RunningBum
Give me a museum and I'll fill it. (Picasso) Give me a forum ...
- Joined
- Jun 18, 2007
- Messages
- 13,264
Since retirement, I've been doing some form of an age based AA, with fewer equities as I've been getting older. X has varied as I've reassessed my risk tolerance, but it's currently 120-age, and has always been > 100. I'm strongly considering changing that to a range of years worth of withdrawals (expenses) in non-equities. Perhaps 10-15 years, based on my view of market conditions.
A poll I started a couple years ago (http://www.early-retirement.org/forums/f28/age-based-aa-poll-88258.html) opened my eyes that many of you smart people are not using an age based AA, so this has been stewing for awhile. I don't mind bucking the norm if I'm comfortable with my reason for doing it. Then in the recent thread http://www.early-retirement.org/forums/f28/asset-allocation-100830.html (end of page 1, start of page 2), age based AA was basically said to be too simplistic and probably not right for most people. I asked why it was wrong, and the question was astutely turned around to me, "why are you using age based AA?"
Well, that kind of stumped me. The stock answer is that as you get older, you have less time to recover from a downturn, thus you should take less risk, but does that really make sense in a case like mine, where I will almost certainly not run out of money, have heirs to leave money to, and fewer years of my life I need to fund? I don't think so. What I really want is to be able to ride out an extended downturn without having to liquidate depressed stocks. Age is not really a factor for that. I'm no longer comfortable with x-age.
Another thing that bugged me about both x-age and a set AA is that in a downturn, how do you avoid selling stocks but stick to your AA plan?
What I'm consider is, in times like these where we've had a bull market, to keep 15 years of bonds+cash. In a downturn I'd let it go as low as 10 years. So in a bad year, I'd spend a year's worth out of the bonds+cash, and at the end of the year I'd drop my requirement to holding 14 years of bonds+cash. Depending on how the next year went, I could drop it another year with another bad market year, hold it at 14 if things were pretty steady, or go back to 15 years if the market had recovered. In a really bad year I could drop my cash/bond requirement by more than one year at a time, but to no lower than 10 years.
If we had an extended downturn as I get older, that 10-15 years of cash+bonds could turn into a significant % of my holdings, but if things matched most historical runs, I would keep a pretty high % of stocks, and still be safe with 10-15 years of cash+bonds to fall back on. Both seem acceptable and reasonable to me.
I'm not sure if 10-15 years is the right range, but 15 years happens to put me at pretty close the AA mix I have right now, so it wouldn't be an adjustment. I don't know if I want to go much lower than 10 years just in case of a market drop that takes a really long time to recover. I could always revisit the plan if I have to.
One further detail, right now I have assigned NPVs for SS and my small pension, add them to my investment portfolio value, and treat that like cash. (I actually use 75% of SS.) Once I start collecting on them, I will take them out of my portfolio value, but the benefit will also reduce the withdrawal needed each year, so I think it'll be a pretty seamless transition. I could use a side fund instead, but I like the idea of leaving the start of SS flexible. I plan to wait until 70, but might take it earlier if we have a big market downturn.
Anyone still reading? Did I explain it well enough? Please shoot holes where you see issues. Does the plan in general make sense? Is 10-15 years a reasonable range? I'm 58 if that matters.
A poll I started a couple years ago (http://www.early-retirement.org/forums/f28/age-based-aa-poll-88258.html) opened my eyes that many of you smart people are not using an age based AA, so this has been stewing for awhile. I don't mind bucking the norm if I'm comfortable with my reason for doing it. Then in the recent thread http://www.early-retirement.org/forums/f28/asset-allocation-100830.html (end of page 1, start of page 2), age based AA was basically said to be too simplistic and probably not right for most people. I asked why it was wrong, and the question was astutely turned around to me, "why are you using age based AA?"
Well, that kind of stumped me. The stock answer is that as you get older, you have less time to recover from a downturn, thus you should take less risk, but does that really make sense in a case like mine, where I will almost certainly not run out of money, have heirs to leave money to, and fewer years of my life I need to fund? I don't think so. What I really want is to be able to ride out an extended downturn without having to liquidate depressed stocks. Age is not really a factor for that. I'm no longer comfortable with x-age.
Another thing that bugged me about both x-age and a set AA is that in a downturn, how do you avoid selling stocks but stick to your AA plan?
What I'm consider is, in times like these where we've had a bull market, to keep 15 years of bonds+cash. In a downturn I'd let it go as low as 10 years. So in a bad year, I'd spend a year's worth out of the bonds+cash, and at the end of the year I'd drop my requirement to holding 14 years of bonds+cash. Depending on how the next year went, I could drop it another year with another bad market year, hold it at 14 if things were pretty steady, or go back to 15 years if the market had recovered. In a really bad year I could drop my cash/bond requirement by more than one year at a time, but to no lower than 10 years.
If we had an extended downturn as I get older, that 10-15 years of cash+bonds could turn into a significant % of my holdings, but if things matched most historical runs, I would keep a pretty high % of stocks, and still be safe with 10-15 years of cash+bonds to fall back on. Both seem acceptable and reasonable to me.
I'm not sure if 10-15 years is the right range, but 15 years happens to put me at pretty close the AA mix I have right now, so it wouldn't be an adjustment. I don't know if I want to go much lower than 10 years just in case of a market drop that takes a really long time to recover. I could always revisit the plan if I have to.
One further detail, right now I have assigned NPVs for SS and my small pension, add them to my investment portfolio value, and treat that like cash. (I actually use 75% of SS.) Once I start collecting on them, I will take them out of my portfolio value, but the benefit will also reduce the withdrawal needed each year, so I think it'll be a pretty seamless transition. I could use a side fund instead, but I like the idea of leaving the start of SS flexible. I plan to wait until 70, but might take it earlier if we have a big market downturn.
Anyone still reading? Did I explain it well enough? Please shoot holes where you see issues. Does the plan in general make sense? Is 10-15 years a reasonable range? I'm 58 if that matters.