My "sleep well at night" number seems to be changing

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Beth*
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My "sleep well at night" number seems to be changing

Post by Beth* »

I've never been the type of investor who sold low and bought high. I'm almost 60 years old and I have ridden out quite a few ups and down in the market without rashly selling stocks. In 2008-2009, as the percentage of stocks in my portfolio declined with the market I started putting all my new savings into stocks to rebalance up to where I wanted to be.

However, lately I have found myself worrying about the stock market and checking it multiple times a day. According to my Investment Policy Statement my portfolio should be between 55 and 60 percent stocks and that's where it is right now. That is where I had intended to stay as I headed into and through retirement, but given my recent change in attitude I am wondering if it makes sense to lower the percentage of stocks I am holding. My husband and I are still working and saving and given what we have already saved we don't need a lot of growth in our investments but I would like to stay at least a little ahead of inflation so I am not proposing getting out of stocks entirely.

Have other people experienced this change in attitude toward the stock market? If so, what did you do? Did you wait it out and did it go away or did you decide to move ahead and reduce your exposure to stocks? I don't think I am trying to time the market because I have never been inclined to do that in the past. It really does seem to me like my comfort level has shifted.
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steve roy
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Re: My "sleep well at night" number seems to be changing

Post by steve roy »

Stock valuations are high, interest rates are rising so bond funds' net asset values are dropping. Don't blame you for being a bit kerflempt. The only "bargains" are in international, and I don't know how keen you are to buy more foreign equities and/or bonds.

But maybe you should consider an international tilt, since international isn't overvalued to the degree domestic investments are. I'm going to have money to invest next year and I'll be increasing foreign holdings from 24% now to 35%. But I face the same reality/question you do: where the heck are the good investments?
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mgullo
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Re: My "sleep well at night" number seems to be changing

Post by mgullo »

Beth* wrote:......and given what we have already saved we don't need a lot of growth in our investments but I would like to stay at least a little ahead of inflation.....
Once I get what I need for retirement, I'd like to think I won't take unnecessary chances. But what one needs is different for everyone. Good luck with your decision.
Aim above morality. Be not simply good, be good for something. | -Thoreau
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FIREchief
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Re: My "sleep well at night" number seems to be changing

Post by FIREchief »

US equities have always proven to be a great investment over the long term. I would ignore all the noise and just stay the course. If that doesn't work for you, then look into TIPS. They are selling more of these gems next Thursday.
I am not a lawyer, accountant or financial advisor. Any advice or suggestions that I may provide shall be considered for entertainment purposes only.
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Rob5TCP
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Re: My "sleep well at night" number seems to be changing

Post by Rob5TCP »

I've watched International drag down my returns for multiple years now. Will it reverse next year - who knows.
I keep roughly 25% of my equities in international. I re-balance once or twice a year. So far, my re-balancing has gone lower
than just leaving it as it was. We shall see if it pays off in 5-10 years.

If your really concerned, lower your equity level and purchase some CD's. I purchased a bunch from Andrews C.U. for 7 years at 3% with a 6 month EWP.
(The special ends 12/30/216). I prefer my risk on the equity side, not my fixed income.

I am the level now where I sleep comfortably; no matter what the market does.
mindboggling
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Re: My "sleep well at night" number seems to be changing

Post by mindboggling »

You may wish to change your stock/bond ratio a bit. It's not against the law!

steve
In broken mathematics, We estimate our prize, --Emily Dickinson
grok87
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Re: My "sleep well at night" number seems to be changing

Post by grok87 »

Beth* wrote:I've never been the type of investor who sold low and bought high. I'm almost 60 years old and I have ridden out quite a few ups and down in the market without rashly selling stocks. In 2008-2009, as the percentage of stocks in my portfolio declined with the market I started putting all my new savings into stocks to rebalance up to where I wanted to be.

However, lately I have found myself worrying about the stock market and checking it multiple times a day. According to my Investment Policy Statement my portfolio should be between 55 and 60 percent stocks and that's where it is right now. That is where I had intended to stay as I headed into and through retirement, but given my recent change in attitude I am wondering if it makes sense to lower the percentage of stocks I am holding. My husband and I are still working and saving and given what we have already saved we don't need a lot of growth in our investments but I would like to stay at least a little ahead of inflation so I am not proposing getting out of stocks entirely.

Have other people experienced this change in attitude toward the stock market? If so, what did you do? Did you wait it out and did it go away or did you decide to move ahead and reduce your exposure to stocks? I don't think I am trying to time the market because I have never been inclined to do that in the past. It really does seem to me like my comfort level has shifted.
Here is a different way to think about this that may be helpful: I think of my retirement portfolio two pieces:
A Liability Matching Portfolio (LMP) and a "Risk Portfolio" (RP):

1) Liability Matching Portfolio (LMP)
Let's say someone makes $120,000 per year and is expecting $30,000 a year from Social Security when they retire. They would like to ensure a minimum guaranteed retirement income of $55,000 a year. So they need an additional $25,000 a year. They do not have a pension.
To secure the $25,000 a year, they could build a tips ladder in a tax-deferred account, say for 30 years = 30*25k = $750,000. If they are say 4 years away from retirement they should have this mostly in place- i.e. $650,000 of this should be in place with the other 4 payments of $25,000 = $100,000 left to contribute over the next 4 years out of savings from salary etc.

2) Any current savings in excess of the $650,000 can be thought of as the Risk Portfolio (RP). Let's say they have $350,000 left over. This could be divided between a) stocks, b) alternatives like the TIAA Real Estate account, and c) cash/bonds. Some people might argue for no cash/bonds at all in this RP account, but I would argue for at least 10-20% for rebalancing purposes.

If you do the math on this you may end up with a lower stock allocation than you have now...
hope this helps
cheers,
grok
Last edited by grok87 on Fri Dec 16, 2016 11:46 pm, edited 2 times in total.
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Pajamas
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Re: My "sleep well at night" number seems to be changing

Post by Pajamas »

Your anxiety comes from watching the market and the change in attitude began recently. Since you have an Investment Policy Statement that is a carefully-considered long-term plan to see you through this exact situation, you shouldn't alter it based on the short-term.

