What is the best AA for me?

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Teague
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What is the best AA for me?

Post by Teague » Fri Oct 27, 2017 8:33 pm

This is a spin-off from another thread, where several folks suggested I increase my stock AA. It's an important question, and I'd like input please. Should I increase my stock AA, and how much and how quickly?

Assumptions:

I retired today.
Assume all assets are 35% S&P 500, 65% intermediate bond fund
_____________________________________________________
Emergency funds: Covered
Well insured, including umbrella.
Effective Tax Rates: 16% Federal, 5% State
State of Residence: CA
Age: 58 “Planning age:” 102
_______________________________________________________
Current retirement assets : 875K
Assume all expense ratios are 0.1% (they are actually less)

Tax-free $70K
Taxable $25K
Tax deferred $780K
Income in retirement:
Pension with COLA starting immediately: $6100/month ($73,200 annually.)
SS starting at 67: $2500/month ($30,000 annually)
______________________________________________________________________________
Expenses in retirement:
Adequate, and about what I spend now: $6200/month ($74,400K annual)
Let’s party, and what I’m planning for: $8000/month (96K annual)

Thank you,
Teague
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Hyperborea
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Re: What is the best AA for me?

Post by Hyperborea » Fri Oct 27, 2017 8:46 pm

I'm going to say that it just about doesn't matter. Your baseline spending is pretty much covered by your pension. You've got less than 10 years until your SS kicks in and that will more than cover the difference between fun and FUN! in your budget. So, you only need to cover 10 years and then the money is mostly irrelevant.

Does the pension have any top up that goes away once you hit full SS age? Do you have a spouse who will at least get half the amount of SS you do? Do you have plans to leave money to somebody or some charity?

If you want to go to a higher equity allocation you could consider gliding in to one. https://earlyretirementnow.com/2017/09/ ... lidepaths/
"Plans are worthless, but planning is everything." - Dwight D. Eisenhower

jchris
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Re: What is the best AA for me?

Post by jchris » Fri Oct 27, 2017 8:51 pm

I read your other thread and first I would say I agree with the majority that you are good to go for immediate retirement.

On this question, I think your AA should be weighted more toward stocks. You are young - you probably have 30+ years of retirement ahead of you, 100% of your expenses are covered by a COLA'd pension, and your healthcare situation seems solid. When SS kicks in, way more than 100% of expenses will be covered. So you will never have to eat cat food to survive. Given that, I think you should take a bit more risk in your AA and grow your nest egg a bit more. Maybe in a few years you can buy a bigger sailboat.

On the other hand I understand if you stick with it where it is. You've won the game, as they say...

Teague
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Re: What is the best AA for me?

Post by Teague » Fri Oct 27, 2017 9:00 pm

Hyperborea wrote:
Fri Oct 27, 2017 8:46 pm
I'm going to say that it just about doesn't matter. Your baseline spending is pretty much covered by your pension. You've got less than 10 years until your SS kicks in and that will more than cover the difference between fun and FUN! in your budget. So, you only need to cover 10 years and then the money is mostly irrelevant.

Does the pension have any top up that goes away once you hit full SS age? Do you have a spouse who will at least get half the amount of SS you do? Do you have plans to leave money to somebody or some charity?
Baseline spending is indeed just about covered by the Pension, but the taxes on that income are not.
Pension continues with COLA indexed to CPI indefinitely. Has been 2% COLA last few years.
Spouse is actually domestic partner, so she will rely on her own SS and other income. My retirement spending covers all basic needs for both of us.
No plans for charity, though I may revisit that if I get an (expected) inheritance.
Daughter, 13 years old. If I croak soon she gets pension income ($1500/month) until 22 years old, plus whatever I have left in investment funds. Whenever I expire, she gets whatever $ I have left, plus whatever exists of the expected inheritance.
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Re: What is the best AA for me?

