Adjusting Strategy when you hit your # early

[Snowjob]

I feel like this question if it doesnt apply to a lot of people now, will apply to a lot of younger people on this website during their lives since we got started on the right foot by saving early.

Basically, If you start out by saving and investing in a conventional mix of bonds and stocks with a target of getting to XX dollars or whatever the metric, but are fortunate enough to get there significantly ahead of time what would you do next? Sure your options could be to scale back investments, take more vacations, downsize, think about retiring early etc. But from the investment standpoint, would you continue to invest with the same stock & bond mix that got you there? would you conservatively alter the mix increasing bonds? Would you convert to some sort of liability matching scheme? A combination?

Part of my confusion with this question is that I would like to say adding individual tips / I-bonds if I'm over my target, but rates are horrible right now so perhaps a CD ladder would be best. I suppose how early you hit the target would matter too. If you hit your target in your late 30s early 40s, vs hitting it in your late 40s early 50s. Anyone have any experience with this?

[livesoft]

I changed my equity:fixed_income ratio when a reached a big round number. I no longer had the need to take risk.

I think the need for the lowest risk for me will be between 5 years before stopping work and 5 years after stopping work. As I get further into retirement, I will know how my portfolio has behaved, how my expenses have been, how my health has been, and closer to death. I will know that I will not be needing all my money, so I will probably increase my equity:fixed_income ratio in order to make my portfolio larger for the folks who will end up with the money.

Thus, I do not believe in this age_in_bonds things.

[Johm221122]

My plan is to add fix income as I reach milestones,I have it written down in my investment plan. This way if I'm behind I stay more aggressive and if I'm ahead I scale back risk.I just added 5% to fixed income
John

[Col Klink]

Yes. I have adjusted my portfolio to more fixed income given that I am approaching a level that the DW and I believe we can live with for the duration along with SS. However, we are still investing in a manner that should allow us to beat inflation handily in any year that the market is not at a loss. Inflation, as many Bogleheads have noted in other posts, is the reason why parking it all in FDIC insured accounts and CDs will result in a net erosion of principal over time.

[ResNullius]

What I did was to hunker down into a more conservative portfolio. Not all bond funds, mind you, but I significantly raised my fixed asset allocation. I watched any number of folks lose their financial security after or near retiring due to the last crash (2008-2009). They sold at or near the bottom, and they've stayed in cash or short-term bonds ever since. In short, they missed a 100% upswing in the equity market, thus locking in the huge loss they had suffered on paper during the crash. These folks are not happy campers. I only hope my wife and I never learn what it felt like for them. Good luck to us all.

[rkhusky]

It depends what your goals are. Do you want to retire early? Then move to a more conservative allocation. Do you want to increase your standard of living? Then maintain current allocation. Do you want to leave a large inheritance? Then use a more conservative allocation for funds needed for retirement and become more aggressive with the remaining funds.

[Riprap]

I'm thinking of shifting more into equities due to low withdrawal rate and plan to build a financial legacy. The liability matching portfolio as described by Bernstein is covered. Buffet's thoughts on dollar denominated assets vs inflation weigh heavily too.

http://finance.fortune.cnn.com/2012/02/ ... er-letter/

[scone]

I'm just getting into this territory right now. DH could retire tomorrow, and we would have a very modest retirement. However, and this is the big worry going forward, we would have a hard time if inflation picked up. So I guess the next four years will be about building a deeper "buffer zone" against inflation and black swans. So I don't anticipate much change in my portfolio going forward.

It's kind of moot, as DH is having a hard time wrapping his head around the idea of retirement. I think some people over-identify with the job, and the retirement prospect can trigger a bit of an existential crisis. But the minute my guy turns 65, I'm putting my foot down. No more work, come hell or high water.

[reggiesimpson]

I hit my number several years before i officially retired. I am at heart paranoid about the loss of money (who isnt?) so saving even more and shifting to more fixed income has given me the peace of mind i have been looking forward to in retirement.

[The Wizard]

Why tamper with success, assuming you hit your "number" by steady growth over a period of years?
Especially if you hit it early, age 45 say, there's more uncertainty about expenses over the next 40+ years, so your number might be low.
I plan to reduce my exposure to stocks as I get older, yes, but I've not decided yet where my AA will bottom out. More than 25% stocks, probably 30% or more, even in my 80s (fingers crossed)...

[wesleymouch]

I use the Swedroe principal and limit equity allocation to 30%. If you have won the game stop playing it. Also since I use the PP I do have a modest allocation to gold in case there is a problem with the dollar/inflation.

