"Won the Game" Strategies

[DawgMan]

So after a couple of years of absorbing the wisdom from many of you on this site, I have adjusted my old way of thinking in many ways in an effort to hit my long term RE objectives. That being said, I find myself (in a good way) at a new crossroad I would be interested to get some advice on. First, a few pieces of background which may help...

- 53 yr old, self-employed single earner, SAHW, 4 kids (all out of college in 2 yrs, 2 married).
- My business is and has been very lucrative/enjoyable/flexible and my plans would be to keep doing it while it is essentially that way, however, my crystal ball says it may turn the opposite in 2 yrs or so.
- Good news is my strategy to potentially launch into RE would tie into last kid graduating and my business no longer being "fun".
- Ratcheted down my previous aggressive allocation from 80/20 to 60/40 about 18 months ago. Models all seem to say I am/will be good to hit my projected income goals in 2 yrs, maybe sooner.
- Plan is to pay off house and have 0 debt by RE and have the 2 remaining girl's wedding $ in the bank. That being said, I have somewhat lofty RE income "wants", so will have plenty of room to cut back expenses if things go south.

So based on the above, here are the questions...
- I will essentially hit my "number" if my portfolio grows another 10% total over the next 2 yrs, excluding any contributions. If my business stays strong over the next 1 - 2 yrs I may be able to contribute 5% - 8% pure cash to the pot basically minimizing much needed portfolio return. My fear is our market may be in extra innings which has me thinking about my strategy and should I play more defense over the next 2 years. Would you just stay the course and follow your AA allocation (in my case 60/40) from now into/thru my RE years? If your this close to having "won the game", would you ratchet down the AA (i.e. 40/60, 50/50) and then maybe move back up to 60/40 once I launce?

I know there are different thoughts here. It's just interesting that now that I can finally see the finish line, I don't want to trip before I get there! Thoughts?

 

[pb4uski]

I am/was in a similar situation to you in that we were well funded (had a low ultimate WR once SS and pensions started) and we also had a lot of redundancy and flexibility in our spending.

I stayed with 60/40 because as a long term investor (over 30 years) I was comfortable with equities risk (dance with the girl that brung you to the dance) and in an odd sense, since we are so well funded, at the end of days I am investing for my kids and 60/40 is plenty conservative for mid 20 year olds (at the time that I retired).

If I was so concerned with sequence of returns risk that I was losing sleep, then I probably would have set up a CD ladder for 10 years of spending and invested the rest... which probably puts you at 40/60 vs 60/40. Since the survivability of 40/60 and 60/40 are not very different, I prefer 60/40... mostly because it is more likely to be better for the heirs.

 

[LOL!]

I was told recently that one could draw a straight line between any 3 points which is absolutely true: Just make the line thicker.

So you mentioned "the finish line." How thick is that finish line? If it is very thin and you are looking at a single number with no contingency, then I think you will have trouble. I think one's finish line should be thick, so that the number is just one part of the whole deal. Or one should cross the line and keep going for a year to see how things change for you.

One doesn't have to move the line, but one can look fondly back a year and say, "That was a nice line, wasn't it?"

Also, over time your portfolio or net worth may move up over the line and down back below the line a few times if the line is too thin.

 

[kcowan]

I think your are asking a market timing question. That is beyond my pay grade.

The market adjusted my AA in 2008 and then adjusted it back. So my advice would be to stay the course.

 

[Danmar]

I am/was in a similar situation to you in that we were well funded (had a low ultimate WR once SS and pensions started) and we also had a lot of redundancy and flexibility in our spending.

I stayed with 60/40 because as a long term investor (over 30 years) I was comfortable with equities risk (dance with the girl that brung you to the dance) and in an odd sense, since we are so well funded, at the end of days I am investing for my kids and 60/40 is plenty conservative for mid 20 year olds (at the time that I retired).

If I was so concerned with sequence of returns risk that I was losing sleep, then I probably would have set up a CD ladder for 10 years of spending and invested the rest... which probably puts you at 40/60 vs 60/40. Since the survivability of 40/60 and 60/40 are not very different, I prefer 60/40... mostly because it is more likely to be better for the heirs.

This describes my strategy perfectly. Really investing for the next generation. I often think about the saying “dance with the one that brung you” or sometimes “live by the sword die by the sword”. Obviously, this takes a fairly high risk appetite which I certainly have. It also helps to end up with a fairly large “stash” so there is plenty of room for reduced spending in an emergency. Also, to some degree I “keep playing” because I enjoy it. Everybody is different.

I retired in 2006 so during the period 2008-2009 I did actually lose some sleep. Stayed the course though and sleep great now.

