Confusion Over Retiree Asset Allocation Advice

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Munir
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Confusion Over Retiree Asset Allocation Advice

Post by Munir » Sun Feb 09, 2014 2:07 pm

I am a retiree in the distribution phase. In addition to Social Security, I have three SPIAs but no pension or other source of income. Nearly all my assets are in a TIRA. Up till the last few months, most Bogleheads seem to advise an asset formula close to age in bonds or age -10 (or some similar number). Recently, Wade Pfau and some others are advocating the highest bond allocation at the time of retirement then to start increasing the equity allocation as one gets older- the opposite of Jack Bogle's traditional advice. Currently, my asset allocation is age minus 10 in bonds (I am in my seventies).

There has been a notable silence (at least to me) from the pillars of this forum about this new asset allocation formula being advocated by some. Do the BH wise-heads agree with this new formula, disagree, or what? Help! :?

RadAudit
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Re: Confusion Over Retiree Asset Allocation Advice

Post by RadAudit » Sun Feb 09, 2014 2:24 pm

Munir wrote:Do the BH wise-heads agree with this new formula, disagree, or what?
Yes.

Other threads on this topic have folks that feel strongly both ways. Since it is a relatively new idea, a number on the site still favor some variation of age in bonds.

http://www.bogleheads.org/forum/viewtop ... 0&t=126639
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GerryL
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Re: Confusion Over Retiree Asset Allocation Advice

Post by GerryL » Sun Feb 09, 2014 2:40 pm

My interpretation of the advice is: Be conservative with the money that you expect to need in the short or medium term; be more aggressive with the money that you want to grow for the future (living expenses in advanced old age or to pass along with your estate). In it's simplest form it's not all that different from the kind of advice you get about where to put money for a down payment or the kids' college fund.

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Sheepdog
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Re: Confusion Over Retiree Asset Allocation Advice

Post by Sheepdog » Sun Feb 09, 2014 3:03 pm

Why would I change my allocation? Why should I consider it? I am half way to my 30 year plan to have my money last. (Now 80, heading for 95). With a stock allocation of basically 100 minus my age, and taking out 4.5% average per year to go along with our Social Security, our investment value has continued to grow. I am one who doesn't need or want appreciably more stock in my allocation, although I stopped reducing my stocks at age 78 and let the percentage drift up some. (Now 24% stock at age 80 and don't plan to change....my wife is 74, after all.)
It's not what you gather, but what you scatter which tells what kind of life you have lived---Helen Walton

Daniel O
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Re: Confusion Over Retiree Asset Allocation Advice

Post by Daniel O » Sun Feb 09, 2014 3:08 pm

Munir wrote:Do the BH wise-heads agree with this new formula, disagree, or what? Help! :?
I believe the wisest advice is what is found on the wiki as that's where the most senior members have really set out the BH philosophy in the most definitive and moderated way.

As far as the forums, there are tens of thousands of registered users making about a thousand posts per day. I doubt the founders have time to step into every topic and settle all the confusion.
~ daniel

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Bustoff
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Re: Confusion Over Retiree Asset Allocation Advice

Post by Bustoff » Sun Feb 09, 2014 3:29 pm

Munir wrote:I am a retiree in the distribution phase. In addition to Social Security, I have three SPIAs but no pension or other source of income. Nearly all my assets are in a TIRA. Up till the last few months, most Bogleheads seem to advise an asset formula close to age in bonds or age -10 (or some similar number). Recently, Wade Pfau and some others are advocating the highest bond allocation at the time of retirement then to start increasing the equity allocation as one gets older- the opposite of Jack Bogle's traditional advice. Currently, my asset allocation is age minus 10 in bonds (I am in my seventies).

