I count it the way John Bogle has suggested any number of times. Quoting him, "I recommended -- as a crude starting point -- that an investor's bond position should be equal to his or her age. An investor age 65, then, would consider the propriety of a 65/35 bond/stock allocation. Clearly, such a rule must be adjusted to reflect an investor's objectives, risk tolerance, and overall financial position.
(For example, pension and Social Security payments would be considered bondlike investments
.)" See the wiki. http://www.bogleheads.org/wiki/Asset_Allocation
Personally speaking, I count it this way because it is a way of risk leveling. I'm retiring with a pension & 401k nest egg this spring. I would like to just take whatever the RMD is and spend what we need to, give away what we don't need, & have some chance to still grow the nest egg for our heirs. So what's a reasonable AA in the nest egg? I'd like to have enough stocks to grow it if possible for heirs, but without too much risk.
The risk I worry about is some 1980's Japan style kind of semi-permanent stock market crash where stocks drop 50% and settle there for my lifetime. So this is a table of gross income reduction after a 50% equities crash as a function of AA and fraction of income you were getting from the pension/SS before the crash. It just states the obvious that if you were at all stocks and you had no pension/SS you lose half your income, all bonds you lose nothing, AA was 50/50 and half your income was from pension/SS means you lose 25% of your income...... and so on.
The green line drawn on the table is one constant risk locus. All nest egg income at 30/70 AA with no pension gives a 15% income drop, all stocks with a 70% pension at 70/30 nest egg AA gives the same. That is about the level of belt tightening DW and I estimate we could easily stand at our age (69). We could stand more if we had to. Anyway, if I follow the green 15% loss locus line to the right to the 50% of income from pension/SS column it says I could have a 60/40 AA and risk the same 15% income loss. That is roughly where we are..... half of projected retirement income from pension/SS and AA close to 60/40. It feels pretty darn safe.
Bogle's age in bonds with pension/SS counted as a bond approach gives the same sort of AA increases with the size of pension/SS as this table does. It levels risk more or less automatically. Why not use it?
Disclosure: I posted this table at the end of an old thread, it got ignored and the thread died. Please somebody comment.
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