Reducing stock exposure in Retirement, age 60+

[dmpi]

I guess I have a split personality based on your two rationales.

Rationale #1 - (or bucket #1) I play often and aggressively at the Casinos in hopes of pulling off something extraordinary.

Rationale #2 - (or bucket 2) Is my won the game money so I'm far less aggressive with my money and have gone mostly all in with CD's.


As my time horizon continues to shrink (I'm not getting younger), I'm thinking more about moving some money from bucket 2 to bucket 1... But so far, I'm okay with with things as they are.

Being a gambler myself (but clearly not at your level) I've noticed that losing money gambling hurts a whole lot more than losing it investing. Same goes for making money. There a huge rush getting a jackpot that's just not there when you make money in the market. There's a mental aspect to it where casino gambling has a multiplier effect where you get to live in the moment rather than always planning for the future.

 

[Car-Guy]

Being a gambler myself (but clearly not at your level) I've noticed that losing money gambling hurts a whole lot more than losing it investing. Same goes for making money. There a huge rush getting a jackpot that's just not there when you make money in the market. There's a mental aspect to it where casino gambling has a multiplier effect where you get to live in the moment rather than always planning for the future.

Pretty much agree with all of that, especially the bold text. Of course with stocks, it's not lost until you sell (so they say ). With gambling on the tables, it's "pretty much" all or nothing with each bet. If you consider the fun factor, casino play is "light years" ahead of market play. Of course YMMV.

 

[ERD50]

Originally Posted by FREE866 View Post
...To me, it's about "cash flow" not "income" and cash flow generated from stock sales is also much more tax efficient than fixed income ESPECIALLY if you're looking at year tax outlays every year for lets say 20-30 years.

Fixed income, to me, would just be to mitigate volatility, ....

I agree that too many posters get wound up in their underwear about income vs cash flow, but not all fixed income is tax inefficient. There are loads of investment grade preferred stocks that pay regular dividends like bonds but the dividends are qualified dividends so they are tax preferenced. These preferreds are more volatile than bonds but much less volatile than stocks, so they mitigate volatility, provide good returns (6.4% yield in my case) AND are tax efficient.

It helps that they are qualified divs, but that doesn't make them more tax efficient than selling equities.

Long Term Cap Gains will get the same tax rate as qualified divs, but only on the gains (which will always be less than 100% of what was sold). And for SPY (as an example), almost all the divs are qualified as well.

-ERD50

 

[engineernerd]

We're both in our 60s (me - early, wife - mid) and are getting increasingly uncomfortably holding equities - even at our current ~22% of portfolio.

Have you tried using the FIRE Calc Investigate option (under the tab labeled "Investigate", which is the rightmost tab at the top of the calculator page) to investigate changing your allocation? It will graph your chances of success (portfolio staying above zero value for the length of time you want it to) for stock allocations ranging from 0% to 100%.

Make sure your withdrawal rate includes enough money to pay taxes, BTW.

Hopefully that will help you be more comfortable with keeping stocks in your portfolio. I've never seen an allocation below 25% look like the best choice.


I once took a bunch of money out of stocks thinking they were hugely overvalued and "sensing" an impending crash...and then watched stocks continue to soar for YEARS while my money sat there earning not much. Even after the market did crash, I was behind where I would have been if I'd just left my money in. I've never tried to time the market again.

People like us have no idea what really drives the stock market.

 

[rayvt]

The 2008 downturn taught me to listen to my spouse who did not really participate much in investment decisions.

Her advice at the time...why on earth bail and realize a loss? Hold, and if anything consider averaging down.

I followed her advice, and it worked out exceeding well for us.

Your wife and mine must be twins. When I convinced her that we should go seriously into stocks with $20K that we pulled out of a cash-out refi --- this was long ago when you could do that with no extra costs, I said that I would keep track and when/if the investments grew enough to pay off the mortgage we would decide what to do.

A few years later we got to that point. I asked her if she wanted to cash in the investments and pay off the mortgage. Figuring that since she was a woman she would strongly want to pay off the house.

Instead she said, "Are you nuts? We are handling the mortgage payments just fine. Keep investing and let me know when we have enough to retire comfortably and safely."

We retired at 58 years old, long before my co-worker whose wife prioritized paying off their mortgage.

 

[rayvt]

Market timing has a poor reputation. With mostly good reason.
However....
We are something like 97% equities. No bonds, just a smattering of high yield money market funds & CDs.

For the equities I've been using the Growth Trend Timing for a market timing scheme. It's a long paper, but distills down to a couple of simple rules.

Basically, use the 10 month Simple Moving Average of the S&P500 for the in/out signal -- except only take the sell signal if either of two FRED indexes are down YOY, signalling the possibility of a recession. If we are not in a potential recession stay invested.

 

[HI Bill]

You complained about inflation rising a total of 18% over the past 3 years. That’s an argument for maintaining your stock exposure.

