Is it time to adjust the AA?

[disneysteve]

I'm curious to hear everyone's thoughts here. And to be clear, I have not made any decision on this one way or the other. I'm just weighing the pros and cons.

My wife and I are both 61. I retired in early 2024. Our portfolio sits at just over $4 million. Our annual spending is about 120K so right around a 3% WR. Currently, our portfolio is 60/40. We have plenty of money to last for the rest of our lives and that's not counting SS. I am not now and have never been a market timer but I find myself thinking more and more about shifting our AA to be a little more conservative. Nothing too drastic as I completely understand the importance of maintaining growth over time. I would just hate, at this point in our lives, to see the bottom line drop 20 or 30% due to a serious market downturn. Would it be crazy to trim back to 55/45 or even 50/50? I feel like "if you've won the game ..." applies here. I don't want to stop playing, but maybe just pull some winnings off the table. With a 3% WR, if we can average a 4-5% return over time, we'd be just fine. And at 67 (in 5-6 years) we'll get 69K/yr from SS, 77K/yr if we wait until 70.

This certainly isn't something I'm losing sleep over but I'm curious what everyone else thinks. I know there are folks here who have gone 100% fixed income. I definitely don't want to do that, but I feel like 50/50 or so would reduce overall risk and volatility while still maintaining adequate growth over the next 30 years or so. Thanks for your thoughts.

 

[audreyh1]

This is just something everyone should review every few years and see how their AA lines up based with their personal priorities and goals. Sure, if you think it would work better for you for the next few decades, reduce your equity exposure.

On the other hand, I’ve been letting our equities drift up slightly simply because it’s far more tax efficient (all equity is in taxable), and we have more than enough in fixed income in absolute terms.

 

[RetiredHappy]

It has to do with your own comfort level, no one size fits all. For me, I am investing for the next 30 years because I "have" to leave an estate for my son and I am 100% equities with my brokerage. I can stomach a 40% drop even if takes a decade to recover. On the other hand I turned my entire IRA into annuities that deposit money into my checking account every month to help cover expenses. My husband who is in his late 70s has 80% in equities and 20% in MYGAs. The MYGAs are the insurance to help meet RMDs as necessary. I just started SS this year, so 2 SS, annuity, dividends from taxable brokerage and RMDs, they just about cover all our expenses which are about $250K a year.

The way we take winnings out is not to deprive ourselves of our spendings. We just spent $80K on a car end of last year and sold some positions. Technically, we never need to sell anything in a down market.

 

[TheWizard]

I have plenty of income beyond what I "need" to withdraw.
So I'm 95+% in stock funds and don't worry about it...

 

[Car-Guy]

My wife and I are both 61.

I know there are folks here who have gone 100% fixed income. I definitely don't want to do that, but I feel like 50/50 or so would reduce overall risk and volatility while still maintaining adequate growth over the next 30 years or so. Thanks for your thoughts.

At 61, I don't think I'd go 100% fixed income either.... 50/50 or even 40/60 sounds about right. Wait another 10+ years for near all fixed income.

 

[COcheesehead]

There are ways to get income, protect the downside and still have growth. Those gems of wisdom are sprinkled in a few threads here.

 

[mrfeh]

Lots and lots of posts over on bogleheads if you want opinions...

Generally speaking, when you stop earning an income is when you're at the most peril, due to SORR. I see nothing wrong with dialing back your equity exposure. At 3% withdrawal, you should be golden.

The real question is what to do in the coming years. Some folks continue to get more conservative. Others actually let their equity percentage increase naturally (assuming equities outpace fixed income).

I'm 59 with a lower WR than you. I plan on keeping 60/40 forever.

 

[FlaGator]

How about looking at it the absolute $$s in a bad decline?

If there is a 40% decline in equities, at the trough you're down $960,000. 4M*.60 = 2.4M $2.4Mx.40=960,000.

With 55% equities, you're down $880,000, 50/50 has you down "just" $800,000.

Not that any of those are good, but that decline could happen. Are any of those tolerable? Would you be more comfortable with even less equity exposure under a worst case scenario?

