How much passive/fixed income would you need to get out of equities?

[MarieIG]

No amount of passive income would make me want to get out of equities completely.

 

[LARS]

I got to thinking (Yes, that is what the noise was), what would make one comfortable enough so as not to take any additional investment risk. This is not intended as an investment vs inflation discussion so please try to refrain from bringing it up and making it one.

We (DW & I) as I assume most of us here on ER.ORG, IMHO have a good (to very good) middle class life, we own our own home and live in a nice resort area, there is lots to do, even if we do not always take part in the activities as we enjoy staying at home and enjoying each other's company.

We do not spend our days chasing the almighty $$, and are pretty much fixed income investors and have been for the last 25 years. Most of you know that about us anyway.

Our Mandatory expenses are about $45k a year and our returns for various investments are approximately about $95k of which 40% is Taxable. We do currently shelter/defer some of the taxable for ACA purposes. We do not budget for discretional spending items, we just fund them as needed/wanted.

This does NOT include any SS or pension income that we are eligible for from 3 different sources (Estimated at about $60k when we start taking them). We have chosen NOT to take any at all until DW is eligible for Medicare or something changes in the USA Healthcare system (Unlikely). Or, we move to a country that has proper sensible HC or universal healthcare that truly benefits it's citizens and not the providers or insurance companies (That is a debate for another time though).

In our case this is more than enough to last us the next 25 - 30 years (I will not last that long for sure), so we think we can "Still" go without traditional stock market investing.

I would be grateful for your thoughts and wonder if anyone else here is like us.

We do not have any heirs and when we die ALL our assets will be sold and split evenly between, St. Judes & Shriners hospitals for sick kids, Guide Dogs for the Blind and Guide dogs of America.

Having no pressure to leave an Estate of size gives one tremendous flexibility to dial back risk.

I long ago came to the conclusion that doubling my net worth would, while nice, make very little difference in how we live our lives. A loss of 50% of our Net Worth, on the other hand, would mean a change in lifestyle.

Thus, I manage our investments with that understanding in mind.

So you are not alone in your thinking...

 

[youbet]

A loss of 50% of our Net Worth, on the other hand, would mean a change in lifestyle.
.

But it's hard to envision how a conservative and diversified portfolio which includes a significant allocation to equities (say 50%) could permanently lose 50%. How do you think that might happen?

Even the Great Recession where I saw a 30% dip in my FIRE portfolio value only lasted a few years during which I never had to adjust my spending a bit thanks to diversification and my FI + cash positions.

Are you thinking of someone with a 100% aggressive and speculative equity allocation where companies go out of business and your holdings literally default permanently to zero and drag your networth down 50% overall? That could happen, of course, if you really dumped the kettle into undiversified, risky,speculative positions and the economy tanked. But it seems like most of the members here don't do that. Simply owning the TSM plus perhaps some international seems much, much more common.

Just wondering what investment strategy and what economic calamity you're envisioning that would result in a permanent (or at least long term) 50% decline in your net worth.

 

[LARS]

It takes little imagination to my mind to see the next big crisis cause equities to lose half their value; and, equally important the remedy of QE, which managed to dig us out of the 2008 hole, is wholly not effective again. Thus, we're in the crapper.

Add to this discussion that time horizon to rebound becomes more and more important as you age and it doesn’t take a rocket scientist to see a potential risk (real in my eyes).

Thus, I would personally not want to continue my spending (eg lifestyle) on the hope equities rebound in a timely manner.

Obviously I’m speaking to substantial equity position as many still carry here deep into Retirement.

YMMV... but, I, too, fervently subscribe to the "once you've won the game approach". Not to mention there is a liberating feeling going to bed not worried about market gyrations, which, to me personally, is a tremendous mental benefit; and, again, more than offsets the lose of current return.

 

[daylatedollarshort]

One factor I thought I'd bring up again is inflation. Inflation hurts pensioners with fixed monthly payments. But fixed income in CD ladders isn't really fixed, as the rates change as the ladders mature and renew at the prevailing rates. For CD holders, isn't it real interest rates that matter? If inflation is 10% but real interest rates are 15%, then wouldn't that be a good thing, as long as one has ladders trended towards prevailing rates and not a portfolio of 2%, 30 year bonds?

 

[Badger]

I'd call it as a moot point. If you have enough that you can support yourself on fixed income alone, even through a decade of high inflation, then you also have enough to weather the volatility of some market exposure.
-ERD50

So if you are already in the position as described on fixed income then what is the point of risking volatility of some market exposure just because you have enough when it isn't necessary?