Post by Grt2bOutdoors » Fri Oct 27, 2017 9:16 pm

Read my signature. What is the need for a higher equity allocation when you have a significant pension? Assume you are planning to take Social Security at FRA of age 70. You need 13 years of expenses. Pension gives you $60K a year, 13 years of $21600 based on tax deferred portfolio is a 2.8% draw. For comparison purposes, the Vanguard Target Retirement Income fund is invested 30/70, year to date it's up 6.1% (your anticipated draw is less than half of that). Lifestrategy Conservative Growth is up 8.60% ytd, allocated at 40/60. What you need to consider is Need, Ability and Willingness to take risk translated into SWAN - sleep well at night. What is most important is your ability to meet expenses over the next 13 years or 10 years if you need/want to collect at 67, 12 years will provide you with an optimal benefit; a 24% higher COLA adjusted benefit for life under current law. You should be in great shape ~ your current plan offers alot of optionality that others do not have (cola adjusted pension which meets more than 2/3rd's of required spend) leading them to take more risk if they can not save more. Dr. Bernstein has often said "when you've won the game, stop playing". You've won, the need is not there, the ability is not there either - you stopped working today, if you lose it how will you replace it, and finally we come down to the willingness part - are you so willing to risk it, that which you worked a lifetime for, just because some suggested having a higher equity allocation?

You've retired, so now is not the time to start tinkering. If it ain't broke, don't fix it.
Last edited by Grt2bOutdoors on Fri Oct 27, 2017 9:19 pm, edited 1 time in total.
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Hyperborea
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Re: What is the best AA for me?

Post by Hyperborea » Fri Oct 27, 2017 9:17 pm

Teague wrote:
Fri Oct 27, 2017 9:00 pm
Hyperborea wrote:
Fri Oct 27, 2017 8:46 pm
I'm going to say that it just about doesn't matter. Your baseline spending is pretty much covered by your pension. You've got less than 10 years until your SS kicks in and that will more than cover the difference between fun and FUN! in your budget. So, you only need to cover 10 years and then the money is mostly irrelevant.

Does the pension have any top up that goes away once you hit full SS age? Do you have a spouse who will at least get half the amount of SS you do? Do you have plans to leave money to somebody or some charity?
Baseline spending is indeed just about covered by the Pension, but the taxes on that income are not.
Pension continues with COLA indexed to CPI indefinitely. Has been 2% COLA last few years.
Spouse is actually domestic partner, so she will rely on her own SS and other income. My retirement spending covers all basic needs for both of us.
No plans for charity, though I may revisit that if I get an (expected) inheritance.
Daughter, 13 years old. If I croak soon she gets pension income ($1500/month) until 22 years old, plus whatever I have left in investment funds. Whenever I expire, she gets whatever $ I have left, plus whatever exists of the expected inheritance.
Ok, I didn't realize taxes weren't included. So, that's maybe $10K / year in taxes on the pension if you are filing as head of household. Your party extra is $22K /year. That might cost you $6-7K in taxes depending on exactly how you take it out and from where. So, now you're talking about $38K / year needed from the investments. You only need that for 9 years. I'd say just take that money and spend it every single year and party right now while you are still able to. That will cost you $342K total in today's dollars. If you are risk averse then you could put that much aside to cover those costs and then dump the remainder of your investments into the equity market.

You could delay SS to 70 and get a bigger payout. That will require you to pull from the investments for 12 years. So that would need $456K in today's dollars.
"Plans are worthless, but planning is everything." - Dwight D. Eisenhower

Teague
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Re: What is the best AA for me?

Post by Teague » Fri Oct 27, 2017 9:24 pm

Hyperborea wrote:
Fri Oct 27, 2017 9:17 pm
Teague wrote:
Fri Oct 27, 2017 9:00 pm
Hyperborea wrote:
Fri Oct 27, 2017 8:46 pm
I'm going to say that it just about doesn't matter. Your baseline spending is pretty much covered by your pension. You've got less than 10 years until your SS kicks in and that will more than cover the difference between fun and FUN! in your budget. So, you only need to cover 10 years and then the money is mostly irrelevant.

Does the pension have any top up that goes away once you hit full SS age? Do you have a spouse who will at least get half the amount of SS you do? Do you have plans to leave money to somebody or some charity?
Baseline spending is indeed just about covered by the Pension, but the taxes on that income are not.
Pension continues with COLA indexed to CPI indefinitely. Has been 2% COLA last few years.
Spouse is actually domestic partner, so she will rely on her own SS and other income. My retirement spending covers all basic needs for both of us.
No plans for charity, though I may revisit that if I get an (expected) inheritance.
Daughter, 13 years old. If I croak soon she gets pension income ($1500/month) until 22 years old, plus whatever I have left in investment funds. Whenever I expire, she gets whatever $ I have left, plus whatever exists of the expected inheritance.
Ok, I didn't realize taxes weren't included. So, that's maybe $10K / year in taxes on the pension if you are filing as head of household. Your party extra is $22K /year. That might cost you $6-7K in taxes depending on exactly how you take it out and from where. So, now you're talking about $38K / year needed from the investments. You only need that for 9 years. I'd say just take that money and spend it every single year and party right now while you are still able to. That will cost you $342K total in today's dollars. If you are risk averse then you could put that much aside to cover those costs and then dump the remainder of your investments into the equity market.

