Stock market expoure and pensions

I am planning to RE next year at the age of 62, and I am hearing that I should consider re-allocating my 85/15 stock/bond mix to provide less exposure to the volatile equity market. While I can see the wisdom in that advice generally, in my case 80% of my retirement expenses will be funded by COL adjusted pensions. The remaining 20% being funded from well-diversified investments at a withdrawal rate of about 2 1/2 %.
I am not particularly worried about leaving any large terminal value, but on the other hand, I do want to see reasonable growth.
Do I need to re-allocate? Any thoughts?
John Lee

[unclemick]

First answer - yes you should reallocate to the 20-60% stock range if you plan to take money out during retirement.

Second answer - maybe. Whadda got in your portfolio?

What is the horse you rode in on and how good a rider are you? Show me your SD, R squared, SEC yield, your analysis of how your portfolio is expected to perform with 73-4 type bear or a 1966-1982 type flat spot. Forget 2000-02 - that was a nit, not a real bear.

100% stock(not mutual funds) can be perfectly comfortable for some(very rare) and 20% stock index funds is too much for others.

Once you are not working, I humbly suggest 40-60% stock index funds and adjust according to your risk tolerance. Most people rate their's higher than it really is - picture a 50-60% drop in your $ portfolio value and living off div/interest for the next fifteen years. That's what I do (I'm 50-60% stock) at age 61. And I was working 1966-1982.


To repeat, 2000-02 was a nit - not a real market test.

Unclemick,
Thank you for your advice. My investments are are mostly in mutual funds including S&P 500 index, health care, some growth & income funds, a few balnced funds, and a little international growth, plus a hanful of Dow component stocks.
My confidence in my current allocation was supported to some extend by running FireCalc, which indicated a 4.1% SWR with my current 85% stock allocation. Since i need a max of 2-1/2%, I didn't feel the need to panic.
John Lee

[brewer12345]

Actually, I would argue that John's pension does most of the heavy lifting, income wise, so he could actually sfford greater risk if he had such an inclination. I'd guess that you'd be fine with 85-15, with some room to invest a portion of the stock allocation in higher risk exposures if you think you would be commensurately rewarded.

[charlie]

I agree with brewer12345. Actually, you could invest
enough in long term TIPS paying about 2.3-2.5%
real return plus inflation to supplement your pension
and then go aggressive with the rest to your heart's
content. This would, in effect, give you a COLA for
your entire income needs.

Cheers,

Charlie

[Nords]

We're over 90% stocks with similar pensions.

We know we can handle 40% volatility. You should consider whether you're willing to handle the same.

You could also test FIREcalc with 1966-1982, which is the period that some claim we're in now. Assume your portfolio has zero growth (no dividends, no cap gains) for 15 years while you withdraw 3-4%. Then see how much SWR it can handle from that point forward.

[azanon]

I like 110- your age should be in stock. /shrug.

[sgeeeee]

Some comments Bogle made about this issue were discussed on these boards several months ago:

http://early-retirement.org/cgi-bin/...21709;start=15

Thank you all for your advice, especially Salaryguru for his reference to last year's string, in which he referenced Bogle's comments on this subject.
According to Bogle I am already under-allocated in stocks with only 85%!!!!!!!
Or perhaps this is just his crafty way of getting me to investing more in Vanguard's mutual funds!
John Lee

[Nords]

(Reciprocate: 1 : to give and take mutually
2 : to return in kind or degree
Diatribe: 1 archaic : a prolonged discourse
2 : a bitter and abusive speech or writing
3 : ironical or satirical criticism)

Own or rent? Mortgage or debt-free? Active or indexed? 4.000% or 2.389% or "it depends"? Stocks or bonds? Growth or value? Small-cap or large? Tastes great or less filling?

Then there's the debate over assessing your stock/bond allocation. One camp, led by Bogle, claims that you should convert all your pensions to their cash equivalent of a suitable asset class. Add up all the assets and decide your asset allocation. This tends to lead to equity-heavy retirement portfolios, and I'd bet that 85% is a LOW number.