Cheers!

 

[phil1ben]

My allocation is currently:

25% - Individual Stocks
25% - Individual Muni Bonds
25% - Investment real estate (i.e. homes in resort locations that are rented seasonally (in locations where I also own primary/vacation homes) and minority interests in LLCs that own apartment complexes (I was in that business)
25% - Cash (CDs, Money Markets)

I know this is conservative for 59 years old but an important goal is preservation. The muni bond interest covers annual expenditures (not yet at SS age but this never played a part of my planning). However, I will always hold a portion in equities and real estate(low leveraged) to provide potential growth and hedge against inflation.

 

[ERD50]

So if you are already in the position as described on fixed income then what is the point of risking volatility of some market exposure just because you have enough when it isn't necessary?



Cheers!

Because it's not really a risk to your portfolio survival, as defined in this thread. It's been said in the other posts, this isn't a scenario where you would go 100% equities, but keeping 30-40% equities is prudent, based on history. For those w/o heirs, they mostly seem to want to leave some to charity - why not include some equities which have a very high probability of adding to the end balance?

Once again, do not confuse "volatility" with "portfolio survival". Study FIRECalc with the Investigate tab and portfolio success versus AA. You will see that a portfolio with < 30% equities fails more often than one with > 30% equities. So how is that less risky? It's not.

I'll say that again - not including equities is what makes your portfolio more risky, not less. So turn your question around, why wouldn't I include some equities in my portfolio?

And as also pointed out earlier, the caveat in the OP is rather silly - "This is not intended as an investment vs inflation discussion so please try to refrain from bringing it up and making it one." That's a bit like saying "Assuming this stock will only go up, and don't tell me it won't, then why wouldn't I buy it?".

-ERD50

 

[easysurfer]

When you sleep well at night, that is the proper amount .

 

[ShokWaveRider]

Here is another way of putting it. At least for me. If my portfolio lost 25-45% in a matter of a week, I would definitely not sleep or a year, maybe more. The 25 - 45% reduction in income would make quite a difference in our lifestyle, even if it was just me going into ultra frugal mode for a while till it came back.

If one can afford to lose up to 50% of one's stash and not batt an eyelid, lose any sleep or change one's standard of living, that is great, good on you. But for the rest of us, me especially, that is not the case.

 

[Dtail]

I can go down to 15% equities with 100% survival according to Firecalc. Nevertheless, I will remain at 55/35/10 for now, as need to offset the cash (used for ACA management) and the calculations are counting on SS at 100% payout. We also have 5 children between us.
I also wish to keep minimal risk on the bond side, so 55% works for me at this early stage of retirement.

 

[ERD50]

Here is another way of putting it. At least for me. If my portfolio lost 25-45% in a matter of a week, I would definitely not sleep or a year, maybe more. The 25 - 45% reduction in income would make quite a difference in our lifestyle, even if it was just me going into ultra frugal mode for a while till it came back.

If one can afford to lose up to 50% of one's stash and not batt an eyelid, lose any sleep or change one's standard of living, that is great, good on you. But for the rest of us, me especially, that is not the case.

But knowing you will almost certainly be losing 25% or more to inflation over 10 years is something you can just ignore? That's just 3% inflation over 10 years ( 100 ⋅ (1 − (0.97^10)) ≈ 26.26% drop. And inflation from 1980 to 1990 was.... wait for it.... 58.6%! Note, in case you missed it - that's greater than the 50% portfolio drop you use as a knock against equities.

https://www.usinflationcalculator.com/

Also, a drop in a portfolio is not equated to a drop in income. I have a fairly aggressive portfolio, I dropped a lot in the last crash. My income did not change one bit, I kept withdrawing what I always did.

Do as you wish, it's your money, your life. But I don't like to see misinformation or twisted views presented on this forum w/o challenge. Some people may get the wrong idea about some of this.


-ERD50

 

[ShokWaveRider]

Here is a post where folks can rant about inflation. Please observe those who calculated their own Personal Inflation Rates. This post is not intended to comment on inflation, we do not ignore it, just discuss it in other posts such as the one below. Please respect that.

http://www.early-retirement.org/forums/f28/the-real-impact-of-inflation-on-retired-folks-96928.html

 

[ERD50]

Here is a post where folks can rant about inflation. Please observe those who calculated their own Personal Inflation Rates. This post is not intended to comment on inflation, we do not ignore it, just discuss it in other posts such as the one below. Please respect that.

http://www.early-retirement.org/forums/f28/the-real-impact-of-inflation-on-retired-folks-96928.html

To not discuss inflation in this thread is to put your head in the sand. It's really senseless. And dangerous. Why do you want to do that? I'm guessing it is because you have made up your mind, and do not want to be confused by the facts. Have fun with that if you want, but I don't want to see other readers led astray with this nonsense.