[The Wizard]

I hit my number several years before i officially retired. I am at heart paranoid about the loss of money (who isnt?) so saving even more and shifting to more fixed income has given me the peace of mind i have been looking forward to in retirement.

This is another reason for some of us to delay Social Security till close to age 70. Call it insurance against a stock market "crash".
If a crash happens when I'm 68, say, then BAM, start SS then rather than selling stocks to live on when they're low.
The assumes sufficient assets to live on w/o SS in the early going, of course...

[larryswedroe]

It depends on marginal utility of wealth,.

If have already won the game, as one poster said, and more wealth while better doesn't change your life in any meaningful way, why take more risk.

This is why IPS and AA should be living documents, whenever any assumption in plan changes should change the AA accordingly. Could be simply passage of time which reduces ability to take risk, or a good or bad life event, or better or worse than expected returns

We have many clients who started in 90s with high equity allocation and by time 08 hit were down to 20-30% equity, often with help of high tilt, and thus were much better prepared and suffered much lower losses than if they stuck with original AA. And you can be sure they were enjoying their life much more, not worried or as worried about markets

I hope that helps
Larry

[Taylor Larimore]

Snowjob:

If you start out by saving and investing in a conventional mix of bonds and stocks with a target of getting to XX dollars or whatever the metric, but are fortunate enough to get there significantly ahead of time, what would you do next?

I would consider an asset-allocation similar to what Vanguard experts chose for their Target Retirement Income Fund:

Vanguard Total Bond Market II Index Fund Admiral Shares 44.7%
Vanguard Total Stock Market Index Fund Admiral Shares 21.2%
Vanguard Inflation-Protected Securities Fund Admiral Shares 19.9%
Vanguard Total International Stock Index Fund Admiral Shares 9.2%
Vanguard Tax-Exempt Money Market Fund 5.0%

If you have won the game, why keep playing?

Best wishes
Taylor

[Garco]

I never had a "number." But as I've moved on in my life and career, it's become larger, to protect the standard of living and life style that I've attained over the years, as opposed to some hypothetical number that I set out as an initial target. At this time I have a *number that >90% of people would be happy to have. And I know that if I had a whole lot less than this, I'd probably find a way to survive on the cash that I could generate. But still, there's my family of grown children and their (future) children to help. So I'm not about to stop trying to reach a larger **number. That said, I am a lot more focused on reducing risks now than on maximizing gains -- and keeping my eye out for black swans.

[Grt2bOutdoors]

Increase your fixed allocation by paying off any debt you may have.
Purchase your annual allotment of I bonds. Heck, buy some EE bonds, wait 20 years, collect. I assume by that time, you will have officially retired.
Ease up on your equity contributions.

Good for you if you know what your number is. I'm still trying to figure it out - it's a moving target and while a 2 digit number sounds great, in my current location it just doesn't go far enough to even think about retiring from employment.

[KyleAAA]

I would certainly err on the conservative side if, say, I won $10 million in the lottery tomorrow. So I guess there's your answer. I'm not sure I would quite go so far as a 30/70 portfolio, but 50/50 sounds about right to me. To each his own. I think the major risk is that your "number" will turn out to have been too low in retrospect, so I wouldn't go too conservative unless I had WAY more than I knew I'd ever need.

[Call_Me_Op]

I don't believe we have a number. I plan to accumulate as much as possible before I stop working, because when I stop it will probably be because I don't want to have to work (or won't be able to work) again. When you get to that point, I would think you want as much security as possible. I don't want to require 6% of my assets for living expenses each year.

[Blues]

I am firmly in the camp with Larry and Taylor. While I was still employed our portfolio was much more equity oriented.

Since retiring 9 years ago at 51 I have found that we can live for the most part on my pension and have thus concentrated on reducing the overall risk to the portfolio while rapidly prepaying the mortgage on our home.

Now that those mortgage payments are a thing of the past I have more available income from the pension and so I have found that a 20-80 (bonds-stocks) ratio provides a nice balance of preservation while still allowing for a bit of growth.

Larry's mantra of "ability, willingness or need to take risk" in concert with Jack Bogle's philosophy on simplicity and index investing have become the cornerstones of our investment policy over the past several years.

We are grateful for and sleep better at night for the lessons they (and other like minded contributors) have shared both here and via their publications.

