AA Question - How would you handle?

[RetiredAt49]

Already done, like i said before, I'm talking specifically about my 401k. We have IRAs that I backdoor/ROTHs, HSAs, and after tax accounts that i have had pretty much left alone and at pretty good AA. My after tax account is essentially all stocks as we have been accumulating ESPPs over the last 5 years.

What I mean is can’t you automatically transfer everything in your 401k (like monthly) to your IRA so that you’re investing in funds you want?

 

[SecondCor521]

What I mean is can’t you automatically transfer everything in your 401k (like monthly) to your IRA so that you’re investing in funds you want?

Most companies don't allow that while you're still working for them.

 

[COcheesehead]

OP says they plan to FIRE in the next 7-10 years (didn’t mention age) so I assumed they are in their late 40’s or early 50’s so I can only assume they have at least a 30 year time horizon - probably more like 40+ more years.

The returns are likely not based on pulling money out simultaneously with down markets, classic return sequence risk. It’s foolish to not have some SORR strategy to cover the early retirement years.

I became a student of SORR prior to retirement because I had enough money to last a lifetime, I just needed to be smart about it.

I remember reading one real world case study of a couple who had “enough”, in 100% equities. They retired into a bear, portfolio dropped 40%+, they took 6% out based on front end loading their go go years and at the end of year one, they sat with 46% less in their portfolio. Less than ideal to start your golden years.

 

[RetiredAt49]

The returns are likely not based on pulling money out simultaneously with down markets, classic return sequence risk. It’s foolish to not have some SORR strategy to cover the early retirement years.



I became a student of SORR prior to retirement because I had enough money to last a lifetime, I just needed to be smart about it.



I remember reading one real world case study of a couple who had “enough”, in 100% equities. They retired into a bear, portfolio dropped 40%+, they took 6% out based on front end loading their go go years and at the end of year one, they sat with 46% less in their portfolio. Less than ideal to start your golden years.

I retired 1/1/2022 (beginning of the last bear market) on an AA = 100% equities (excluding rentals). Because our 100% stock portfolio has grown so much since I started investing 25+ years ago, we could live on about 1% of it because we are also debt free. When the bear started (the first day I retired) we implemented our SORR mitigation strategy so that we didn’t impact our first golden year (with lots of vacations) in retirement by:

1) Opening up a HELOC on primary home
2) Opening up a 15 month no interest credit card.
3) We pulled less than 1% out of our portfolio

Fast forward to today, our portfolio is nearly back to where it was when we retired and that’s after paying off the HELOC and the no interest credit card.

There are many ways to mitigate SORR. Being debt free helps a lot. Having a 100% stock portfolio leading up to retirement means that your overall NW is greater too and thus the “need” to pull a higher % out of the portfolio decreases. Also, keep in mind that Bill Begen’s 4% “rule” factored in SORR because the 4% “rule” was the worst case scenario as to never run out of money over a 30 year time horizon.

YMMV

 

[COcheesehead]

I retired 1/1/2022 (beginning of the last bear market) on an AA = 100% equities (excluding rentals). Because our 100% stock portfolio has grown so much since I started investing 25+ years ago, we could live on about 1% of it because we are also debt free. When the bear started (the first day I retired) we implemented our SORR mitigation strategy so that we didn’t impact our first golden year (with lots of vacations) in retirement by:

1) Opening up a HELOC on primary home
2) Opening up a 15 month no interest credit card.
3) We pulled less than 1% out of our portfolio

Fast forward to today, our portfolio is nearly back to where it was when we retired and that’s after paying off the HELOC and the no interest credit card.

There are many ways to mitigate SORR. Being debt free helps a lot. Having a 100% stock portfolio leading up to retirement means that your overall NW is greater too and thus the “need” to pull a higher % out of the portfolio decreases. Also, keep in mind that Bill Begen’s 4% “rule” factored in SORR because the 4% “rule” was the worst case scenario as to never run out of money over a 30 year time horizon.

YMMV

Yep, you and I are lucky because we were overfunded. Not everyone is that fortunate. If you have so much that losing half of it doesn’t matter, then you have a SORR strategy. Many are happy to get to the 4% rule point.

