Time Horizon

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BostonButterfly
Posts: 145
Joined: Tue Jun 06, 2017 11:49 am
Location: Boston

Time Horizon

Post by BostonButterfly »

I need help clarifying time horizon. The goal that I’m working towards is to cut back to part time work in ten years (age 57), then fully retire in twelve. The part time thing is because I don’t think I can financially reach full retirement in ten years. If for some reason I can, I will.

I understand that asset allocations should change as you approach retirement. And I also understand that “time in the market” has a major impact on reaching one’s goals. What isn’t clear to me is when considering “time in the market” - does my time horizon end in ten to twelve years, when it becomes about preserving the nest egg and making it last until I die? My confusion is about the fact that come retirement, your money is still IN the market, albeit invested conservatively. It’s not like you retire and stuff the nest egg under the mattress. So if I’m still in the market, my time horizon continues – no? If I’m fortunate enough to live to 90, my money would be in the market for 30+ years after retirement. That’s a long time!

So, when contemplating how much time I have to ride out any future storms in the market in order to decide on an asset allocation that will allow me to sleep at night, do I assume that age 57-59 (for me) is the end of the line? Or should the fact that the money will remain in the market for decades post-retirement influence my planning today?
Grt2bOutdoors
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Location: New York

Re: Time Horizon

Post by Grt2bOutdoors »

Your human capital will dissipate in 10-12 years, while you will live potentially for another 18 years after, so yes, time horizon is 30 years, but a bad sequence of returns can make your horizon alot shorter. If retiring today, I'd hold no more than 60% equity. What does your current portfolio look like now?
"One should invest based on their need, ability and willingness to take risk - Larry Swedroe" Asking Portfolio Questions
saveinvestbecomefree
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Joined: Thu Jan 05, 2017 7:06 am

Re: Time Horizon

Post by saveinvestbecomefree »

You are actually asking a very good and complicated question that is rarely addressed.

Unfortunately, there is no single time horizon because you will need money from your portfolio at different points in time. If you're 50 and plan to stay invested until you die at 90, it doesn't mean your horizon is simply 40 years. You will need money before 40 years is up. Most of us have short term spending needs (e.g. regular life expenses each year in retirement), medium term (kids college, new house, big vacation, new roof, vehicle replacement, etc), and long-term (investments to fund longer-term future life expenses). You will need money to spend along the way.

There is no really good way to model this. You just need to pick an asset allocation that is relatively high in stocks if you plan to stay invested for a long time. I would say 75/25 stocks/bonds is an aggressive mix for 5 years prior to retirement and in retirement (especially early retirement). Many here advocate 60/40. Early in your working career when you are far from needing spending money from your investments, I think 100% stocks is fine. I plan to remain between 75/25 stocks/bonds and 100% stocks throughout my lifetime based on valuations but I am on the aggressive side (I have some financial cushion so my personal risk is low).

Good luck!
Topic Author
BostonButterfly
Posts: 145
Joined: Tue Jun 06, 2017 11:49 am
Location: Boston

Re: Time Horizon

Post by BostonButterfly »

Our current portfolio is a disaster (ie......a HUGE % of our money is in money market). I'm educating myself now about moving to a three/four fund portfolio, as well as making sure our monthly retirement savings will get us to our goal.
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siamond
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Re: Time Horizon

Post by siamond »

As was pointed out before, your time horizon is actually very diverse, but by no mean does it stop at retirement time. If you fully retire before reaching 60, then you have 3 or 4 decades in front of you to plan for. That's a long time. During which you'll regularly withdraw money, but not such a big % every year. And you'd better keep a solid engine of growth in your portfolio for it to sustain such withdrawals for 3 (or more) decades.

In addition, depending on your bequest goals, the actual time horizon might actually be longer than that. I personally have a goal to leave a solid bequest to my children, if only because I am worried that their own retirement is going to be more challenging than mine (if only due to SSA benefits shrinking over time). One could say that my time horizon is THEIR lifetime. Based on that and other considerations, I never saw the point of a glide path towards more bonds.

I would urge you to think long and carefully about the various risks you will face. People seem to obsess over short-term volatility while forgetting other types of risk (inflation; loss of purchasing power over time; LTC costs; etc) which are more mid to long-term in nature. Your decision about your asset allocation in retirement really should be a compromise between dealing with those various types of risk, and is VERY dependent on your specific circumstances. A very helpful booklet is 'Deep Risk' from D. Bernstein. This helped me a lot shaping my thinking (I am in my mid-50s, early retired, DW will keep working for a few years).
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siamond
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Re: Time Horizon

Post by siamond »

One more thought. If you're a bit stuck in indecision (yes, this is hard), why don't you go with a Life Strategy fund, for example Vanguard LifeStrategy Moderate Growth Fund (VSMGX)? The worse thing you can do right now is stay in cash (a sure money loser). Then you can take your time studying the matter while your money is properly invested, and later on tweak your AA as you desire.

PS. given your user name, may I venture to guess that you live near Boston? If then, you may want to join us at our next Metro-Boston local chapter meeting? See this thread and post. Please contact me by PM if interested, as I am the coordinator of this chapter.
dbr
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Re: Time Horizon

Post by dbr »

I think time horizon is a bad concept as it suggests that everything is aimed at an end point whereas in fact it is a continuous process, an extended plain for example. (I say plain, not plane, for better visualization having rejected the Vanguard image of cruising on an infinite sea.)

That plain does have events where situations change, such as retirement when, as stated, personal capital runs out, and when one dies, when one stops spending (sort of, maybe) and one progresses on the plain occupied by one's heirs, etc.

One example that is clearly erroneous is to imagine that resources for retirement are cashed in on the day or retirement rather than gradually withdrawn in very small amounts over a long time.
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