Poll: Excess savings and risk tolerance

[SecondCor521]

Imagine the following hypothetical scenario:

You have been saving diligently for retirement for many years and are now 49 years old. You've done the calculations and they show you are on track to retire and meet your financial goals at age 50, which is just dandy fine with you because age 50 meshes well with your life plans.

One day, you look at your calculations and realize that they are off by a factor of two to your benefit: instead of being able to retire at 50 with $X million, you'll be able to retire at age 50 with $2X million.

Setting aside the question of whether or not to retire immediately, the question I wonder about is this:

How would you change your investment allocation after having this realization?

2Cor521

 

[Bikerdude]

Since there's no current level of risk mentioned I voted to increase.

 

[Gotadimple]

Less Risk. I'm assuming that the person has no strong feelings about increasing his/her nest egg to support favorite charities, beyond what is in the original plan.

-- Rita

 

[FIREd]

I like the concept of "marginal utility of wealth" as described by Swedroe in one of his book. Basically, once you have accumulated enough to cover your needs, any incremental increase in wealth becomes less and less significant. Therefore the need to take risk decreases. The hard part is figuring out when enough is enough...

 

[SecondCor521]

Bikerdude (and others),

My question assumes your current level of risk, whatever that happens to be.

2Cor521

 

[bbbamI]

I don't think I would change a thing. I've been conservative for the past 20 years...40% stocks has always been my comfort level...in the best/worst of times.

 

[Animorph]

Same asset allocation, I'd try to spend more. That might be hard to do, but I'd give it a try. I've always just tried to maintain a sustainable spending level that stayed pretty much the same through retirement.

 

[Rambler]

I'm getting close to having my AA aligned for my currently anticipated retirement needs. I figure I'm about 3 years away from retiring. If I assume that my retirement budget is correct (and I have been conservative, meaning there is more in the budget than I think I will need), then my WR to meet my expenses, as of today, would be about 3.5%. But I am not satisfied with that. I want it under 3% because I think my DW will live a good long time (I'd like to be there to see it as well...), and because of our relative youth. That means we are planning for 50 years of retirement.

My portfolio, as of right now, throws off a little more than 4% in muni interest and dividends, but when I get the AA completely straightened out, and when the market recovers a little, my estimate is that it will have around a 3.5% cash throw. Fine. The excess cash thrown off will be reinvested, such that my AA remains at the level that I choose. So if I make it on a 2.75% SWR at age 51 as I anticipate, then the excess 0.75% cash thrown off will be put back in the kitty to grow and throw more cash. When I am 60 or so I may want to buy another toy, or splurge a little more often.

At the end of the day though, my biggest problem is that I don't have a clue what my expenses will really be. (Try making a budget for living in the US when you live in Tokyo...it ain't easy). So I would anticipate carrying the same risk profile/AA as I do now, unless there was a compelling event to change it (inflation goes to 10% and muni bonds go to 17%...not likely, but it would get my attention).

R

 

[kumquat]

I voted increase. I had to vote that way, I did act that way.

I RE'd in June of 07 with an AA that would make most of you puke. By June of 08 it had more than doubled. That was when I noticed. Did NOTHING. That was an [-]informed[/-] greedy decision. Down 40+% by Dec. 08. Did NOTHING. Now above the June 07 level.

 

[ziggy29]

It's probably recency bias, but I feel a lot more inclined to avoid risks I don't need to take any more.

 

[CyclingInvestor]

I would keep it at 100% stocks.

 

[donheff]

Alright fess up 2Cor, how the heck did you get that mixed up?

 

[W2R]

One year short of retirement? By that time, you are essentially done with the accumulation phase and your assets most likely have been shifted to your retirement asset allocation anyway.

So, I would leave the asset allocation alone.

In my case, I received an unexpected windfall less than two years before ER. I then shifted my AA to a more conservative stance. However, that had nothing to do with the windfall, and everything to do with getting close to my ER date. I had been making my asset allocation more conservative slowly since I was about 3 years out anyway, and just continued. I think the one difference in my AA was that I decided I no longer needed to consider a small immediate lifetime annuity to beef up my pension enough to cover my food and utilities bills. Instead, I put that money into bond funds which yield a bit less but give me more control over that portion of my money. Both annuity and bond funds could be considered as part of my fixed income allocation, I suppose.

SecondCor521, did this happen to you? If so, I am and really happy for you.

 

[ziggy29]

Setting aside the question of whether or not to retire immediately...

It would be awfully hard for me to set that question aside if it were reality.