 

[tulak]

Yep, you and I are lucky because we were overfunded. Not everyone is that fortunate. If you have so much that losing half of it doesn’t matter, then you have a SORR strategy. Many are happy to get to the 4% rule point.

Yep, and this last drop was short. I wonder what would have happened if you retired in the early 2000s or one of the historical bear markets. If I remember correctly, the worst year was 1966 (or 67?) and a 100% equities would have been a killer.

I have a high equities allocation and still working for another ~5 years. I’m starting to think about how to handle SORR and will probably use something like Kitches bond tent strategy.

 

[COcheesehead]

Yep, and this last drop was short. I wonder what would have happened if you retired in the early 2000s or one of the historical bear markets. If I remember correctly, the worst year was 1966 (or 67?) and a 100% equities would have been a killer.

I have a high equities allocation and still working for another ~5 years. I’m starting to think about how to handle SORR and will probably use something like Kitches bond tent strategy.

If you use FICalc it will show you the years that are killer. There are a few. I remember another was 1946. Another high inflation time frame.

 

[madatrub]

What I mean is can’t you automatically transfer everything in your 401k (like monthly) to your IRA so that you’re investing in funds you want?

What SecondCor521 said. Money is untouchable until we leave our workplaces.

 

[RetiredAt49]

Yep, and this last drop was short. I wonder what would have happened if you retired in the early 2000s or one of the historical bear markets. If I remember correctly, the worst year was 1966 (or 67?) and a 100% equities would have been a killer.

I have a high equities allocation and still working for another ~5 years. I’m starting to think about how to handle SORR and will probably use something like Kitches bond tent strategy.

Again, Bill Bengen’s 4% rule covered the worst case scenario, so, what would I do if the stock market plummeted 50% and remained low for an extended amount of time? Absolutely nothing (at least with my portfolio). However, I would do various things that I think anyone would do regardless of your AA:

1) Spend less on discretionary things like travel
2) Leverage HELOC
3) Leverage zero interest credit cards (15 month or longer)
4) If things get real ugly… downsize house, sale extra vehicle, etc…

Again, our 100% stock portfolio has grown so large over the past 25+ years (coupled with the fact that we can leverage various other financial vehicles mentioned previously) which gives us a lot of options in retirement. IMHO this approach gives us more financial options than those people who have had (and still have) a much more conservative portfolio and they truly need every dime just to make it across the finish line.

 

[tulak]

Don’t disagree that on average, a 100% equity allocation works well. But if you look at some of the portfolio balances using the 4% rule, it gets downright scary. These years are outliers, but they exist and can happen again. It’s been a long time since we’ve seen one of these years and hopefully none of us will have to go through it.

But from a practical standpoint, I want to make sure there’s a lot of buffer in case I retire at a bad time.

 

[tulak]

Because I’m thinking about it, let me work through a few scenarios.

1. The first you have 2 million and need 40k a year. WR is 2%. If you have a 100% equity allocation and your portfolio drops 50% to 1 million, your WR is 4% which is still consider safe. For this scenario, you over-saved and will likely be fine, even though you probably won’t be ecstatic that half your portfolio went *poof*.

2. You have 1 million and need 40k a year. WR is 4%. You have a 100% equity allocation. Your portfolio drops by 50% to 500k. This ain’t good. Odds are you will have to figure out alternatives to avoid eating dog food.

3. You have 1 million and need 40k a year. WR is 4%. Instead of 100% equities, you go with a 60/40 balance. This gives you 400k in fixed income, 600k equities. Equities drop 50%, you have a total of 400k + 300k = 700k. But the key is that 400k can get you safely through 10 years of retirement without having to sell any equities.

So those are the common scenarios. I suspect that you are in #1, much like Buffett when he recommends a 90/10 portfolio. But if you want to retire asap, or don’t have a lot of savings, then you’re probably in #2 or #3. If those were your options, which would you choose?

Personally, I’m going with a combo of #3 and #1. I might over save, which is fine, since I like my job. I probably won’t have a fixed percentage in FI and will keep a max of ten years in FI or equivalents to deal with any market drops. I’ll do this for a barebones yearly amount, enough to get by if SHTF. The rest I will leave invested in equities. I am curious enough to run up the portfolio as much as possible and I’m not risk adverse, but I am dog food adverse.

