If You Were in Your mid-40s

[nico08]

and you were going to retire within the next one to three years, what asset allocation would you be using? I was thinking 60 percent stocks and 40 percent bonds would be a good choice, but since my retirement may last a long time, 40+ years, I wondered if a 70 percent stock and 30 percent bond allocation would be more appropriate. What do you think?

 

[brewer12345]

I waffle between 60 and 65% equities with the balance in a mix of CDs, bonds, merger arbitrage funds and a few other things. If you look at firecalc runs for long term retirements (40 years) there isn't really a benefit to going above 65% or so for survivability.

 

[FIREd]

Early 40's here, and I shoot for ~50/50. But that's because much of my equity allocation is highly speculative and leveraged at the moment and I need some fixed income to dampen the crazy ups and downs. I would probably go up to 60-65% with a more traditional equity allocation.

 

[photoguy]

I'm 41 not yet ER'd but last day is tomorrow. I set a target for about 73/27 equities to fixed income. However we recently sold our house and that gave us a big chunk of cash (more than we expected) so we are sitting closer to 65% equities.

Before the extra cash infusion, we had 10+ years of expenses in FI.

Nico08 -- what withdrawal rate are you targeting?

 

[comicbookgujy]

I 'm 40 and plan to retire at 45. Right now, I 'm at 60% stock and 35% cash, 5% bond from holding Balanced funds. I would put more into bonds, but at this interest rate...

70% stock and 30% bonds make sense with the low interest rate you will get from bond.

 

[scrabbler1]

When I ERed back in late 2008, I had about 50% stock and 50% bonds in my 401k which I rolled into an IRA. The stock part was depressed at the time, of course, but it rebounded nicely back to my desired 55/45 stock/bond ratio if not more skewed. I rebalanced a few times until I switched to 50/50 last year.

Meanwhile, I cashed out my large company stock holding when I ERed and put it into a bond fund whose price was also depressed. Because my goal was to generate income to cover my expenses, I became bond heavy in my taxable accounts. It is about 63/37 in favor of bonds and it has deviated little in the last 5 years.

 

[traineeinvestor]

I FIREd last year at age 47.

We keep a few years worth of expenses in cash/bonds and the bulk of our investments in equities and real estate. No pension, SS etc. Over the longer term, I worry a lot more about inflation (over 4% last year where we are) than volatility.

 

[ShortInSeattle]

I plan to retire mid-forties at a 60/40 Equities/Bonds ratio.

I'm at 65/35 today, 5-10 years out from FI. I get the sense I'm conservative compared to many of my peers in their 30s,

I'm roughly "age in bonds" today but don't ever see myself going much below 55% equities.

 

[panhead]

and you were going to retire within the next one to three years, what asset allocation would you be using? I was thinking 60 percent stocks and 40 percent bonds would be a good choice, but since my retirement may last a long time, 40+ years, I wondered if a 70 percent stock and 30 percent bond allocation would be more appropriate. What do you think?

This pretty much describes me except I'm not sure WHEN I will retire, I just want to make sure that everything is set up so I can whenever I want to. I'm 60/40 right now if you consider my mortgage as a negative bond. I have 10% in cash (offsetting my mortgage) and I also have a paid off rental property worth about 10% of my nest egg. I like 'age in bonds' with about a 5% tolerance or so. I think anywhere between 60/40 and 50/50 should be ok, depending on withdrawal rate.

 

[Fermion]

We will be retiring in mid-40s and are going for 75% stocks 25% cash, 0% long term bonds (cash will probably be held in CD ladder/I-bonds for quick access with very little if any interest rate risk).

I probably won't rebalance in a market drop but will take dividends and use them for replenishing the cash pile.

 

[ziggy29]

I was at 70/30 when the last crash hit (I was 43 at the time). I stayed 70/30 for a while (and rebalanced to it periodically) to recover from the losses, but once I mostly recouped the losses I decided to ratchet back to about 60/40, where I am today.

 

[jebmke]

It would depend a lot on how big the portfolio was. The larger the pile, the less need to take on equity risk.

 

[hausfrau]

Hmm, I'm young 40's and DH is young 50's. Our taxable account is all equities. DH's retirement accounts are mostly equities, although he does have a bit in bonds via a target fund. I'm all equities. Maybe this a bad idea.

DH likes his work and is still employed. That may change in a couple of years though and I'm thinking about how to prepare. It's really hard to pull the trigger and invest in bonds right now. I thought I could compensate with dividend payers? Part of our taxable portfolio is invested in these. We also have about 6 months cash.

 

[Fermion]

The market can't survive a sustained 50% drop, so that alone is a nice reason to be higher equities. If we have a sustained 50% drop a ton of public pension funds will go belly up, causing disaster (they have only recovered from the last drop because of the tremendous bailout support).

