Good problem, but how would you setup AA

[DFA]

Here is the situation(both retired, no kids)

Expenses 83K/yr; Expenses include all, but travel

Current retirement income 103K/COLA adjusted each year

Additional income: SS/both and two additional pensions totaling 60k/yr within 5 yrs

Current AA is 85%Eq/13%FI/2%Cash


Is our AA right for us, ages myself 60, DW 57 since don't have a need for it currently, that may change later if we have an unexpected life event.

 

[COcheesehead]

Is the 103k in income coming from the portfolio or is that pension as well?

 

[OldShooter]

Well, we are in a similar situation in that we probably have more money than we will ever need. So in that situation, the question becomes: What is the purpose or eventual use of the money? Kids' trusts or bequests? Gifts before you die? Grandchildren's education? Charitable gifts from the estate or before your demise?

Equities IMO should have at least a 5 year time horizon, ideally longer. With a long time horizon you may be looking at some volatility enroute but at the end odds are you will be much further ahead than you will be with fixed income or cash. So the risk with the long term stuff is that you will be too conservative in your investments and not have gained what you could. The risk is not the volatility.

Assuming that your COLA-ed $103K income is pensions not portfolio income, with that and the other income sources you are looking at a portfolio that will continue to increase until you both die. Is that necessary? What about having some fun with charitable giving along the way? Or helping out relatives and friends in an unobtrusive way. We have some friends who are not in great financial shape and who just had a 50th anniversary party. We left an unmarked envelope with fifty, $50 bills on the gift table. $2500. It would have been fun to be a mouse in the corner when they opened that one! But we enjoy just thinking about it.

The right answer for your AA depends on your goals, not on what SGOTI thinks.

 

[DeborahB]

I’m always independent and don’t follow orthodox approaches. I don’t have any asset allocation scheme. I am living on the interest and dividends on a variety of investment vehicles. Not too much into bonds right now, even with a rising interest rate. It’s still too low.

So I don’t follow any plan except to make educated decisions. I seem to always have enough money to pay for stuff. I need to have the exterior trim painted on my house, unexpectedly. $5K or so.

So do people use asset allocation because someone recommended it, or it lets you sleep at night, or something else? I am very confident about my approach FOR ME but I don’t recommend it unless you have a lot of background in finance and aren’t risk-averse.

 

[DFA]

103k is pensions.

 

[HI Bill]

I don’t have any asset allocation scheme. I seem to always have enough money to pay for stuff.

That's all great, until we encounter a black swan event (super high inflation, WW III, home country economy collapse (like Greece), etc. Following AA, with diversification between US and international investments, is designed to allow you to diversify risk, and enhance the probability that you won't end up bankrupt.

 

[DeborahB]

That's all great, until we encounter a black swan event (super high inflation, WW III, home country economy collapse (like Greece), etc. Following AA, with diversification between US and international investments, is designed to allow you to diversify risk, and enhance the probability that you won't end up bankrupt.

I’m actually doing all that, just not tied to a strict %. I don’t recommend it for most. I’m very diversified, have some international exposure and some bond funds as well as many stocks and some REITs.

 

[HI Bill]

I’m actually doing all that, just not tied to a strict %. I don’t recommend it for most. I’m very diversified, have some international exposure and some bond funds as well as many stocks and some REITs.

Great! Sounds like me up until this month. I actually decided upon an AA, and calculated deltas (differences, in both percents and dollars), and have been trying to rebalance to my goal AA. This week has made the task difficult, although I did move a bunch from money market into equities (buying some of the dip)!

 

[RetireBy90]

I would suggest that since you have expense needs covered with the pension, then you are back to advice from OldShooter, that is it depends on what you intend for the stash and the timeframe. My thinking is that money that isn’t needed in next 5 to 10 years or longer should have a greater allocation to equities, like you show. The other thing to consider is how great is the need for growth. DW and I are a bit older than you (62 and 65) and we have expenses covered with SS and pensions, so we have 70% in equities today. Yes, SS will kick in 8 years from now, so will draw a small amount from our pile for a while.

I would layout the intended use of your investment pile and plan around that.

One thing to consider, we have 3 pension checks and will have 2 SS checks, but will loose some income when one of us dies. If you don’t have a survivor benefit on pensions, consider how much of your pile the remaining spouse will need as a replacement. Just one item we have planned for.

 

[RunningBum]

Agree with OldShooter, it depends on what you see the money going to eventually, but it doesn't sound like anything near term, which implies mostly equities to me.

You also don't say how much we're talking about. If it's 100K, that could get eaten up pretty quickly by unanticipated expenses, and I'd lean more towards cash. If it's $1M or more, you're probably a whole lot safer.

 

[DFA]

Thank you for the feedback.

