Best AA?

[Midpack]

I's say you're just about there. And keep in mind at some point in the not-too-distant future social security will be available which will cut your withdrawal rate way down. (Unless you just want to spend more.)

I'd sleep better with less than 90% stocks and the survival rate is just as good. But around here you'll get lots of differing opinions

+1. To me it comes down to how much downside volatility can you handle and still sleep well at night? To me upside and average returns are important but secondary.

There’s no right answer for everyone. Being fully invested in 1987, 2000 and 2008 taught me what I can live with, recognizing there’s a difference between accumulation and distribution years. And some people choose to accept more volatility to make their plan work, while others have a lower volatility AA because they don’t need to live with the volatility.

 

[flintnational]

But doesn't FIRECALC assume the worst of the worst and that includes testing the portfolio at awful times--ie 1966?

You are correct. But, keep in mind FIRECALC is only looking backwards. Relying on the success ratio assumes the future is no worse than the past. That is probably a good bet but not a guarantee. I am also a stock guy. I like Pb4uski's concept of allowing the stock allocation to drift up over time. We are currently at a 70/30 allocation and will likely let it drift up. We will accomplish this by not rebalancing. I also believe SORR is a serious threat to FIRE and it is prudent to take steps to minimize its potential impact. Otherwise, I would probably be 100% stocks. Like you, I can handle the volatility. I think?

 

[DrRoy]

I would want to have a WR of 3% and AA of 60%.

 

[MrLoco]

Yeah, she loves her job, but who knows what future holds....just ran numbers again and they still put me at 95% + with higher expenses...
my thinking is it just has to last until I'm 70 as ss will kick in big time...maybe I'm too optimistic[/QUOTE


Be very, very careful with this assumption. You are 17 years away from collecting SS at age 70. You are probably using SS calculators giving you estimates that far in the future. Shave 25% off those estimates. How does the monthly SS benefit look now?


Also, assuming your wife does work until 65 when Medicare kicks in.
God forbid she passes away next year. Now, you may be collecting SS a lot sooner at a smaller benefit AND you are 11 years away from MEdicare. 11 years under the ACA could be very expensive.


A hedge might be to take out a small ( $100k) 10 year term policy on your wife. This would help with health insurance pre Medicare and allow you to delay taking SS benefits.


You did not mention if pensions were available? This could help of course. Good luck!

 

[Bill from NYC]

Thank you everyone for your replies.....I totally understand that FIRECALC is just the past, SS might get cut, market could crash in next couple of years, etc However, I don't view any of those events as "probable" though. I need to give this more thought.

 

[24601NoMore]

Most financial planners would tell you that 90% stocks in your situation is way too high. You're taking a lot of unnecessary risk at precisely the time that you may need to pull from your portfolio, AND in a market that shows all signs of not having the types of returns we've had in the past 10 years. How would you feel if that ~$1M in equities went to ~$500K, and that's all you had to rely on in ER for some time?

If you haven't done so already, take a close look at the data above that Midpack posted. There is not a huge variation in annual average returns as you go from ~90% stocks to ~60% stocks, but your risk of loss (even if on paper) drops dramatically with some fixed income ballast to balance things out a bit more.

There's similar data available from Vanguard at https://personal.vanguard.com/us/insights/saving-investing/model-portfolio-allocations?lang=en. This shows average annual returns, max yearly loss and other interesting data points going back to 1926. What it doesn't show is max drawdown over multi-year bear markets and how long it has taken to recover. There's another chart that I've posted previously on that - will need to dig it up. But the net is that it can take a LONG time to recover from the average bear market. It's generally not so nice and rosy as it was in the 2008 meltdown, and you can find yourself underwater for 5-10+ years. You may want to consider what you'd do to fund your annual expenses during that time, because selling when your portfolio is down is something none of us want to do..

DW and I are retiring (my last day is tomorrow [close in age to you] and she'll probably follow within a couple of months max). Personally, I'm not comfortable with much more than ~30% stocks in this market and do expect the next several years are not going to be a fun time to be holding equities. In fact, if we get back to Dow ~26K, I'll probably dial down to ~20% and live off the dividends from bonds, MM funds and CDS until we start pulling SS - but YMMV.

 

[mrfeh]

Hi everyone, I've lurked on here for years and finally decided to join!
Here are my stats:
I'm 53, married with no kids. Recently lost job and I'm wondering if I have enough to retire. I have health care coverage through my wife and have for years. Total portfolio is $1,100,000 and total expenses including everything are ~$40,000.
When I run the numbers though Firecalc and other calculators they give me the green light , but I wanted to ask on here because it seems like everyone has much more money so not totally confident. My AA is ~90% stock and rest is in 2 corporate bond ETFS.