+1. At a 22% equity exposure, I'd be far more concerned about inflation than a temporarily falling market. Of course, I have a budge that includes 40% discretionary spending, so I can afford to cut back during downturns.

 

[TickTock]

People like us have no idea what really drives the stock market.

Greed. Fear. [Not that knowing that helps any of us time the market.]

"The market can remain irrational longer than you can remain solvent."

 

[engineernerd]

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.

The conventional wisdom says you need a decent amount of stock, not necessarily 80 or 90 percent.

What I have found from playing around with FIRECalc is what I'll call the Suze Orman effect. Suze Orman apparently doesn't follow her own advice to others, and holds little or no stock. Sounds hypocritical, doesn't it? But it's not. The reason she doesn't bother holding stocks is she is SO filthy rich she has a 100% chance of success even if she stuffs it all under the mattress!

The more modest your portfolio is in comparison to your needs (withdrawal rate and length of retirement) the more stock you need to hold to optimize your chances of success. (Also true, of course: the more modest your portfolio is in comparison to your needs the lower your peak chance of success.)

So basically the more scared of running out of money you should be, the more you should act like you AREN'T scared

 

[pb4uski]

I agree that too many posters get wound up in their underwear about income vs cash flow, but not all fixed income is tax inefficient. There are loads of investment grade preferred stocks that pay regular dividends like bonds but the dividends are qualified dividends so they are tax preferenced. These preferreds are more volatile than bonds but much less volatile than stocks, so they mitigate volatility, provide good returns (6.4% yield in my case) AND are tax efficient.

It helps that they are qualified divs, but that doesn't make them more tax efficient than selling equities.

Long Term Cap Gains will get the same tax rate as qualified divs, but only on the gains (which will always be less than 100% of what was sold). And for SPY (as an example), almost all the divs are qualified as well.

-ERD50

I never wrote that preferred stock qualified dividends are more tax efficient than selling equities... I'm not sure why you thought so.

FWIW, the point you made in the last paragraph applies to preferred stocks as well, both common stock and preferred stock LTCG are taxed at preferenced rates but only on the gain which will always be less than 100% of the sales proceeds.

But since the dividend yield of preferreds are higher then the gain potential is lower.

 

[jdnd9091]

I just turned 61 and have a year to retirement. I'm at 75% equities and heavy in my own Company which I know is crazy. Extremely healthy company that I know very well and have got me to this point. It is also a Fortune 20 company that is very highly respected amongst most investors. I retire in one year and will live off the stable assets for the first 5 years, so will need to make some adjustments once I retire. I will probably stay heavy in equities at least for another 5-7 years and then pull back if I get nervous. Worst comes to worst we live off SS and reduce our travel budget

 

[Happyras]

We're both in our 60s ... 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.
.... 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.

.....
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?

I had a consult with my guru (best friend) this week. Indicators are strong for something to happen in the markets, more risk than upside reward. I am trying to follow the lead of those who have more than won the game. As you pointed out, valuations are high and things are not that Rosey in the economy. WE maintain a conservative approach in this market. However, I am very optimistic for future years under the right leadership, not so much right now.

We are a little low on equities right now and need to get this back up to 20% over the next few months, but we will likely not exceed 40% equities again. At 80% equities we had mostly used volatility to sell covered calls, which led to a larger reduction in equities as that strategy dropped along with the VIX. 2022 was a great year due to this yielding 8 to 9%, but that died and we moved more into individual bonds and mostly T-Bills.

We are just reaching 70 this year, and with that the SORR is getting higher. We won the game a while ago and are not reaching for a lot more growth. Without saying too much, it is time to extend bond duration cautiously, but we average a 5.5% yield on those Agency Bonds, Treasuries and other fixed income invested. Preferred shares having the highest yield >6%, but with share price risk. We do not need to touch IRA's, as we have plenty of income from pension, SS, and mostly real estate leases indexed to inflation. We save a lot, but that will be reducing over the next few years.

Having time left to still enjoy spending what we have, that window is closing too fast. We decided to sell one rental investment, but not sure what we will do with that cash. For now its my new "job" to get it restored for market. One more thing off our plate will make us feel better.

 

[Koolau]

Greed. Fear. [Not that knowing that helps any of us time the market.]

"The market can remain irrational longer than you can remain solvent."

Ko'olau's market timing = When I Need the Money.

 

[Brangus Baldies]

Feel the same way. I currently have 70% of my portfolio in cash and a stable value fund. Thinking of a cd or treasury ladder but not familiar with them.

 

[maestro]

In late 60's here, and I believe your thoughts and concerns on equities in the market today are valid. You've seen what can happen. Get your peace of mind, and lower your percentage accordingly. You gotta be able to sleep at night, as others have said. Broad experience in equities tells you when to get out.