[Random Walker]

I really think there is a risk of being too conservative. If one retires at say 55-65, he can potentially live another 30 years. Inflation could be an absolute killer over that time period. Add to this the fact that Medicare and social security may not be able to be counted on many years from now to the extent that they are today and the fact that this generation is more likely to depend on defined contribution plans than defined benefit plan. I believe that many people may be underestimating the risk of being too conservative. Very curious what others think.

Dave

[Grt2bOutdoors]

It depends on marginal utility of wealth,.

If have already won the game, as one poster said, and more wealth while better doesn't change your life in any meaningful way, why take more risk.

This is why IPS and AA should be living documents, whenever any assumption in plan changes should change the AA accordingly. Could be simply passage of time which reduces ability to take risk, or a good or bad life event, or better or worse than expected returns

We have many clients who started in 90s with high equity allocation and by time 08 hit were down to 20-30% equity, often with help of high tilt, and thus were much better prepared and suffered much lower losses than if they stuck with original AA. And you can be sure they were enjoying their life much more, not worried or as worried about markets

I hope that helps
Larry

Some folks are just plain greedy. I have five relatives who are wealthy - two are what one might say are extremely wealthy - they refuse to buy fixed income. They made their money with business equity and to this day will continue to sink their cash flow into public equities. Bonds are anthema to them. I don't blame them - it is just what they are comfortable with even though they won the game long long ago.

[ResNullius]

Some folks are just plain greedy. I have five relatives who are wealthy - two are what one might say are extremely wealthy - they refuse to buy fixed income. They made their money with business equity and to this day will continue to sink their cash flow into public equities. Bonds are anthema to them. I don't blame them - it is just what they are comfortable with even though they won the game long long ago.

I know a number of formerly wealthy folks between 65 and 75 who had between 60% and 100% of their retirement portfolio in Bank of America stock or Wachovia stock back in late 2008 and early 2009. They lived a very favored standard of living off of the dividends from what they considered to be gold plated companies, the same companies they retired from after decades of loyal service. They know differently now.

[Taylor Larimore]

Bogleheads:

I once visited the Museum of American Finance in New York City to learn about my grandfather, Christopher F. Coombs. An employee found the following excerpt in a book titled: "The Story of Investment Companies" by Hugh Bullock:

"The United Founders Corporation, came into being at the top of the pyramid, organized by Mr. Seagrave, Christopher F. Coombs, and Frank B. Erwin."

"The Founders group, above all others, was the hallmark of the Roaring Twenties."

"The resources so dominated by the United Founders Corporation group were at one time in excess of $2,100,000,000."

My multi-millionaire grandfather had most of his fortune in stocks bought on margin when the Dow plunged 89%. My grandfather died bankrupt.

This is why I never have, and never will, recommend a 100% stock portfolio.

Best wishes.
Taylor Coombs Larimore

[midareff]

I'd adjust my AA to be more conservative. Hitting numbers when markets are at/near 5 year highs doesn't mean much. If equities drop 50% next month will you still have your number?

[Watty]

A lot really depends on how early you hit the "number" and if you will keep working or retire early.

For someone hitting it at 60 instead of 65 they might want to cut back on their savings but to fund their retirement until the age of 95 the assets would need to last 35 years instead of 30 so there would be virtually no difference in the asset allocation that should be used.

If they decide to actually retire early then their "number" would change significantly.

[baw703916]

My multi-millionaire grandfather had most of his fortune in stocks bought on margin when the Dow plunged 89%. My grandfather died bankrupt.

This is why I never have, and never will, recommend a 100% stock portfolio.

Best wishes.
Taylor Coombs Larimore

100% stocks when the Dow drops 89% won't bankrupt you, if you have a sufficiently large net worth to start with. 300% stocks (i.e. margin), on the other hand...

[EDN]

I really think there is a risk of being too conservative. If one retires at say 55-65, he can potentially live another 30 years. Inflation could be an absolute killer over that time period. Add to this the fact that Medicare and social security may not be able to be counted on many years from now to the extent that they are today and the fact that this generation is more likely to depend on defined contribution plans than defined benefit plan. I believe that many people may be underestimating the risk of being too conservative. Very curious what others think.

Dave

Dave,

I completely agree with you here. Risk isn't just the chance of losing money next quarter or next year, but also the chance of investing in a portfolio whose return does not keep pace with a multi-decade retirement where living standards rise over time.