Before you make any decisions, I suggest you educate yourself. This is a great place to start:

https://www.bogleheads.org/wiki/Bogleheads®_investing_start-up_kit

 

[Bill from NYC]

+1. To me it comes down to how much downside volatility can you handle and still sleep well at night? To me upside and average returns are important but secondary.

There’s no right answer for everyone. Being fully invested in 1987, 2000 and 2008 taught me what I can live with, recognizing there’s a difference between accumulation and distribution years. And some people choose to accept more risk to make their plan work, while others have a lower risk AA because they don’t need to take much risk.

thx for that graph....question--what is the time frame on those returns that they show?

EDIT--never mind--I see 87 years....thx

 

[mrWinter]

Thank you everyone for all your input....

Yeah, that is interesting that the % success is the same whether its 60 or 100% stock. I guess the difference is that the 100% stock most likely will be worth much more, albeit with significant more volatility.

Will see, I haven't "finalized" my decision yet, but nice to know it's not out of the question.

Yes that is the difference, and not an insignificant one. For the previously mentioned scenario firecalc gives average ending portfolio balances of the following for the given % allocation to equities:


100: 6,926,874
90: 5,600,304
80: 4,401,022
70: 3,344,423
60: 2,435,548


Seems to me firecalc is screaming at us all to keep a higher stock allocation. Yes you'd see more volatility, which I guess would be scary, but losing literally millions of dollars is pretty scary too.

+1. To me it comes down to how much downside volatility can you handle and still sleep well at night? To me upside and average returns are important but secondary.

There’s no right answer for everyone. Being fully invested in 1987, 2000 and 2008 taught me what I can live with, recognizing there’s a difference between accumulation and distribution years. And some people choose to accept more risk to make their plan work, while others have a lower risk AA because they don’t need to take much risk.

I haven't lived it yet so what do I know, but I feel like I'd surely sleep a lot better on a bed padded with an extra 4 million dollars. Yes you'll see more volatility, but you'll be seeing more volatility in portfolio double+ the size, so volatility will matter less as you'll have more to lose before you worry.


Also, Midpack knows more than me, but it doesn't jive with me when people conflate volatility and risk. What is meant by risk? The only definition that makes sense to me is a risk of running out of money, the risk of the plan failing. Higher volatility does not equal higher risk of running out of money. Firecalc just told us that, as allocation to equities increase from 60 to 100% risk stays the same, while volatility and returns both increase.

 

[Dtail]

Yes, theoretically one's balance would end up higher with a larger equity %.
However, I do believe the volatility matters especially in the earlier years of retirement, especially if one doesn't obviously have a huge buffer.

 

[audreyh1]

thx for that graph....question--what is the time frame on those returns that they show?

EDIT--never mind--I see 87 years....thx

It’s the range of annual returns.

 

[Midpack]

Also, Midpack knows more than me, but it doesn't jive with me when people conflate volatility and risk. What is meant by risk? The only definition that makes sense to me is a risk of running out of money, the risk of the plan failing. Higher volatility does not equal higher risk of running out of money. Firecalc just told us that, as allocation to equities increase from 60 to 100% risk stays the same, while volatility and returns both increase.

You're right, I've used volatility and risk interchangeably (it's incorrect, and careless of me) and so I changed my earlier post. Volatility and risk are not completely independent of each other, but they're not interchangeable, my bad. Hopefully the point came across regardless. Thanks.

 

[24601NoMore]

Another question worth asking is..how much do you expect to NEED throughout retirement to pay the bills, have a good quality of life and to be financially secure?

William Bernstein famously (and IMHO wisely) said "when you've won the game, quit playing".

Most of us don't NEED to run up the number as high as we can get it.

If you haven't done so already, a well thought out spreadsheet or similar plan showing expected yearly spend over the next 30 or so years (adjusted for inflation and "lumpy" expenditures including all the things you may want or need such as major vacations, big house expenses, large healthcare bills, etc) and income is a very good place to start in answering the "how much do you NEED" question. I spent the better part of 18 months putting ours together, and it accounts for everything I could possibly conceive of. Once you model it out, you can run a lot of "what if" scenarios that are hard to do any other way. FireCalc and other tools are great, but there's no substitute for a year-by-year plan.

It's easy to get caught up in thinking about how high you can potentially run up the number with a high equity %. Sure, it'd feel great to have $5, 10 or even > $$millions in the portfolio. But if that strategy results in your $1M+ in equities dipping at times to $500K or so in a 50% market meltdown that may take 5-10 years to recover from, it's worth thinking long and hard about how you'd react in that type of situation. I know from a lot of personal reflection that I would not react well psychologically, but my own risk profile is such that I focus more on what we NEED vs what I can potentially (in a good or perfect market scenario) could run the number up to..