 

[RetiredAt49]

Bill Bengen’s 4% rule research contained data for various AA including a 100% equities portfolio, which produced a 98% success rate withdrawing 4% annually for 30 years and a 100% success rate when pulling 3%.

My point here is that by me having a 100% equities portfolio for the past 25+ years, my total NW has grown so large that I now only need to pull 1% to cover expenses. Again, I feel people are way too risk adverse and don’t realize that there is just as much (if not more risk) having a too conservative portfolio. YMMV

 

[Route246]

Agree 100% with your sentiment regarding the market but if you have rental properties then you do have some diversification away from equities, correct? Not sure about OP but everyone's risk tolerance varies.

Regarding non-retirement accounts the value of 100% equities that many people miss is two-fold in my opinion. First, balancing a portfolio away from equities can be very tax-inefficient if you have unrealized gains that suddenly become taxable that would otherwise remain dormant and deferred in a buy-and-hold scenario. Second, and I already mentioned it is that the vast majority of your unrealized gains are going to be deferred as you are not taxed on capital gains until you exit your position.

That said, unless your investible assets are at 100% of your critical mass and any asset devaluation would take you out of critical mass (I guess it is called FI here). Mine are probably around 300% now so I'm quite able to take a significant short-term market correction just fine.

My stock portfolio is up significantly this year, but not for a good reason. I have a few stocks that have done very well but now those individual stocks (there are 4 of them) represent a bothersome percentage (40% aggregate) of my equities position beyond my personal "limit" of 4%. It is a nice problem to have but requires some tax-inefficient rebalancing.

Well I retired at age 49 with an AA = 100% equities (Excluding some rental properties). Why? We have over 200 years of historical stock market data and the WORST 30 year rolling period produced a 7.8% annual return. Think about it… we’ve had wars, major world events, recessions, financial meltdowns, you name it and the worst annual returns over any rolling 30 year period was 7.8%.

Our all stock portfolio is up 30% YTD. Stop trying to time the market. Trust in the data. Stop looking at your portfolio every hour/day/week and chill. Just my .02

 

[tulak]

My point here is that by me having a 100% equities portfolio for the past 25+ years, my total NW has grown so large that I now only need to pull 1% to cover expenses. Again, I feel people are way too risk adverse and don’t realize that there is just as much (if not more risk) having a too conservative portfolio. YMMV

So if your portfolio drops 50%, you have a 2% WR. That makes it easy to stay at 100% equities.

Lots of people here have had high/all equity allocations while working. Usually allocations shift prior to retirement. At least that’s been my observation.

 

[HarveyS]

What choices do you have in your 401k? Perhaps if we know that we can provide better information.

 

[COcheesehead]

He is my reality of using the Kitces’ bond tent. I retired in 2020 right at a market high and right out of the gate - boom Covid, huge downdraft. Market rebounds only to have 2022 - another bear market. I pulled out over $400,000 in the last 3.5 years. Where is my portfolio? As of this morning I have $88,000 more than the day I retired. Not a lot of money, but still higher - with no pension, no social security. So I have a negative withdrawal rate, meaning I am adding to the pile while still taking money out.

Some folks say they’ll adjust spending if bad things happen. I am in a position to adjust spending higher after a lot of bad things happened.

The year you retire can matter a lot, the problem is no one has a crystal ball to know if you picked the right year.

If a high equity position works for someone, great. If a bond tent works for someone great. There are many paths to financial security.

 

[tulak]

He is my reality of using the Kitces’ bond tent. I retired in 2020 right at a market high and right out of the gate - boom Covid, huge downdraft. Market rebounds only to have 2022 - another bear market. I pulled out over $400,000 in the last 3.5 years. Where is my portfolio? As of this morning I have $88,000 more than the day I retired. Not a lot of money, but still higher - with no pension, no social security. So I have a negative withdrawal rate, meaning I am adding to the pile while still taking money out.