 

[bingybear]

Here is the situation(both retired, no kids)

Expenses 83K/yr; Expenses include all, but travel

Current retirement income 103K/COLA adjusted each year

Additional income: SS/both and two additional pensions totaling 60k/yr within 5 yrs

Current AA is 85%Eq/13%FI/2%Cash


Is our AA right for us, ages myself 60, DW 57 since don't have a need for it currently, that may change later if we have an unexpected life event.

you note expenses, a pension and SS. Are there assets you want to invest in this allocation? Or are the assets the $ that you don't spend from your pension/SS?

If an existing investment , how is it allocated now?

 

[DFA]

you note expenses, a pension and SS. Are there assets you want to invest in this allocation? Or are the assets the $ that you don't spend from your pension/SS?

If an existing investment , how is it allocated now?

Current AA is 85%Eq/13%FI/2%Cash; I really want to know if we are to heavy in Equites and Fixed Income. We really don't need the growth since all of our expenses are covered by pensions.

 

[Fedup]

Only you know that. How do you react to a big drop. I thought I was a long term holder until I’m not.

 

[53anddone]

I am younger than you (56) and have my expenses covered with interest and dividends on an AA of 50% equity, 45% CDs Etc and 5% cash. I feel under weighted in securities but I also sleep well at night knowing I have a large enough nest egg to support myself with a pretty conservative mix.

 

[Golden sunsets]

I’m always independent and don’t follow orthodox approaches. I don’t have any asset allocation scheme. I am living on the interest and dividends on a variety of investment vehicles. Not too much into bonds right now, even with a rising interest rate. It’s still too low.



So I don’t follow any plan except to make educated decisions. I seem to always have enough money to pay for stuff. I need to have the exterior trim painted on my house, unexpectedly. $5K or so.



So do people use asset allocation because someone recommended it, or it lets you sleep at night, or something else? I am very confident about my approach FOR ME but I don’t recommend it unless you have a lot of background in finance and aren’t risk-averse.

I'm curious. What is your withdrawal rate (SWR)?


Sent from my iPad using Early Retirement Forum

 

[bingybear]

I'm curious. What is your withdrawal rate (SWR)?

Are you asking for Safe Withdraw Rate or Withdraw Rate?

 

[Golden sunsets]

Well I call my withdrawal rate, my SWR. In this case I'm asking Deborah B, what her withdrawal rate is, if she is willing to share it.

 

[big-papa]

Here is the situation(both retired, no kids)

Expenses 83K/yr; Expenses include all, but travel

Current retirement income 103K/COLA adjusted each year

Additional income: SS/both and two additional pensions totaling 60k/yr within 5 yrs

Current AA is 85%Eq/13%FI/2%Cash


Is our AA right for us, ages myself 60, DW 57 since don't have a need for it currently, that may change later if we have an unexpected life event.

You are in an enviable position between your COLA'd pension and upcoming SS. So the only thing you seem to be concerned about is whether you can cover an unexpected life event, the magnitude of which is of course unknowable. But at least some of them can be mitigated.

Regarding expensive life events, presumably you have some form of health insurance that will carry you until Medicare? The only other thing I can think of is how you might be situated for the possible future need for Long Term Care, which is a life event that could easily be quite large in magnitude. LTC Insurance is one way to mitigate it.

If all are already considered, then it boils down to your "Need, Willingness, and Ability" to accept risk. We don't know the size of your savings, but you don't appear to have much of need to take risk, yet you appear to have the ability. That leaves you with "Willingness", meaning the question is how would you react to a large loss in your portfolio?

An excellent discussion of this topic is available here: https://www.bogleheads.org/wiki/Risk_tolerance

Best of luck!
Big-Papa

 

[DeborahB]

Well I call my withdrawal rate, my SWR. In this case I'm asking Deborah B, what her withdrawal rate is, if she is willing to share it.

I really don’t have a SWR. I withdraw cash when I need it... I have a lot of investments that together with SS kick off enough dividends and interest to easily cover my expenses. I stopped re-investing dividends a couple of years ago so some cash would accumulate. I try to move cash from non-qualified accounts into Ally. There always is enough money. As I said, it’s a very unorthodox approach that I don’t recommend to everyone. My assets grow each year.

I don’t budget and I don’t take a set amount per month or year out to spend. I am single with no kids. And I have a large amount in investments, not counting my house. If I want something, I buy it but my wants aren’t that much. I lived way below my means for many years to get to this point.

Just did a little math. I spend a little over 4% of my assets, rough estimate.

 

[target2019]

Here is the situation(both retired, no kids)

Expenses 83K/yr; Expenses include all, but travel
Current retirement income 103K/COLA adjusted each year
Additional income: SS/both and two additional pensions totaling 60k/yr within 5 yrs
Current AA is 85%Eq/13%FI/2%Cash

Is our AA right for us, ages myself 60, DW 57 since don't have a need for it currently, that may change later if we have an unexpected life event.

I would drop to next range down for equities (60-75%?). Would also consider how equities are invested. For example, heavy on conservative stocks (cap gains significant) or is it a few mutual funds?