Bogle inspires a great exercise for left-handed INTJ number-crunchers because there's lots of room for debate. SS was probably the equivalent of 30-year Treasuries until TIPS came along. 10-year, 20-year, or 30-year? What about the extra trading costs of 30-year TIPS on the secondary market? Or is SS more like I bonds? What equivalent annuity rate do you use for your corporate pension, and what if it has a COLA? Is it corporate bonds or junk? What's the cash value of your medical benefits? It's also cool to add all of this stuff up to achieve a present value of millions of bucks.

But when the exercise is over, you still have to pay expenses out of your retirement portfolio. If it's 100% stocks, you'd better have a low withdrawal rate and an incredible tolerance for volatility. If your retirement portfolio is a little undercapitalized and you're led astray by Bogle, then in a couple of bad (downwardly volatile) years your withdrawal rate may zoom up over 6% and you'll have a hard time preserving the portfolio's survival. It's essential to keep a few years in cash to avoid having to sell equities in a down/sideways market. (How many years of cash? Two? Three? Seven?! Fifteen?!?) The only other alternative is cutting expenses.

Bloomberg's Wealth Advisor magazine had an article on this subject a couple months ago. An investor was complaining to his advisor "Hey, we beat the S&P500 again this year, but I can't pay my bills!" Great asset allocation but lousy liability funding. A more conservative way (sorry, Jack) to view the situation is to devote your retirement portfolio to paying for unfunded expenses (liabilities). If you're spending $30K/year but $25K of that is funded by pensions/SS, then your unfunded liability is $5K and all you have to do is design a portfolio that will handle an annual $5K withdrawal. (Don't even get me started on "other" liabilities-- college funds, new roofs, new car/appliances, etc.) That portfolio could be all stocks but it'd need a lot of wiggle room (bigger portfolio or extra buckets of cash) to handle the volatility. Bernstein's "Four Pillars" would probably be able to design a SMALLER portfolio (with lower volatility) just by adding bonds and reducing equities.

The end approach is to design a portfolio that annuitizes the liability. Instead of drawing it down over some estimated life expectancy (If you live long but don't prosper, better have a Plan B!) the portfolio throws off enough cash each year to handle the liability plus volatility & inflation without actually eroding the principle. Then it's up to the retiree to decide how to balance the size of the portfolio against volatility & other risks. When you die, the pensions stop and the retirement portfolio becomes your heirs' problem.

I can't claim that one method is better than another, but funding liabilities is certainly simpler than Bogle's approach. We've tried playing Bogle's pension-equivalent game. Instead we've elected to fund our liabilities with an oversized self-sustaining portfolio of equities and a couple years' expenses in cash.

We now return you to your regular reciprocated diatribe...

In the musical ANNIE, Miss Hannigan opines that she
can't understand why anyone would want to be an
orphan. I feel just the same about owning common stocks.

John Gal

[REWahoo]

Quote:

John Gal

John, is this just a typo or are you trying to send us a message?

Re. "John Gal", posted during cocktail hour.
Always dangerous

John Galt

[unclemick]

Nords and the Norwegian widow.

SWR sucks - the widow rules(third cup of coffee this morning) - heh,heh,heh.

SEC yield plus defined non- cola pension covers liabilities. Dividends and interest are real money. Growth to cover inflation, SWR calcs. etc. are hope, speculation, and faith in history.

If my portfolio doesn't cover my bill's, I overhaul/rebuild my portfolio/lower my bill's. Being an ex-engineer, I view my portfolio as a valuable piece of machinery that cranks out dividends and interest.

Pontification, endless cranking of numbers, SWR's, portfolio analysis are good clean fun - as long as you don't take it too serious.

LYBM and party on.

"Dividends and interest are real money!" Damn,
unclemick; have some more coffee

When I file my taxes, I report dividends, interest,
royalties and rent; the "big four" of what the IRS
calls "passive" income. It may be passive now, but
that surely does not take into account what I went through to get myself to this point.

John Galt

[unclemick]

John

The IRS has pages and pages to explain themselves - heh, heh maybe "passive' is sour grapes cause they don't get the second dip for SS.

I agree it sure was not "passive" getting there thru the working/savings years.