Help With Asset Allocation - 7 years to retirement

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msj16
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Help With Asset Allocation - 7 years to retirement

Post by msj16 » Wed Sep 13, 2017 7:19 pm

I would appreciate some help with asset allocation.

I am getting close (95% of way) to financial independence at age 52. I am not interested in retiring yet. I am able to withstand sharp drops in the market (did not sell in 2008). I want to retire in 7 years but I like my job and may even work part-time after that. At retirement, I would like to maintain 60% allocation to stock. I am currently at 75% stock.

This seems like a good time to revisit my allocation to stocks. Vanguard suggests about 64% stocks for those who want to retire when I do. This seems too conservative for me. I am wondering what is a recommended allocation for someone with 7 years to retirement who has the ability and willingness to take risk, just not the need.

Thank you for your help,
msj16

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Watty
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Re: Help With Asset Allocation - 7 years to retirement

Post by Watty » Wed Sep 13, 2017 9:51 pm

msj16 wrote:
Wed Sep 13, 2017 7:19 pm
I am wondering what is a recommended allocation for someone with 7 years to retirement who has the ability and willingness to take risk, just not the need.
For checking to see if I am in the right ballpark with my asset allocation I take a look at what asset allocation a similar target date fund is using. Here is the Vanguard 2025 fund which is at 65% stocks.

https://personal.vanguard.com/us/funds/ ... undId=0304

The problem with using that though is that when you retire when you are 59 then your income needs for your early retirement will be a lot higher than after you get on Medicare and start Social Security. By coincidence I retired when I was 59 and I was running my numbers before I retired I looked at my portfolios as having two components; what I would need from 59 until 65, and what I would need after I was 65.

The "bucket" of money that I would spend during the first six years or retirement needed to be invest more conservatively since it would be spent sooner.

With that in mind it I would suggest not be too aggressive.

An additional risk is that even though you plan on seven more years and possibly beyond there is a risk that you could have a career or health setback and might not be able to actually work that long.

dwickenh
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Re: Help With Asset Allocation - 7 years to retirement

Post by dwickenh » Wed Sep 13, 2017 9:57 pm

Without more specifics, I am big on compromise. You say 75% and the Target Date says 65%. Why not split the difference at 70% and call it a day. It will likely not make a large difference in returns, but you will have the peace of mind of reducing risk just a bit.

My 2 cents worth,

Dan
The market is the most efficient mechanism anywhere in the world for transferring wealth from impatient people to patient people.” | — Warren Buffett

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Hyperborea
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Re: Help With Asset Allocation - 7 years to retirement

Post by Hyperborea » Wed Sep 13, 2017 10:06 pm

You need more info than that to decide what to do. Are you expecting any cash inflows between now and retirement? Are you expecting big cash payments (e.g. deferred comp)? Can you just change your yearly investment stream over to buying the fixed income that you want? How about turning off dividend reinvestment and redirecting that? You don't necessarily need to sell to make you planned glide to your new AA targets. Selling will generate taxable income on top of your salary.

I was at 100/0/0 and knew that I would have some large cash coming in the last year of my work and the first year of my retirement. I used that along with a little bit of redirected investment savings to move to 90/0/10. Next year when I sell the house, after I put aside some to pay for another place in a few years, I will use the rest to move to my desired retirement allocation of 80/10/10.

Dandy
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Re: Help With Asset Allocation - 7 years to retirement

Post by Dandy » Thu Sep 14, 2017 9:10 am

1. estimate your equity dollar value at retirement.
2. estimate your yearly dollar withdrawal from your nest egg
3. at your estimated retirement age assume equity dollar amount drops 40% over the next 3 years e.g. if you had a million in equities when you retired you now have $600k starting year 4.
4. estimate your nest egg at retirement + 3 years (actually starting year 4) after the 40% drop in equity dollars and 3 years of withdrawals from fixed income.

Are you in reasonable shape after the above stress test?
You might try doing this with several different equity dollars and potentially equity declines. Percentages can be tricky that is why I suggest using dollars.

I think the biggest change in retirement is the combination of lower guaranteed income e.g. a smaller pension or social security, no investments or company match to soften the blow of equity market decline and the "new" factor of actually withdrawing from your nest egg especially in a bad equity market environment. It can be a game changer. Been there done that -- forced to retire at age 60 in 2008 went from having more than enough to probably not enough - and I had a nice pension.