If you are eventually convinced that you must change your plan, put at least as much time and consideration into it as you did into your original Investment Policy Statement.

You should also ask yourself to what degree the contemporary market state influenced your original statement and to what degree it should influence a change to a new statement.
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FIREchief
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Re: My "sleep well at night" number seems to be changing

Post by FIREchief »

grok87 wrote:
Here is a different way to think about this that may be helpful: I think of my retirement portfolio two pieces:
A Liability Matching Portfolio (LMP) and a "Risk Portfolio" (RP):

1) Liability Matching Portfolio (LMP)
Let's say someone makes $120,000 per year and is expecting $30,000 a year from Social Security when they retire. They would like to ensure a minimum guaranteed retirement income of $55,000 a year. So they need an additional $25,000 a year. They do not have a pension.
To secure the $25,000 a year, they could build a tips ladder in a tax-deferred account, say for 30 years = 30*25k = $750,000. If you are say 4 years away from retirement they should have this mostly in place- i.e. $650,000 of this should be in place with the other 4 payments of $25,000 = $100,000 left to contribute over the next 4 years out of savings from salary etc.

2) Any current savings in excess of the $650,000 can be thought of as the Risk Portfolio (RP). Let's say they have $350,000 left over. This could be divided between a) stocks, b) alternatives like the TIAA Real Estate account, and c) cash/bonds. Some people might argue for no cash/bonds at all in this RP account, but I would argue for at least 10-20% for rebalancing purposes.

If you do the math on this you may end up with a lower stock allocation than you have now...
hope this helps
cheers,
grok
Excellent post grok! :sharebeer I look at my approach more as an LMP with an AA overlaid on top. If the AA starts interfering with the LMP, the LMP wins.
I am not a lawyer, accountant or financial advisor. Any advice or suggestions that I may provide shall be considered for entertainment purposes only.
oragne lovre
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Re: My "sleep well at night" number seems to be changing

Post by oragne lovre »

FIREchief wrote:
grok87 wrote:
Here is a different way to think about this that may be helpful: I think of my retirement portfolio two pieces:
A Liability Matching Portfolio (LMP) and a "Risk Portfolio" (RP):

1) Liability Matching Portfolio (LMP)
Let's say someone makes $120,000 per year and is expecting $30,000 a year from Social Security when they retire. They would like to ensure a minimum guaranteed retirement income of $55,000 a year. So they need an additional $25,000 a year. They do not have a pension.
To secure the $25,000 a year, they could build a tips ladder in a tax-deferred account, say for 30 years = 30*25k = $750,000. If you are say 4 years away from retirement they should have this mostly in place- i.e. $650,000 of this should be in place with the other 4 payments of $25,000 = $100,000 left to contribute over the next 4 years out of savings from salary etc.

2) Any current savings in excess of the $650,000 can be thought of as the Risk Portfolio (RP). Let's say they have $350,000 left over. This could be divided between a) stocks, b) alternatives like the TIAA Real Estate account, and c) cash/bonds. Some people might argue for no cash/bonds at all in this RP account, but I would argue for at least 10-20% for rebalancing purposes.

If you do the math on this you may end up with a lower stock allocation than you have now...
hope this helps
cheers,
grok
Excellent post grok! :sharebeer I look at my approach more as an LMP with an AA overlaid on top. If the AA starts interfering with the LMP, the LMP wins.
I second it.
I'll look into this strategy when I get closer to retirement.
The finest, albeit the most difficult, of all human achievements is being reasonable.
JoinToday
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Re: My "sleep well at night" number seems to be changing

Post by JoinToday »

I am 60:40 (stock:bond), late 50's, retired. I look at the S&P 500 everyday. Almost compulsive behavior on my part. So I relate to your anxiety. Best advice I can give: don't look. The more often you look, the more anxious you will get.

I plan to stay at 60:40, but I haven't decided if I am going to rebalance from bonds to stock with a big drop in the market. Being that I am retired, I should probably give it more thought. Like FIREChief says, "once AA starts interfering with the LMP, the LMP wins."

Excellent advice from posters above. Let me offer a slightly different answer: Stock is hovering at an all time high. If you feel the need to change your AA, now is the time to do it -- better to sell high than low.
I wish I had learned about index funds 25 years ago
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Toons
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Re: My "sleep well at night" number seems to be changing

Post by Toons »

The stock market was high in 1997 when the Dow crossed 7k.
Then it dropped below that 11 years later.
It is triple that now,almost,
Ignore the daily stuff,,,,waste of valuable time.
Stick to YOUR asset allocation.
It is a marathon,not a sprint.
If you are not at your "sleep well" point,
then do something about it.
:happy
"One does not accumulate but eliminate. It is not daily increase but daily decrease. The height of cultivation always runs to simplicity" –Bruce Lee
Quark
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Re: My "sleep well at night" number seems to be changing

Post by Quark »

You identify two issues, nervousness about the market and "given what we have already saved we don't need a lot of growth in our investments".

Focusing on the second, why take risk if you don't have to? If your portfolio has grown or your circumstances have otherwise changed such that you don't need to take as much stock risk, it can make sense to decrease your stock allocation.

Regarding nervousness, sleeping well at night is important. Selling something that's gone down recently is often a sign of panic and a serious mistake. Selling something that's at record highs seems less of the behavioral flaw.

Has your stock/bond ratio changed enough for you to rebalance by selling stock and buying bonds? If so, would that be enough to get you comfortable and to bring you to a more appropriate level of risk?

