Lifestyle timing or market timing?

[AboutThere]

Wanted to share my somewhat unique situation with regard to my asset allocation. It feels like lifestyle planning to me but also seems like I'm timing the market.

To simplify things, I'll use some generalities.
I'm in my mid-50s.
Current 401k asset allocation (index funds) is 82% stocks, 18% bonds

I WAS COMFORTABLE WITH THIS IN SPRING 2020 AND DIDN'T FLINCH

HOWEVER

My contract is up in June 2023 and there is at least a 50/50 chance I won't be renewed. My skill set is narrow and there's no chance I'll replace my income - I won't know until 2023 whether I have a job.

If I'm rehired I'm fine with an aggressive AA as I won't need the money for another 7-10 years or perhaps longer.

BUT - and it's a big BUT - if I don't get my contract renewed I'll have to access the 401k and use a substantial amount of it.

Obviously, this presents profound sequence risks if the market is down in 2023.

So, I'm thinking of flipping the AA to 20% stock, 80% bonds until I know whether I have the contract. Or even 0/100

My plan is to just change my allocation now and turn off the stock ticker until 2023 ha ha. If I have the contract I'll buy back into stocks. If not, I'll access the funds at the 20/80 or 0/100 AA and reassess.

My main concern is that my 401k can't withstand the 2023 withdrawals if the long-anticipated market decline happens between now and 2023. I really just want to protect the number I'm at right now (plus contributions over the next 2.5 years). I hear the voice saying "if you've won quit playing"

OTOH I'll be missing out on gains if I change my AA now, but I'm comfortable with that. Also, I recognize the inflation risk.

Odds and ends in anticipation of questions:

- my Plan doesn't allow for targeted withdrawals, I have to withdraw at whatever AA ratio I have at the time of withdrawal.

- I'm in a much much higher bracket now than I will be in retirement - I'm saving as aggressively as I can right now and maxing out tax advantaged accounts.

- I have lifetime guaranteed paid health care if that matters.

- I can make it in retirement starting in 2023 if I don't lose much principal

- I've already taken into account emergency fund availability

- I've left off a lot of details because I really want to focus on the core problem of when to change my AA (I'm not looking for job advice or house hacking, etc)

Should I wait until early 2023 to change? Just bite the bullet and do it now? In pieces or all at once?

Anything else I'm missing?

 

[Rambler]

I don’t think I’d go 0/100 or even 20/80. I might consider a 50/50 or more likely a 60/40...but that’s me...I don’t know your specialty, how or where you’d find replacement employment, etc. I can’t quote sources, but I am pretty sure that I’ve read that going 0/100 doesnt usually a successful retirement make.

 

[AboutThere]

I don’t think I’d go 0/100 or even 20/80. I might consider a 50/50 or more likely a 60/40...but that’s me...I don’t know your specialty, how or where you’d find replacement employment, etc. I can’t quote sources, but I am pretty sure that I’ve read that going 0/100 doesnt usually a successful retirement make.

Thanks - the 20/80 or 0/100 would be temporary and I would reassess after a few years and likely go to 40/60 or thereabouts.

 

[chassis]

You are in your mid-50s. What are your annual living expenses and what is your total net worth?

 

[AboutThere]

You are in your mid-50s. What are your annual living expenses and what is your total net worth?

Thanks - I've already done that math really just looking at the asset allocation timing change issue

 

[RetireeRobert]

Your plan and your reasoning about going to 20/80 asset allocation now, or even 0/100, to "lock in" (and not lose) until 2023 sounds eminently reasonable to me.

You said: "I hear the voice saying "if you've won quit playing"
OTOH I'll be missing out on gains if I change my AA now, but I'm comfortable with that."

Listen to you gut. If you don't listen, and things turn out the way you anticipate they might, you will forever kick yourself and live with regrets for the rest of your life.

Follow your gut.

 

[RVplusDog]

If it were me, and it kinda is (I’m RE & mid 50s), I’d keep cash/bonds/equities. There seem to be almost as many warnings currently about bonds as there are about equities. I would personally want 1-2 years in cash, only 1-3 in bonds, and the rest in equities. But you do you - whatever helps you sleep at night.

 

[mrfeh]

Thanks - I've already done that math really just looking at the asset allocation timing change issue

My vote: market timing.

Such a drastic change in AA should not be necessary if you are truly FI. If you aren't FI, plan on continuing to work.

 

[deserat]

To OP,

I am mid 50s, have a retire/leave from employment date ranging from this summer to 2024. I have either employee subsidized health insurance until retirement/leave and if retire in 2024 will have TRICARE for retirees (subsidized healthcare), otherwise will pay full boat until 2024 if retire/leave before then. I currently have AA range of 70/30-60/40 with a large part of that cash in anticipation of purchasing a home for cash. I have one non COLA pension (small) now and will have COLA pension at 60 and then SS at 70. I do not think I will be changing my AA from here on as *my lifestyle costs will most probably be covered by my pensions.* In the meantime, I am working to convert all tax deferred assets to the Roth while employed and/or in gap before pension at 60 as RMDs will be brutal from a tax perspective in my later years.

The key parts for you to me would be: what will cover your lifestyle costs from now to when and after you retire and how much are you willing to lose in your Stock portion of the AA such that it would not crimp your lifestyle.

