Considering a 20% swing in my asset allocation

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Dave C.
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Considering a 20% swing in my asset allocation

Post by Dave C. » Thu Sep 15, 2016 11:56 pm

I am 64 years old, I retired two years ago, and my net worth is about $1.6M excluding my home.

It is beginning to make sense to me to change my asset allocation from 50% equity/50% fixed income, to 30%/70%. Please tell me if my rationale makes sense to you.

Within 2-years our combined Social Security will amount to roughly $3500 per month. My pension is $1800 per month. Today our living expenses fall just shy of $5000 per month. Which means within two years our Social Security/pension will pretty much cover our living expenses. We are not particularly interested in leaving a legacy for our children.

So why assume even a 50%/50% AA risk? I do not view Social Security or my pension as assets. I see them as income streams. Adding them to the fixed income side of my asset allocation would/could cause me to overcompensate my equity position no matter what %/% I chose.

So two questions:
1. In light of my circumstances stated above, does the asset allocation switch to 30/70 from 50/50 make sense?
2. Do you view pensions and Social Security as assets to be numerically included in your asset allocation, or do you see them as simply income streams and adding them to your asset allocation percentages would only skew the numbers inappropriately?

( if you feel I am over complicating a fairly simple circumstance, please say so).
Easy does it/Live & Let Live/One day at a time. Thanks Bill.

jjface
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Re: Considering a 20% swing in my asset allocation

Post by jjface » Fri Sep 16, 2016 12:10 am

Two schools of thought really -
a) you've won the game so you can afford to dial down the risk. Why keep playing the game. Berstein has suggested something like this.

b) You have your expenses covered so can take more risk. Taylor suggests to keep what you can't afford to lose in bonds and put the rest in stocks. For you that would mean a high stock allocation.

So there you go - either is fine (and 50:50 is too!) You probably won't touch the principal in any case as any extra income could be taken from the $30k or so dividends/interest.

Yes don't consider income streams as part of your AA but the income will lower what you need to withdraw from your portfolio. In your case very little even if your pension isn't adjusted for inflation.

Just go with what helps you sleep at night. You can't really go wrong.
Last edited by jjface on Fri Sep 16, 2016 12:16 am, edited 4 times in total.

lack_ey
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Re: Considering a 20% swing in my asset allocation

Post by lack_ey » Fri Sep 16, 2016 12:12 am

Dave C. wrote:1. In light of my circumstances stated above, does the asset allocation switch to 30/70 from 50/50 make sense?

Possible, depending on your priorities and preferences. What would you do with more money than you expected? What would it be like to have to spend closer to $4000 a month? Is the pension inflation adjusted or not?

At this point you can do pretty much whatever you want in terms of asset allocation as $1.6M is way more than enough to cover residual expenses unless things drastically change.

Dave C. wrote:2. Do you view pensions and Social Security as assets to be numerically included in your asset allocation, or do you see them as simply income streams and adding them to your asset allocation percentages would only skew the numbers inappropriately?

IMHO because these are not transferrable to cash, I agree with the income stream formulation. Examine spending needs relative to the income stream and then the $1.6M portfolio. This informs the kind of risk that might be prudent to take with the liquid assets.

Theoretical
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Re: Considering a 20% swing in my asset allocation

Post by Theoretical » Fri Sep 16, 2016 12:27 am

I think that your logic is more than reasonable, especially early in retirement. Our own Rick Ferri says that's where retirees should start when deciding on their asset allocation. You've got two assets that are linked to inflation, one directly (Social Security) and one indirectly (house) (if your pension is too then it's 3), so you're really set. You're keeping a stock allocation, which is important for the long-term diversification benefits, so there's really nothing to add other than "well done!"

If you've won the game, there's just no need to keep playing. If 10 years go by and you decide you do want to leave a legacy/expand it, then you can increase the equity allocation after your first years of retirement have been through a business cycle. If you're uncomfortable making a 20 point swing, just do 40/60 this year and 30/70 next year.

What I would recommend is discussing with your wife what your goals are for your own spending and any educational-type gifts or during-life gifts you might give to your children. See if there's any big ticket items you foresee and want to address consciously.

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LAlearning
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Re: Considering a 20% swing in my asset allocation

Post by LAlearning » Fri Sep 16, 2016 1:46 am

What not 40:60 and re-eval after a few years?
I know nothing!

magneto
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Re: Considering a 20% swing in my asset allocation

Post by magneto » Fri Sep 16, 2016 3:54 am

Dave C. wrote:I am 64 years old, I retired two years ago, and my net worth is about $1.6M excluding my home.