In any event, frequently looking at the market is bad for your emotional and financial health. There's a major tendency to overreact to insignificant movements. Watching the news can be even worse.
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Re: My "sleep well at night" number seems to be changing

Post by Grt2bOutdoors »

How much growth do you need? It seems like you are very close to winning the game. Perhaps it is time to reduce the equity allocation and do something like Grok suggested.
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gd
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Re: My "sleep well at night" number seems to be changing

Post by gd »

Reacting to the market or other current events is sliding to market timing. Using some real-life stress testing to realize your AA is wrong for you is correcting a mistake, provided you have the dispassionate judgement to analyze it properly. Realizing your AA changes as your life circumstances change is common sense. That can go either way-- it might be you increase your stable investments, it might be your total amount increases enough that you have a stable investment base large enough to be able to play more and increase your risk-tolerant component.
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Re: My "sleep well at night" number seems to be changing

Post by mouses »

mgullo wrote:
Beth* wrote:......and given what we have already saved we don't need a lot of growth in our investments but I would like to stay at least a little ahead of inflation.....
Once I get what I need for retirement, I'd like to think I won't take unnecessary chances. But what one needs is different for everyone. Good luck with your decision.
I became much more conservative after I retired. Everything I have is in CDs now. If I were in the stock market and my investments tanked, I would have no way of making the loss up and not enough time to wait a decade or two for a possible recovery.
Last edited by mouses on Sat Dec 17, 2016 6:58 am, edited 1 time in total.
Levett
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Re: My "sleep well at night" number seems to be changing

Post by Levett »

Grt2bOutdoors observed:

"How much growth do you need? It seems like you are very close to winning the game. Perhaps it is time to reduce the equity allocation and do something like Grok suggested."

That's exactly what I am hearing from Beth.

Lev
cherijoh
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Re: My "sleep well at night" number seems to be changing

Post by cherijoh »

Beth* wrote:I've never been the type of investor who sold low and bought high. I'm almost 60 years old and I have ridden out quite a few ups and down in the market without rashly selling stocks. In 2008-2009, as the percentage of stocks in my portfolio declined with the market I started putting all my new savings into stocks to rebalance up to where I wanted to be.

However, lately I have found myself worrying about the stock market and checking it multiple times a day. According to my Investment Policy Statement my portfolio should be between 55 and 60 percent stocks and that's where it is right now. That is where I had intended to stay as I headed into and through retirement, but given my recent change in attitude I am wondering if it makes sense to lower the percentage of stocks I am holding. My husband and I are still working and saving and given what we have already saved we don't need a lot of growth in our investments but I would like to stay at least a little ahead of inflation so I am not proposing getting out of stocks entirely.

Have other people experienced this change in attitude toward the stock market? If so, what did you do? Did you wait it out and did it go away or did you decide to move ahead and reduce your exposure to stocks? I don't think I am trying to time the market because I have never been inclined to do that in the past. It really does seem to me like my comfort level has shifted.
I actually have a AA similar to yours and am in a similar age cohort, although I think I'll be retired before you (and before I hit 59.5). With the domestic stock market flirting around new all-time highs, I have been a bit concerned with sequence of return risk, but I'm not as nervous as you appear to be - I haven't been checking the stock market multiple times a day. You might sleep better if you stop that bad habit!

I have stockpiled a bit of cash to act as a buffer against needing to sell stocks in a declining market. But I don't anticipate changing my portfolio dramatically.

FWIW, the rule of thumb I have heard is to not reduce your stock allocation below 30%, otherwise you could run afoul of inflation. So you still have room to reduce your stock AA without becoming TOO risk-averse.

You could also consider a liability matching portfolio. I'm not an expert by any means, but it is my understanding that you invest enough money to cover your floor expenses with very conservative assets. The remainder is invested more aggressively for growth. That might address your "sleep well at night" concerns.
FCM
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Re: My "sleep well at night" number seems to be changing

Post by FCM »

For what it's worth, Rick Ferri believes "the center of gravity shifts when a person stops accumulating assets and starts taking income from their assets. The corrected ideal asset allocation for beginning a discussion on asset allocation with a pre-retiree or retiree is 30% stocks and 70% bonds." I myself have finalized on a 40/60 mix of stocks to fixed income as my "sleep well at night" number since I'm 70 and have been retired for 4 years. I have a modest pension, and my wife and I draw social security, both of which combined meet our monthly expenses. This monthly income along with our fixed income assets are what I consider to be our LMP; the stock portion (all mutual funds - mostly Vanguard and Fidelity) are our RP, which is something that allows for growth both for my wife and me while we are alive as well as for eventual legacy purposes.
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Re: My "sleep well at night" number seems to be changing

Post by KlangFool »

OP,

My IPS told me that when my portfolio is above 20X of my current annual expense, I will adjust my AA from 64/36 to 60/40. Your IPS should provide for the adjustment of AA when your portfolio is big enough and you do not have the need to take the risk.

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Re: My "sleep well at night" number seems to be changing

Post by fourwheelcycle »

grok87 wrote:
Here is a different way to think about this that may be helpful: I think of my retirement portfolio as two pieces:
A Liability Matching Portfolio (LMP) and a "Risk Portfolio" (RP).
I agree with grok87's approach. I have a spreadsheet that projects our annual income, living expenses, and taxes out to age 100 (we are in our sixties now). I estimate our minimum savings reserve (grok87's Liability portfolio) by assuming (not realistically, I hope) that the stock market goes to zero and stays there. That means we would be supported only by my pension, our social security income, and our non-stock interest and withdrawals. We keep 100% of our minimum savings reserve in bonds, mostly in Vanguard's VBILX. The balance of our savings, above our bond reserve, are mostly in Vanguard's VTSAX.

This calculation would give you your minimum portfolio allocation for bonds, and I think that would be a reasonable maximum allocation also.

Someone talked about tilting toward international. I'm guessing they may have posted before they saw last night's news about the possibility of the five-star party winning a sufficient role in Italy's parliament to take Italy out of the Euro.
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Re: My "sleep well at night" number seems to be changing

Post by itstoomuch »

See my signature line: Hitting first RMD and facing some physical issues.

We have a LMP (2 of 4 buckets, or SS+pension and annuities) and a RiskPortfolio (Discretionary bucket) and a pay-it-forward bucket (rental). The Discretionary as of Friday, is ~85% cash. Sold off stock holdings. I met 2016's IPS of +10% and to take less risk (leave some cookies on the table). I've taken individual stock risk over the last 4 years that is beyond the scope and ability of BH. I can now afford to pull back to cash and risk not losing in a Market correction. I can afford to not gaining in a Market runup.

