AA gear shift at retirement?

[albireo13]

I am wondering how other folks look at their AA
as they switch from savings mode to draw-down mode.
I have been using 60/40 allocation the last 5yrs as I approach
retirement next year. Friends tell me I should drop to
50/50 or 40/60 in retirement. This seems safe but
I worry about inflation erosion and also what is going
to happen to SS.

Firecalc numbers predict we are ok but I include SS.
Also, I expect a market correction soon.

How do other folks approach this?

 

[VanWinkle]

I am wondering how other folks look at their AA
as they switch from savings mode to draw-down mode.
I have been using 60/40 allocation the last 5yrs as I approach
retirement next year. Friends tell me I should drop to
50/50 or 40/60 in retirement. This seems safe but
I worry about inflation erosion and also what is going
to happen to SS.

Firecalc numbers predict we are ok but I include SS.
Also, I expect a market correction soon.

How do other folks approach this?

If we have your expected correction, could you watch your stocks value
reduced by 30-50% and your overall portfolio reduced 15-25%?

If not, you should likely revisit you allocation and lower equities to a level
where you could live with a correction.

You should do this only due to your age and need to draw funds, not due to the impending correction that no one can predict with any accuracy.

If you sleep better with a more conservative portfolio, that also has some worth.

I would make the adjustment gradually to 50/50 and then 40/60 if you still
have questions about how well you can tolerate equity values declining in a correction/bear.

Hope this helps.

I am 3 years retired and currently 50/50 with plans to remain there.

VW

 

[marko]

Re: Correction:
According to Fido's Jurrien Timmer: "Did you blink and miss the bear? The bulls would argue that most equity markets around the world have already corrected 20-30% over the past year or so, either in price or valuation or both. So yes, bulls think we have seen a bear market: It has already come and gone!"

I would tend to agree that a year ago we were in the midst of a correction with a nice bounce back by March; 'corrections' are mostly short-lived IMO.

As far as allocation and risk I always go back to this chart.

 

[OldShooter]

For us, an AA ratio is the consequence of a plan. A good sanity check, but it is not a plan in itself.

Our plan, roughly, is to have enough on the fixed assets side to ride out around 5 years of poor equity performance. With that amount in hand, equity volatility is pretty much a don't care. Fortunately we have enough in our portfolio that pulling this "1-5 year bucket" out still leaves us with plenty of equity investments. We also don't have to fool ourselves by trying (and almost certainly failing) to time the market.

"Plenty of equity" means enough to achieve our estate plan's goals.

As far as inflation is concerned, most of our "fixed income" is invested in TIPS. We are happy to take the yield hit in exchange for inflation insurance.

 

[Midpack]

In terms of returns or down years, the difference between 60:40 and 40:60 isn’t enough to worry about IMO (see below) - I wouldn't sleep better at 40:60 vs 60:40. If you want to slowly drift to a lower equity position then by all means do so, but I’d be very mindful of taxes on capital gains. I don’t see any reason to wholesale change AA 10-20%, it won’t make a big difference either way.

https://personal.vanguard.com/us/insights/saving-investing/model-portfolio-allocations

 

[marko]

+1.

In terms of returns or down years, the difference between 60:40 and 40:60 isn’t enough to worry about IMO (see below) - I wouldn't sleep better at 40:60 vs 60:40. If you want to slowly drift to a lower equity position then by all means do so, but I’d be very mindful of taxes on capital gains. I don’t see any reason to wholesale change AA 10-20%, it won’t make a big difference either way.

https://personal.vanguard.com/us/insights/saving-investing/model-portfolio-allocations

 

[brett]

We were 60-70 percent equities for the past 8 years since early retirement.

Over the past year we have come down to 50-55 percent equities. I expect that we will remain there. The fixed amounts would actually be a larger percentage if my DB pension was taken in to account as a 'fixed' investment.

This distribution has served us very well over the past nine years. As we age we get a little more conservative. We judge our returns net of inflation. Not looking for a fast buck, just slow steady growth in our portfolio.

 

[Chuckanut]

I think 60/40 is plenty conservative if one is planning for a 20-30 year retirement period. But, if going to 50/50 or 40/60 helps you sleep at night, by all means do it. Nobody knows for sure how it will work out.

I am keeping my AA at 60/40 for now, but I am thinking that when I hit 70 and add SS to my monthly pension income I may let my AA start to creep up as I withdraw from bond fund in my taxable IRA. But I will still keep at least three years of funds available in Federally insured savings instrument at all time. There is no point in betting the farm on the belief that the market that will always go up.

