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Revenue Streams and Asset Allocation
Old 12-13-2016, 09:46 PM   #1
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Revenue Streams and Asset Allocation

There is much discussion about re-balancing now given the high markets. Asset Allocation is also discussed. This past run has been a good time to be loaded up with equities.

I am trying to wrap my head around the impact of fixed revenue streams on what an appropriate AA might be.

I have a decent pension which is not COLA'd. Retiree healthcare is an expense of approximately $10K per year (my contribution plus max out of pocket). I have land which is generating a fixed income for the next 15 years. Pension plus SS plus Land Rent exceeds $125K. Basically, I do not see a need to tap any investments unless we get into massive inflation.

As I understand it, the concept of Asset Allocation is to become more conservative as you get older, so that you manage volatility at a time when you are drawing down your investments. If the market takes a huge drop, you are not selling at the bottom in order to pay your bills. I do not foresee us being put into a position where we need to tap those investments. Does this indicate that our risk tolerance is higher, and thus an AA with more equities is appropriate?

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Old 12-13-2016, 09:57 PM   #2
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Yes, if your expenses are already covered by guaranteed income streams and you don't need to tap into your investments, then you can choose to invest aggressively. It all comes down to what lets you sleep at night and whether you can ignore the volatility in your investments.

Actually, asset allocation doesn't say anything about becoming more conservative as you get older. It's just about diversifying across different asset classes to manage volatility in a portfolio yet still reach long term performance goals. Picking a trade off between the two. Some people may choose to change their asset allocation as they get older to increasing bond allocations that tend to be more stable.

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Old 12-14-2016, 07:29 AM   #3
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I'm in a similar situation with pension and rental income covering my expenses. I have 60% in equities and 15% in cash and stable value that was my ultra safe buffer for the time between retirement and the pension beginning. I am reinvesting dividends and will let the equity percentage drift up over the years and use the cash to buy on any big downturns. When income is taken care of from sources other than your investment accounts you can afford to take a bit more risk and emphasize the potential for portfolio growth over portfolio survival.
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Old 12-14-2016, 07:41 AM   #4
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Many people include their pensions as a Fixed Income proxy, ie they capitalize their pension value and notionally consider it part of their FI AA. I do this. It allows me to feel comfortable with a greater proportion of my portfolio in equities.
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Old 12-14-2016, 07:52 AM   #5
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Originally Posted by Clone View Post
.... Does this indicate that our risk tolerance is higher, and thus an AA with more equities is appropriate?
There are two schools of thought on this.

One is that you have "won the game" since your fixed income streams exceed you needs so you can be very conservative with your retirement assets because you don't really need them to live on. IOW, you'll accept inflation risk in order to avoid volatility and risk of capital losses.

The other extreme is that since you don't need these assets to live on that you can swing for the fences because a loss or volatility isn't going to interrupt your lifestyle.

To me, at the end of the day, it depends on your risk tolerance and your plans for the money. In our case, whatever I do affects our kids inheritance and I am very comfortable with investment risk being a seasoned investor so I expect that we will stay with our current 60/35/5 allocation for some time to come and perhaps even get more aggressive later in life.
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Old 12-14-2016, 08:25 AM   #6
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Originally Posted by Clone View Post
I do not foresee us being put into a position where we need to tap those investments. Does this indicate that our risk tolerance is higher, and thus an AA with more equities is appropriate?
I am in a similar boat as you. My rental income covered 3-4x my pre-retirement spending. I am ramping it up a bit in FIRE, but there is plenty there. At least 2x.

Other income streams are still to be tapped. My healthcare is free. My SS, at whatever age, will be near the max. I have a non-COLA pension ready when I want it. My investments would also provide enough to live in nicely. My DGF has a small pension at some point, SS and investments too.

I have most of my investable assets in equity index funds. IVV, IVW, IWM, DVY, QQQ. My dividends are still being reinvested. I avoid bonds and international funds.

I am leveraging some tax strategies to avoid taxes in the future. Roth conversions, etc.

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