FYI-with a smaller portfolio and higher WD rate, I took my equity component down to 60% for the first several years for the same reason you are considering. I've since let it float up to 70-ish.

 

[RetiredHappy]

We were on 60/40 for almost a decade when our investments were managed first by by Merrill Lynch. Before then Fidelity managed the funds at 100% equities during the 2008 to 2011, we lost about 40% of our investments then. Our current Fidelity FA admitted that back then, Fidelity knew nothing about managing investments for clients when they were paid to manage our investments.

Anyway, we took back control of our investments about 4 years ago and slowly switched it to the current mix, finally getting out of all bonds in the last couple of years. We are comfortable with our positions as we have a mix of value etf and growth etfs, international, as well as the usually S&P 500 and total stock market funds. I would say we are probably too heavy on value etf, but it also gives us a little more protection in a down market.

 

[FD1000]

It all depends on style and goals.
Ask yourself, if 2022 happens again, are you willing to lose the same amount? VBIAX (60/40) lost 17%
Are you OK with losing over 20% in just 5 weeks, as it did in Covid 2020? See below.
Are you OK with a black swan?

It's been very important to me since 5 years before retirement.

This is what I do at least once a month.
I ask myself, “If I had 100% cash right now, what would I buy?”, I force myself to:

• Reevaluate positions without emotional attachment.
• Avoid anchoring on your past entry prices.
• Make allocation decisions based on current risk/reward, not history.

It’s like hitting the “portfolio refresh” button in my head — and it’s a mindset most investors never train themselves to use.

 

[swakyaby]

. . . Before then Fidelity managed the funds at 100% equities during the 2008 to 2011, we lost about 40% of our investments then.

That sounds like a really distressing time.

 

[RetiredHappy]

Our friends - husband is 82 years old, when the stock market dropped during COVID, he sold all his investments and held on the cash (CDs) and never re-entered the market saying that he was not going to live to see it recover. They want to leave their money to their 2 adult children and their family, who are very successful with their careers. I don't understand his thinking.

 

[RetiredHappy]

That sounds like a really distressing time.

It was. But when the accounts were transferred to Merrill Lynch, the market recovered so whatever we lost came back. But ML went 60-40, so the recovery wasn't as huge, but ultimately the accounts grew.

 

[audreyh1]

Our friends - husband is 82 years old, when the stock market dropped during COVID, he sold all his investments and held on the cash (CDs) and never re-entered the market saying that he was not going to live to see it recover. They want to leave their money to their 2 adult children and their family, who are very successful with their careers. I don't understand his thinking.

There are lots of stories of folks who sell at the bottom and never get back in.

 

[Midpack]

This is just something everyone should review every few years and see how their AA lines up based with their personal priorities and goals. Sure, if you think it would work better for you for the next few decades, reduce your equity exposure.

On the other hand, I’ve been letting our equities drift up slightly simply because it’s far more tax efficient (all equity is in taxable), and we have more than enough in fixed income in absolute terms.

My target was 50/50 but it’s drifted up. We’ve won the game too and I’d love to rebalance back down but why take the tax hit? I spend all our dividends so I’ve stopped reinvesting to slow the upward drift. But our passive income now exceeds our spending needs, so why add cap gains on top of that? DW’s Soc Sec and RMDS in the next few years will make holding taxes down even harder. Yes, first world problem…

I went through the 1987 crash, the 2000 bubble, the 2008-09 fiasco and the 2020 Covid panic without selling anything or losing sleep. And I’m glad I did. I know there will be more corrections, but I expect to ride those out too. We have enough in bonds and cash to be OK even if our equity holdings get crushed - not that I’d like it.

 

[Flieger]

Looking at a $4MM portfolio with "basic" 60/40 vs 50/50 and $10k/month withdrawals, from 2020 to today, (~5 yrs) there would have been less than $100k difference in Portfolio value at the end of March 2020 (worst period) and overall much higher value to ending portfolio.

this aligns with many statements that there is not a lot of difference until you make a much larger shift in AA.