Formulating 2017 IPS: Monetary: 5-8% gains, attempt to beat SP500, moderate risks. Non-Monetary: Take some trips and spend money. Eat less cookies.

YcookiesMV
Last edited by itstoomuch on Sat Dec 17, 2016 9:20 am, edited 1 time in total.
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Topic Author
Beth*
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Re: My "sleep well at night" number seems to be changing

Post by Beth* »

Thanks everyone for your input. I should have put in my original post that most of my fixed income investments are in TIAA Traditional, not bonds. My husband and I have access to two different TIAA Traditional accounts through our 403(b)s. One account, which has restrictions on when the money can be withdrawn is currently paying 3.75% interest for new investments (our current investments in the account are earning over 4%) and the other account, which has no restrictions on when the money can be withdrawn, is currently paying 3% interest. If I reduce stocks, I'd probably put more money into TIAA Traditional rather than bonds. We do hold some bonds in retirement accounts and, unfortunately for tax purposes, some bonds in the Wellington fund in a regular account. We bought Wellington years ago before we were educated enough to understand the tax consequences and our capital gains are large enough that we don't want to sell right now. We also have about $30,000 in the Vanguard intermediate tax-free bond fund which is our secondary emergency fund. However, the bulk of our fixed income is in TIAA Traditional and I'm comfortable with that.

Right now we have about $2 million in pre-tax tax sheltered accounts, $50,000 in Roth IRAs (we just learned about the backdoor Roth IRA a few years ago) and $400,000 in taxable accounts. We also own our house, which is worth about $500,000, without a mortgage. We have no debts. We're currently saving/investing about $75,000 a year (this includes employer matching contributions to retirement accounts).

I cannot get a handle on how much money we need for retirement because I'm not sure where we are going to end up living. We'll probably move to be closer to one of our children and they live in high cost of living areas. However, given the investments we currently have and the amount we are currently saving I am confident that we will have enough money saved for retirement even if we reduce our exposure to stocks. I'm thinking it might be time to go down to 45 to 50 percent stocks, rather than our current 55 to 60 percent stocks, and see if at that level I am more comfortable. I am going to wait until after the holidays to make any changes. I want to think about this a while longer and make sure that I don't change my mind.
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celia
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Re: My "sleep well at night" number seems to be changing

Post by celia »

Beth, I think your concern in changing comfort levels has to do with a retirement start date that will soon be here and you may not be able to save after that. You have built up a history of saving, so it will be hard to "break".

But if you look at your guaranteed income in retirement (pensions, annuities, SS?, dividends, etc), I suspect it will be more than your current living expenses. If it isn't, what is your estimated shortfall? You need to protect 30 or 40 years of that. The rest is for you to contine with your IPS.

Entering retirement is often a scary time because of unknowns. It is not just making the transition from accumulating to spending, but you have mentioned possibly moving. Relationships change as you and your spouse have more time to spend together and possibly different hobbies, friends, and interests you each hope to persue. All I can say is to be aware that transitions can be challenging even though you've been looking towards retirement from the day you started working. (And this doesn't even mention health issues that will pop up at unexpected times--not that they were expected. :? )
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Re: My "sleep well at night" number seems to be changing

Post by epictetus »

this is one of the advantages of an "age in bonds" or "age - X in bonds" mechanical approach that helps you gradually become more conservative over time.

even if you have the ability to take risk but have less need and willingness to take risk no harm in changing allocation to reduce stock exposure.

if you were talking about allocating more to stocks because they are going up that would be potentially a problematic approach.

you are talking about allocating less to stocks because they are going up in order to reduce your risk of loss. that is very different.
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Re: My "sleep well at night" number seems to be changing

Post by David Scubadiver »

Most retirees will outlive their investments if they do not have a portion invested in equities. What portion that is depends on what you have and what you spend, as well as on how the markets do during the early years of your retirement. Life is complicated.

I have always been 100% invested in equities. Recently I put some of my portfolio in municipal (individually owned) and savings bonds. I have about 2 million invested at 48 and I am nervous about a market drop because it would mean a huge loss. On the other hand market increases give me big gains, increasing my nervousness and increasing my returns. I have a long time horizon so I sleep well enough. As that time horizon drops before I need to start selling, I will move the portion I will need to sell, out of equities and into stable investments or savings bonds.
2015
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Re: My "sleep well at night" number seems to be changing

Post by 2015 »

celia wrote:Beth, I think your concern in changing comfort levels has to do with a retirement start date that will soon be here and you may not be able to save after that. You have built up a history of saving, so it will be hard to "break".

But if you look at your guaranteed income in retirement (pensions, annuities, SS?, dividends, etc), I suspect it will be more than your current living expenses. If it isn't, what is your estimated shortfall? You need to protect 30 or 40 years of that. The rest is for you to contine with your IPS.

Entering retirement is often a scary time because of unknowns. It is not just making the transition from accumulating to spending, but you have mentioned possibly moving. Relationships change as you and your spouse have more time to spend together and possibly different hobbies, friends, and interests you each hope to persue. All I can say is to be aware that transitions can be challenging even though you've been looking towards retirement from the day you started working. (And this doesn't even mention health issues that will pop up at unexpected times--not that they were expected. :? )
+1
Very astute observation. This is exactly what happened to me last year as I entered early retirement (I'm not even sure I have completely exited that stage of unease, even though I am in even much better financial shape than expected). Becoming aware of this sense of (unwarranted) unease, earlier this year I changed my IPS to reflect the LMP strategies mentioned above. Getting that sense of comfort in retirement depends on the individual and their particular circumstances--for me (based on my conservative financial nature) it was LMP and tracking/estimating all anticipated/unanticipated expenses through end of PF life with much greater scrutiny. These actions have allowed me to sleep very well at night.
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Re: My "sleep well at night" number seems to be changing

Post by grok87 »

2015 wrote:
celia wrote:Beth, I think your concern in changing comfort levels has to do with a retirement start date that will soon be here and you may not be able to save after that. You have built up a history of saving, so it will be hard to "break".