Also - as other posters have suggested, you may want to consider the "black swan" type events. What if your spouse were to pre-decease you? That SS goes away. Ditto if you pre-decease her. You may think that's "unlikely", but I've had numerous friends and family in their 50s and 60s that have developed terminal health issues almost randomly, including a 60-YO BIL that's otherwise healthy as a horse who just was diagnosed with terminal non-primary melanoma. Unlikely is no longer unlikely when you're in your 50s. SS is also likely to be cut somewhere in the next 15-20 years, and estimates IIRC range up to 23% or so. HC is another huge X-factor. ACA and the generous subsidies are not guaranteed with recent court decisions. What can and will happen is anyone's guess. So can you also cover (very expensive in some cases) annual premiums and deductibles once your DW quits working? Lots of things that can happen to derail even the best/well thought out plans..

 

[RenoJay]

Rather than rely on old saw like “markets usually rally 25% after correction”, try Googling the Stan Drunkenmiller interview he did in December. Get the other side of the story so you can make more balanced decisions.

 

[pb4uski]

.... William Bernstein famously (and IMHO wisely) said "when you've won the game, quit playing"......

Did he say that before or after 2008/2009.... he was whistling different tunes at different times IIRC.

 

[24601NoMore]

Did he say that before or after 2008/2009.... he was whistling different tunes at different times IIRC.

Far as I know, Bernstein has never changed his tune on that..wouldn't make sense to, as it's a wise strategy regardless of what the market is doing at any particular moment.

 

[Midpack]

Did he say that before or after 2008/2009.... he was whistling different tunes at different times IIRC.

Far as I know, Bernstein has never changed his tune on that..wouldn't make sense to, as it's a wise strategy regardless of what the market is doing at any particular moment.

It appears he said it before 2008, and was even more convinced by 2012. But he seems to have radically changed his views on the risk tolerance/ability to 'buy & hold' of clients...

Bernstein was asked “How much exposure should people have to stocks?” He answered:

A lot of people had won the game before the [2008] crisis happened: They had pretty much saved enough for retirement, and they were continuing to take risk by investing in equities.
Afterward, many of them sold either at or near the bottom and never bought back into it. And those people have irretrievably damaged themselves.
I began to understand this point 10 or 15 years ago, but now I’m convinced: When you’ve won the game, why keep playing it?
How risky stocks are to a given investor depends upon which part of the life cycle he or she is in. For a younger investor, stocks aren’t as risky as they seem. For the middle-aged, they’re pretty risky. And for a retired person, they can be nuclear-level toxic.
​

The reason why stocks aren’t very risky for a young person is that you have a lot of “human capital” (ability to make money working) left. On the eve of retirement, you don’t have any of that.

https://www.whitecoatinvestor.com/bernstein-says-stop-when-you-win-the-game/

https://esimoney.com/youve-won-game-stop-playing/

 

[dtbach]

But "won the game" has to include inflation of which there is no good forecast. I've "won the game" but will only pare down to perhaps 40% stock exposure at the minimum.

 

[razztazz]

But "won the game" has to include inflation of which there is no good forecast. I've "won the game" but will only pare down to perhaps 40% stock exposure at the minimum.

If I am not mistaken his "Won the game" stance includes someone in retirement not being more than 50% (That's Fifty) in stocks. So, your 40% stocks is in the neighborhood. I'm pretty sure that's a Bernsteinism from one of his articles on the subject. So, it's not like he thinks at a certain point stocks ought to be abandoned as too risky. He just doesn't jump on the "stocks uber alles" bandwagon as a necessity.

Altho I believe he does state, perhaps in an interview (can't find the link att) when asked about inflation he says something like: "Bonds pretty much keep up with inflation anyway" suggesting that yes, you can forget stocks.

If I can untangle my mass of links on the subject I'll post

 

[pb4uski]

But if 40/60 is ok in his book and we know that success rates are not significantly different from 40/60 to 90/10, and are actually a tad higher for 55/45 to 70/30, so I'm not sure what the point of his advice is.

 

[OldShooter]

Text search says "Inflation" has only been mentioned by a couple of posters here and never by the OP.

If we average 30 years of inflation history we get something like 2.4%. At 2.4% going out the OP's 17 years, a dollar's buying power is only 65 cents.

30 years average sounds conservative but the period starts just after the last round of exciting inflation in the late 70s. The 40 year average is about 4.1%. So again looking at 17 years a dollar's buying power is 49 cents.

The politically least painful way for the politicians to "fix" social security will be to include reduction or elimination of the inflation indexing.

The hippo is one of the two most dangerous animals in Africa. This guy is literally running for his life. YMMV, of course.
​

 

[FREE866]

Yes that is the difference, and not an insignificant one. For the previously mentioned scenario firecalc gives average ending portfolio balances of the following for the given % allocation to equities:


100: 6,926,874
90: 5,600,304
80: 4,401,022
70: 3,344,423
60: 2,435,548


Seems to me firecalc is screaming at us all to keep a higher stock allocation. Yes you'd see more volatility, which I guess would be scary, but losing literally millions of dollars is pretty scary too.