There has been a notable silence (at least to me) from the pillars of this forum about this new asset allocation formula being advocated by some. Do the BH wise-heads agree with this new formula, disagree, or what? Help! :?
Munir,

Otar studied this, and if my recollection is correct, he found the difference was statistically insignificant. He found the increasing equity allocation approach provided the same end result as the static allocation except that the increasing equity strategy came with a bumpier ride.
You can see the results of his study at his website. http://www.retirementoptimizer.com/

Bustoff

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Bustoff
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Re: Confusion Over Retiree Asset Allocation Advice

Post by Bustoff » Sun Feb 09, 2014 3:40 pm

Munir here is a thread for you.
http://www.bogleheads.org/forum/viewtop ... 0&t=126639
JOtar wrote:Beware of all new findings, especially if it does not make sense in your guts.
Let's look at two scenarios:

1. We have a 65 year old with a $100,000 portfolio. He takes out $4,500 /year at age 65 and then increases this amount by CPI until age 95. His asset allocation is 35% in S&P500 and 65% in fixed income for life.
The outcome: The probability of portfolio depletion: At age 90: 14%, at age 95: 42%

2. Assume we have a 65 year old with a $100,000 portfolio. He takes out $4,500 /year at age 65 and then increases this amount by CPI until age 95. His equity allocation starts 20% at age 65, end at 100% at age 90.
The outcome: The probability of portfolio depletion: At age 90: 10%, at age 95: 48%

Conclusion: The difference is statistically insignificant, however, strategy #2 creates a lot of volatility in later years for no additional benefit. In both cases the unlucky and median portfolios deplete at just about the same age. Only if the retiree is lucky, then there is somewhat a higher estate value with strategy #2. However, I do not design retirement portfolios for lucky outcomes, I design them to withstand the unlucky outcomes. In this case, I would take strategy #1 at anytime.

More Info and aftcast asset charts: http://www.retirementoptimizer.com/lowequityat65.pdf

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tuckeverlasting
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Re: Confusion Over Retiree Asset Allocation Advice

Post by tuckeverlasting » Sun Feb 09, 2014 3:54 pm

Munir wrote: Recently, Wade Pfau and some others are advocating the highest bond allocation at the time of retirement then to start increasing the equity allocation as one gets older- the opposite of Jack Bogle's traditional advice.
Discussed in this thread: http://www.bogleheads.org/forum/viewtop ... 0&t=130648
It's Good To Be A Boglehead

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Munir
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Re: Confusion Over Retiree Asset Allocation Advice

Post by Munir » Sun Feb 09, 2014 4:29 pm

Thank you for the responses and the discussions. They are educational. I am still studying them.

I wonder if people like Ferri, Swedroe, and Bernstein have taken a position on this isuue.

Levett
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Re: Confusion Over Retiree Asset Allocation Advice

Post by Levett » Sun Feb 09, 2014 5:37 pm

I am of the view, Munir, that retirees (such as ourselves) should focus on the particular--namely, what serves ourselves and our loved ones best--and not what some other person ( especially if said person isn't retired) asserts in this article or that blog or this presentation or that newsletter or even said person's latest book (which often differs from a previous book).

No one knows more about your financial well-being than you. And if it (or you) ain't broke, why should you need a "fix?"

If your retirement program is working out, as sheepdog's and mine (for that matter) are, why should I or you or some other happily retired folks get distracted by someone else's new, new thing when our old thing is doing just fine--thank you very much. 8-)

Press on regardless!

Lev

livesoft
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Re: Confusion Over Retiree Asset Allocation Advice

Post by livesoft » Sun Feb 09, 2014 5:46 pm

Every passing year means one less year of longevity risk that one has to worry about. With that reduction in risk, I think one can let equities become a higher percentage of one's asset allocation. There is less of an unknown of whether one's portfolio will survive or not, so some adjustment is perfectly natural. If one's portfolio has tanked, then perhaps SPIAs are in order, but if the portfolio is doing great, then that's a relief.

Furthermore, one might also be over the hump anyways and perhaps investing for one's heirs who have a higher willingness for risk and need for risk, but perhaps not the ability for risk.
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