What do you think about this asset allocation?

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rhodnius
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What do you think about this asset allocation?

Post by rhodnius » Fri May 19, 2017 11:27 pm

Hello Bogleheads!

What do you think of this asset allocation for us given our financial details below. Is this too aggressive given our retirement age? Not sure if some info are relevant but including them just in case others might ask for analysis. Thanks!

Image


Age: both 35yo
Age planning to retire: 55 yo
Gross salary: 252k and 104k
Savings after taxes: 230,987
Investing: 3 fund portfolio maximizing 403b, 457b 401k, 2 backdoor roths, hsa and taxable accounts
Aiming to spend during retirement: 61806
Start receiving social security: 70 yo at ~28k each
House down payment of 50k in 5 years for a 250k house
Healthcare: 30k/year for 10 yrs until medicare kicks in at 65
Last edited by rhodnius on Sat May 20, 2017 6:55 pm, edited 1 time in total.

Vanguard Fan 1367
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Re: What do you think about this asset allocation?

Post by Vanguard Fan 1367 » Fri May 19, 2017 11:52 pm

I like it.

Lafder
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Re: What do you think about this asset allocation?

Post by Lafder » Fri May 19, 2017 11:55 pm

We were at 80/20 until our late 40's.

Age in bonds down to age- 20 is the usually discussed range here. It seems easier to remember than having to look at that table :)

Personally I prefer no less than 20% bonds at any age.

lafder

NiceUnparticularMan
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Re: What do you think about this asset allocation?

Post by NiceUnparticularMan » Sat May 20, 2017 8:02 am

So generally speaking, I would note there is a good argument for being at minimum high-volatility investments not at the end of your life, but rather around the time you retire. This is the "U-Shaped" theory, and it is based on the observation that volatility is most dangerous to the long-term success of a retirement portfolio during that period.

This is just a hypothetical, but if, say, you were retiring at 55, you might want to actually be 60/40 at 50 and then 50/50 at 55 and 60. Then at 65 you might ramp up to 60/40 and then 70/30 at 70+. Note also this would dovetail a bit more sensibly with Social Security, where you would likely be adding that to your income floor at roughly the same time you were backing down your bonds.

Or you can skip the later ramp up, meaning just hit 50-50 at 55 and leave it there. I would have concerns about what I think of as longevity tail risk in such scenarios, but it could work fine.

Or you can ramp even lower, down to say 30/70, then ramp up. There is some debate about whether that makes much difference over ramping down to say 50/50 and staying there.

Regardless, the point is the time around retirement and the period right afterward is really the one to worry about when it comes to volatility and short-term losses. Exactly how low you go and whether you stay that low depends on a lot of variables, but I would in fact push back on the idea of only planning to hit your low point 20 years after you plan to retire.

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ruralavalon
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Re: What do you think about this asset allocation?

Post by ruralavalon » Sat May 20, 2017 9:48 am

In my opinion the chart is fairly reasonable at higher ages (55+), but too aggressive at younger ages. In my opinion the minimum for nearly anyone should be about 20% in bonds.

We are both 71 and our asset allocation is 50/50, but I think 60/40 for that age as in the chart is reasonable.

Since you plan to retire at 55, not 65, treat yourself as 45, not 35, for asset allocation purposes. My suggestion for that age (45) would be around 70/30.
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aristotelian
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Re: What do you think about this asset allocation?

Post by aristotelian » Sat May 20, 2017 10:12 am

Because you are talking about early retirement, I would be more conservative. What do you consider to be your "number" that you are seeking to hit by 55? Start from there and work backwards. What is the most conservative path you can take that can get you to that number?

It looks like you need $1M to cover living costs and health care from 55-65, then $350K to cover living costs until SS. When SS kicks in you might need an additional $1.5M. Let's say your number is $2M at age 55. You have to hit that number to feel safe in retirement.

If I understand correctly, you are saving over $200K per year. That is fantastic! Assuming you are starting from scratch, by age 55 that adds up to $4M even if you put it in cash.

In my opinion, you have no need to take risk because of your income. I would suggest a balanced portfolio at 40/60 or 50/50. You will most likely win the game even earlier than 55. Now, you will stand an excellent chance of making even more money if you go 80/20, but there is some downside risk there. Why would you take that risk when you are already on track to win the game?

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High Income Parent
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Re: What do you think about this asset allocation?

Post by High Income Parent » Sat May 20, 2017 10:13 am

I personally like it. I'm even more aggressive than that but I also am okay delaying retirment if I need too.

I like my job but if someone has hard and fast rules about retiring by a certain year, then I agree with getting more conservative as you approach retirment.
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rob
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Re: What do you think about this asset allocation?

Post by rob » Sat May 20, 2017 10:18 am

I have never bought the age thing..... Depends on need (savings vs. est expenses in retirement) and risk tolerance....
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rhodnius
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Re: What do you think about this asset allocation?

Post by rhodnius » Sat May 20, 2017 4:53 pm

NiceUnparticularMan wrote:So generally speaking, I would note there is a good argument for being at minimum high-volatility investments not at the end of your life, but rather around the time you retire. This is the "U-Shaped" theory, and it is based on the observation that volatility is most dangerous to the long-term success of a retirement portfolio during that period.

This is just a hypothetical, but if, say, you were retiring at 55, you might want to actually be 60/40 at 50 and then 50/50 at 55 and 60. Then at 65 you might ramp up to 60/40 and then 70/30 at 70+. Note also this would dovetail a bit more sensibly with Social Security, where you would likely be adding that to your income floor at roughly the same time you were backing down your bonds.

Or you can skip the later ramp up, meaning just hit 50-50 at 55 and leave it there. I would have concerns about what I think of as longevity tail risk in such scenarios, but it could work fine.

