Reducing stock exposure in Retirement, age 60+

[24601NoMore]

We're both in our 60s (me - early, wife - mid) and are getting increasingly uncomfortably holding equities - even at our current ~22% of portfolio. Largely because of current excessively stretched valuations and what I see happening in the economy - and also because an even 25% let alone 50% drop would represent a big chunk of $$s that I'd feel pretty stupid seeing vanish (albeit, "on paper"). Instead, my gut is literally screaming at me to sell to get down to maybe 15% of the total value of our portfolio, if that.

Wondering if anyone else feels the same and has taken steps to reduce equity exposure as you get later in life?

Our goals are simple: protect what we've worked decades to accumulate, and guard against inflation best we can, while having "enough" to get to end of life comfortable (but not extravagantly). Our goals do not include planning to leave a large inheritance for heirs.

2 problems: inflation has eaten up 18% cumulative the past 3 years, and while the rate of price increases has slowed, it's reasonable to assume that it's going to continue to run at a higher than normal clip given current Federal spending and policy. So, every dollar we had saved is now worth 82 cents. I'm concerned about will happen the next 5, 10 and even 20 years that will further chip away at our piggybank. I truly believe we live in very abnormal times and do not see that changing anytime soon.

Secondly, equity valuations are stretched to what I personally think are crazy levels. Shiller PE is at 34+ (!) and peeling back the economic numbers, things are not nearly as rosy as some like to represent.

So, we're caught between a rock and hard place.

My gut tells me to lock in some profits at these levels, wait for the pullback that I'm pretty confident will occur sometime in 2024 - especially with Summer coming up AND an election year upon us, and buy back in at 10-25% (or possibly even cheaper) levels - or maybe NOT buy back in and just live off cash (CDs, MYGAs, MMs, etc). Incidentally, I've modeled that out and it works through age 90..IF inflation doesn't go totally bonzo, which there's no guarantee of anymore.

It's worth mentioning that neither of us is that likely to live to our 90s for various health reasons. I'm guessing we'll be lucky to make it to "average" life expectancy. We also (assuming we both live that long) will have pretty decent SS that will pay a good chunk of the monthly bills, assuming THAT also is still able to pay as planned. So, let's say we have ~20 years left. We could literally cash out, bury the money in the backyard (or put it all in Treasuries), and probably be fine. So I struggle to justify owning ANY stocks or bond funds. But "you HAVE to own stocks forever to keep up with inflation!" has been drilled into my head for 40+ years, and it's hard to overcome the brainwashing even though my gut is telling me "run for the hills! Save yourself, before things go 'splat' in a big way.."

Anyone else (especially those 60+) have the same concerns, assuming your goals don't include leaving a large inheritance to your heirs and you're just looking to get through end of life safely/comfortably?

 

[Jeffman52]

For me, not really. I plan on riding the horse that got me here right across that proverbial goal line. I am using SORR planning to account for an extended downturn of the market. So basically having a number of years of required income in very low risk accounts that I will draw off off when the market is down, but the rest will be highly invested in equities. I may change that one day if I feel that the risk is higher than I can stomach.

 

[Midpack]

Lots of retirees reduce their equity exposure in retirement, but if you're already at 22%, not much left to reduce.

Unless you're permanently reducing your equity exposure - good luck timing when to get out, and even more so when to get back in. Odds are decidedly against getting either/both right - your "gut" isn't a good barometer. How often has your gut been wrong in the past, honestly?

I have systematically reduced my equity exposure over the past 20 years, but not in response to any market doomsayers - they are wrong as often as they are right. And most certainly not my gut.

For us, I didn't sell a single share of anything in 1987, 2000, 2008 or 2020 - and that's easily proven to be the right decision. There were big downturns, but they all proved to be blips in time. Take a look at those 'disastrous periods" for the broad market. There will be recessions ahead like always, but holding has beat market timers for everyone except maybe a few pros...

 

[aja8888]

I'm 80, widowed, and won the game. I can live on my SS for most expenses. I have moved my investments into fixed income and will buy a small percentage of equities when they fall into the abyss. Then I will sell them when they go up. I can sleep at night and have no debt.

 

[JBTX]

We are a few years younger at 60% equities. We may reduce as we age, but we also hope to pass on some to kids.

The difference in 22% or 15% isn’t dramatic either way. There is a point where a portfolio take on more risk with no stocks, as you lose the diversification effect of stocks and bonds. Efficient frontier I think. My recollection is that is around 20% stocks.

Yes valuations are high, but globally valuations are not high, so having a healthy allocation of international stocks gives diversification from that perspective. In terms of high valuations - such valuations are indicative of generally lower long term equity returns. But they are not good for market timing - such as predicting a crash. I wouldn’t advise changing your portfolio much based upon valuations.