For many once you retire your human capital goes to minimum wage or close to it rather quickly.

retiredjg
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Re: Help With Asset Allocation - 7 years to retirement

Post by retiredjg » Thu Sep 14, 2017 9:56 am

If you've decided you want to be at 60% when you retire, I'd just move that direction over the next 7 years. You can likely do that by just increasing your bond contributions now - enough to nudge you toward 1 or 2% more bonds each year. Seems easy enough.

Jack FFR1846
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Re: Help With Asset Allocation - 7 years to retirement

Post by Jack FFR1846 » Thu Sep 14, 2017 10:05 am

You have a long time to retirement so you can adjust as you go along. If the market drops between now and 7 years from now, then maybe you keep working till you're 65, when health insurance drops. If that thought is unacceptable, then I'd submit that even 65% is to aggressive. I'm 60 and plan to retire in 2 or 3 years (kids education cost is the big factor for me) and have been at 50/50 for some time. It's quite settling to watch the panic during random really bad days and I look at my portfolio and see nothing of concern.

It does seem that a lot of people say that they are willing to accept risk. Then the market drops 3% and they're in panic mode. In reality, these people are not willing to accept risk. Think about long term goals and what you need to do to assure yourself that you'll meet them. Since you like your job, that's a big plus and gives you lots of flexibility. Is your wife younger and planning to work after your planned retirement? There's potential health insurance coverage, right? That's my plan with a wife who has been either SAHM or per diem for 16 years. She's very ready to go back full time.
Bogle: Smart Beta is stupid

msj16
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Re: Help With Asset Allocation - 7 years to retirement

Post by msj16 » Fri Sep 15, 2017 3:27 pm

My apologies for not responding sooner. Thank you everyone for your very helpful advice. I really like the idea of just smoothly decreasing the allocation over the 7 years since I can adjust the glide path as needed, depending on whether I might continue working. Thank you to everyone for giving me many good ideas to think about. Bogleheads are better than a financial advisor since they speak also from their own experience!

inbox788
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Re: Help With Asset Allocation - 7 years to retirement

Post by inbox788 » Sat Sep 16, 2017 12:03 am

My AA has been overweight equities for some time (good problem to have IMO, since I'm ahead of schedule due to higher than projected returns). Rather than make a rebalance, I've been adding more to bonds and letting the equities overweight ride with mostly good results (i.e. higher risk). Things got so skewed that I finally put all new additions to bonds, and despite that, I manually made a few manual small rebalances (only around 1% each time). I'm slowly getting away from an aggressive AA and as retirement approaches, I will have to make a decision whether to maintain what I've been doing or making a larger final rebalance near the date. I'm hoping to remain ahead of schedule, and if I had 2 or 3 years of living expenses for retirement, I might be willing to be a little more on the moderate to aggressive AA (aiming for somewhere between 50/50 to 70/30), but as they say about the rubber meeting the road and battle plans contacting the enemy...

Dottie57
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Re: Help With Asset Allocation - 7 years to retirement

Post by Dottie57 » Sat Sep 16, 2017 6:37 am

msj16 wrote:
Fri Sep 15, 2017 3:27 pm
My apologies for not responding sooner. Thank you everyone for your very helpful advice. I really like the idea of just smoothly decreasing the allocation over the 7 years since I can adjust the glide path as needed, depending on whether I might continue working. Thank you to everyone for giving me many good ideas to think about. Bogleheads are better than a financial advisor since they speak also from their own experience!

The opposite way of thinking is to move more to bonds now and ramp up yor stock purchases. In essence locking in your gains.

trueblueky
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Re: Help With Asset Allocation - 7 years to retirement

Post by trueblueky » Sat Sep 16, 2017 9:16 am

Dottie57 wrote:
Sat Sep 16, 2017 6:37 am
msj16 wrote:
Fri Sep 15, 2017 3:27 pm
My apologies for not responding sooner. Thank you everyone for your very helpful advice. I really like the idea of just smoothly decreasing the allocation over the 7 years since I can adjust the glide path as needed, depending on whether I might continue working. Thank you to everyone for giving me many good ideas to think about. Bogleheads are better than a financial advisor since they speak also from their own experience!

The opposite way of thinking is to move more to bonds now and ramp up yor stock purchases. In essence locking in your gains.
+1
Latest research is that the years just before and after retirement are the most critical. A sudden drop in the market then is the worst possible timing.

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