It is beginning to make sense to me to change my asset allocation from 50% equity/50% fixed income, to 30%/70%. Please tell me if my rationale makes sense to you.

within two years our Social Security/pension will pretty much cover our living expenses. We are not particularly interested in leaving a legacy for our children.

So two questions:
1. In light of my circumstances stated above, does the asset allocation switch to 30/70 from 50/50 make sense?
2. Do you view pensions and Social Security as assets to be numerically included in your asset allocation, or do you see them as simply income streams and adding them to your asset allocation percentages would only skew the numbers inappropriately?


64 years old is no age at all.
There may be 30 years plus of enjoyable retirement ahead!
30 years plus is a long haul for Fixed Income to bear most of the burden.
While the cash flows today might seem adequate, an uptick to even quite modest inflation could destroy financial security over such a long period.
Only Stocks and to a lesser degree TIPS would offer any kind of protection against the ravages of inflation?

1. It may be helpful to read Frank Armstrong's book 'The Informed Investor', esp chapter 18, which addresses this retirement issue head on.

2. We base Asset Allocation decisions purely on the Assets directly under our control, I.E. those which can be bought or sold.
The other income streams we exclude from the AA calcs.

There may be a hidden third question lurking here?
Do present market valuations give grounds for dialling back on Stocks for the short to medium term, in the name of prudence?
Having, as noted by others above, "won the game".
And dialling back up as valuations subside?
In which case we are talking about a form of Dynamic Asset Allocation as outlined inter-alia by Ben Graham and Wm Bernstein.
The following sets out our thinking on this delicate subject:-

viewtopic.php?t=134378#p1981998

Trust this helps a little.
'There is a tide in the affairs of men ...', Brutus (Market Timer)

freebeer
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Re: Considering a 20% swing in my asset allocation

Post by freebeer » Fri Sep 16, 2016 6:16 am

Dave C. wrote:I am 64 years old, I retired two years ago, and my net worth is about $1.6M excluding my home.

It is beginning to make sense to me to change my asset allocation from 50% equity/50% fixed income, to 30%/70%. Please tell me if my rationale makes sense to you.

Within 2-years our combined Social Security will amount to roughly $3500 per month. My pension is $1800 per month. Today our living expenses fall just shy of $5000 per month. Which means within two years our Social Security/pension will pretty much cover our living expenses. We are not particularly interested in leaving a legacy for our children.

So why assume even a 50%/50% AA risk? I do not view Social Security or my pension as assets. I see them as income streams. Adding them to the fixed income side of my asset allocation would/could cause me to overcompensate my equity position no matter what %/% I chose.

So two questions:
1. In light of my circumstances stated above, does the asset allocation switch to 30/70 from 50/50 make sense?
2. Do you view pensions and Social Security as assets to be numerically included in your asset allocation, or do you see them as simply income streams and adding them to your asset allocation percentages would only skew the numbers inappropriately?

( if you feel I am over complicating a fairly simple circumstance, please say so).


If your living expenses will more than be covered by your SS+pension then what's the money for? If you don't care to leave it to faimily, then do you have a favorite charity? 50/50 is not particularly aggressive and it seems to me there is no rational reason to change that allocation and one rational reason not to (smells of market timing). It's a heck of an emergency fund, I'll give you that.

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siamond
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Re: Considering a 20% swing in my asset allocation

Post by siamond » Fri Sep 16, 2016 6:37 am

Agreed with magneto that you wouldn't dial down the risk by going 30/70, you would dial it up. Bonds come with with their own risks, which are much more insidious than risks coming with stocks, but nonetheless potentially extremely damaging over time. Folks who went through WW-II and its aftermath knew it all too well. A very simple reasoning is to hedge your bets, and that is exactly what you're doing with 50/50, so why change it.

As to SS & Pension, personally I ran a few times a Net Present Value calculation (very easy to do with Excel NPV() function), and checked what would be my overarching AA if I were to account for such guaranteed income flows as part of my overall portfolio. This is very enlightening, and definitely puts things in perspective. This helped refining my goals for my regular AA (without such factors), which is the one I use for my regular monitoring & rebalancing.

As a side note, once you turn 70 or so, you may consider converting some (or all) of your bonds in an SPIA. Here is a good article which makes a very good case for it:
http://www.advisorperspectives.com/articles/2015/08/04/why-bond-funds-don-t-belong-in-retirement-portfolios

And once you ponder about such SPIA conversion, then it should become quite clear that looking at an AA in full isolation from guaranteed income flows (SS, Pension, SPIA) makes little sense.

freebeer
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Re: Considering a 20% swing in my asset allocation

Post by freebeer » Fri Sep 16, 2016 6:58 am

siamond wrote:. Here is a good article which makes a very good case for it:
http://www.advisorperspectives.com/articles/2015/08/04/why-bond-funds-don-t-belong-in-retirement-portfolios.