 

[24601NoMore]

In terms of returns or down years, the difference between 60:40 and 40:60 isn’t enough to worry about IMO (see below) - I wouldn't sleep better at 40:60 vs 60:40. If you want to slowly drift to a lower equity position then by all means do so, but I’d be very mindful of taxes on capital gains. I don’t see any reason to wholesale change AA 10-20%, it won’t make a big difference either way.

https://personal.vanguard.com/us/insights/saving-investing/model-portfolio-allocations

Funny..I was just about to post a link to the same study but have a different take on the net than MidPack does apparently..

To me, the upside (increase in average annual return) of 60/40 over 40/60 is not that huge - but the downside is much more significant (max % down, # of down years).

Everyone of course has their own tolerance for risk and ability / willingness to absorb the type of hit a 60/40 portfolio may incur, but for me being first year in ER I'm not one that wants to take on that much risk and hold < 25% equities total for that reason..

I've posted before that Rick Ferri has mentioned 30% equities being the "sweet spot" for those nearing or in retirement - but of course, it all depends on your long term goals for those $$s as well as your willingness and/or need to take more risk. You might find the following interesting reading..

https://www.forbes.com/sites/rickferri/2015/02/06/the-center-of-gravity-for-retirees/#772d0ccc5dae

YMMV..

 

[youbet]

There is no point in betting the farm on the belief that the market that will always go up.

And there is no point in betting the farm on inflation always being low. I remind myself periodically that according to FireCalc, the inflation of the 80's killed more portfolios than the Great Depression.

We're 55/45 (target, drifts around that a bit) backed by mid-sized pensions.

Diversification and moderation are the words we live by at our house. 72 yo and 13 years into FIRE and so far, so good.

 

[youbet]

In terms of returns or down years, the difference between 60:40 and 40:60 isn’t enough to worry about IMO (see below) - I wouldn't sleep better at 40:60 vs 60:40. If you want to slowly drift to a lower equity position then by all means do so, but I’d be very mindful of taxes on capital gains. I don’t see any reason to wholesale change AA 10-20%, it won’t make a big difference either way.

https://personal.vanguard.com/us/insights/saving-investing/model-portfolio-allocations

While I generally agree with this, these stats are generated from a very long period of data. The higher equity AA example would have more variation over shorter periods which doesn't show up here. For geezers like me, that could be a significant issue.

IOW, the length of the period you're interested in is relevant and isn't really addressed in this study.

 

[Midpack]

While I generally agree with this, these stats are generated from a very long period of data. The higher equity AA example would have more variation over shorter periods which doesn't show up here. For geezers like me, that could be a significant issue.

IOW, the length of the period you're interested in is relevant and isn't really addressed in this study.

I'm not sure what the difference in variation would be over shorter periods. It would be easy enough to test your theory using FIRECALC for anyone who has an interest. An example with 4% WR below (not necessarily representative), but the user would want to enter their own numbers.

My point was just to illustrate the small difference between 40:60 and 60:40. But we all have to do what we're comfortable with.

FIRECalc Results

Your spending in every year after the first year will be adjusted for inflation, so the spending power is preserved.
FIRECalc looked at the 119 possible 30 year periods in the available data, starting with a portfolio of $750,000 and spending your specified amounts each year thereafter.

60% Equity: Here is how your portfolio would have fared in each of the 119 cycles. The lowest and highest portfolio balance at the end of your retirement was $-204,356 to $3,423,674, with an average at the end of $1,062,738. (Note: this is looking at all the possible periods; values are in terms of the dollars as of the beginning of the retirement period for each cycle.)
For our purposes, failure means the portfolio was depleted before the end of the 30 years. FIRECalc found that 5 cycles failed, for a success rate of 95.8%.

40% Equity: Here is how your portfolio would have fared in each of the 119 cycles. The lowest and highest portfolio balance at the end of your retirement was $-140,801 to $2,813,342, with an average at the end of $676,519. (Note: this is looking at all the possible periods; values are in terms of the dollars as of the beginning of the retirement period for each cycle.) For our purposes, failure means the portfolio was depleted before the end of the 30 years. FIRECalc found that 8 cycles failed, for a success rate of 93.3%.

 

[BeachOrCity]

I think people should have a third stool that is income producing. This can be real estate, pension or social security or something else.
Nothing wrong with 1/3 1/3 1/3

While bonds and stocks produce some income, they don’t do it like pensions or real estate.

 

[DawgMan]

For us, an AA ratio is the consequence of a plan. A good sanity check, but it is not a plan in itself.

Our plan, roughly, is to have enough on the fixed assets side to ride out around 5 years of poor equity performance. With that amount in hand, equity volatility is pretty much a don't care. Fortunately we have enough in our portfolio that pulling this "1-5 year bucket" out still leaves us with plenty of equity investments. We also don't have to fool ourselves by trying (and almost certainly failing) to time the market.

"Plenty of equity" means enough to achieve our estate plan's goals.