I have found the VPW worksheet at Bogleheads a great tool to look at with regard to what would happen to your yearly withdrawal amount based on the AA and a possible 50% decrease in the value of the stock portion of the AA. It gives you an idea of how much belt tightening you might need.

So, could you take a 50% decrease in the value of your stock portfolio and still be ok? If not, how much do you need to reduce that stock volatility risk to have comfort with what you might need to withdraw meet your retirement income goals?

That is why people who use their portfolio only for retirement tend to become much more risk averse as they get closer to retirement. Those with pensions can take on more risk because their pension functions like a bond or release valve on the performance of their stock in their portfolio for retirement income withdrawal purposes.

I would say based on your post you are uncomfortable with your current allocation and would shift if down - however, I don't think I would go to 20/80 -0/100 just yet. Possibly play around with the VPW worksheet retirement tab...that should help give you some numbers to compare against your lifestyle costs and possibly help guide what the stock portion of your AA should be to meet your needs.

 

[racy]

...I'm in my mid-50s. Current 401k asset allocation (index funds) is 82% stocks, 18% bonds...My main concern is that my 401k can't withstand the 2023 withdrawals if the long-anticipated market decline happens between now and 2023. I really just want to protect the number I'm at right now (plus contributions over the next 2.5 years)...
Anything else I'm missing?

82% in stocks might be a little high, but 20% seems too low to me. I suggest building up your cash; your 401k might have a pretty good stable value fund.

 

[VanWinkle]

Reducing the stock allocation makes sense to me as it is governed by life changes, not timing the market. Pick a conservative allocation 20/80 to 30/70. If a 10-15% loss in your portfolio would change your retirement, you're not ready anyway.

VW

 

[OldShooter]

... BUT - and it's a big BUT - if I don't get my contract renewed I'll have to access the 401k and use a substantial amount of it. Obviously, this presents profound sequence risks if the market is down in 2023. So, I'm thinking of flipping the AA to 20% stock, 80% bonds until I know whether I have the contract. Or even 0/100 ... Anything else I'm missing?

Yes. I think this situation is an example where thinking percentages is nearly useless. Think buckets. IMO you probably want an allocation that leaves you a liquid and safe bucket of 3-5 years, maybe even a little more. This is SORR insurance for your initial retirement years. What is the resulting AA? Who cares?

 

[VanWinkle]

Yes. I think this situation is an example where thinking percentages is nearly useless. Think buckets. IMO you probably want an allocation that leaves you a liquid and safe bucket of 3-5 years, maybe even a little more. This is SORR insurance for your initial retirement years. What is the resulting AA? Who cares?

I agree with the cash(conservative) bucket, but the ability to take risk without getting emotional may dictate a lower allocation to equity. Not everyone is a 'rock" when it comes to watching a stock heavy portfolio go down in a bear market. The proof is in how many sell out near the bottom. You're experience makes it an easy decision, but for many there is much more hand ringing.

Best to you,

VW

 

[OldShooter]

I agree with the cash(conservative) bucket, but the ability to take risk without getting emotional may dictate a lower allocation to equity. Not everyone is a 'rock" when it comes to watching a stock heavy portfolio go down in a bear market. The proof is in how many sell out near the bottom. You're experience makes it an easy decision, but for many there is much more hand ringing.

Best to you,

VW

Good point.

 

[jollystomper]

If I were in that situation, I would build up cash so that, come 2023, if you do not have a job you have enough cash to draw on for several years without touching your 401K. My opinion (and what I did) was to have 5 years of cash needs before I reitred, which I know many here think is too much. But from today that you give you at least 7 years before you would have to touch your 401K, and rarely has the market done extremely bad in a 7 year period.

For your AA, just estimate what your equities would be if the market fell 50-60%. If you can live with that number, and have to patience to see it come back (which may take years), your current AA is fine. If not, reduce the stock component of your AA until the estimate still lets you sleep at night. Then, in my view, you'll know you have the right AA. Many folks focus on the AA percentage without understanding that than can mean in terms of dollars lost on paper during a downturn, and panic as a result. You do not want to do that.

This just my opinion based on what I chose to do, and I am happy with the results. But my happiness may not be someone else's happiness.

 

[Chuckanut]

I can't tell you what to do. But, all of us are in a similar predicament - The Future is Unknown.

 

[38Chevy454]

I understand your concern, but I think I would not go 20/80 or more conservative. I think a 50/50 or so would work, the idea being that you can draw from the fixed side while waiting for the equity side to recover. That way you still get some of the equity recovery before you decide to up your AA to higher than 50% equities. Of course it all is function of your risk tolerance.


Are your numbers so close that you are worried that taking income out for say 3 years would cause you unrecoverable withdrawal? Because even at your 82/18 you still have that 18% fixed income that you can draw down before having to worry about selling equities in a down market. Not sure of the exact numbers, but most bear markets have historically been 2-3 years max, most less than 2 years. So unless you feel that an extended downturn longer than 3 years, it seems going to 20/80 or more conservative is not needed.

 

[OldShooter]

But ... but ... but ... Twenty percent of what?

If 20% of the OP's portfolio is $2M that is a lot different situation than of 20% of his portfolio is $20K. It's probably neither, of course, but without knowing that answer the discussion ends up being like the "subtract your age from ... " rules which are pretty thoroughly disliked around here.

Or maybe the OP could at least say how many years' spending would be covered by 20% of the portfolio.