 

[Brangus Baldies]

Thanks for your response

 

[Healthy Lifestyle]

I had a consult with my guru (best friend) this week. Indicators are strong for something to happen in the markets, more risk than upside reward. I am trying to follow the lead of those who have more than won the game. As you pointed out, valuations are high and things are not that Rosey in the economy. WE maintain a conservative approach in this market. However, I am very optimistic for future years under the right leadership, not so much right now.

We are a little low on equities right now and need to get this back up to 20% over the next few months, but we will likely not exceed 40% equities again. At 80% equities we had mostly used volatility to sell covered calls, which led to a larger reduction in equities as that strategy dropped along with the VIX. 2022 was a great year due to this yielding 8 to 9%, but that died and we moved more into individual bonds and mostly T-Bills.

We are just reaching 70 this year, and with that the SORR is getting higher. We won the game a while ago and are not reaching for a lot more growth. Without saying too much, it is time to extend bond duration cautiously, but we average a 5.5% yield on those Agency Bonds, Treasuries and other fixed income invested. Preferred shares having the highest yield >6%, but with share price risk. We do not need to touch IRA's, as we have plenty of income from pension, SS, and mostly real estate leases indexed to inflation. We save a lot, but that will be reducing over the next few years.

Having time left to still enjoy spending what we have, that window is closing too fast. We decided to sell one rental investment, but not sure what we will do with that cash. For now its my new "job" to get it restored for market. One more thing off our plate will make us feel better.

Thank you for sharing your thoughts as I am also not interested in chasing the stock market at my age (67) and concerns of SORR.

I feel I have squirreled away enough for a happy life.

 

[bonvoyage]

Jonathan Clements had a very relevant article about this topic on his website, The Humble Dollar: https://humbledollar.com/2024/03/comfort-has-a-cost/

 

[marko]

Maybe I'm out in the weeds (per usual), but I think that once the Feds take the brakes off of the economy with a rate cut or three, the market is going to rocket up.

Then again, as noted, I have a pretty high risk tolerance for a 72 year old.

 

[Onda]

Maybe I'm out in the weeds (per usual), but I think that once the Feds take the brakes off of the economy with a rate cut or three, the market is going to rocket up.

AI is the new Industrial Revolution. Productivity will go up. Profits will go up. Dividends will go up. Market will go up.

Bonds were never all that safe. The likelihood that bonds would be eroded by inflation was always a problem.

 

[Running_Man]

actually dividends are a poor way way to take your money .

the entire dividend is taxable .

if i pull the same dollars from my berkshire or an etf that spins off no dividend, only the gain portion is taxable .

plus i get to pick how much and when to take that money .

so dividends are not a great tax structure.

unfortunately 80% of the s&p and 100% of the dow pay dividends so it’s hard to avoid when it comes to large caps .

which is why i like berkshire in my taxable account.

over time dividends being taxed and turnover if its funds can wipe away any tax advantage

For a married couple dividends are not taxable at all until taxable income exceeds $89,250. And dividends are taxable at the LT Capital gains rate of 15% until income exceeds $500,000.

With the standard deduction of $29,000, an income combining dividends and social security to get $88,000 of taxable income (which will be actually higher due to non-taxable portion of SS will pay almost nothing in tax.

For instance if Social security for a couple was 50K per year and you had 45K per year of dividend income your taxable income on SS at most would be 85% of 50K or 42.5 K less standard deduction of 29,0000 or about $1,300 in Federal tax on 95K of actual cash income. This is about equal in spendable funds to a working couple earning $140,000 before retirement.

 

[dmpi]

AI is the new Industrial Revolution. Productivity will go up. Profits will go up. Dividends will go up. Market will go up.

Bonds were never all that safe. The likelihood that bonds would be eroded by inflation was always a problem.

When you see massive layoffs in tech and other industries you know AI is working. I'm sure glad I'm retired. I'd hate to graduate just to find there's no jobs.

 

[Onda]

When you see massive layoffs in tech and other industries you know AI is working. I'm sure glad I'm retired. I'd hate to graduate just to find there's no jobs.

Humans With AI Will Replace Humans Without AI. Better said 1 human with AI will replace X humans without AI.

The above means productivity and profits will go up which is great thing for equities.

 

[Koolau]

When you see massive layoffs in tech and other industries you know AI is working. I'm sure glad I'm retired. I'd hate to graduate just to find there's no jobs.

Humans With AI Will Replace Humans Without AI. Better said 1 human with AI will replace X humans without AI.

The above means productivity and profits will go up which is great thing for equities.

I'm guessing it will cause significant disruptions in the w*rk place status quo BUT will be more or less like Onda suggests. Those who adapt will excel and those who don't will be out. Much like it's always been. YMMV

 

[JJpop]

Stocks have had a historic run the past 14 years and a lot of very respected researchers doing the math think it highly likely future returns will be well below average which if true makes them much less attractive for the risk involved.
A lot of stock euphoria currently.