It should make a good case for annuities since insurers paid Dr. Pfau to write it!

IMHO the last thing OP needs is more lifetime guaranteed income... their SS+pension ALREADY covers more than 100% of their spending .

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siamond
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Re: Considering a 20% swing in my asset allocation

Post by siamond » Fri Sep 16, 2016 7:31 am

freebeer wrote:
siamond wrote:. Here is a good article which makes a very good case for it:
http://www.advisorperspectives.com/articles/2015/08/04/why-bond-funds-don-t-belong-in-retirement-portfolios.


It should make a good case for annuities since insurers paid Dr. Pfau to write it!

IMHO the last thing OP needs is more lifetime guaranteed income... their SS+pension ALREADY covers more than 100% of their spending .

Dr. Pfau's writings make it clear that he has impeccable integrity. Plus you can read an article for its own merits and think by yourself, you know. I found the case very convincing, and I am a very big skeptic about *anything* provided by insurance companies.

Now I wouldn't disagree with you that this might not be the best move for the OP. I mostly mentioned it because once you understand the logic of such a move, then it becomes clear that doing the NPV() math to consider the overarching AA is definitely useful, if not a must.

dbr
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Re: Considering a 20% swing in my asset allocation

Post by dbr » Fri Sep 16, 2016 8:02 am

Dave C. wrote:Within 2-years our combined Social Security will amount to roughly $3500 per month. My pension is $1800 per month. Today our living expenses fall just shy of $5000 per month. Which means within two years our Social Security/pension will pretty much cover our living expenses. We are not particularly interested in leaving a legacy for our children.

So why assume even a 50%/50% AA risk?



Why indeed. Why not assume a 30%/70% risk? Why not hold no stocks at all or assume a 100% stock risk? It doesn't make any difference because you have no use for the money and can invest it any way you want. Having more or less money does not logically make any difference. There would still be plenty there for contingencies. You could give the money away to worthwhile causes now and not worry about the asset allocation. A logical approach to risk is to take no more risk than needed to meet objectives. This would suggest in your case avoiding stocks entirely.

What I am saying is that the AA follows from understanding your purpose in holding this money.

Short answer to your question is that in my opinion, absent specific objectives, 50/50 is the golden mean of asset allocation, and you should stay there.

soboggled
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Re: Considering a 20% swing in my asset allocation

Post by soboggled » Fri Sep 16, 2016 8:12 am

30/70 is appropriate if it makes you more comfortable. It is also a sweet spot on the efficient frontier where risk and expected return are optimally balanced.
Those who say otherwise discount the fact that historically stocks have lost 80% of their value over three years, (including over 40% one year) while fixed income has never had losses two years in a row and the largest annual loss was 11%.
Just compute the income necessary excluding the SS and pension to determine AA.

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Re: Considering a 20% swing in my asset allocation

Post by dbr » Fri Sep 16, 2016 8:19 am

soboggled wrote:Just compute the income necessary excluding the SS and pension to determine AA.


He is saying that is zero. So what is the correct AA for a retiree who is not going to use his assets in retirement? Indeed, what would be the AA if we did know a withdrawal rate?

soboggled
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Re: Considering a 20% swing in my asset allocation

Post by soboggled » Fri Sep 16, 2016 8:33 am

dbr wrote:
soboggled wrote:Just compute the income necessary excluding the SS and pension to determine AA.


He is saying that is zero. So what is the correct AA for a retiree who is not going to use his assets in retirement? Indeed, what would be the AA if we did know a withdrawal rate?

I know it is zero, but he asked the question.
If he did know a non-zero withdrawal rate, he could use SWR historical tables as a starting point.
There is always a chance he may be underestimating his future needs a bit, so a conservative approach with a minimal risk of loss and a nominal gain that is almost certain to keep pace with inflation makes sense. Historically, 30/70 on the efficient frontier is the closest AA to riskless (lowest volatility). Further, I think he should be considering TIPS and possible inflation-adjusted annuities. Bottom line, he can do whatever he wants but apparently he wants above all to sleep well at night - that means not worrying at all about the future if the market drops 40% in a year.
PS: I am just trying to answer the question as posed. If he had said he wanted to leave a legacy or charitable contributions, the answer would be different.

dbr
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Re: Considering a 20% swing in my asset allocation

Post by dbr » Fri Sep 16, 2016 8:50 am

soboggled wrote:
dbr wrote:
soboggled wrote:Just compute the income necessary excluding the SS and pension to determine AA.


He is saying that is zero. So what is the correct AA for a retiree who is not going to use his assets in retirement? Indeed, what would be the AA if we did know a withdrawal rate?