Here is another way of putting it. At least for me. If my portfolio lost 25-45% in a matter of a week, I would definitely not sleep or a year, maybe more. ....

When did the market lose 45% in a week? And a conservative portfolio would likely be along the lines of 40/60, so even a 45% market drop would only be an 18% portfolio drop. And divs from the stocks and bonds would keep pouring in, if you need an extra 1% for expenses, you sell from the bond fund, and could do that for decades.

You seem to making up straw-man scenarios to fit your world view. I prefer reality, because in the long run, it always wins.

Good luck.

-ERD50

 

[EarlyBirdly]

" We do not spend our days chasing the almighty $$ *, and are pretty much fixed income investors and have been for the last 25 years. Most of you know that about us anyway. Our Mandatory expenses are about $45k a year and our returns for various investments are approximately about $95k.."

You have done this for a considerable amount of time, and continue to produce more than 2x the money you need annually. You also have income sources you are not even tapping as of yet.

Q: WHAT ARE YOU TRYING TO ACCOMPLISH ?

IMHO-You do not fix that which is not even remotely ( or by any standards, in your case) broke. (!)





* - Why start now?

 

[LARS]

I get the feeling that some are discounting too heavily the risk of age versus time for portfolio to recover. Small consolation if your portfolio takes five years to recover if you "wasted" five years having to tighten your belt at age 65 to 70 in your prime remaining years.

Just my opinion...

 

[ShokWaveRider]

Q: WHAT ARE YOU TRYING TO ACCOMPLISH (!)

Simply asking a question of others as stated in the OP and title of this thread. Also I enjoy hearing from other folks who feel as I do. Why do some people have to get so adversarial simply because others do not do as they do. No advice is being given, no recommendations, yet folks imply false information is being propagated. Go figure. Can we get back to the original question please.

 

[ERD50]

" We do not spend our days chasing the almighty $$, ...

And neither do I. I have not done anything with my portfolio, outside of tax planning maneuvers, since I did some re-balancing into equities in what turned out to be very near the lows of the last crash. That worked out very well for me.

...

You have done this for a considerable amount of time, and continue to produce more than 2x the money you need annually. You also have income sources you are not even tapping as of yet.

Q: WHAT ARE YOU TRYING TO ACCOMPLISH ?

IMHO-You do NOT fix that which is not even remotely (by any standards, in your case) broke. (!)

As was stated earlier, to provide a buffer (who knows what expenses might come up int he future?), and why not provide a larger stash for hers/charities? If you choose not to do this, no big deal, it's your money. But why act like others are crazy dare-devils for wanting to keep some equity allocation?

I get the feeling that some are discounting too heavily the risk of age versus time for portfolio to recover. Small consolation if your portfolio takes five years to recover if you "wasted" five years having to tighten your belt at age 65 to 70 in your prime remaining years.

Just my opinion...

Again, there is no need to cut spending with a conservative WR and some equity exposure.

OK, it's all getting repetitive, once again. I'll try to stay out. Can lead a horse to water....

-ERD50

 

[EarlyBirdly]

Not intended to be adversarial in the least. The question is a large one, hence the caps for emphasis. Sorry if it is taken otherwise.

Any way, simply restated ( as in my original post ):

> Why try to fix something that needs no fixing ?

 

[ERD50]

Simply asking a question of others as stated in the OP and title of this thread. Also I enjoy hearing from other folks who feel as I do. Why do some people have to get so adversarial simply because others do not do as they do. No advice is being given, no recommendations, yet folks imply false information is being propagated. Go figure. Can we get back to the original question please.

Cross posted, so OK, I'll answer your question:

How much passive/fixed income would you need to get out of equities?

Answer: I would not ever go below 40% equities, unless/until the following conditions occurred:

A) My portfolio had dwindled down to the level that that there was a significant chance I would not be passing anything on to heirs/charities.

and...

B) A tool like FireCalc showed that for my estimated years remaining, a 40% or higher equity exposure reduced my portfolio survival. Off the top of my head, that happens at somewhere under a 10 year span.

Does that answer your question? Interestingly (to me at least!), my answer is sort of backwards to the answer you imply in your question. For me, having a LOT of fixed income allows me to have some equities. So it isn't a matter of how much fixed income would I need to get out of equities, it's how little fixed income would I have before I decided to get out of equities. And that aligns with the information we can glean from historical tools like FIRECalc.

