say that about 2005?

 

[mrWinter]

Yes he does. He changed to say to have 20 to 25x income needs in cash, cash equivalents and very high quality fixed income. Only funds above that should be invested in stocks. So someone seeking to retire with typical 25x needs is looking at a 100% conservative fixed income portfolio or is advised to retire with a much larger pile if they want some stock exposure.

That's a pretty extreme stance. I don't see in firecalc how to include cash in the portfolio, but using other calculators, having 25x times spending in 50/50 bonds/cash is a pretty clear recipe to go broke. Maybe if you are retiring at age 75 that would work...

 

[REWahoo]

Here's a thread discussing Bernstein's "won the game" ultra-conservative AA recommendation for retirees:

http://www.early-retirement.org/forums/f28/the-worst-retirement-investing-mistake-63236.html

 

[pb4uski]

Good point.

 

[meleana]

Does Firecalc take into consideration that you have to pay taxes on your withdrawals that you have to live on and on SS and so forth? So you actually have to take out more money from your savings/investments than just what your net expenses are?

 

[mrfeh]

Does Firecalc take into consideration that you have to pay taxes on your withdrawals that you have to live on and on SS and so forth? So you actually have to take out more money from your savings/investments than just what your net expenses are?

You need to estimate what your taxes will be and treat them as an expense. There's no way for firecalc to do that, because the effective tax rate will vary greatly from person to person.

 

[galeno]

I like the Boglehead rule of thumb: "keep your age in bonds".

 

[Dtail]

I like the Boglehead rule of thumb: "keep your age in bonds".

Some folks have modified that concept to 110 or 120 minus age equals stock allocation, as the concept of keeping up with inflation related to stocks has received more press.

 

[IMATERP]

Thank you! I have to think about that. That would equate to like $330,000 in bonds. I've always been a big stock guy, but I get the logic.

I have a little less than you (765k) but have a monthly State Pension (+ free healthcare) that begins in 23 months. I retired in 12/2017. I followed the previous posters advice and purchased CDs and Bonds (40k each) that mature each year over the next 7 years.

Having some fixed income due annually allows me to either use the money as needed OR strategize annual transfers from my IRA to my Roth (at least for the next two years.)

Oh, I also picked up a side hustle - 10-15 hour weeks with maximum flexibility.

Cheers,
I

 

[Hamlet]

Yeah, she loves her job, but who knows what future holds....just ran numbers again and they still put me at 95% + with higher expenses...
my thinking is it just has to last until I'm 70 as ss will kick in big time...maybe I'm too optimistic

This would be my main worry with your retirement. Will your wife really want to keep working in 5 years while you are not working? Health insurance costs if she wanted to retire as well would put a monkey wrench into your plans.

I would discuss some of the possible scenarios ahead of time with her so that you are both prepared for bumps in the road-

What will you do if she gets fired or decides she no longer likes her job? Tighten belts or potentially return to the workforce?

None of this is to say you shouldn't retire. Its just best to have an idea of how you both will want to proceed if bad things happen.

 

[GravitySucks]

To the OPs question:
The Best AA is the one that keeps you from selling into the drops due to fear, or buying into raises due to greed. It is a very individual decision that, no matter how logical you believe you will be, will be driven by emotion.
I certainly didn't get it right from out of the gate. At retirement I went from 90/10 to 80/20 on advice and from both 80/20 to 70/30 also 70/30 to 60/40 on experience.