Flieger

 

[stepford]

I remember when '100 minus your age' was a widely accepted AA for retirees. I too have vivid memories of having a 100% equity allocation back in 2008. Now at 65 with a 50/50 AA I'm considering dialing back further, but certainly understand the inflation hit I would take if I did so. Our situation is similar to that of the OP - all expenses covered by SS and pensions so we can ride out any downturn, but another 2008 would still be stressful.

 

[target2019]

The difference between 60% and 50% equity halving in the worst case is measurable as a percentage and dollars. How do you feel about those possible scenarios?

 

[disneysteve]

Looking at a $4MM portfolio with "basic" 60/40 vs 50/50 and $10k/month withdrawals, from 2020 to today, (~5 yrs) there would have been less than $100k difference in Portfolio value at the end of March 2020 (worst period) and overall much higher value to ending portfolio.

this aligns with many statements that there is not a lot of difference until you make a much larger shift in AA.

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Flieger

Excellent analysis. Data to the rescue. That really shows that a 10% allocation variance doesn’t really make a huge difference over time. Food for thought for sure.

I will also add that over the past couple of years I’ve actually sold off quite a bit of stock only to have the allocation not change much because the market just kept climbing.

 

[audreyh1]

Excellent analysis. Data to the rescue. That really shows that a 10% allocation variance doesn’t really make a huge difference over time. Food for thought for sure.

I will also add that over the past couple of years I’ve actually sold off quite a bit of stock only to have the allocation not change much because the market just kept climbing.

That’s a good point - taking profits to rebalance while equities keep climbing. You’ve already been doing that.

 

[bobandsherry]

The relatively small shift you are considering doesn't have a meaningful difference in the big picture over a 30 year period. So, in the grand scheme, whether you make the change or not likely won’t change the outcome, you've already “won the game.” The real decision is about psychological comfort:

• If you'd like to sleep better with less volatility, shift the AA.
• If you are fine with short-term swings, staying at 60/40 is just as viable.

This is less about need and more about preference.

 

[imjustawarrior]

60/40, 55/45, 50/50 does not make any difference for success with a 3% WR. The different AA will only affect how much money you die with.

From a behavioral (happiness, peace of mind) perspective, if a more conservative portfolio helps you, then go for it.

In general, if one stays equity heavy, then downturns don't matter as much. Yes, the portfolio will drop a lot, but that is because the portfolio is much larger because it has been in equities. At 61, you may have 1-4 decades left.

 

[COcheesehead]

The same can be said about inflation. If you have a large enough pile, it’s just a matter of the buying power you lose over time. If you have enough, it pretty much doesn’t matter what your allocation is. FireCalc tells me I need 0% equities and I will never run out of money. I am currently 30% pure equity, 15% alternative and the balance bonds. The portfolio continues to grow, is less volatile and throws off tons of income. I hit a new all time high this morning.

 

[Koolau]

For me, the AA is less an issue if you have enough "ready cash" to avoid the need to sell any depressed and/or taxable component in order to keep up spending. I struggle the most with "ready cash" and continue to whittle at my 401(k) as I rebalance. I actually let my AA drift up and down a bit to avoid tax hits and also to fill my cash bucket (though I don't consider myself a "bucket" person).

 

[jollystomper]

At the beginning of the year I retired (2018) I shifted from 60 /40 to 40/60. I went more conservative because, as much as our planning said we would be okay, nothing is guaranteed. I went as low as 30/70 until the pandemic hit in 2020. Even though our portfolio dipped, our WR in retirement was half of what we had projected. Given that, and with my pension and DW's SS still covering 60% or so of our desired lifestyle, I increased the stock portion and we are around 38/50/12. I will probably just let it "drift" around that level, plus or minus a few percentage points at the whims of the market. We have enough cash so that we are not forced to sell at "'bad" times. It is all about being comfortable and sleeping well at night, regardless of the market. When I start taking SS, we will have more than enough fixed income to cover our expenses, so that might be the next time I may actively look at adjusting it.