Now my question: Considering all these facts, why wouldn't you include at least 40% equities in your portfolio?

-ERD50

 

[LARS]

Cross posted, so OK, I'll answer your question:



How much passive/fixed income would you need to get out of equities?



Answer: I would not ever go below 40% equities, unless/until the following conditions occurred:



A) My portfolio had dwindled down to the level that that there was a significant chance I would not be passing anything on to heirs/charities.



and...



B) A tool like FireCalc showed that for my estimated years remaining, a 40% or higher equity exposure reduced my portfolio survival. Off the top of my head, that happens at somewhere under a 10 year span.



Does that answer your question?



Now my question: Considering all these facts, why wouldn't you include at least 40% equities in your portfolio?



-ERD50

Easy to answer. Because to support the lifestyle I wish to live, given my Net Worth, I don’t need to. And I can say this with conviction having successfully been retired for 24 years and am just in my early sixties now. So plenty of track record.

Called winning the game. Reality, however, as this thread demonstrates, is that there is no one path for all.

Next question...

 

[Chuckanut]

If the current plan works for the OP and they think they have enough buffer to allow for future uncertainties, then all the best to them. I have to think they know more about what is good for them than I do.

However, to not talk about inflation is risky in that 'newbies' who come across this thread may not realize how badly inflation can thrash one's life savings. Newbies often don't know that they don't know, so I think its important to mention inflation. Here's my personal example. I had never heard of Sequence of Returns Risk before I found it on a retirement site about six months before I retired. It was a real eye opener. After making a few adjustments to my AA holdings I was able to sleep well in my early years of retirement knowing that a Bear Market would not force me to go back to work.

 

[OldShooter]

Here is another way of putting it. At least for me. If my portfolio lost 25-45% in a matter of a week, I would definitely not sleep or a year, maybe more. The 25 - 45% reduction in income would make quite a difference in our lifestyle, even if it was just me going into ultra frugal mode for a while till it came back.

If one can afford to lose up to 50% of one's stash and not batt an eyelid, lose any sleep or change one's standard of living, that is great, good on you. But for the rest of us, me especially, that is not the case.

I think there are a couple of unstated premises in your thinking.

First, you write as if the money is gone forever. If history is any guide, it is not. From history, five years of patience usually gets it back. We've been sleepting well with very aggressive AAs since 1987. Waiting patiently through each round of excitement makes waiting through the next round easier and easier.

Second, you seem to be thinking only of the equity portion of your "stash." Presumably you have some kind of conservative AA, which makes a 45% drop in your total stash essentially impossible.

So ... IMO your risks are much less dire than you perceive.

But knowing you will almost certainly be losing 25% or more to inflation ...

TIPS is the answer to that. One of life's little mysteries for me is why TIPS are not discussed more here. All this anguish about yield curves and long bonds is essentially moot for someone who holds mostly TIPS on the fixed income side. So, "almost certainly losing?" No.

 

[ShokWaveRider]

Easy to answer. Because to support the lifestyle I wish to live, given my Net Worth, I don’t need to.

Called winning the game.

Next question...

Agreed, thank you.

Some folk just want more and more, I would not know what to spend more on anyway.

Being a car guy, Maybe a very expensive Bentley. But, having owned many exotics and luxury cars in my lifetime, knowing I can basically buy any car I want within reason actually gives me greater pleasure than owning one any more. Maybe a nice well restored MGB or Aston Martin Vantage, but they are not bank breakers. But I probably will pass on the Aston, as I know what it needs from a maintenance perspective. But I digress.

 

[LARS]

Agreed, thank you.



Some folk just want more and more, I would not know what to spend more on anyway.



Being a car guy, Maybe a very expensive Bentley. But, having owned many exotics and luxury cars in my lifetime, knowing I can basically buy any car I want within reason actually gives me greater pleasure than owning one any more. Maybe a nice well restored MGB or Aston Martin Vantage, but they are not bank breakers. But I probably will pass on the Aston, as I know what it needs from a maintenance perspective. But I digress.

I am SADLY afflicted with the car bug. I’ve generally dealt with this by having my sports car quotient be buy and hold. Thus, helping on the depreciation hit. That said, I owned my Ferrari for eleven years, which I replaced with my Porsche 993 that I’ve owned for twenty two years.

Porsche, having made my 993 "last of the air cooled", has actually made the 911 an appreciating asset!