But if you look at your guaranteed income in retirement (pensions, annuities, SS?, dividends, etc), I suspect it will be more than your current living expenses. If it isn't, what is your estimated shortfall? You need to protect 30 or 40 years of that. The rest is for you to contine with your IPS.

Entering retirement is often a scary time because of unknowns. It is not just making the transition from accumulating to spending, but you have mentioned possibly moving. Relationships change as you and your spouse have more time to spend together and possibly different hobbies, friends, and interests you each hope to persue. All I can say is to be aware that transitions can be challenging even though you've been looking towards retirement from the day you started working. (And this doesn't even mention health issues that will pop up at unexpected times--not that they were expected. :? )
+1
Very astute observation. This is exactly what happened to me last year as I entered early retirement (I'm not even sure I have completely exited that stage of unease, even though I am in even much better financial shape than expected). Becoming aware of this sense of (unwarranted) unease, earlier this year I changed my IPS to reflect the LMP strategies mentioned above. Getting that sense of comfort in retirement depends on the individual and their particular circumstances--for me (based on my conservative financial nature) it was LMP and tracking/estimating all anticipated/unanticipated expenses through end of PF life with much greater scrutiny. These actions have allowed me to sleep very well at night.
I don't think you are alone in this. THe LMP approach basically recreates an annuity or pension (that many of us don't have any more). In fact, after a certain number of years of retirement my plan is to convert it to an annuity.

As Jane Austen once said
http://www.goodreads.com/quotes/268710- ... an-annuity
"people always live for ever when there is an annuity to be paid them"
(Sense and Sensibility)
RIP Mr. Bogle.
Dandy
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Re: My "sleep well at night" number seems to be changing

Post by Dandy »

Just before and very early in retirement is a good time to assess your risk/allocation. For most, salary, bonuses, contributions, company matches etc. comes to an end and issues like Social Security, Pension (if you are lucky), health coverage/Medicare, and a significant changes in expenses etc.occur. Also, no more contribs to Social Security/Medicare, commuting expenses, etc. and for most a rapid decline in human capital to minimum wage. Usually, withdrawals are needed to replace wages and eventually RMDs create, for some, a new experience of drawing down assets instead of adding to them.

So, I would not make panic moves but recognize that you are moving to a different stage of life that may last for 30 years or more and the "pot" is likely all you've got. When you realize that the pot is all you've got you will reassess whether growth or asset preservation makes sense. If you have more than your number you might find there is less need for growth and a bit more for preservation.

In retirement the first year you take a decent withdrawal and your investment nest egg also takes a hit you will likely feel the difference between investing in the accumulation stage and in retirement.

I retired at age 60 in 2008 which was a terrible year. I entered the year with assets a bit above my number and before I knew it I was well below that number. I was lucky having a pension to mitigate the amount of withdrawals needed. Thank goodness for the rapid recovery. What changed my mind about retirement asset allocation was Dr. Bernstein's idea of having 20-25 years of your drawdown in "safe" assets and invest the rest anyway you want.

This bottom up approach was a game changer for me. I make sure I have enough to fund my current withdrawal needs until age 90 in short term bond funds and FDIC products. So, while I'm not fond of market declines I have little need to panic since for the most part my "safe" portfolio will likely fund my needs for quite a long time. When the market does well I'll withdraw all or most from my "risk" portfolio when it does poorly I use my "safe" portfolio.

No approach is set it and forget it. So, I'll always keep an eye on things. But I sleep well.
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Re: My "sleep well at night" number seems to be changing

Post by MathWizard »

I sounds like you should lower your equity ratio.

If you are having problems when stocks are at an all-time high, what would happen if it drops
25%. Would you sell then?

This is not market timing. What has changed is your ability to take risk. When that changes, it
is reasonable to change AA.
2015
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Re: My "sleep well at night" number seems to be changing

Post by 2015 »

Dandy wrote:
<snip?

I retired at age 60 in 2008 which was a terrible year. I entered the year with assets a bit above my number and before I knew it I was well below that number. I was lucky having a pension to mitigate the amount of withdrawals needed. Thank goodness for the rapid recovery. What changed my mind about retirement asset allocation was Dr. Bernstein's idea of having 20-25 years of your drawdown in "safe" assets and invest the rest anyway you want.

This bottom up approach was a game changer for me. I make sure I have enough to fund my current withdrawal needs until age 90 in short term bond funds and FDIC products. So, while I'm not fond of market declines I have little need to panic since for the most part my "safe" portfolio will likely fund my needs for quite a long time. When the market does well I'll withdraw all or most from my "risk" portfolio when it does poorly I use my "safe" portfolio.

No approach is set it and forget it. So, I'll always keep an eye on things. But I sleep well.
I think I would have just died if the underlined above would have happened to me. It was exactly this realization that made me transfer from a total return approach to LMP. As with all of these discussions, I had to apply them to my own temperament, and I know that temperament is: financially conservative. What rattled around in my brain for a long time was Taylor Larimore's phrase "bonds let me sleep well at night." I really did want bonds let me sleep well at night, but finally had to admit to myself that, for me, bonds do not (but more so than equities, however!). What lets me sleep well is matching my liabilities through FDIC products. I also had to realize, after reading way too many threads on short-term bond funds versus CD's for short-term cash needs, that for my temperament, CD's were a better match.

There were some excellent recent threads on roth conversions and a discussion on whether they should be done at all, and at what point conversions can be optimized. As I always do, I got around optomizing conversions by simply being conservative. If I leave money on the table in doing so, given my temperment for risk, that's okay by me.

