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Pensions replace bond funds for AA
Old 08-19-2018, 08:02 AM   #1
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Pensions replace bond funds for AA

We've been investing more of our AA towards stocks (85%) than bonds over the past 15 years as I knew the two of us would be receiving pensions and social security.
As well, we have rental income that gives off a monthly income stream.
Between all of the above mentioned their total income replaces most, if not all, of our retirement expenses. Pensions are COLA adjusted for inflation..no debt.


Now for the question, is my thinking sound to be running 85% stock allocation throughout retirement if expenses are covered ?


I'm sure it's been ask before on this site but I could not find it in the forums.
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Old 08-19-2018, 08:29 AM   #2
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Between all of the above mentioned their total income replaces most, if not all, of our retirement expenses. Pensions are COLA adjusted for inflation..no debt.

Now for the question, is my thinking sound to be running 85% stock allocation throughout retirement if expenses are covered ?
The answer will always come down to your investment objective and your risk tolerance.

What is it that you are hoping to accomplish with such a high stock allocation? Is there a reason for assuming such a high level of risk as opposed to having a low risk portfolio that would simply be guaranteed of maintaining its value through retirement, and being your safety net?

Clearly, if you are considering an 85% stock allocation, you believe you have a high risk tolerance. Ask yourself (trying to be as objective as possible) if you'd be ok seeing the bottom line on your portfolio being half of what it is today during a crisis situation with your rental properties vacant and/or unable to sell. It's a difficult thing to do, especially during a time when the economy appears to be strong, the stock market is flirting with all-time highs, and most folks are feeling good about their financial situation.
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Old 08-19-2018, 08:59 AM   #3
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Something to consider:
https://www.thebalance.com/i-bonds-b...n-make-2388902
... an article about IBonds

Not as advice, but from personal experience. Back in 2001-2003, the maximum IBond investment was $30,000 per person per year. Now, the max is $10,000. While we took it on the chin in the high interest years, those bonds, which track inflation twice a year, are paying over 5% today. Current (buy May 2018-Oct 2018) composite rate is 2.5%.

Depends on what you think the market will do. IBond calculations (twice a year), includes the CPI as part of the composite formula.

We're risk averse and over the past 30 years, would probably have done better by investing in the market, but not having a good way to recover from a bad market, we took what we though to be a safe path.
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Old 08-19-2018, 09:08 AM   #4
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We're risk averse and over the past 30 years, would probably have done better by investing in the market, but not having a good way to recover from a bad market, we took what we though to be a safe path.

Ditto - for the next 30 years in our case.
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Old 08-19-2018, 09:18 AM   #5
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I can't tell you what to do, but I can tell you what I am doing and why.

I think that diversification of income sources in important in retirement - the three legged stool. Alas, I only have control over one leg - personal investments. The pension and SS legs are in the hands of politicians.

The Detroit pension fiasco scared the H#$@!L out of me.

My pension, while decently funded compared to many states, and solid gold compared to states like Illinois and Connecticut, could be cut in the future. I think the rate of return, though recently lowered, is still optimistic for the next decade - 6.8% IIRC. I am also assuming that my SS payment will be cut to 75% of the current projection.

Running the reduced expectations through Firecalc and a MonteCarlo simulator showed me that I can still enjoy retirement, but the weekend 1st Class flights to Paris for dinner at Le Meurice ($500 per person) will have to end. Instead it will be wine, women and song at the local winery's Friday night shindig. Heck, the shindig is a lot more fun anyway.

So, I have decided to not risk the investment leg of the stool, but will keep it strong with a 60/40 AA. If my pension and SS legs get a bit wobbly, I will need at least one strong leg on that stool to keep from falling over.

When you have won the game why risk an injury trying to put more points on the board?
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Old 08-19-2018, 10:05 AM   #6
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Quote:
Originally Posted by workmyfingerstothebone View Post
We've been investing more of our AA towards stocks (85%) than bonds over the past 15 years as I knew the two of us would be receiving pensions and social security.
As well, we have rental income that gives off a monthly income stream.
Between all of the above mentioned their total income replaces most, if not all, of our retirement expenses. Pensions are COLA adjusted for inflation..no debt.


Now for the question, is my thinking sound to be running 85% stock allocation throughout retirement if expenses are covered ?