1) The problem is that 85% equities may be cut in half by next recession, and how would you feel?
2) I take it you're looking at the investments as self insurance. In that case, I am guessing comparable institutions would be at 60-40 as a matter of policy. Make sense?

 

[Golden sunsets]

I really don’t have a SWR. I withdraw cash when I need it... I have a lot of investments that together with SS kick off enough dividends and interest to easily cover my expenses. I stopped re-investing dividends a couple of years ago so some cash would accumulate. I try to move cash from non-qualified accounts into Ally. There always is enough money. As I said, it’s a very unorthodox approach that I don’t recommend to everyone. My assets grow each year.

I don’t budget and I don’t take a set amount per month or year out to spend. I am single with no kids. And I have a large amount in investments, not counting my house. If I want something, I buy it but my wants aren’t that much. I lived way below my means for many years to get to this point.

Just did a little math. I spend a little over 4% of my assets, rough estimate.

Thank you for sharing Deborah. If you spend a bit more than 4% of your investment assets each year and don't have any income sources other than your dividends and interest, then your WR is over 4% which is not necessarily safe as a long term approach. However if you have SS, or a pension, or investment RE that throws off income, or expect SS or a pension in the future, then being a bit above 4% may be fine. As a general statement though spending more than 4% of your investment assets each year, (net of revenue sources) other than Dividends and Interest, is not a very safe withdrawal rate. What is your AA, if I may ask?

 

[ERD50]

... I have a lot of investments that together with SS kick off enough dividends and interest to easily cover my expenses. I stopped re-investing dividends a couple of years ago so some cash would accumulate. I try to move cash from non-qualified accounts into Ally. There always is enough money. As I said, it’s a very unorthodox approach that I don’t recommend to everyone. My assets grow each year. ...

It doesn't sound so unorthodox to me. If you have a diversified portfolio, and you can meet expenses from SS and the divs from your portfolio, it sounds like you are in good shape.

It seems like you should have some idea of your AA in that portfolio though. But history says portfolio success is not very sensitive to AA (pretty flat between about 40/60 and 95/5), so it probably isn't all that important anyhow.

...
Just did a little math. I spend a little over 4% of my assets, rough estimate.

Not sure what to make of that number. Spending 4% of your assets doesn't say anything about the long term safety of your portfolio, if some of that spending is funded from SS or another income stream.

Regarding the portfolio, it is the withdraw from the portfolio that matters. If you really are well diversified, and not focused on high-yield (possibly 'risky') investments, and only taking divs, that's probably ! 2.5%, which should be very safe.

-ERD50

 

[DeborahB]

It doesn't sound so unorthodox to me. If you have a diversified portfolio, and you can meet expenses from SS and the divs from your portfolio, it sounds like you are in good shape.

It seems like you should have some idea of your AA in that portfolio though. But history says portfolio success is not very sensitive to AA (pretty flat between about 40/60 and 95/5), so it probably isn't all that important anyhow.





Not sure what to make of that number. Spending 4% of your assets doesn't say anything about the long term safety of your portfolio, if some of that spending is funded from SS or another income stream.

Regarding the portfolio, it is the withdraw from the portfolio that matters. If you really are well diversified, and not focused on high-yield (possibly 'risky') investments, and only taking divs, that's probably ! 2.5%, which should be very safe.

-ERD50

I am well diversified in mostly dividend paying stocks. I have a moderate amount in other stuff like REITs. I take a long term view of my portfolio and don’t trade much any more. If my cash grows too large I buy something.

I appreciate all the concern but I’ve looked at this with various professionals and i really don’t want to share my net worth. I’ve got plenty of money. It’s irrelevant to me what the math looks like. At the end of the year I compare what I have with what I expected to have and it’s always higher. I do have a giant spreadsheet that started before I retired. And Quicken which I use solely to keep track of my total portfolio.

I think I have to say that I have enough money, net worth, to not have money worries. I’ve never believed that formulas explained anything about the stock market. It’s all built on psychology, fear and expectations. It is affected by world events, of course. But I’ve never found a technical way to play with the stock market that made sense to me. And it always bounces back eventually.

Long ago I was a financial planner for a while and have an MBA. I have a firm grasp on how money works. I’m just not technical about it.

My yield from all my investments, meaning dividends and interest, is $45K and I get $15K from SS. That’s more than enough for me. I have too much in cash right now, not earning. This is from memory, I didn’t recheck the figures. It could be $55K from investments. My asset base is growing every year. I have a recent 30 year mortgage at 4.125% which gives me deductible interest. I make more than that on investments.

Long winded! But truly this works for me and there is absolutely no way I end up poor.

 

[Fedup]

I think SWR is for 30 year horizon, if you are already 70, you are reasonable safe regardless, even if you live till 100.
I too don’t worry about my withdrawal rate, I withdraw what I need, and if it’s more than 4-5%, so be it. I might run out of life than run out of money. This is why I delay taking SS until I’m 70. A bit of a buffer in case I’m wrong.