You could delay SS to 70 and get a bigger payout. That will require you to pull from the investments for 12 years. So that would need $456K in today's dollars.
Your numbers are very much in line with what I anticipated. Thank you, very helpful.
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Re: What is the best AA for me?

Post by Grt2bOutdoors » Fri Oct 27, 2017 9:26 pm

Teague wrote:
Fri Oct 27, 2017 9:00 pm
Hyperborea wrote:
Fri Oct 27, 2017 8:46 pm
I'm going to say that it just about doesn't matter. Your baseline spending is pretty much covered by your pension. You've got less than 10 years until your SS kicks in and that will more than cover the difference between fun and FUN! in your budget. So, you only need to cover 10 years and then the money is mostly irrelevant.

Does the pension have any top up that goes away once you hit full SS age? Do you have a spouse who will at least get half the amount of SS you do? Do you have plans to leave money to somebody or some charity?
Baseline spending is indeed just about covered by the Pension, but the taxes on that income are not.
Pension continues with COLA indexed to CPI indefinitely. Has been 2% COLA last few years.
Spouse is actually domestic partner, so she will rely on her own SS and other income. My retirement spending covers all basic needs for both of us.
No plans for charity, though I may revisit that if I get an (expected) inheritance.
Daughter, 13 years old. If I croak soon she gets pension income ($1500/month) until 22 years old, plus whatever I have left in investment funds. Whenever I expire, she gets whatever $ I have left, plus whatever exists of the expected inheritance.
Two options - 1) take a part time job, take rest from current portfolio.
Or 2) Increase equity portion to no more than 50% equity. Should markets crash, you'll still have 50% of portfolio in fixed income. If equity markets declined by 50%, you would still have 75% of original 780K intact, that would be a 3.7% draw instead of 2.8%, you spend from the fixed income portion until equity markets come back (say in year 5 or 6). Annual draw is $22K + pension ~ taxes are now covered, you continue to spend as you are today until you reach Social Security. You'll have to watch your spending though, no more than the $8K you are planning on spending per month, if you go above that your plan may not work.
"One should invest based on their need, ability and willingness to take risk - Larry Swedroe" Asking Portfolio Questions

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Re: What is the best AA for me?

Post by BolderBoy » Fri Oct 27, 2017 10:28 pm

Teague wrote:
Fri Oct 27, 2017 8:33 pm
I retired today.
Assume all assets are 35% S&P 500, 65% intermediate bond fund
Nothing wrong with that. I'm at 30/70 (total stock and total bond) and 9 years older than you.

"The enemy of a good plan is a perfect plan."
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3funder
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Re: What is the best AA for me?

Post by 3funder » Sat Oct 28, 2017 5:41 am

50/50. Pretty hard to lose the shirt off your back. Moderate protection against risk of loss, longevity, AND inflation.

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Re: What is the best AA for me?

Post by nisiprius » Sat Oct 28, 2017 6:25 am

This is absolutely a personal decision, and any idea that there is an objectively best or mathematically correct asset allocation is nonsense. It depends on your risk tolerance. As wealth increases and you become increasingly sure that you have "enough," some people have "increasing relative risk aversion" and say "why should I keep playing if I've won the game?" They prefer to keep their "extra" money safe. Others say "now I can afford to take risk, and I choose to shoot for the moon with the money I don't actually need, because it doesn't matter if I lose it." Sometimes people add "because his is for the kids, anyway" (but if it is, perhaps they should be asking their kids about it!)

This is simply a personal choice; there is no right or wrong. And in my personal opinion the whole point of having money is to make your own choices and manage it as you see it.

What can be said is this. This is a chart of the glide slopes Morningstar uses to benchmark target date retirement funds, and represents both Morningstar's ideas of a reasonable range of choices and it is in fact representative of the actual range of glide slopes chosen by fund companies for their target-date retirement funds.

Image

As you see, 35% stocks at age 58 is close to but just above the "conservative" glide slope, and 35% stocks at age 65 (i.e. "at retirement") is definitely above it.

So, the thing that can be said is that 35% stocks at your age is a sane choice that others have made. It's too much work to winkle out exactly which blue line is which fund, and to find out whether the fund company has made any changes since Morningstar made this chart in 2010, but as you can see there are definitely fund companies that have chosen conservative allocations close to yours.