I'm sure it's been ask before on this site but I could not find it in the forums.
The devil is in the details, but FIRECalc's investigate tab will let you see how changing your AA will affect your results.... but if stable sources of income cover a lot of your spending then I think a higher allocation to stocks would be unlikely to significantly increase the risk of ruin.
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Depends on your spending goal
Old 08-19-2018, 11:06 AM   #7
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Depends on your spending goal

I think your plan is probably sound, but it depends on how much you want to spend from your stock/bond portfolio. If you plan to spend 4 percent annually then a historical simulation like firecalc would suggest there will be risk of running out of money unless you reduce spending. However, if you plan to spend only 3 percent or less then you will be fine unless we have an economy so bad it is worse than anything observed in the past 100 years. I base this assertion on the analysis in this:
https://earlyretirementnow.com/2017/...y-gliadepaths/
but I warn you that it is not real easy reading.
I am doing what you are proposing: 85 percent equities with all basic needs coming from other sources (SS, annuities). Why? Although I know I will be somewhat uncomfortable when the inevitable downturn in the stock market occurs, I want to grow my funds so that I can give more to my favorite charity and to my children.
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Old 08-19-2018, 11:20 AM   #8
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We are in a similar situation - Cola'd pensions and SS cover our essentials. Withdrawals cover the rest. We our desire for substantial travel, those withdrawals are still significant. I evaluate my optimal AA based on how much of the portfolio I need to withdraw each year to meet my desires - not just needs. That led me to move under 70% so I would have some volatility cushion and plenty of bonds to pull from if we have a prolonged equity meltdown. As DW and I get older I am planning to increase the equity portion since I will be thinking more and more about long term growth for the estate rather than withdrawals. At some point I will ask the kids what they want our AA set at.
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Old 08-19-2018, 12:22 PM   #9
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I think this is what I need to determine "The answer will always come down to your investment objective and your risk tolerance."


Having been through California housing meltdown (50%cut in market value) and multiple market meltdowns (2 or 3 in the last 15 years) we are aware of the risks. I would be waiting till I was 70 1/2 ( 12 years to go) and then take the required RMD. DW would do the same though she has 18 years before RMD.



Trying to predict if our pensions fail, SS gets cut, bonds sink, real estate tumbles, markets crash or I get hit by a truck is all a guessing game. All could happen, none could happen or some probability of each could happen. As well, the opposite could happen and everything is fine.

We are comfortable downsizing our life stye if needed, move from 2200 sq. ft. home to 1500 sq. ft., one car, etc. I suspect we'll do this naturally as we age anyway.

At this point, I have know defined use for the RMD funds. Maybe medical issues arise and we use the funds for that.
A first world problem, I think is the saying.
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Old 08-19-2018, 12:35 PM   #10
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Quote:
Originally Posted by workmyfingerstothebone View Post
We've been investing more of our AA towards stocks (85%) than bonds over the past 15 years as I knew the two of us would be receiving pensions and social security.
As well, we have rental income that gives off a monthly income stream.
Between all of the above mentioned their total income replaces most, if not all, of our retirement expenses. Pensions are COLA adjusted for inflation..no debt.


Now for the question, is my thinking sound to be running 85% stock allocation throughout retirement if expenses are covered ?
I don't know if it's sound or not - time will tell - but that's exact what we are planning to do. I'm investing 85/15 stock/bond with a COLA pension that will account for roughly half of our income in retirement. I don't intend to change that probably ever. It might even be too conservative for my taste, but I probably won't go 90/10 again, unless the market really tanks and I "time" it near the bottom.
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Old 08-19-2018, 12:49 PM   #11
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Figure the cash equivalent of the pension by what it would take to buy an annuity to provide that income. Add that to your investment net worth as a non-equity. What does this drop your AA to? Are you comfortable with that?
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Old 08-19-2018, 02:18 PM   #12
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“ Bones” and “ Nash” we are with you. DH has a cola’d pension that with our SS checks is enough. We have about 70% in stocks and about half of the rest is in cash equivalents.
Not brave enough to go for more than the 70 in stocks....
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Old 08-19-2018, 02:33 PM   #13
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My pension alone, using %6.75 return, will roughly skew the numbers to an AA of 42/58/0 from 85/15/0.
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Old 08-19-2018, 02:38 PM   #14
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Quote:
Originally Posted by workmyfingerstothebone View Post
We've been investing more of our AA towards stocks (85%) than bonds over the past 15 years as I knew the two of us would be receiving pensions and social security.
As well, we have rental income that gives off a monthly income stream.
Between all of the above mentioned their total income replaces most, if not all, of our retirement expenses. Pensions are COLA adjusted for inflation..no debt.


Now for the question, is my thinking sound to be running 85% stock allocation throughout retirement if expenses are covered ?


I'm sure it's been ask before on this site but I could not find it in the forums.
I think the question you need to ask yourself is why. What is your goal? That’s all.

If you don’t really need the investments to cover retirement expenses, then there must be something else you have in mind for those funds. That would drive how they are invested.
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Old 08-19-2018, 02:44 PM   #15
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Quote:
Originally Posted by workmyfingerstothebone View Post
My pension alone, using %6.75 return, will roughly skew the numbers to an AA of 42/58/0 from 85/15/0.
Excellent advice from RBum.

42/58/0 sounds pretty conservative huh?

ETA: If this still makes you a bit nervous, you could revisit your backup plans for a severe market drop and see if that relieves some anxiety.
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