The willingness, need, and ability to take risk discussions have always seemed a bit sterile to me and couched too academically to transfer completely to real life. The better I've come to know myself and my own investing temperament (conservative) the better I've been able to get a real feel for my willingness for risk (which isn't all that much).
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Re: My "sleep well at night" number seems to be changing

Post by Dandy »

What lets me sleep well is matching my liabilities through FDIC products. I also had to realize, after reading way too many threads on short-term bond funds versus CD's for short-term cash needs, that for my temperament, CD's were a better match.
Try not to put all your "safe" eggs in one basket e.g. all in CDs/Savings accts. My mother in law had 90% in CDs which was great when they were paying 6%. As those CD renewals drifting down to 3% and then 2% her nest egg income dropped 50% then 67% from its peak. Remember, when interest rates drop bond funds tend to rise. It was like that mythical frog that was in a pot that gradually heated up so he didn't jump out until it was boiling. So, just keep an eye on things.
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Re: My "sleep well at night" number seems to be changing

Post by itstoomuch »

^ If the ship is taking on water, the Captain had better know how to handle the ship, ask for help, and be prudent enough to change course towards safe harbor until safety is assured. Staying-the-course is preferred but maybe not the wisest.
YShipMV :beer
Rev012718; 4 Incm stream buckets: SS+pension; dfr'd GLWB VA & FI anntys, by time & $$ laddered; Discretionary; Rentals. LTCi. Own, not asset. Tax TBT%. Early SS. FundRatio (FR) >1.1 67/70yo
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Re: My "sleep well at night" number seems to be changing

Post by grok87 »

Dandy wrote:
What lets me sleep well is matching my liabilities through FDIC products. I also had to realize, after reading way too many threads on short-term bond funds versus CD's for short-term cash needs, that for my temperament, CD's were a better match.
Try not to put all your "safe" eggs in one basket e.g. all in CDs/Savings accts. My mother in law had 90% in CDs which was great when they were paying 6%. As those CD renewals drifting down to 3% and then 2% her nest egg income dropped 50% then 67% from its peak. Remember, when interest rates drop bond funds tend to rise. It was like that mythical frog that was in a pot that gradually heated up so he didn't jump out until it was boiling. So, just keep an eye on things.
Yep, that's what happens when you match a long term liability with a short term asset.
Long term tips would avoid this problem...
RIP Mr. Bogle.
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Re: My "sleep well at night" number seems to be changing

Post by FelixTheCat »

Think about it for a month. If you still can't sleep well, then change your AA.

Per Vanguard's allocation model, the difference in average return of a 60/40 vs 50/50 portfolio is .4% https://personal.vanguard.com/us/insigh ... llocations
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MSDOGS1976
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Re: My "sleep well at night" number seems to be changing

Post by MSDOGS1976 »

Beth* wrote:
Have other people experienced this change in attitude toward the stock market? If so, what did you do? Did you wait it out and did it go away or did you decide to move ahead and reduce your exposure to stocks? I don't think I am trying to time the market because I have never been inclined to do that in the past. It really does seem to me like my comfort level has shifted.
Yes. I reduced my equity exposure. I'm in my early 60's and my AA is roughly 20/80. The numbers work according to all the calculators I have run them through so why not go conservative if it makes you sleep better? Just because your statement indicates a classic AA is 60/40 doesn't mean you have to go that route.
2015
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Re: My "sleep well at night" number seems to be changing

Post by 2015 »

Dandy wrote:
What lets me sleep well is matching my liabilities through FDIC products. I also had to realize, after reading way too many threads on short-term bond funds versus CD's for short-term cash needs, that for my temperament, CD's were a better match.
Try not to put all your "safe" eggs in one basket e.g. all in CDs/Savings accts. My mother in law had 90% in CDs which was great when they were paying 6%. As those CD renewals drifting down to 3% and then 2% her nest egg income dropped 50% then 67% from its peak. Remember, when interest rates drop bond funds tend to rise. It was like that mythical frog that was in a pot that gradually heated up so he didn't jump out until it was boiling. So, just keep an eye on things.
Heavens I would never put 90% of AA in FI, let alone CD's. CD's are used for LMP only for the next 4 years. Thereafter, I have other strategies. And I absolutely agree, never take an eye off of a boiling pot.
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Re: My "sleep well at night" number seems to be changing

Post by Kevin M »

Beth, are you familiar with the ability, willingness and need to take risk paradigm popularized by Larry Swedroe? Learning about this as I was approaching early retirement at age 55 in 2007 was a real eye opener for me.

In that paradigm, what you are saying is that your willingness to take risk is decreasing, but for me the real light bulb event was understanding that my need to take risk was low enough that I didn't need to have a high allocation to stocks. I don't recall exactly when I established an actual target stock allocation, but at some point I decided that 30% allocated to stocks was all the risk I needed to take. The financial crisis of 2008/2009 helped me really understand my willingness to take risk, and it confirmed that no more than 30% in stocks was good for me. I have stuck with that target allocation ever since.

Subsequently I learned about the LMP/RP approach mentioned by grok87 from one of Bill Bernstein's books. I now also think about that paradigm when considering my AA, and I come up with the same answer that I came up with using Larry's risk paradigm. I think that 70% in safe assets (mostly direct CDs, which I think are far superior to bonds on a risk-adjusted basis, as is your TIAA Traditional, which I don't have access to) is more than enough for my LMP, and I think the early withdrawal options of my CDs is enough of a hedge against inflation that I'm not ready to convert to TIPS at current low real yields.

So from my perspective your allocation to stocks may be higher than it needs to be, but I don't know enough about your situation to really know. I would just think very seriously about how you'll be able to handle things if stocks drop 50% or more as they have twice in the last 15 years, knowing that they may not recover as quickly as they did in the last two big bear markets. If you're worried about stocks now as US stocks are hitting new highs, think about how you'll feel when they are crashing.