 

[6miths]

I am/was in a similar situation to you in that we were well funded (had a low ultimate WR once SS and pensions started) and we also had a lot of redundancy and flexibility in our spending.

I stayed with 60/40 because as a long term investor (over 30 years) I was comfortable with equities risk (dance with the girl that brung you to the dance) and in an odd sense, since we are so well funded, at the end of days I am investing for my kids and 60/40 is plenty conservative for mid 20 year olds (at the time that I retired).

If I was so concerned with sequence of returns risk that I was losing sleep, then I probably would have set up a CD ladder for 10 years of spending and invested the rest... which probably puts you at 40/60 vs 60/40. Since the survivability of 40/60 and 60/40 are not very different, I prefer 60/40... mostly because it is more likely to be better for the heirs.

I agree with this. I'm mainly investing for the kids now so continue to be on the aggressive side for my age, but it isn't really my age that I'm considering.

 

[Midpack]

Ratcheting back before you've won and then ratcheting back up sounds like market timing to me too. But you're not talking about radical AA's or anything - 60/40 > 40/60 > 60/40. I've always thought of ratcheting back only (well) after you've won, but there's no right answer. I slowly dialed back equities starting in my early 50's (when we first reached FI) and I'm just planning to continue to slowly dial back equities over the next 30 years. YMMV

 

[kevink]

"If you've won the game, stop playing" comes from William Bernstein's book "The Ages of the Investor" and reflects a lot of hard-won wisdom on his part - including seeing many people who'd read his books, followed his advice and "knew" their risk tolerance selling stocks like crazy during the '08-09 market crash.

I think you're wise to pay attention to lofty stock valuations, and 60/40, IMHO, is quite far removed from a "won the game" portfolio that typically includes just enough equities to hede against inflation along with a boatload of high-quality bonds. If you haven't perused it, I really recommend spending some time on the portfolio charts site looking at real-world returns for various portfolios:

https://portfoliocharts.com/portfolios/

 

[pb4uski]

It is worth noting that Bernstein's "stop playing" position is a recent change of tune by him.

To me, that change was a cop out... if his clients and readers didn't have the will to stay the course in '08-09 to me the solution is more education for those people rather than changing your principles and advocating an ultra-conservative portfolio.

 

[W2R]

What you do is, of course, up to you. Here's what I did.

As I approached retirement, I gradually (over 2-3 years) moved my AA from 100:0 to 45:55 (equities, fixed). Got there maybe a year before I retired, and left it there for good.

I got my house paid off 3+ years before retirement but then I am in the "pay off the mortgage" camp when it comes to this contraversial question. Also got all other debt paid off several years before paying off the house.

 

[daylatedollarshort]

I know there are different thoughts here. It's just interesting that now that I can finally see the finish line, I don't want to trip before I get there! Thoughts?

Pensions, SS and a little side income cover most of our expenses, so we invest our portfolio more for capital preservation rather than market gains. If you can get even a zero real return, your safe withdrawal rate over 40 years is 2.5%, Add in .5% real and you are at ~3% SWR investing in a TIPS ladder. We don't have 100% TIPS but this is the general idea (matching strategies) we use in our planning since we aren't big spenders or risk takers.

 

[IMATERP]

What you do is, of course, up to you. Here's what I did.

As I approached retirement, I gradually (over 2-3 years) moved my AA from 100:0 to 45:55 (equities, fixed). Got there maybe a year before I retired, and left it there for good.

I got my house paid off 3+ years before retirement but then I am in the "pay off the mortgage" camp when it comes to this contraversial question. Also got all other debt paid off several years before paying off the house.

My methodology matches yours to a tee. I think that I am about 40:60 with a nice stable pension starting in three years.

 

[Golden sunsets]

The rate at which you anticipate withdrawing from your portfolio is probably the best measure to answering your question . If you retire in two years and anticipate drawing down 3% or less than you probably can hold firm on your 60/40 portfolio. If you will need more than 3.5% then I would try to protect against sequence of returns risk.


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[DrRoy]

- Ratcheted down my previous aggressive allocation from 80/20 to 60/40 about 18 months ago. Would you just stay the course and follow your AA allocation (in my case 60/40) from now into/thru my RE years? If your this close to having "won the game", would you ratchet down the AA (i.e. 40/60, 50/50) and then maybe move back up to 60/40 once I launce?

I pretty much did the same - went from 80 to 60 near RE. Beyond that NO MARKET TIMING! I am really beyond my "number" so if I tack on another 20% I will go to 55% AA along the way, but then hold there.

 

[marko]

The market adjusted my AA in 2008 and then adjusted it back. So my advice would be to stay the course.

