Asset allocation for retirees

[friar1610]

This is an asset allocation question. I'll give details below. I'm just interested in what other Bogleheads think is a reasonable asset allocation for a couple in our situation. Because I am dipping into our portfolio to buy a new primary house for cash in the near future, the current asset allocation will be thrown off for a while. We will potentially close on the new house prior to selling the current one, so I won't really be able to put things back in ideal order until after the current house sells. (The cash for the new house will come from a combination of our assets as well as a HELOC on the current house. When the current house sells, the HELOC will be paid off and the difference {between the sales price and the payoff of the HELOC} will go toward repaying the portfolio.)

Ages: 67 (me), 66 (spouse), both retired.
Income: my military pension, my SS, spouse SS. Total a bit over $100K/yr. We live comfortably on that and most months we bank our SS checks.
Investment assets: (after adjusting for the fact that the new house will cost more than the current house will sell for): About $1.25M.
Current allocation: 40% equity; 53% fixed; 7% cash. Taxable portfolio consists of VTSAX and VBIRX (this is where I am putting money to use for the new house.) Non-Vanguard taxable assets include $100K in CU MMSAs (will be used for new house), $37K in CDs (also for new house) and $150K I-Bonds, most at 3.4% (hope not to touch for new house.)
Marginal tax bracket:) 25%

Our IRAs (total of $410K) are primarily in VBTLX and VBIRX. A Vanguard Variable Annuity is $215 and is primarily in the Total Bond Market clone. Both the annuity and the IRAs have a enough International between them to bring the International portion of our equity to about 22%.

Primary goals for the portfolioafter the dust settles from new house:
- Provide sufficient assets for my spouse if I predecease her (as, actuarially speaking, I will.) Between the SBP from my military pension and survivor SS, she will have about $50K in guaranteed income. She will also inherit the Variable Annuity and depending on when she starts it, will get $12K - $15K a year from that. She will own her home outright but will have taxes, condo fees, etc.
- Provide a modest withdrawal (no more than 2%/yr, if that) to pay for big trips, new car when needed, etc. while I am still in the picture.
- Keep pace with inflation, perhaps grow the portfolio a bit, keep risk very moderate.
- Follow the KISS principle in portfolio construction, particularly for the benefit of my spouse who has no real interest in "high finance." (I am an indexer and have no real desire to get into managed funds or individual stocks.)

I'm aware of the "age in bonds" rule. I'm also aware that some advise to treat pension and SS income as "bonds" in a portfolio, although I don't necessarily buy that argument. I've been comfortable with the 40% equity allocation for a few years now but am starting to wonder if that might be a bit more equity than I need to have at my age. On the other hand, the Vanguard AA questionnaire tells me I should be at 50-50. I'm looking at this big, temporary disruption to the portfolio as an opportunity to reset things appropriately and, where possible, to simplify the portfolio.

Thoughts from other Bogleheads would be much appreciated.

[bertilak]

I'm aware of the "age in bonds" rule. I'm also aware that some advise to treat pension and SS income as "bonds" in a portfolio, although I don't necessarily buy that argument.

I don't buy that either, but having a lot of guaranteed cash flow does give you a lot of freedom in how you invest. You can look at things from two perspectives:

1. Be conservative since you simply do not need to get any cash flow from your portfolio. In your case, the portfolio needs to be able to replace any cash flow lost with your death and any extra cash flow needed to keep up with inflation. Since you are already banking some of your SS income you seem to be in pretty good shape.
2. Be aggressive since even if you lose a big chunk of your portfolio it won't affect your lifestyle or plans. Make it work towards a legacy.

Or anywhere in between. Evaluate your current and future cash flow needs and base your strategy on maintaining the required portfolio size to satisfy that. However much "extra" you have can be invested in any way you like.

[Slapshot]

Hey, Friar, Brown grad here. I had some great high school friends your age who went to PC. Bet you might know them. Spent some quality time in some establishments on your side of town. In regards to your question, we are in about the same situation as you are. I have a teachers pension. My view is that I don't have to take risk, so we have 30% stock, 65% bonds, and 5% cash. We essentially use the Total Stock Market Index, Total International Index, Total Bond Market Index and the TIPS fund as the core of our asset allocation. This has worked out fine for us.

[Blues]

Brown was one of my top three choices when I went off to college in 1970. Great school and I liked Providence a lot as well.

As to the question, I'm in a relatively similar boat to both you gents. Retired from federal law enforcement under CSRS at 51 and have been living the past 9 years virtually entirely on my pension and some of the distributions.

Now that the mortgage has been paid off I can reinvest the distributions as I have "enough" coming in monthly and no need for a legacy beyond making sure that the missus is taken care of in case I exit earlier.

As a result I have my fixed income to equity ratio at roughly 75/25 with the fixed income made up of TSP "G", TBM and ST Bond (plus cash).
The equity side is composed of TSM, Extended Market Index, FTSE All World Ex-US and FTSE All World Ex-US Small Cap. I've always liked having just a bit more exposure to the smaller caps without tilting to either value or growth.

I follow the recommendations of Messrs Swedroe and Bernstein and give the "need to take risk" primary consideration in making adjustments to the portfolio and investment policy we've adopted.

[btenny]

Welcome Friar, I think you need to keep at least 40% equities for the forseeable future for two key reasons.

1. Your wife may need the income from your $1.2M portfolio in the future if you should predecede her. So you need to make sure the future value of this portfolio is inflation protected. In that case she could spend 4% of your portfolio or around $48K plus SS and pension for total of about $100k. Thus she could maintain about what you are spending today. And anyone who says one is much cheaper than two needs to do some looking at expenses for those in old age.

2. Inflation protection of your $1.2K portfolio long term suggests you keep 40% to 60% stocks. Any less than 40% stock in most studies suggest a portfolio will not sustane a 4% withdrawal rate. So if she needs this money for say 20 years (76 to 96) you need to insure the value is there. Plus since you will be drawing around 2% already from this portfolio this will change the number slightly. Any more accurate pojection would require various FireCalc runs to review but I suspect this is pretty close.

So Good Luck. I am pretty sure you are all set and protected for the future.
Bill

[Aptenodytes]

If you rely on pension and ss for spending you don't need cash in your portfolio. If the cash is destined for the new house ok but then it isn't part of your portfolio.

[dickenjb]

I don't buy that either, but having a lot of guaranteed cash flow does give you a lot of freedom in how you invest. You can look at things from two perspectives:

1. Be conservative since you simply do not need to get any cash flow from your portfolio. In your case, the portfolio needs to be able to replace any cash flow lost with your death and any extra cash flow needed to keep up with inflation. Since you are already banking some of your SS income you seem to be in pretty good shape.
2. Be aggressive since even if you lose a big chunk of your portfolio it won't affect your lifestyle or plans. Make it work towards a legacy.

Or anywhere in between. Evaluate your current and future cash flow needs and base your strategy on maintaining the required portfolio size to satisfy that. However much "extra" you have can be invested in any way you like.

My take exactly. You can either view this as you've won the game and don't need to take risk or you are investing for your kids (since you and widow are provided for) and invest for growth. A good position to be in.

[friar1610]

Thanks to those who responded. In the final analysis, I think I will probably end up fairly close to the 40% I currently have in equities - about 30% in Total Stock Market Index and about 10% in one of the total international indexes.