Knowing that the goal of the government is to support equities and keep interest rates low makes it smart to be at least 60% equities.

Edit. I mean this is a bet, but a good bet, like betting that the USA will not default. If you know that the government will not let pension funds collapse and you know that pension funds rely heavily on stock market returns, then you know that the government will not let the stock market collapse.

 

[Koogie]

It would depend a lot on how big the portfolio was. The larger the pile, the less need to take on equity risk.

I agree. Plus how much you spend, if you have a pension, yada yada.

FWIW, I'm forty and will semi/full retire next year. I have over 15 years in FI (yes, 15 years). I took a lot of risks in my life with my business and sacrificed a lot to get to this point. Therefore I only take on as much risk as I need to as myself, my advisor and Firecalc all agree that we probably have enough to make it or close enough anyway. So, we are closer to 35/65 EQ/FI.

 

[HFWR]

If I were mid-40s, I'd be a lot younger!

 

[eridanus]

I'm currently 85/5/10 (s/b/c) and will move to 80/10/10 at ER, which should be around 45.

 

[Ready]

Try running different scenarios through Firecalc by going to the "Investigate" tab, and then select determine a spending level to achieve 100% historical success.

I've tried ten degree increments from 30% - 80% equities. The historical maximum yield is achieved for me at 50% stocks. Going either 40% or 60% stocks only changes my spending level very slightly though.

It's not until I drop down to 30% stocks that I see a measurable drop in expense levels. So realistically, 50-60% equities is more than enough to maintain a conservative portfolio with moderate volatility, assuming you have enough to live on without requiring extraordinary returns.

 

[Henry Lili]

I tend to lean to where "Ready" is coming from. Play with Firecalc, Vanguard and/or Fidelity or other calcs. to get a feel for where you might "need" to be. If all show you can make it "45 or 50 years" with "50%" equites you may not need or want to be at 60% or more. It's also insightful to try diffent periods of time in increments of 5 or 10 years.

 

[CyberBob]

I retired at 42 and am now 50.
Even though I retired only two years before the 2008 nosedive, I still feel that volatility isn't a good measure of risk. Since I'll hopefully be retired for quite a long time (40+ years), I think the biggest risk is inflation.

Consequently, my current allocation is 89/10/1 stocks/bonds/cash.

But you have to consider withdrawal rate and allocation together. If my withdrawal rate were higher, I'd benefit from having more in bonds, as the volatility of a higher stock portfolio would work against me as to portfolio longevity because of potential sequence of withdrawal risk issues.

Bob

 

[clifp]

I certainly say 70%. It is not random chance that default AA for FIRECalc is 75/25%. As the FIRECalc instructions say.

percentage of your portfolio that is in equities, versus fixed income? Research seems to suggest about 50% for a 10 year term, almost 70% for a 20 year term, and around 85% for a 60 year term. %

I understand that stock price seems expensive (and they well maybe) but bonds are even more overvalued IMO. More importantly bonds just aren't going to produce enough income to fund a 40+ year retirement, unless you have really low withdrawal rates.

You figure bonds are producing about 1% real returns (total bond market (BND) 2.5% minus 1.5% inflation)
If 40% of your portfolio is earning 1% that is .4% you can withdraw without touching principal.
If you think stocks are overvalued and unlikely to return more than 4% (real) over the next decade than 60%* 4%= 2.4% +.4%= 2.8% withdrawal bumping the AA up to 70% moves the withdrawal rate up to 3.1% (or a 10%+ bump in spending.)

It seems me if you think stocks are going to be returning less than 3% a year, you shouldn't be retiring without a full pensions.

 

[Fermion]

It seems me if you think stocks are going to be returning less than 3% a year, you shouldn't be retiring without a full pensions.

I would not want to depend on a pension if stocks were returning less than 3% a year for an extended period. The pensions would go bankrupt. They all use about 6 to 8% for funding calculations.

 

[clifp]

I would not want to depend on a pension if stocks were returning less than 3% a year for an extended period. The pensions would go bankrupt. They all use about 6 to 8% for funding calculations.

Good point although to be clear I was referring to 3% real return, so if inflation is 2-3% than 5-6% nominal returns. The larger point is spot on, we can be as conservative as we want in planning on for future returns. The rest of the world is far less conservative and prolonged period of 1% real bond yields and 3% real stock returns, is a Japanese like economy or Greece.

 

[Turboslacker]

I'm mid forties and 100% equities. Will likely stay that way forever but I'm more comfortable with risk than most here.

 

[Hermit]

I would not want to depend on a pension if stocks were returning less than 3% a year for an extended period. The pensions would go bankrupt. They all use about 6 to 8% for funding calculations.

My megacorp was putting billions into the pension fund there for a few years. Didn't do a lot for the stock price, but as one drawing from the fund, I'm not complaining.