To see this, I ran a quick Monte Carlo simulation on an investor who retires at 55 (instead of 65) with $1.3M (instead of the planned $1M) who needs $40k per year (a 3% starting withdrawal instead of the traditional 4%) adjusted for 3% inflation ($122k by age 90). I modeled 3 portfolios (small & value tilted equities + 5YR bonds in various allocations)-- a 60/40, 40/60, and 20/80. I used historical simulated returns from 1928-2011 with the adjustment that bonds have 0% real returns going forward (3% nominal returns).

Two measures of risk were "% of times one ran out of money by age 90" and "the remaining portfolio value in the 10th percentile of simulations @ age 90". Here were my findings:

60/40
Survival = 96%
10th % $ = $1.76M

40/60
Survival = 95%
10th % $ = $0.98M

20/80
Survival = 90%
10th % $ = $0.02M

As you can see, the cushion afforded by the 60/40 meant you still had a sizable portfolio left at age 90 which could have been used for higher-than-expected withdrawals or unplanned one-time expenses (or leaving a larger legacy, spending more in retirement, etc.). At 40/60, you survived just the same, but the likelihood of ever growing the portfolio were smaller and you had less room to deal with surprises. At 20/80, which was the least volatile of the three portfolios, you began to face the very real risk of running out of money over a sufficiently long retirement--in effect trading volatility for longevity risk.

Of course, had the investor shifted down at 55 and not taken out money until 65 or 70, they would have been in much better shape. So it depends on the assumptions and decisions. But in general, you cannot eliminate risks, only trade some risks for others. The key is finding the best balance between risks so you'll be as successful as possible and as comfortable as you can be.

Eric

[Blues]

Of course, had the investor shifted down at 55 and not taken out money until 65 or 70, they would have been in much better shape. So it depends on the assumptions and decisions. But in general, you cannot eliminate risks, only trade some risks for others. The key is finding the best balance between risks so you'll be as successful as possible and as comfortable as you can be.

Eric

Totally agree. Not having to remove invested assets from my portfolio allows a conservative approach.


These charts are worth looking at as well...

https://personal.vanguard.com/us/insigh ... llocations

[johnep]

I know several people who had big market gains in the 90s and then retired. They unretired after the dot.com bubble burst in 2001 because they failed to adjust their AA to lower risk. Same thing happened in 2008. Again a lot of people had to unretire. I planned to retire in 2008 but delayed it 2 years due to market losses even though my AA was not that risky and I could have retired. I would probably still be working if I had an 80/20 equity/FI portfolio in 2008. Everyone has a different risk tolerance, but even the risk takers need to dial it back some when they have won the game.

[Grt2bOutdoors]

Some folks are just plain greedy. I have five relatives who are wealthy - two are what one might say are extremely wealthy - they refuse to buy fixed income. They made their money with business equity and to this day will continue to sink their cash flow into public equities. Bonds are anthema to them. I don't blame them - it is just what they are comfortable with even though they won the game long long ago.

I know a number of formerly wealthy folks between 65 and 75 who had between 60% and 100% of their retirement portfolio in Bank of America stock or Wachovia stock back in late 2008 and early 2009. They lived a very favored standard of living off of the dividends from what they considered to be gold plated companies, the same companies they retired from after decades of loyal service. They know differently now.

That may be true for them, not so for my relatives - they have been buying dividend paying stocks long before it ever became popular, sure they've been burned a few times, but by and large they own so many different companies (hundreds) you could say they are the index.

[The Wizard]

...it is just what they are comfortable with even though they won the game long long ago.

It appears that there are two kinds of people on this topic:
Those who think in terms of Winning The Game and those who do not...

[foxfirev5]

At my current age of nearly 57 I have hit my age 60 "number". I plan to stick fairly close to my current AA of 45/40/15 for the next few years. Since I am still accumulating my rebalancing is partially accomplished through new contributions. Currently these are all going into a stable value fund.
Eventually the equity portion will decline somewhat down to a minimum of 35%.

[Random Walker]

EDN,
Thanks for that monte Carlo work. I'd sure like to know how to do that! I think it's worthwhile to note that the classic pension or endowment AA is 60/40. There must be some pretty solid reasoning behind this. I do believe there is tremendous longevity risk for individuals. Of course being right in the long run is worthless if we can't survive the short run!
The aggressive AA's should result in larger terminal value but will definitely have a much greater range of potential terminal values as well.