Kevin
If I make a calculation error, #Cruncher probably will let me know.
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Kevin M
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Re: My "sleep well at night" number seems to be changing

Post by Kevin M »

Dandy wrote:
What lets me sleep well is matching my liabilities through FDIC products. I also had to realize, after reading way too many threads on short-term bond funds versus CD's for short-term cash needs, that for my temperament, CD's were a better match.
Try not to put all your "safe" eggs in one basket e.g. all in CDs/Savings accts. My mother in law had 90% in CDs which was great when they were paying 6%. As those CD renewals drifting down to 3% and then 2% her nest egg income dropped 50% then 67% from its peak. Remember, when interest rates drop bond funds tend to rise. It was like that mythical frog that was in a pot that gradually heated up so he didn't jump out until it was boiling. So, just keep an eye on things.
OK, but that can't happen with CD rates at about 2%, unless you believe that CD rates can fall to -4%. I was adding a lot to investment grade bond funds in 2005-2009, but then as yields fell and bond fund share prices hit highs, I started shifting to CDs. The closer yields get to 0%, the more I'll have in CDs. Now I'm at about 75% of fixed income in CDs, and am happy as a clam. If bond yields continue to increase, I'll probably shift some back to bonds as my CDs mature. If TIPS yields return to more reasonable levels, I'll probably start buying TIPS.

I agree that it's good to keep some exposure to term risk, and even some credit risk, as long as the upside potential sufficiently offsets the downside potential, but with bond yields at 2%, there just isn't that much upside potential, so no more than 20% of fixed income in bonds for me right now.

Another problem with this thinking is that it's just the CD interest that funds living expenses in retirement. Consuming the CD capital can be part of the plan as well. Keeping the capital safe is a much more important consideration for me than taking more risk to squeeze out a little more income.

Kevin
If I make a calculation error, #Cruncher probably will let me know.
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Beth*
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Re: My "sleep well at night" number seems to be changing

Post by Beth* »

Kevin M wrote:
Dandy wrote:
What lets me sleep well is matching my liabilities through FDIC products. I also had to realize, after reading way too many threads on short-term bond funds versus CD's for short-term cash needs, that for my temperament, CD's were a better match.
Try not to put all your "safe" eggs in one basket e.g. all in CDs/Savings accts. My mother in law had 90% in CDs which was great when they were paying 6%. As those CD renewals drifting down to 3% and then 2% her nest egg income dropped 50% then 67% from its peak. Remember, when interest rates drop bond funds tend to rise. It was like that mythical frog that was in a pot that gradually heated up so he didn't jump out until it was boiling. So, just keep an eye on things.
OK, but that can't happen with CD rates at about 2%, unless you believe that CD rates can fall to -4%. I was adding a lot to investment grade bond funds in 2005-2009, but then as yields fell and bond fund share prices hit highs, I started shifting to CDs. The closer yields get to 0%, the more I'll have in CDs. Now I'm at about 75% of fixed income in CDs, and am happy as a clam. If bond yields continue to increase, I'll probably shift some back to bonds as my CDs mature. If TIPS yields return to more reasonable levels, I'll probably start buying TIPS.

I agree that it's good to keep some exposure to term risk, and even some credit risk, as long as the upside potential sufficiently offsets the downside potential, but with bond yields at 2%, there just isn't that much upside potential, so no more than 20% of fixed income in bonds for me right now.

Another problem with this thinking is that it's just the CD interest that funds living expenses in retirement. Consuming the CD capital can be part of the plan as well. Keeping the capital safe is a much more important consideration for me than taking more risk to squeeze out a little more income.

Kevin
I am not considering CDs. I can get 3 or 4 percent interest with principle guaranteed in TIAA Traditional so that is my safe investment. I did just move $40,000 out of stocks and into TIAA Traditional. I will probably move more money next month. I have decided I want to do this gradually.
Dandy
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Re: My "sleep well at night" number seems to be changing

Post by Dandy »

OK, but that can't happen with CD rates at about 2%, unless you believe that CD rates can fall to -4%. I was adding a lot to investment grade bond funds in 2005-2009, but then as yields fell and bond fund share prices hit highs, I started shifting to CDs. The closer yields get to 0%, the more I'll have in CDs. Now I'm at about 75% of fixed income in CDs, and am happy as a clam. If bond yields continue to increase, I'll probably shift some back to bonds as my CDs mature. If TIPS yields return to more reasonable levels, I'll probably start buying TIPS.

I agree that it's good to keep some exposure to term risk, and even some credit risk, as long as the upside potential sufficiently offsets the downside potential, but with bond yields at 2%, there just isn't that much upside potential, so no more than 20% of fixed income in bonds for me right now.
Another problem with this thinking is that it's just the CD interest that funds living expenses in retirement. Consuming the CD capital can be part of the plan as well. Keeping the capital safe is a much more important consideration for me than taking more risk to squeeze out a little more income.
Agree with almost everything you have said. But if someone decided to live off their CD income that generated 2% their income can still drop 50% when new CDs earn only 1%. Is that likely to happen? I doubt it but I would have never thought banks would pay negative rates on savings :oops: We agree that you need some fixed income diversity and are unlikely to fund retirement living off CD and/or short term bond interest. You most likely do have to consume some of your assets.
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Re: My "sleep well at night" number seems to be changing

Post by Kevin M »

Beth* wrote: I am not considering CDs. I can get 3 or 4 percent interest with principle guaranteed in TIAA Traditional so that is my safe investment. I did just move $40,000 out of stocks and into TIAA Traditional. I will probably move more money next month. I have decided I want to do this gradually.
Wasn't suggesting CDs for you, since your TIAA Traditional fills a similar role (as I mentioned in my other post)--just an input to the general discussion that your post has spawned.

Kevin
If I make a calculation error, #Cruncher probably will let me know.
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Re: My "sleep well at night" number seems to be changing

Post by littlebird »

Yes. With a spouse in assisted living (self-pay), and in anticipation of volatility, the conservative dollar value of equities that made me feel secure up until now no longer does. Lowered myself into the lowest end of generally recommended equity allocation. About age +5 in bonds
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Re: My "sleep well at night" number seems to be changing

Post by The Wizard »

Similar to Beth, the majority of my assets are with TIAA. I tapered my AA down to 50% equities before I retired 3.8 years ago and plan to stay around that level indefinitely.
But I have a significant amount in TREA as well as Trad, on the non equity side.