 

[LateToFIRE]

I'm early 60's, just entered ret, still rocking 80% equities, though will likely cut that back to 60-70% as part of a whole portfolio redo exercise. Like you, I don't think either of us will make it past 90, but the stats suggest a high probability that at least one of us will survive that long, so have to plan on it. If I thought we only had 20 years remaining, then yeh, I could hold CD's and Treasuries and be just fine. My expectation is more like 25 more years, and planning period is 30 years, so intend to remain heavily weighted on equities. It's a major part of what got me here.

 

[Al18]

You complained about inflation rising a total of 18% over the past 3 years. That’s an argument for maintaining your stock exposure. You also mentioned you could not suffer a 25% decrease in stock value. That has already occurred recently. On 12/27/21 the SP500 was at 4766 and it decreased 25% to 3583 on 10/10/22. A year later the SP500 was 16% higher at 4117 on 10/23/23. Five months later (today) the SP500 is 25% higher at 5159.

To put things into perspective, the SP500 has increased a total of 8,4% over the past 27 months. Does that sound unreasonable?

 

[Sunset]

OP - at 22% equity, you are already below the normally recommended percentage.

Your SS and 78% interest earning investments should easily carry you past any downturn, meaning don't spend the stocks if/when the market falls.

If you are worried about inflation, buy TIPs (directly not a fund).

 

[Closet_Gamer]

If you've really won the game and want to stop playing, I'd say go for it so long as:

1 - you're really sure you can live on SS + TIPS, which should be inflation protected. I believe pb4uski is at 0% equities right now and has built a non-TIPS strategy. He may have advice.

2 - This is a long term change and not a trade. If you're trading on your gut, I would step away from the computer for a month and not touch anything. History says you're in for pain if you trade on gut. When the market continues to run, you're likely to say "I made a mistake" and buy back in at higher prices.

FYI, I'm in my early 50s and contemplating my 60s AA plan. So not there yet.

 

[Alex The Great]

Currently, I'm at 50% equities and I'm at the very beginning of retirement. This is as much reduction as I can take, to ensure fixed income can take me to major milestone (take SS) at 70 as planned. When I get closer to that goal, I plan to increase equities as the risk will be mitigated once I take SS.
I'd say equities definitely expose you to market risk therefore it is always a personal choice how much much to have, in order to survive a long market downturn.

 

[Car-Guy]

Plenty of us have discussed this many times before around here. Search "won the game" and you should find some of the threads... I'm out too and have become a CD/Bond baron..

Of course I'm in the boat of having more than enough for me and the DW to live pretty well, I have zero debt and don't care if I leave a dime to my heirs.

 

[pacergal]

Everyone finds their "sleep at night" number for asset allocation.
We settled on about 70/30, after being anywhere from 90/10 to 50/50.
We are late 60's, been retired since age 60, have secure income via pension and ss, and also plan to leave inheritance for kids.

 

[pb4uski]

.... Anyone else (especially those 60+) have the same concerns, assuming your goals don't include leaving a large inheritance to your heirs and you're just looking to get through end of life safely/comfortably?

OP - at 22% equity, you are already below the normally recommended percentage.

Your SS and 78% interest earning investments should easily carry you past any downturn, meaning don't spend the stocks if/when the market falls.

If you are worried about inflation, buy TIPs (directly not a fund).

Plenty of us have discussed this many times before around here. Search "won the game" and you should find some of the threads... I'm out too and have become a CD/Bond baron..

Of course I'm in the boat of having more than enough for me and the DW to live pretty well, I have zero debt and don't care if I leave a dime to my heirs.

Yes, I'm with you. Shifted from 60/40 to capital preservation mode in 2020. We have plenty... ~2% WR once I start SS in a couple years... pigs get fat and hogs get slaughtered.

Similar to OP, I am concerned about equity valuations and have been for some time but it seems they inexplicably keep going up. I think it might be that the poplularity of index funds may have too much money chasing equities indiscriminately... to the extent that money is flowing into equity index funds irrespective of valuations the fund managers are forced to invest that fund flow in equities, creating demand that drives up prices no matter what the fundamentals suggest that valuations should be.

So at least for now, I've taken my ball and bat and gone home. My equity exposure these days is preferred stocks... more predictable income and much less volatility. I've cobbled together a portfolio of 34 preferreds that are mostly investment grade and yield 6.86% and am adding to it as I can. I'll take a 6-7% yield that is not so volatile vs a 10% yield roller coaster.

IF equity valuations ever become sensible again then I'll be back and I think ~25% would be about right in our circumstances.

OP, have you considered putting in stop-loss orders if you have individual issues or some at-the-money or slightly out-of-the-money put options to mitigate the downside risk that you are so concerned about?

 

[pb4uski]

If you've really won the game and want to stop playing, I'd say go for it so long as:

1 - you're really sure you can live on SS + TIPS, which should be inflation protected. I believe pb4uski is at 0% equities right now and has built a non-TIPS strategy. ...