I know it is zero, but he asked the question.
If he did know a non-zero withdrawal rate, he could use SWR historical tables as a starting point.
There is always a chance he may be underestimating his future needs a bit, so a conservative approach with a minimal risk of loss and a nominal gain that is almost certain to keep pace with inflation makes sense. Historically, 30/70 on the efficient frontier is the closest AA to riskless (lowest volatility). Further, I think he should be considering TIPS and possible inflation-adjusted annuities. Bottom line, he can do whatever he wants but apparently he wants above all to sleep well at night - that means not worrying at all about the future if the market drops 40% in a year.
PS: I am just trying to answer the question as posed. If he had said he wanted to leave a legacy or charitable contributions, the answer would be different.


I agree. Your comments are totally reasonable.

I guess the question to ask is if stock volatility is making a person uncomfortable then would the answer not be to not own any stocks? I guess next after that is that 30/70 would be preferable to 50/50, so I change my advice to be in favor of making the change.

soboggled
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Re: Considering a 20% swing in my asset allocation

Post by soboggled » Fri Sep 16, 2016 9:05 am

dbr wrote:
soboggled wrote:
dbr wrote:
soboggled wrote:Just compute the income necessary excluding the SS and pension to determine AA.


He is saying that is zero. So what is the correct AA for a retiree who is not going to use his assets in retirement? Indeed, what would be the AA if we did know a withdrawal rate?

I know it is zero, but he asked the question.
If he did know a non-zero withdrawal rate, he could use SWR historical tables as a starting point.
There is always a chance he may be underestimating his future needs a bit, so a conservative approach with a minimal risk of loss and a nominal gain that is almost certain to keep pace with inflation makes sense. Historically, 30/70 on the efficient frontier is the closest AA to riskless (lowest volatility). Further, I think he should be considering TIPS and possible inflation-adjusted annuities. Bottom line, he can do whatever he wants but apparently he wants above all to sleep well at night - that means not worrying at all about the future if the market drops 40% in a year.
PS: I am just trying to answer the question as posed. If he had said he wanted to leave a legacy or charitable contributions, the answer would be different.


I agree. Your comments are totally reasonable.

I guess the question to ask is if stock volatility is making a person uncomfortable then would the answer not be to not own any stocks? I guess next after that is that 30/70 would be preferable to 50/50, so I change my advice to be in favor of making the change.

Of course, we may all be being too glib with our answers, as we have not reviewed his actual finances. It's just my opinion based on what the OP has said.

dbr
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Re: Considering a 20% swing in my asset allocation

Post by dbr » Fri Sep 16, 2016 9:16 am

soboggled wrote:Of course, we may all be being too glib with our answers, as we have not reviewed his actual finances. It's just my opinion based on what the OP has said.


Yes, a hidden implication in this line of observations is that the OP would be well advised to evaluate risks in the area of underestimating expenses and intentions.

The principle in the background is that AA questions cannot be answered without knowing the objectives of the investor along with the situation in detail.

It is also possible there is less here than meets the eye and the simple answer that 30/70 is just fine will suffice. It is difficult to construct a scenario where 30/70 is somehow a big mistake but 50/50 is perfectly ok.

Mike Scott
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Re: Considering a 20% swing in my asset allocation

Post by Mike Scott » Fri Sep 16, 2016 9:30 am

I hope to be in a similar place at retirement. I keep coming back to a 60:40 to 40:60 range for the long haul which seems to naturally settle at 50:50. But then each person has to pick their own number.

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Re: Considering a 20% swing in my asset allocation

Post by retiredjg » Fri Sep 16, 2016 9:32 am

Dave C. wrote: It is beginning to make sense to me to change...

I think your answer is right here in your post.

You don't need the risk of 50% stocks and it is beginning to make you a little uncomfortable. My question would be "why stay at a higher risk level than you need or want?'


2. Do you view pensions and Social Security as assets to be numerically included in your asset allocation, or do you see them as simply income streams and adding them to your asset allocation percentages would only skew the numbers inappropriately?

I do not. I feel this just complicates things and doesn't really change the outcome. But I do believe that the fact that you have ample SS and pension might make you feel comfortable with a higher or lower stock to bond ratio compared to not having ample income.

staythecourse
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Re: Considering a 20% swing in my asset allocation

Post by staythecourse » Fri Sep 16, 2016 9:43 am

Who cares what others think.

The keys is your gauranteed pensions (SS and private pension) will cover 100% of your over monthly liabilities. You also don't care about inheritance to the kids. So unless you have indeavors for charity during your lifetime it would seem you made your decision which is to cut down on equity exposure.

The bigger question you could be kicking yourself for is with that info. you supplied why did you not retire earlier? It would seem you worked longer then you needed unless it was for the pension?