Apologies if you mentioned this already, but I’m wondering how many years you decided on for the FI part of your portfolio?

Kitches graph shows ~15 years, which on a 1 million portfolio with 4% WR is 40/60. That seems overly conservative to me.

If I’m retiring with a 4% WR, then I’m inclined to go no lower than 60/40 (10 years in FI).

 

[COcheesehead]

Apologies if you mentioned this already, but I’m wondering how many years you decided on for the FI part of your portfolio?

Kitches graph shows ~15 years, which on a 1 million portfolio with 4% WR is 40/60. That seems overly conservative to me.

If I’m retiring with a 4% WR, then I’m inclined to go no lower than 60/40 (10 years in FI).

I based it strictly on bridging to SS at 70. So that is down to 9 years at this point.

The one thing I’ll point out is percentages are used almost exclusively for defining asset allocations, but whole dollars matter too. While I have a large portion devoted to individual bonds, I still have over 7 figures in equities.

All the tools tell me a greater equity portion doesn’t improve the success chances of my plan. I am overfunded.

 

[tulak]

I based it strictly on bridging to SS at 70. So that is down to 9 years at this point.

The one thing I’ll point out is percentages are used almost exclusively for defining asset allocations, but whole dollars matter too. While I have a large portion devoted to individual bonds, I still have over 7 figures in equities.

All the tools tell me a greater equity portion doesn’t improve the success chances of my plan. I am overfunded.

Bridging to SS is a good point. If I’m planning worst case, then I can look at SS @ 62 to allow a higher equity allocation.

I agree that looking at dollar amounts matters. This is actually my approach instead of fixed percentages. I only talk in percentages because that’s more common. I want to have 5-10 years guaranteed FI at a reasonable lifestyle and the rest goes into equities.

I’m not against serious BTD if the portfolio gets large and as I mentioned earlier, I’m curious to see how much it can grow. The only way to do that is to maintain a high(er) allocation to equities.

 

[COcheesehead]

Bridging to SS is a good point. If I’m planning worst case, then I can look at SS @ 62 to allow a higher equity allocation.

I agree that looking at dollar amounts matters. This is actually my approach instead of fixed percentages. I only talk in percentages because that’s more common. I want to have 5-10 years guaranteed FI at a reasonable lifestyle and the rest goes into equities.

I’m not against serious BTD if the portfolio gets large and as I mentioned earlier, I’m curious to see how much it can grow. The only way to do that is to maintain a high(er) allocation to equities.

Smart.
I try and BTD. The reality of our first three years in retirement is we do everything we want. Built a new house, bought a new car, travel freely, eat out, buy good wine, etc and we still under spend. We fund a scholarship and I may increase what we donate to that, but otherwise we are happy and have plenty of money.

 

[Yipper]

Here is another suggestion, go buy or download William Bernstein's 2nd edition of the Four Pillars of Investing and read it. Chock full of great advice and an entertaining and easy read. One of the biggest take aways is the enemy to sound and disciplined investing is looking back at you every morning when you're shaving in front of the mirror. Another take away is to ignore most of if not all of the noise on cable and social media when comes to investing and market predictions.

Reading this now... your advice here is perfect.

 

[madatrub]

What choices do you have in your 401k? Perhaps if we know that we can provide better information.

Bond Fond
US Equity Fund
8 Custom Funds with Target Retirement Dates (AA Changes based on the Retirement Date, e.g. 2025 Target Fund, 2030 Target fund, etc)
International Fund
Capital Preservation Fund

Numerous employees have complained that we need a simple US Equity Index fund that isnt managed, as the fees are outrageous on the US EF.

 

[rayvt]

And what about the worst 5 or 10 years? Retirees no longer have lots of 30 year horizons.

S&P 500:

Yrs -->  2        5         10      15        20     25       30
Avg    11.6%    10.9%    10.5%    10.5%    10.7%    10.9%    11.1%
Med    11.9%    11.2%    10.4%    10.6%    10.6%    10.2%   10.8%
Min    -26.1%    -6.7%    -3.5%    3.7%    6.3%     7.2%     8.9%
Max    43.4%    29.5%    19.4%    19.6%    18.2%    17.1%  14.4%