As far as inflation is concerned, most of our "fixed income" is invested in TIPS. We are happy to take the yield hit in exchange for inflation insurance.

Has anyone run some kind of long term historical comparison between a typical bucket approach and total return/re-balance approach? Say a 60/40 total return portfolio to a typical short term/mid term/long term bucket approach. While I personally subscribe to the total return approach (because I believe it offers superior long term returns... based on my research), I do see some merit psychologically in the bucket approach.

 

[OldShooter]

Has anyone run some kind of long term historical comparison between a typical bucket approach and total return/re-balance approach? Say a 60/40 total return portfolio to a typical short term/mid term/long term bucket approach. While I personally subscribe to the total return approach (because I believe it offers superior long term returns... based on my research), I do see some merit psychologically in the bucket approach.

There are those who argue that a bucket approach and an AA target approach are both roads to the same place, but there are so many detailed policy variables & options that IMO it is really impossible to say. For us, the bucket paradigm is an easy way to think about planning.

We also use a slightly more sophisticated approach at the nonprofit where both DW and I are on the investment committee. There the phrase is "liability matching" and involves planning bucket sizes and, usually, specific bond maturities, to line up in time with large planned capital expenses like a new building or a big renovation project. Lumpy retirement liabilities might be a vacation home, future college and grad school expenses, etc. A strict AA ratio approach does not really lend itself lumpy planning IMO where a bucket approach makes it very easy.

In the end it's probably more a matter of taste & probably any plan should be looked at from both angles.

 

[pb4uski]

I am wondering how other folks look at their AA
as they switch from savings mode to draw-down mode.
I have been using 60/40 allocation the last 5yrs as I approach
retirement next year. Friends tell me I should drop to
50/50 or 40/60 in retirement. This seems safe but
I worry about inflation erosion and also what is going
to happen to SS.

Firecalc numbers predict we are ok but I include SS.
Also, I expect a market correction soon.

How do other folks approach this?

I was 60/40 like you and didn't change things at all.

Frankly, the difference in success rate between 60/40 and 40/60 is not different enought to waste brain cells on.... if you prefer 60/40 go ahead and stick with it unless you think the worry might cause you to do something foolish if we have a correction like bailing on stocks entirely... in that case then go a little conservative.

 

[DSC800]

Maybe not popular here but my wife and I are recently retired at 58 and we are +90% equity and part of the 10% balance is an SFR (which is still an equity), plus a little in cash. We have zero bonds, treasurys, CD's, pensions or annuities. We have no debt at all and our son's college expenses will be done next year.

I only invest in US dividend stocks (mostly growth) and ETF's. If I added bonds, treasury's or CD's I'd feel I'd be missing out on growth over time, be hurt by inflation and the interest earned is usually taxed at a higher rate than dividends. Our WR is <2.5% but we are flexible enough to go to just 1% (of current assets) and still pay our bills, and this is without considering SS. I handled the 2000 and 2008 declines without panicking and expect there will be a few more declines in my lifetime. Note that dividend payments are much less volatile during recessions, declining less than 20% during the great recession (IIRC).

Maybe I'll change my thinking in my 60's (if it's not too late) but for now I'll let it ride.

 

[Midpack]

Maybe not popular here but my wife and I are recently retired at 58 and we are +90% equity and part of the 10% balance is an SFR (which is still an equity), plus a little in cash. We have zero bonds, treasurys, CD's, pensions or annuities. We have no debt at all and our son's college expenses will be done next year.

I only invest in US dividend stocks (mostly growth) and ETF's. If I added bonds, treasury's or CD's I'd feel I'd be missing out on growth over time, be hurt by inflation and the interest earned is usually taxed at a higher rate than dividends. Our WR is <2.5% but we are flexible enough to go to just 1% (of current assets) and still pay our bills, and this is without considering SS. I handled the 2000 and 2008 declines without panicking and expect there will be a few more declines in my lifetime. Note that dividend payments are much less volatile during recessions, declining less than 20% during the great recession (IIRC).

Maybe I'll change my thinking in my 60's (if it's not too late) but for now I'll let it ride.

There’s no right answer. If you’ve won the game, as your WR suggests, you can take more or less risk than those closer to SWR. Even those folks are probably fine between 30 and 70% equity allocation if history holds true.

 

[albireo13]

I'll keep researching but, I think I'll stick with 60/40 for now ... until I find a reason to change. I want to get more inputs though. I will be moving all my funds to Vanguard index funds before I retire. I will likely do the Boglehead 3-fund or 4-fund approach.
I am a set it and forget it investor ... maybe annual re-allocations if that.

 

[mrfeh]

I am wondering how other folks look at their AA
as they switch from savings mode to draw-down mode.
I have been using 60/40 allocation the last 5yrs as I approach
retirement next year. Friends tell me I should drop to
50/50 or 40/60 in retirement. This seems safe but
I worry about inflation erosion and also what is going
to happen to SS.