 

[MichaelB]

If you increase risk you might not sleep so well at night, and if you decrease risk you might leave money in the table. Why not keep it where it is currently, and if you LBYM you can spend your time figuring out what to do with the excess income.

 

[Lawrence of Suburbia]

Change the age to 69 (I'm 55 now), and I'd say take on less risk. $Xmillion?? Try $.0Xmillion.

Actually, I'm paralytically risk-averse now; but I still have stuff like VGSTX and VWINX in there - so I'm in denial? Basically just shovelling in good money after bad, in hopes that when I get to 70 or so I can have a few years of rest before I discorporate.

 

[FUEGO]

I'd probably take on more risk, since I could. Something like go from 70/30 with my X portfolio value to an 80/20 ratio with my 2X portfolio. That would still leave me with a moderately higher amount in fixed income in absolute terms. The rationale being while I could enjoy a nice lifestyle with a high level of safety with X portfolio, anything else I can earn with 2X is pure luxury spending money, and the more the nicer. Losing it would simply put me back in the position of living a nice lifestyle.

I think I might take less risk if the multiplier were 20X or 200X though (ie I won the lottery jackpot or discovered I was Warren Buffet's long lost sole surviving heir). As in 50/50 stocks/fixed income. Why run up the score after all? Or, what would I spend it all on? A bigger private jet?

 

[Tadpole]

One day, you look at your calculations and realize that they are off by a factor of two to your benefit: instead of being able to retire at 50 with $X million, you'll be able to retire at age 50 with $2X million.

2Cor521

Inadvertently or not, I have a winning strategy already and I am cushioned for a -50% shock. I don't call that retirement, I call that ease of mind.

 

[mickeyd]

My AA is set for the long-term and will produce what it needs to produce. With an annual tweak, I'm off to attend to other matters. I have no need for the $ until RMD time of 2014.

Heck, I'm not sure I'll even actually need it at that time...

 

[JDARNELL]

I like the concept of "marginal utility of wealth" as described by Swedroe in one of his book. Basically, once you have accumulated enough to cover your needs, any incremental increase in wealth becomes less and less significant. Therefore the need to take risk decreases. The hard part is figuring out when enough is enough...

Diminishing Marginal Revenue, Returns, Utility etc. You get more satisfaction with the first unit than the next, than the next, etc. When I teach this I talk about being out at survival training and then going to an all you can eat buffet. The first plate is good, 2nd is ok but not as good as the first, the 3rd is ok but not as good as the 2nd and eventually if you eat to much you could actually make yourself worse off. Of course with accumulation wealth for me making myself worse off would take a long time I voted to reduce the risk.

Tomcat98

 

[NW-Bound]

Is SC521 having this thread to see forum members' personalities through their risk tolerance level?

I voted "Keep the same". If it has been working, why change it? Sure, it is riskier. True, you may not need the extra dough, but you also have plenty of margin in case it doesn't work out. The lower-risk AA may be boring to me.

No, I am not full of hormones.

I do not drive fast cars, in fact not even interested in them. No thrill seeker here either. I also do not watch spectator sports as I find them boring. I find the market an interesting subject, and you've got to have a stake in it in order to appreciate it and to pay attention.

 

[SecondCor521]

Alright fess up 2Cor, how the heck did you get that mixed up?

Actually, I have a very complicated and extremely detailed spreadsheet () that I wrote myself, and the last error I found in it was just a few days ago, but the error was not in my favor. I was using a discount rate to compute an NPV, and while the context of the calculation implied a monthly discount rate, I was using an annual discount rate. Unfortunately, the NPV in question is of a liability, so the larger discount rate was making the amount smaller than it needed to be. Whoops. Fixed now .

2Cor521

 

[SecondCor521]

SecondCor521, did this happen to you? If so, I am and really happy for you.

Nope. But there's a modest possibility that a scenario like it might in about 5 years.

2Cor521

 

[W2R]

Nope. But there's a modest possibility that a scenario like it might in about 5 years.

2Cor521

In the modestly possible scenario that something like this happens in about 5 years, I would recommend putting the money that you didn't know you would have into a money market account for about six months before you do anything with it. People say that it is usually not best to make major decisions right after major things happen in life, and I agree with that too. So, at least at first you would have a more conservative AA due to it all being in MM. Don't buy a new house or other major purchase right away until you have settled down for a few months. During that time, you can work hard on fleshing out the details of your new investment plan, and working on any emotional or interpersonal issues that the money brings with it. Ultimately I suspect you will find that the money doesn't really change your lifestyle, so much as easing it a little and making it more worry-free.

 

[Meadbh]

I voted to reduce risk. If I were in that position, my prime concern would be preservation of capital.