+1 I RE'd in 2006 and .... ran into the recession just as I was getting used to retirement. Held the course and now, well, it's like the recession never happened.

I think it's a matter of how much backup/flexibility you have in the event of hitting a snag.

 

[ikubak]

So based on the above, here are the questions...
- I will essentially hit my "number" if my portfolio grows another 10% total over the next 2 yrs, excluding any contributions. If my business stays strong over the next 1 - 2 yrs I may be able to contribute 5% - 8% pure cash to the pot basically minimizing much needed portfolio return. My fear is our market may be in extra innings which has me thinking about my strategy and should I play more defense over the next 2 years. Would you just stay the course and follow your AA allocation (in my case 60/40) from now into/thru my RE years? If your this close to having "won the game", would you ratchet down the AA (i.e. 40/60, 50/50) and then maybe move back up to 60/40 once I launce?

I know there are different thoughts here. It's just interesting that now that I can finally see the finish line, I don't want to trip before I get there! Thoughts?

I think you are over thinking this thing. 60/40 seems conservative enough to me but each person needs to have an allocation that allows them to sleep at night. I would just stay the course.

 

[flyingaway]

Same age here. I have been moving from 85/15 to 70/30 since last year. I am currently in about 73/27, moving 1% to bond if S&P500 is above 2600 every 1%. If the market rises really fast, I might move to 60/40.

 

[Lsbcal]

I don't know why people keep referring to 2008/09 as if it is a model of the worst market. It could be much worse. For one, bonds won't provide quite the cushion should the market tank soon (because of current low rates). Secondly, stocks could go down further in a future decline (thinking 1930's). It all depends on unknowable future events.

So "won the game" needs a clear definition. The definition would be investor dependent. Certainly net worth comes into the picture. Do you have $10M liquid or "just" $2M? What is your portfolio expense target? Etc, etc.

 

[Car-Guy]

So "won the game" needs a clear definition. The definition would be investor dependent. Certainly net worth comes into the picture. Do you have $10M liquid or "just" $2M? What is your portfolio expense target? Etc, etc.

True, like, what's you age, your spend rate, investment strategy, etc, etc, etc. Lots and lots of variables. Some have won the game "in their minds" with less than 2m. Others still haven't with 10.

 

[kcowan]

Would all the participants here with over $10 million in liquid assets care to share why you have not won the game?

 

[daylatedollarshort]

I read an article about a venture capitalist group where all the partners were billionaires, worked long hours and worried about missing the next Google or Facebook. The only one that had cut his hours had a serious illness. I thought what is the good of all those billions if they aren't buying the partners leisure time and peace of mind? It made me realize winning the game after a certain income level was really more a mental hurdle than a financial one.

 

[Danmar]

I read an article about a venture capitalist group where all the partners were billionaires, worked long hours and worried about missing the next Google or Facebook. The only one that had cut his hours had a serious illness. I thought what is the good of all those billions if they aren't buying the partners leisure time and peace of mind? It made me realize winning the game after a certain income level was really more a mental hurdle than a financial one.

Interesting, agree that some people are just “driven” and can’t retire. I have no such issue and despite “winning the game” by most definitions, am thoroughly enjoying retirement but also maintaining a fairly aggressive AA. I don’t think they need to be mutually exclusive.

 

[CaliKid]

Would all the participants here with over $10 million in liquid assets care to share why you have not won the game?

I would imagine some people with $10m+ liquid have a very high standard of living. So, for example, if they are used to an income of $500+ a year $10m might not seem like "game over."

 

[pb4uski]

I read an article about a venture capitalist group where all the partners were billionaires, worked long hours and worried about missing the next Google or Facebook. The only one that had cut his hours had a serious illness. I thought what is the good of all those billions if they aren't buying the partners leisure time and peace of mind? It made me realize winning the game after a certain income level was really more a mental hurdle than a financial one.

Interesting, agree that some people are just “driven” and can’t retire. I have no such issue and despite “winning the game” by most definitions, am thoroughly enjoying retirement but also maintaining a fairly aggressive AA. I don’t think they need to be mutually exclusive.

+1 I knew and worked with and for people like that but never "got it". Sure, I enjoyed the game and closing a big deal but it was a means to an end and not an end in itself. I can't understand those folks who have plenty and could comfortably retire in leisure but keep pounding it anyway.... like Warren Buffett, Hank Greenberg, et al.... their makeup is different from mine.

 

[flyingaway]

Would all the participants here with over $10 million in liquid assets care to share why you have not won the game?

It depends on how the$10 million come from. If it comes from indexing investment, the person may have very high income and high expenses, thus game is not over.