Firecalc numbers predict we are ok but I include SS.
Also, I expect a market correction soon.

How do other folks approach this?

Why would you trust what friends tell you to do?

Choose the AA that is right for you and ignore advice from others. Don't try to time the market.

 

[albireo13]

Why would you trust what friends tell you to do?

Choose the AA that is right for you and ignore advice from others. Don't try to time the market.

I don’t trust them. That's why I am posting here. I am in data gathering
mode and will see what makes sense for us. It's good to
hear from other folks ... get different viewpoints.
Perhaps there are things I've never considered.
In any case I appreciate all opinions here.

 

[jollystomper]

I chose to shift to 40/60 about 6 months before retirement. It was coming off of a good year for us (2017), and I personally felt more comfortable being less aggressive when shifting from savings to spending mode. All forecasts showed everything should be fine without SS, and our planned spending was only 75% of what the forecasts (on average) said we could spend. I do not advise everyone do this, but for our situation I have been happy with the results.

 

[ERD50]

Funny..I was just about to post a link to the same study but have a different take on the net than MidPack does apparently..

To me, the upside (increase in average annual return) of 60/40 over 40/60 is not that huge - but the downside is much more significant (max % down, # of down years). ...

But you are looking at it in a vacuum. Sure the down years are deeper, but when do deep drops occur? After big rises. But you ingnore that? Don't, it's part of the big picture.

The important part is how does it work in retirement?

Here's a link to Portfolio analyzer, going back as far as they have data for VFINX and VBMFX [Jan 1987 - Oct 2019]. I used a 3.5% inflation adjusted withdraw, annual rebalance. 40/60 vs 60/40.

http://bit.ly/2DkTVbJ

The 60/40 pulls ahead, so after the dips, it is still ahead.

Try 5, 10, 15, 20, 25, and 30 year time frames. In 5 of 6 of those, the 60/40 comes out ahead (mostly by quite a lot), and 4 of 6 never dips below the 40/60 value at all. And note that this is with inflation adjusted withdrawals.

In the 15 year period, the 60/40 does dip below the 40/60 a little in the 2008 crash, but not by much and not for long. It recovers, and is now over 15% ahead.

Only the 20 year period is worse for 60/40, starting in 1999 hits the 200 crash smack on. And that is now less than 0.9% behind.

I'd suggest that you forget about "viewpoints" from different people - look at the data.

But for the record, 6040/ 40/60 - my viewpoint is do what you want. But the data does not paint a good picture for 40/60. Personally for me, 40/60 is getting too close to the point where portfolio success starts to drop off (IIRC success is pretty flat from about 30/70 to 95/5) - I'd rather be in the middle of that range, than close to an edge, since the future may well be different from the past.

-ERD50

 

[OldShooter]

... I do not advise everyone do this, but for our situation I have been happy with the results.

This cannot be said too frequently during these endless threads on what people are doing with their AAs. (added underlines mine)

 

[FireFool]

Maybe not popular here but my wife and I are recently retired at 58 and we are +90% equity and part of the 10% balance is an SFR (which is still an equity), plus a little in cash. We have zero bonds, treasurys, CD's, pensions or annuities. We have no debt at all and our son's college expenses will be done next year.

I only invest in US dividend stocks (mostly growth) and ETF's. If I added bonds, treasury's or CD's I'd feel I'd be missing out on growth over time, be hurt by inflation and the interest earned is usually taxed at a higher rate than dividends. Our WR is <2.5% but we are flexible enough to go to just 1% (of current assets) and still pay our bills, and this is without considering SS. I handled the 2000 and 2008 declines without panicking and expect there will be a few more declines in my lifetime. Note that dividend payments are much less volatile during recessions, declining less than 20% during the great recession (IIRC).

Maybe I'll change my thinking in my 60's (if it's not too late) but for now I'll let it ride.

I'm in a similar situation, so my attitude has been that my AA should be closer to what's recommended for my children, as a substantial portion of my assets will ultimately become theirs. In the three years I've been retired my assets have grown almost 60% and my WR is <2% despite my efforts to loosen up our spending (I don't have time for more than the four large trips a year we're doing). So somewhere else in the thread was the statement that AA really needs to be individual circumstance specific. WR's, risk tolerance, investment goals, tax situation of you and your heirs, split between tax deferred and post tax investments, etc. don't fall into a neat one-size fits all rule of thumb. I can afford to be wrong by quite a bit in my AA decision as I retired with a conservative WR that has only become even moreso ridiculously conservative to the point I've come to grips that it's extraordinarily unlikely that my wife and I will ever be able to spend all our assets. Sharing my wishes that others can be in the position we are, but I still have to recognize a good amount of where we're at boils down to just good luck.