Good luck.
"The stock market [fluctuation], therefore, is noise. A giant distraction from the business of investing.” | -Jack Bogle

Theoretical
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Re: Considering a 20% swing in my asset allocation

Post by Theoretical » Fri Sep 16, 2016 9:53 am

There's a few additional questions that come to mind:

1. How old is your wife, if she's younger? If she's 1-5 years younger than you, you should plan on her outliving you by 7-12 years. If she's 5-10 years older, then it's more like 10-15+. If you're the same age or younger than your wife, it doesn't make much difference.

2. What's your pension, and is it a private company's pension or a governmental (not Illinois) pension? What's the survivorship benefit she could expect, if any, upon your death for it? What are the living expenses for just her would be as opposed to yourself? How much could your/her lifestyle be trimmed if we get another lost decade for US Equities?

3. How much is the house relative to the portfolio, and is downsizing seen in the future? Related to that, are you in a depressed or strong local market?

The biggest concerns I have are 2-fold. 1 is the very real risk of pension failure or cuts. We're in a very low yield environment and pensions are taking severe, costly risks to make up for it to try to fulfill their promises.

Related to that is the risk of inflation for non-inflation linked fixed income. For that, I think Bill Bernstein's Deep Risk has a lot of insightful things to say, especially the role of international stocks and TIPS/I Bonds.

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Re: Considering a 20% swing in my asset allocation

Post by JW-Retired » Fri Sep 16, 2016 10:13 am

Dave C. wrote:
Within 2-years our combined Social Security will amount to roughly $3500 per month. My pension is $1800 per month. Today our living expenses fall just shy of $5000 per month. Which means within two years our Social Security/pension will pretty much cover our living expenses. We are not particularly interested in leaving a legacy for our children.

So two questions:
1. In light of my circumstances stated above, does the asset allocation switch to 30/70 from 50/50 make sense?
2. Do you view pensions and Social Security as assets to be numerically included in your asset allocation, or do you see them as simply income streams and adding them to your asset allocation percentages would only skew the numbers inappropriately?

RE 1: I don't think 30/70 makes much sense given the ultra low yield on bonds now (1.9% for VBTLX). At some point in the next 20-30 years your expenses may be much larger. Also, living expenses are pretty darn malleable. Our pension/SS covers our basic expenses too but we can still find ways to spend a good deal of our RMDs.

RE 2: In terms of the AA of our portfolio equities/bonds using Bogle's Rule versus just selecting our AA in the normal Boglehead way, we personally get just about the same thing (Portfolio AA= 60/40).

Bogle's Rule-of-thumb is your real chronological age in bonds counting your SS/pension present value added to your real bonds. You now have your 50/50 $1.6M portfolio AA + another $1.44M in pseudo bonds (from a NPV calculator on your $63.6k/yr pension & SS (NPV w/30 yrs duration & 1.9% interest)).

That means by Bogle's Rule you presently have $0.8M stocks and $2.24M "bonds". That's already a Bogle AA = 36/64. Exactly your age in total "bonds" by Bogle counting. Bogle might say you chose well, don't change it! :beer
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Re: Considering a 20% swing in my asset allocation

Post by NotWhoYouThink » Fri Sep 16, 2016 10:27 am

What about long term care needs, or just the need to pay for more lifestyle support when you are older? In my area, a good CCRC can be $250-500K to move in to, plus $2500-4000 per month fees, maybe a little more for a couple. Nursing homes, good ones, are $8-10K per month. 24/7 in home help more like $12-15K per month. Assisted living, memory care, one of you living independently and the other needing skilled nursing....the possibilities are endless. So there may well be a need for the money down the road. Keep all of that in mind.

Even with those potential needs, it sounds like you have enough, you just need to make sure it continues to grow so it can support whatever your needs are. 30/70 is probably fine for keeping up with cost growth of long term care.

Like you, I don't see the point in trying to convert Social Security and pensions to net worth, then using the net worth figure to compute AA and SWR. Processing the same data back and forth usually results in loss of data integrity. You have some income, and some investments, and some spending needs, and some wants, and some risks. They don't all have to fit in the same basket.

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Re: Considering a 20% swing in my asset allocation

Post by rkhusky » Fri Sep 16, 2016 10:37 am

Vanguard's Target Retirement funds settle at 30/70 7 years after their target date. The Government's TSP Lifecycle funds settle at 20/80 on their target date. 30/70 is fine for your situation.

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Re: Considering a 20% swing in my asset allocation

Post by kolea » Fri Sep 16, 2016 10:40 am

Apparently you have no need for the $1.6M as your expenses are covered. You have zero risk as it is and nothing you do will change that. I would actually go the other way with your AA, up it to 70/30 and put some great charities in your will.