Or you can ramp even lower, down to say 30/70, then ramp up. There is some debate about whether that makes much difference over ramping down to say 50/50 and staying there.

Regardless, the point is the time around retirement and the period right afterward is really the one to worry about when it comes to volatility and short-term losses. Exactly how low you go and whether you stay that low depends on a lot of variables, but I would in fact push back on the idea of only planning to hit your low point 20 years after you plan to retire.


The "U-Shaped" theory does make sense. Are you planning to follow this asset allocation when you are nearing retirement then ramping back up on stocks as you age?

rhodnius
Posts: 37
Joined: Sat May 30, 2015 5:07 pm

Re: What do you think about this asset allocation?

Post by rhodnius » Sat May 20, 2017 5:17 pm

aristotelian wrote:Because you are talking about early retirement, I would be more conservative. What do you consider to be your "number" that you are seeking to hit by 55? Start from there and work backwards. What is the most conservative path you can take that can get you to that number?

It looks like you need $1M to cover living costs and health care from 55-65, then $350K to cover living costs until SS. When SS kicks in you might need an additional $1.5M. Let's say your number is $2M at age 55. You have to hit that number to feel safe in retirement.

If I understand correctly, you are saving over $200K per year. That is fantastic! Assuming you are starting from scratch, by age 55 that adds up to $4M even if you put it in cash.

In my opinion, you have no need to take risk because of your income. I would suggest a balanced portfolio at 40/60 or 50/50. You will most likely win the game even earlier than 55. Now, you will stand an excellent chance of making even more money if you go 80/20, but there is some downside risk there. Why would you take that risk when you are already on track to win the game?


Our number is around $5M and our portfolio is now $1,138,137. Based on Personal Capital's retirement planner, if we maintain this asset allocation it would grow to $7,737,298 in an average market and $5,016,612 in a poor market and can actually achieve this by age 52. I don't know what Personal Capital means by "average" and "poor"markets. But the sooner we reach $5M the better for we can retire and not wait till age 55. So do you think then that even if we do a conservative portfolio (50/50), we can reach $5M at age 52?

aristotelian
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Re: What do you think about this asset allocation?

Post by aristotelian » Sat May 20, 2017 6:33 pm

rhodnius wrote:Our number is around $5M and our portfolio is now $1,138,137. Based on Personal Capital's retirement planner, if we maintain this asset allocation it would grow to $7,737,298 in an average market and $5,016,612 in a poor market and can actually achieve this by age 52. I don't know what Personal Capital means by "average" and "poor"markets. But the sooner we reach $5M the better for we can retire and not wait till age 55. So do you think then that even if we do a conservative portfolio (50/50), we can reach $5M at age 52?


How do you get $5M? It looks to me that you need about $1M to cover your bridge years, and then $2.3M in retirement. $4M would seem to be fairly conservative. Your number does increase as you move out your retirement date. Now you are trying to retire at 52?

Yes, saving $200K per year for 20 years you should be fine. Assuming a conservative 4% return, a simple compounding calculator puts you at $6.1M at age 52. If your contributions increase or you get better return you will end up well ahead of that.

With a conservative 40/60 portfolio, Portfolio Visualizer gives you a median outcome at age 50 of $10M.

Keep in mind, the earlier retire, the shorter your time horizon and the longer your money has to last. With your savings rate, you are going to have no problem retiring early, the only question is how early. An aggressive allocation is going to expose you to sequence-of-returns risk and could potentially backfire.

rhodnius
Posts: 37
Joined: Sat May 30, 2015 5:07 pm

Re: What do you think about this asset allocation?

Post by rhodnius » Sat May 20, 2017 6:53 pm

aristotelian wrote:
rhodnius wrote:Our number is around $5M and our portfolio is now $1,138,137. Based on Personal Capital's retirement planner, if we maintain this asset allocation it would grow to $7,737,298 in an average market and $5,016,612 in a poor market and can actually achieve this by age 52. I don't know what Personal Capital means by "average" and "poor"markets. But the sooner we reach $5M the better for we can retire and not wait till age 55. So do you think then that even if we do a conservative portfolio (50/50), we can reach $5M at age 52?


How do you get $5M? It looks to me that you need about $1M to cover your bridge years, and then $2.3M in retirement. $4M would seem to be fairly conservative. Your number does increase as you move out your retirement date. Now you are trying to retire at 52?

Yes, saving $200K per year for 20 years you should be fine. Assuming a conservative 4% return, a simple compounding calculator puts you at $6.1M at age 52. If your contributions increase or you get better return you will end up well ahead of that.

With a conservative 40/60 portfolio, Portfolio Visualizer gives you a median outcome at age 50 of $10M.

Keep in mind, the earlier retire, the shorter your time horizon and the longer your money has to last. With your savings rate, you are going to have no problem retiring early, the only question is how early. An aggressive allocation is going to expose you to sequence-of-returns risk and could potentially backfire.


How did I come up with $5M? I just based this on what my uncle was telling me that we would need but I guess we can survive with way lower than this. So I guess, we need to rethink our asset allocation and not be too greedy. Thank you for your input aristotelian!

aristotelian
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Re: What do you think about this asset allocation?

Post by aristotelian » Sat May 20, 2017 7:00 pm

rhodnius wrote:
How did I come up with $5M? I just based this on what my uncle was telling me that we would need but I guess we can survive with way lower than this. So I guess, we need to rethink our asset allocation and not be too greedy. Thank you for your input aristotelian!


Well, don't take my word for it either. It is big, possibly irreversible decision. I would suggest reading everything you can on early retirement and how to safely calculate your number.

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