I did annuitize a significant portion of my TIAA accumulation at the start of retirement and this more than covers my basic expenses. My plan B in the event of a significant market decline in early years of retirement was to take my full SS early, prior to age 70. But this obviously hasn't happened, so I'll likely wait three more years to age 70.

I did rebalance a small increment from equities to Trad a week ago and while I do monitor market performance daily, I generally sleep well at night.
:)
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Levett
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Re: My "sleep well at night" number seems to be changing

Post by Levett »

Grok (quoting Jane Austen):

"As Jane Austen once said
http://www.goodreads.com/quotes/268710- ... an-annuity
"people always live for ever when there is an annuity to be paid them"
(Sense and Sensibility)


Just ask TIAA: 30,000 annuitants over age 90. :)

"In fact, TIAA delivered monthly payments to 30,000 people older than age 90 in 2015,” said Ferguson. “Incorporating lifetime income solutions into their retirement plans can help ensure retirees have enough funds to reach retirement, and live comfortably for a lifetime.”

https://www.tiaa.org/public/about-tiaa/ ... se641.html

Lev
grok87
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Re: My "sleep well at night" number seems to be changing

Post by grok87 »

Levett wrote:Grok (quoting Jane Austen):

"As Jane Austen once said
http://www.goodreads.com/quotes/268710- ... an-annuity
"people always live for ever when there is an annuity to be paid them"
(Sense and Sensibility)


Just ask TIAA: 30,000 annuitants over age 90. :)

"In fact, TIAA delivered monthly payments to 30,000 people older than age 90 in 2015,” said Ferguson. “Incorporating lifetime income solutions into their retirement plans can help ensure retirees have enough funds to reach retirement, and live comfortably for a lifetime.”

https://www.tiaa.org/public/about-tiaa/ ... se641.html

Lev
thanks!
RIP Mr. Bogle.
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Re: My "sleep well at night" number seems to be changing

Post by carolinaman »

As we get older and closer to retirement, some people's risk tolerance and need to take risk changes. You should be aware of the sequence of return risk and its potential impact if it were to occur around the time you retire. Also, you will lose your human capital once you retire. Therefore, for the first time you will have to rely solely on your investment and other income sources for retirement.

Your post suggests that you are already in good shape with your retirement assets. That begs the question "If you have already won the game, why do you keep playing?". That is not to suggest that you get out of the market, but perhaps scale back your equity some to give you more peace and to better protect what you already have. I am age 72 and have a 40% equity allocation which I am comfortable with as an inflation protector.

FWIW, my perspective on investment and risk changed once I got close to retirement. I sometimes wonder about retirees with high equity allocations. Are they just natural risk takers or have they never thought through the risks to their portfolio?
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Re: My "sleep well at night" number seems to be changing

Post by 209south »

Great thread with really thoughtful replies - the topic of pre-/early-retirement asset allocation / LMPs is the thing I have learned the most about from this forum - this has been incredibly valuable and has reshaped my asset allocation.

Beth, FWIW I think you are doing the right thing by 'gradually' shifting to a more conservative asset allocation. You have accumulated a substantial portfolio and are approaching the time when you'll be drawing from that rather than building it - i.e. market corrections will become more costly in a few years. It is a wonderful time to be able to consider such a shift, with equity markets at an all-time high and bond yields rising, understanding you have superior fixed income alternatives available. My situation is similar - good news is my portfolio is larger, bad news is my burn rate in a HCOL area is far higher - so I made a similar move over the past two years and am now effectively at a 35-65 allocation and sleeping very well. In my case I've built a TIPS ladder to 100% address projected RMDs, and have started to build what is effectively an annuity ladder to deal my biggest financial issue, which is longevity (I have no pensions). I will continue to move in this direction over the next 5+ years and am happy to sacrifice marginal upside to protect the downside. Thanks for beginning this thread.
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Re: My "sleep well at night" number seems to be changindra

Post by friar1610 »

carolinaman wrote:As we get older and closer to retirement, some people's risk tolerance and need to take risk changes....

Your post suggests that you are already in good shape with your retirement assets. That begs the question "If you have already won the game, why do you keep playing?". That is not to suggest that you get out of the market, but perhaps scale back your equity some to give you more peace and to better protect what you already have. I am age 72 and have a 40% equity allocation which I am comfortable with as an inflation protector.
Several others have commented that this is an excellent thread and I agree. It caused me to do an analysis from a liability matching point of view - I had previously gone strictly by AA. As it turns out, my current AA is very close to the results I obtained from the LMP analysis. However, this has caused me to rethink the structure of my portfolio (e.g, where certain assets reside and why) and perhaps reduce equity exposure by a few points. As with Carolinaman above, I'm an early 70's guy who is drawn to about 40% equity and, as a result of further analysis motivated by this thread, also now quite comfortable this would adequately provide for my wife indefinitely should widowhood be in her future.
Friar1610 | 50-ish/50-ish - a satisficer, not a maximizer
2015
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Re: My "sleep well at night" number seems to be changing

Post by 2015 »

Upon retirement, what I hadn't planned on was an unconscious "what have I done" feeling, even though I was more than adequately prepared and funded. I then went on a quest to quell this feeling. In terms of investing, for retirement and otherwise, I am the dumbest person in the room, the patsy at the poker table. For this reason, my default is always but always toward simplicity and conservatism. Charlie Munger has said in investing (like tennis, chess, baseball, and life) avoiding stupidity is easier than seeking brilliance, and I abide by this rule. This is one of the reasons I migrated from total return to LMP. I am not trying to maximize outcome as much as minimize downside.

Nassim Taleb's Anti-Fragility also got me thinking about what major events or turning points could most negatively impact my retirement from which I wouldn't be able to recover as easily (or at all) as when working. These included increased taxes from RMD's by delaying SS until 70, health costs, theft of all kinds, personal safety, psychological and emotional well-being, the impact of any major geographical relocation, etc.. A thorough review of deep and shallow risk with the a solid plan to minimize or at least mitigate such risk has also increased my ability to sleep well.
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