[edit] I am being a little facetious here. My point is it does not seem to matter what you do with your AA. Great situation to be in.
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Re: Considering a 20% swing in my asset allocation

Post by friar1610 » Fri Sep 16, 2016 1:10 pm

I am in somewhat the same situation as the OP. I'm older (71), port in the same range (15% of port is in a VG deferred VA, another 28% in IRAs, remainder in taxable), expenses nicely covered by an inflation adjusted pension, no mortgage debt. Sometimes spend some of SS checks but not very often. I've waffled on our AA and am still not convinced I have it absolutely correct at 45/51/4 (the 4 being cash). In fact, I had it at 40/56/4 until fairly recently until I juiced our IRAs a bit by adding some equities to what had been all bonds. The main thing that concerns me is leaving my wife with a portfolio that is 1) simple to understand/manage and 2) adequate for her needs for another 20-25 years in the event of my demise prior to hers. My military pension will revert to a survivor benefit plan which will only pay her about 1/3 of what I now receive, although it will be inflation adjusted. Her SS will go away and she will receive mine, it being the larger of the two. So there is some amount of income that would need to be made up from the portfolio/annuity. For me the sweet spot seems to be in the 40/60 to 50/50 range although I occasionally wonder if I should kick it back to 35/65. I don't want to diminish her future lifestyle by putting too much in equities and then hitting a long downturn for stocks. (If I ended up as the surviving spouse I'd probably kick it up to 60/40 and leave it there forever as I would have more than enough on my own. Unless, of course, I were to pursue wine, women and song more aggressively. :beer

BTW, I don't often see this specific issue addressed too often on BH. So maybe I am overworrying the problem.

On the "pensions as bonds" issue, I've always ignored that and gone with the assumption that they're streams of income that provide a certain level of income much as salary does. I've then tried to peg my AA to what makes sense knowing that that floor will always be there.

For now I guess I'll just stick with 45/51/4, never being completely convinced that it's the right AA but not being able to come up with one that I'm convinced is better.
Friar1610

dbr
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Re: Considering a 20% swing in my asset allocation

Post by dbr » Fri Sep 16, 2016 1:33 pm

friar1610 wrote:
BTW, I don't often see this specific issue addressed too often on BH. So maybe I am overworrying the problem.



No one should develop a retirement plan without looking at the alternate plans in the case of someone dying. As you mention the first thing to be considered is a step change in pension and SS income. The other factor is changes in expenses. Sometimes the estimate is made that one person lives on about 2/3 what the couple lived on, but that deserves attention to the individual case and thinking about what life would be like alone. Where a person lives and how one covers services could become very different. Some people when left alone move to be closer to children, etc. That does not preclude remarriage, in which case everything starts over from scratch.

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Re: Considering a 20% swing in my asset allocation

Post by Dave C. » Fri Sep 16, 2016 1:46 pm

Theoretical wrote:There's a few additional questions that come to mind:

1. How old is your wife, if she's younger? If she's 1-5 years younger than you, you should plan on her outliving you by 7-12 years. If she's 5-10 years older, then it's more like 10-15+. If you're the same age or younger than your wife, it doesn't make much difference.
wife is one year younger than me

2. What's your pension, and is it a private company's pension or a governmental (not Illinois) pension? What's the survivorship benefit she could expect, if any, upon your death for it? What are the living expenses for just her would be as opposed to yourself? How much could your/her lifestyle be trimmed if we get another lost decade for US Equities?
My pension is private, and my wife will receive a 100% survivorship benefit

3. How much is the house relative to the portfolio, and is downsizing seen in the future? Related to that, are you in a depressed or strong local market?
our downsizing is complete. We have retired to Arizona, we have no mortgage, our home is worth approximately $250K. We now live in Mesa, AZ....strong market

The biggest concerns I have are 2-fold. 1 is the very real risk of pension failure or cuts. We're in a very low yield environment and pensions are taking severe, costly risks to make up for it to try to fulfill their promises.

Related to that is the risk of inflation for non-inflation linked fixed income. For that, I think Bill Bernstein's Deep Risk has a lot of insightful things to say, especially the role of international stocks and TIPS/I Bonds.
Easy does it/Live & Let Live/One day at a time. Thanks Bill.

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Re: Considering a 20% swing in my asset allocation

Post by Dave C. » Fri Sep 16, 2016 1:53 pm

staythecourse wrote:Who cares what others think.

The keys is your gauranteed pensions (SS and private pension) will cover 100% of your over monthly liabilities. You also don't care about inheritance to the kids. So unless you have indeavors for charity during your lifetime it would seem you made your decision which is to cut down on equity exposure.

The bigger question you could be kicking yourself for is with that info. you supplied why did you not retire earlier? It would seem you worked longer then you needed unless it was for the pension?