I'm in a similar postion as the OP and these numbers here is what keeps me in a high equity position. That's a heck of a lot of money to leave on the table so you can "sleep better at night" IMO.

If his annual expenses are $40,000 then he has 2 and a half years of expenses in bonds and not stocks. He could draw on that if we have a bear market and given the avg bear is 18 months he would be OK.

 

[audreyh1]

Far as I know, Bernstein has never changed his tune on that..wouldn't make sense to, as it's a wise strategy regardless of what the market is doing at any particular moment.

He did indeed completely change his tune after many of his clients reacted very poorly to the 2008/2009 market crash.

 

[24601NoMore]

He did indeed completely change his tune after many of his clients reacted very poorly to the 2008/2009 market crash.

How so? I read the earlier quote posted and it appears to reinforce the "when you've won the game, quit playing" as Bernstein talks about people who had indeed won the game but kept their equity positions unnecessarily high, only to watch it vaporize in the 2008 downturn. They then compounded the problem by selling into weakness. Seems that's exactly the point - they had won the game, so should have reduced equity to a more manageable / lower risk level. (Bernstein also goes on to say that too many equities in retirement can be "nuclear level toxic", and I agree).

I wouldn't interpret "quit playing" as being TOTALLY out of stocks. But instead to dial back your equity exposure to a much more reasonable level (say, 50% or less). If you follow the very common "age in bonds" mantra, a 50+ YO retiree should be 50+% in some kind of fixed income, which would include Bonds, Bond Funds, CDs, MMs, etc. Some may choose to ignore the "age in bonds" guidance, but that's just taking on risk that is in most cases entirely not necessary given the relatively small variations in average annual portfolio return at different AA allocations. Sure, fixed income is "boring" compared to stocks, but the dividend income can be a big part of what covers your annual expenses, also, without "touching the principal"..

It all comes down to risk, and an investor's ability to take on that risk. Bear markets do not always recover in 18 months, and there's no guarantee the next 10-20 years will be anything like the last 10-20 in terms of equity returns. There are multiple (too many for my comfort) periods throughout the market's history where it can take 5-10 years for the market to recover to it's previous levels. If you start with $1M in equities, and it takes 10+ years to get back to $1M in equities, a question we all have to answer is "am I comfortable selling part of my portfolio when it's worth (potentially much) less than I started with?" I'm personally not wild about finding myself in that scenario in retirement. So, I instead invest a good chunk of my portfolio in CDs, MMs, etc. If the market is down (like in 2018), those more liquid parts of the portfolio allow you to cover spending without having to drawn down the equity part of the portfolio. If, on the other hand, you're many years from retirement, you're still generating income via your human capital and a 5-10 year recovery time is not as big of a deal. In fact, you're buying at lower cost and can also take on much more equity risk with higher % equities overall. But with OP potentially no longer working, the human capital return goes way down (potentially to 0) and the risk being taken with the only other source of income (portfolio) becomes exponentially more important.

A good rule of thumb that I've heard many times is "don't invest a penny in stocks that you expect to need in <10 years". Good advice, IMHO and that's my own plan. The stock portion of my portfolio is my 10+ year money..I only hope DW and I are fortunate enough to live long enough to pull from it. Watching many friends and family in their 50s and 60s not make it to their next birthday, I'm increasingly aware that there might be a scenario where someone else is pulling from that 10+ year bucket.

So, to OPs original question on AA - having multiple "buckets" (as recommended by Christine Benz @ Morningstar) to cover different spending periods in retirement is a pretty good strategy. Unfortunately, 90% equities ties up most of the portfolio in a "10-year" bucket and OP may find himself in a tough situation (selling into a market where the value of his equity portfolio is less than he started with) unless there are other spending buckets established to cover those potentially 5-10 year periods where the equity position of the portfolio is down from where it started..

All JMHO but if OP is indeed retiring, 90% equities seems to be at best a very high risk strategy and building up some other "buckets" (1-3 years, 3-5 years at a minimum) with fixed income assets would be recommended, especially at his age and job status..

 

[audreyh1]

How so? I read the earlier quote posted and it appears to reinforce the "when you've won the game, quit playing".


I wouldn't interpret "quit playing" as being TOTALLY out of stocks. But instead to dial back your equity exposure to a much more reasonable level (say, 40% or less).

Yes he does. He changed to say to have 20 to 25x income needs in cash, cash equivalents and very high quality fixed income. Only funds above that should be invested in stocks. So someone seeking to retire with typical 25x needs is looking at a 100% conservative fixed income portfolio or is advised to retire with a much larger pile if they want some stock exposure.