Dave

[larryswedroe]

Grt2bOutdoors
IMO, without knowing all the fact, your relatives are likely making the mistake of confusing the likely with the certain. The cost of going from rich to poor is unthinkable, thus the strategy to stay rich is entirely different than the strategy to get rich, a lesson far too many wealthy people failed to learn and become poor, or a lot poorer.
I know, I've met many of them.
Especially true of those who continue to invest in same businesses/sectors that helped them create wealth, then overconfidence adds to their inability to see the right strategy

Best wishes
Larry

[EDN]

EDN,
Thanks for that monte Carlo work. I'd sure like to know how to do that! I think it's worthwhile to note that the classic pension or endowment AA is 60/40. There must be some pretty solid reasoning behind this. I do believe there is tremendous longevity risk for individuals. Of course being right in the long run is worthless if we can't survive the short run!
The aggressive AA's should result in larger terminal value but will definitely have a much greater range of potential terminal values as well.

Dave

Thanks Dave,

I have a pretty simple MC program. For all its faults, it's still an input I consider, so firing it up periodically keeps me "fresh".

I know a lot of endowments and pensions benchmark themselves to a 60/40, but in the research/writing I've done on the subject, it seems that their overall risk is more in line with an 80/20 portfolio. For example, I recently found that "CALPERS continues to miss the cut", underperforming a 56% Russell 3000, 24% MSCI All Country World exUS, 20% Barclays Aggregate Bond Index over the last 10 years while taking more risk. And that is the biggest pension fund in the country!

But yeah, a 60/40 is a fine allocation, probably the one allocation that works for the widest range of investors that can be faithfully adhered to for a variety of different goals for almost infinite horizons.

Eric

[Abe]

William Bernstein says: Stop when you win the game.

Bernstein recommends a rule of thumb, based on annuity payouts and spending patterns late in life, that you should have 20-25 times your residual living expenses (after pensions/Social Security) invested solely in safe assets. No stocks at all. This should be in TIPS, SPIAs and short-term bonds. If you have more than that, that’s your “risk portfolio,” which he describes this way:

Anything above that, you can invest in risky assets. That’s your risk portfolio. If you dream about taking an around-the-world trip, and the risk portfolio does well, you can use it for that. If the risk portfolio doesn’t do well, at least you’re not pushing a shopping cart under an overpass.

[NYBoglehead]

William Bernstein says: Stop when you win the game.

Bernstein recommends a rule of thumb, based on annuity payouts and spending patterns late in life, that you should have 20-25 times your residual living expenses (after pensions/Social Security) invested solely in safe assets. No stocks at all. This should be in TIPS, SPIAs and short-term bonds. If you have more than that, that’s your “risk portfolio,” which he describes this way:

Anything above that, you can invest in risky assets. That’s your risk portfolio. If you dream about taking an around-the-world trip, and the risk portfolio does well, you can use it for that. If the risk portfolio doesn’t do well, at least you’re not pushing a shopping cart under an overpass.

Sounds like a plan. I'm fairly early in the accumulation phase, but I can imagine it being fairly devastating to have built up a huge portfolio over decades of diligent savings and then watch it take a huge hit because of excessive risk taking.

[Rebecca_S]

About 2 years ago we hit the first number I had in mind, the number that means we can live off the portfolio with a low-but-not-cat-food standard of living if we never add another penny. This gave me much comfort since my husband quit his job to start his own business 10 months ago. Perhaps that is my answer, that we can live off one salary while he devotes time to the business and running the household while still saving a bit. Our asset allocation has not changed, age in bonds which is fairly conservative but not unreasonable. The portfolio and previous years of high savings allowed us to take the risk of living off one income for a few years without feeling too stressed.

[tphp99]

It depends on marginal utility of wealth,.

If have already won the game, as one poster said, and more wealth while better doesn't change your life in any meaningful way, why take more risk.

This is why IPS and AA should be living documents, whenever any assumption in plan changes should change the AA accordingly. Could be simply passage of time which reduces ability to take risk, or a good or bad life event, or better or worse than expected returns

We have many clients who started in 90s with high equity allocation and by time 08 hit were down to 20-30% equity, often with help of high tilt, and thus were much better prepared and suffered much lower losses than if they stuck with original AA. And you can be sure they were enjoying their life much more, not worried or as worried about markets

I hope that helps
Larry

Some folks are just plain greedy. I have five relatives who are wealthy - two are what one might say are extremely wealthy - they refuse to buy fixed income. They made their money with business equity and to this day will continue to sink their cash flow into public equities. Bonds are anthema to them. I don't blame them - it is just what they are comfortable with even though they won the game long long ago.

Why do you think it is driven by greed? Maybe they're simply risk takers that can't help themselves.