Good luck.


I like the way you think.
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Re: Considering a 20% swing in my asset allocation

Post by Dave C. » Fri Sep 16, 2016 2:06 pm

LAlearning wrote:What not 40:60 and re-eval after a few years?


makes sense.....
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Re: Considering a 20% swing in my asset allocation

Post by Dave C. » Fri Sep 16, 2016 2:25 pm

I'm the OP. This is the reason that I value Boggleheads.org so much. Quick responses, clear analysis, loads of options along with many personal experiences.
I am going to move to 40/60 in the near future, keep my eyes open, and "sleep a little better". I offer my most sincere appreciation for your overwhelming responses.

(BTW, The temperatures have finally broken down here in Arizona, our high yesterday was only 102......really)
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Re: Considering a 20% swing in my asset allocation

Post by Van » Fri Sep 16, 2016 2:29 pm

30/70 seems fine to me given your circumstances.

I'm (74) older than you, and I have also "won the game." So my 20/80 allocation suits me.

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Re: Considering a 20% swing in my asset allocation

Post by LadyGeek » Fri Sep 16, 2016 3:09 pm

This thread is now in the Investing - Help with Personal Investments forum (portfolio help).
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Re: Considering a 20% swing in my asset allocation

Post by David Jay » Fri Sep 16, 2016 3:14 pm

Just a thought: My IPS says not to change my AA by more than 5% a year - to keep me from dramatically changing my strategy on a whim.

Maybe make the change in more than one (i.e. 20%) step?
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Re: Considering a 20% swing in my asset allocation

Post by Christine_NM » Fri Sep 16, 2016 3:37 pm

Dave -

I did similar thing over past 2 years, but from 35% to 50% stock. Now it is 54%. Per what I imagine the Pfau article says, I bought an annuity with a bond fund. The simple disappearance of the bond fund changed my AA to 50%, so yes, there is a blurry line between assets and income.

Now that I have more income, in fact more than I need for now, I am willing to stay at 54% stock or whatever my allocation becomes.

Unlike most I have not written off inflation. Or surprise health costs like assisted living. That's what my portfolio is for. I can do well today and for the next few years with pension, SS, annuity, RMDs (mostly to pay income tax) and taxable fund distributions. From my portfolio hopefully I will only need the withholding tax feature of my RMD to pay off the IRS.

30% stock is too low for me. My Mom kept her portfolio at 25% stock (rebalanced into bonds and cash) and with all expenses covered by SS her total portfolio barely budged in the greatest bull market ever. (ETA - seemed a shame, but it did not really matter either to her or to me. Just a lost opportunity.)

I guess I am warning you against projecting the current extraordinary global interest rates and the stable consumer price situation too far into the future. SS looks sufficient now, but near-full employment and higher average household income make me think about inflation showing up at some unknown point.

If you change, yes, 5%/year is better than 20% at one whack.
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Re: Considering a 20% swing in my asset allocation

Post by Dave C. » Fri Sep 16, 2016 3:49 pm

David Jay wrote:Just a thought: My IPS says not to change my AA by more than 5% a year - to keep me from dramatically changing my strategy on a whim.

Maybe make the change in more than one (i.e. 20%) step?


David, good thought. Changing an IPS on a "whim" is foolish, and negates the purpose of an IPS in the first place anyway.
My contemplated change is hardly a whim, made evident by my solicitation for advice and input from this form.
Easy does it/Live & Let Live/One day at a time. Thanks Bill.

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Re: Considering a 20% swing in my asset allocation

Post by KlangFool » Fri Sep 16, 2016 4:24 pm

OP,

Not the question that you asked. But, with 1.6 million worth of investment, does it makes sense for either you or your wife to postpone social security payment beyond the full retirement age of 65?

I am trying to learn and understand the thinking process behind this kind of decision.

KlangFool

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Re: Considering a 20% swing in my asset allocation

Post by Theoretical » Fri Sep 16, 2016 5:11 pm

KlangFool wrote:OP,

Not the question that you asked. But, with 1.6 million worth of investment, does it makes sense for either you or your wife to postpone social security payment beyond the full retirement age of 65?

I am trying to learn and understand the thinking process behind this kind of decision.