You're right, although I do have a small amount of TIPS and may add some more... they are strange little beasts though with the principal adjusting periodically.

 

[FREE866]

Inflation and withdrawals on high a fixed income portfolio will burn away at your portfolio.



Really comes down to how much you have and what your expenses are though. Plug that into Firecalc with your current AA. Be curious what it says.

 

[jollystomper]

Just before I retired at 60 I started reducing my equity holdings, and at 66comfortable at the present 35% of AA level. My pension, though non-COLA, still covers most of our expenses, and what we define as extravagant spending is putting us at <2% withdrawal rate.

I'm just not smart enough to take major action based on market levels... the issue of making a major move to get out always comes with the consideration of when will one decide to get back in.

My equity investments have always been for the long term, so the daily or yearly market noise does not bother me. When I start taking SS, sometime between my FRA and 70 (likely 70 to maximize the survivor benefit), it will add $60-$75K to our annual income, which will likely make short term market concerns even less of a factor.

 

[Lorenzo]

I don't believe in trying to time the market. I have no idea if the market is "overvalued" or when inflation might ramp up again or return to the 2-3% we had gotten used to. My "gut" has been wrong as many times as it has been right in my life.

 

[Dtail]

OP
Based on this thread and past threads, it appears that you are convinced that stocks are headed for a big correction soon enough. So go all in Fixed Income and sleep well at night.
Though it appears that you still are wondering if 100% Fixed Income is the way to go and perhaps FOMO.
As for myself, I feel we need in the 40-60% range of equities, but if I had double my portfolio, I would go all in with Fixed Income and call it a day.

 

[target2019]

If you believe everything written in the OP, then you should change course and include more fixed income.

We're comfortable watching equity allocation drift upwards without new contributions.

There's not just a right approach and a wrong one, IMO.

 

[freedomatlast]

I'm increasing equity exposure by not rebalancing. If you've won the game and have more than you'll ever need, then a little volatility now and then shouldn't be a big deal.

 

[24601NoMore]

Thanks..was more curious what others have done and couldn't think of what to search for to see previous comments but will try "won the game".

TIPS are probably a solution for us, but I honestly don't even pretend to understand how they work. Something to look into more for sure.

 

[pb4uski]

Inflation and withdrawals on high a fixed income portfolio will burn away at your portfolio.



Really comes down to how much you have and what your expenses are though. Plug that into Firecalc with your current AA. Be curious what it says.

Not really. You would think so, but not so according to FIRECalc.

Below is our situation, but I increased the spending so that the success rate with 75% equities (the default equity assumption) was 96.7%. Then I went to the Investigate tab and selected the radio button

Investigate changing my allocation
How will changing the allocation -- putting more or less into stocks -- affect the results?

Then Submit and I got the graph below. Note that the success rate is 95% of better as long as the stock allocation is 30% or more, peaks between 40-55% equities and interestingly, the success rate actually decays once stock allocations exceed 55%.

So the conventional wisdom that you need a lot of stock to provide for inflation doesn't fit with the data.

 

[FREE866]

Not really. You would think so, but not so according to FIRECalc.

Below is our situation, but I increased the spending so that the success rate with 75% equities (the default equity assumption) was 96.7%. Then I went to the Investigate tab and selected the radio button


Then Submit and I got the graph below. Note that the success rate is 95% of better as long as the stock allocation is 30% or more, peaks between 40-55% equities and interestingly, the success rate actually decays once stock allocations exceed 55%.

So the conventional wisdom that you need a lot of stock to provide for inflation doesn't fit with the data.

Let me rephrase this. The ending balance of 100 % stock vs 100 % bond is substantially higher over 20 years
So sure you get “ success” with heavy fixed income but leave a ton of money on the table.

 

[pb4uski]

Let me rephrase this. The ending balance of 100 % stock vs 100 % bond is substantially higher over 20 years
So sure you get “ success” with heavy fixed income but leave a ton of money on the table.

I agree and if a legacy is important to you then that is a consideration. So it won't necessariy burn away at your portfolio as you suggested earlier but rather it will inhibit your portfolio from growing.

I guess it depends on whether your objective is to just have a financially successful retirement or have a financially successful retirement and die richer.

 

[FREE866]

I agree and if a legacy is important to you then that is a consideration. So it won't necessariy burn away at your portfolio as you suggested earlier but rather it will inhibit your portfolio from growing.

I guess it depends on whether your objective is to just have a financially successful retirement or have a financially successful retirement and die richer.

With withdrawals and inflation a 100% bond portfolio will burn away at the portfolio. If you’re getting a ~ 4% inflation adjusted portfolio return ( which is what bonds historically provide)and withdrawing 4% that deeply erodes your portfolio. Hence my original comment of asking what his expenses are.

My objective is market returns with tax efficient investments. Stocks offer that whilst bonds don’t