KlangFool


YES. If you haven't taken it yet, you really should draw down the portfolio first. It's got arguably the best guaranteed rate of return available anywhere. A 32% return over the span of 4 years (66-70) is 7.19%, fully inflation-protected.

https://www.ssa.gov/planners/retire/1943-delay.html

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Re: Considering a 20% swing in my asset allocation

Post by Theoretical » Fri Sep 16, 2016 5:14 pm

Dave C. wrote:
Theoretical wrote:There's a few additional questions that come to mind:

1. How old is your wife, if she's younger? If she's 1-5 years younger than you, you should plan on her outliving you by 7-12 years. If she's 5-10 years older, then it's more like 10-15+. If you're the same age or younger than your wife, it doesn't make much difference.
wife is one year younger than me

2. What's your pension, and is it a private company's pension or a governmental (not Illinois) pension? What's the survivorship benefit she could expect, if any, upon your death for it? What are the living expenses for just her would be as opposed to yourself? How much could your/her lifestyle be trimmed if we get another lost decade for US Equities?
My pension is private, and my wife will receive a 100% survivorship benefit

3. How much is the house relative to the portfolio, and is downsizing seen in the future? Related to that, are you in a depressed or strong local market?
our downsizing is complete. We have retired to Arizona, we have no mortgage, our home is worth approximately $250K. We now live in Mesa, AZ....strong market

The biggest concerns I have are 2-fold. 1 is the very real risk of pension failure or cuts. We're in a very low yield environment and pensions are taking severe, costly risks to make up for it to try to fulfill their promises.

Related to that is the risk of inflation for non-inflation linked fixed income. For that, I think Bill Bernstein's Deep Risk has a lot of insightful things to say, especially the role of international stocks and TIPS/I Bonds.


1 and 2. That's excellent.
3. That's a good situation to be in. :beer

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Re: Considering a 20% swing in my asset allocation

Post by Aptenodytes » Fri Sep 16, 2016 7:40 pm

If you want to be able to be prepared for a big emergency or be ready to splurge on something expensive when the moment finally strikes, then I think you want to stay at 50% stocks. A 30%-equity portfolio exposes you to high inflation risk without any clear offsetting benefit to make it seem justifiable, in wealth-preservation terms.

If, however, you are likely to be ridden with anxiety due to the gyrations of a 50%-equity portfolio but sleeping soundly with a 30%-equity portfolio, then switch.

There are many possible mistakes one can make at this stage of things. One can overreact to volatility. One can underestimate one's tolerance for it. You have to consider all the pitfalls. It isn't clear if you don't have children or you don't care how much they inherit from you. If you do have children, it might be worth at least considering the possibility that a larger inheritance could conceivably make a big difference in a way that you do care about. Consider a hypothetical situation where a yet-to-born grandchild or great grandchild needs expensive medical care that insurance doesn't cover. In the time frames at work, a 50-50 portfolio could conceivably make all the difference compared to a 30-70 portfolio. I'm not suggesting you drive your decision by such extreme scenarios, but rather suggesting that it could be that your valuing the future worth of your estate at near zero may not be a true reflection of your real feelings. I don't pretend to know your true feelings, but am just suggesting they may not always be obvious to us at first glance.

Luckily you have lived a productive and prudent life and will be fine no matter what -- you don't seem like the type to be making 20% swings every two years, but rather are carefully considering one big change.

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Re: Considering a 20% swing in my asset allocation

Post by David Jay » Sat Sep 17, 2016 6:35 pm

Dave C. wrote:
David Jay wrote:Just a thought: My IPS says not to change my AA by more than 5% a year - to keep me from dramatically changing my strategy on a whim.

Maybe make the change in more than one (i.e. 20%) step?


David, good thought. Changing an IPS on a "whim" is foolish, and negates the purpose of an IPS in the first place anyway.
My contemplated change is hardly a whim, made evident by my solicitation for advice and input from this form.


Sorry if you took my "whim" remark as applying to you. It applies to ME. I like to research and read, so I can easily get excited about the latest tilt, etc. I have to keep myself from doing anything rash.
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Re: Considering a 20% swing in my asset allocation

Post by SGM » Sun Sep 18, 2016 5:14 am

KlangFool wrote:OP,

Not the question that you asked. But, with 1.6 million worth of investment, does it makes sense for either you or your wife to postpone social security payment beyond the full retirement age of 65?

I am trying to learn and understand the thinking process behind this kind of decision.

KlangFool

We are postponing social security because we look at it as insurance against being long lived. It will be 32% higher at age 70 than at age 66 which is the OPs full retirement age. SS is adjusted to inflation and the adjustment will be on a higher basis. It is a significantly better deal than buying an annuity on the open market. If the OP would be getting SS at 66 he might be getting $30k a year. The cost of replacing that for 4 years is $120k from his portfolio. What will $120k from a conservative bond portfolio get you with current interest rates? Not much. Higher SS payments is one thing that will allow the OP to be a little more aggressive with stocks as some people have pointed out or he can consider that he has won the game and decrease his stock allocation.

Personally I would go with the higher stock allocation, but I also have a legacy motive and am concerned about inflation. The OP has to go with what he is comfortable with.

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