Image

So why do we see suggestions that people "should" have more or less stocks? There are three possibilities. One is that people feel that the investor hasn't made an accurate assessment of the risk of stocks, or hasn't made an accurate assessment of their risk tolerance. A second is that people feel that the choices they have made themselves are "right" and project their own feelings onto others.

A third, paranoid/conspiratorial idea but I believe it, is that there are reasons why high stock allocations are better for the investment industry and for advisors and they therefore like to recommend stock allocations that are as high as possible. One dynamic is that during "normal" times, high stock allocations will outperform, and advisors worry about their clients talking to people who are making more money with other advisors.
Annual income twenty pounds, annual expenditure nineteen nineteen and six, result happiness; Annual income twenty pounds, annual expenditure twenty pounds ought and six, result misery.

Teague
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Re: What is the best AA for me?

Post by Teague » Sat Oct 28, 2017 9:23 am

Thank you all, particularly nisiprius, for yet another amazingly thorough and helpful explanation of the issues at hand.

I have been reading some from Michael Kitces on adjusting AA, and dynamic AA. I found it and the linked articles to be a good read. Though, of course, he also does not claim to know the "one true way." But still very worthwhile reading.

https://www.kitces.com/blog/valuation-b ... lidepaths/
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Re: What is the best AA for me?

Post by MJS » Sat Oct 28, 2017 3:48 pm

Do you plan to fund 4-10 years of college for your 13 year old, starting in 2023ish? Is there a 529 or are you setting aside some funds for this? Congratulations on your new life!

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Re: What is the best AA for me?

Post by Hyperborea » Sat Oct 28, 2017 3:51 pm

Teague wrote:
Fri Oct 27, 2017 9:24 pm
Hyperborea wrote:
Fri Oct 27, 2017 9:17 pm
Teague wrote:
Fri Oct 27, 2017 9:00 pm
Hyperborea wrote:
Fri Oct 27, 2017 8:46 pm
I'm going to say that it just about doesn't matter. Your baseline spending is pretty much covered by your pension. You've got less than 10 years until your SS kicks in and that will more than cover the difference between fun and FUN! in your budget. So, you only need to cover 10 years and then the money is mostly irrelevant.

Does the pension have any top up that goes away once you hit full SS age? Do you have a spouse who will at least get half the amount of SS you do? Do you have plans to leave money to somebody or some charity?
Baseline spending is indeed just about covered by the Pension, but the taxes on that income are not.
Pension continues with COLA indexed to CPI indefinitely. Has been 2% COLA last few years.
Spouse is actually domestic partner, so she will rely on her own SS and other income. My retirement spending covers all basic needs for both of us.
No plans for charity, though I may revisit that if I get an (expected) inheritance.
Daughter, 13 years old. If I croak soon she gets pension income ($1500/month) until 22 years old, plus whatever I have left in investment funds. Whenever I expire, she gets whatever $ I have left, plus whatever exists of the expected inheritance.
Ok, I didn't realize taxes weren't included. So, that's maybe $10K / year in taxes on the pension if you are filing as head of household. Your party extra is $22K /year. That might cost you $6-7K in taxes depending on exactly how you take it out and from where. So, now you're talking about $38K / year needed from the investments. You only need that for 9 years. I'd say just take that money and spend it every single year and party right now while you are still able to. That will cost you $342K total in today's dollars. If you are risk averse then you could put that much aside to cover those costs and then dump the remainder of your investments into the equity market.

You could delay SS to 70 and get a bigger payout. That will require you to pull from the investments for 12 years. So that would need $456K in today's dollars.
Your numbers are very much in line with what I anticipated. Thank you, very helpful.
I'd suggest that you take your favourite tax software and run a couple of mock returns with the retirement numbers to get a better idea of what to expect.
"Plans are worthless, but planning is everything." - Dwight D. Eisenhower

Teague
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Re: What is the best AA for me?

Post by Teague » Sat Oct 28, 2017 3:54 pm

MJS wrote:
Sat Oct 28, 2017 3:48 pm
Do you plan to fund 4-10 years of college for your 13 year old, starting in 2023ish? Is there a 529 or are you setting aside some funds for this? Congratulations on your new life!
Great question. My "dirty little secret" - to keep this discussion simpler - is that I have $120K sitting in 2.5% 5 year CD's for 4 years of college which I had not disclosed until now. She's on her own after that. (But there is also an inheritance almost surely coming my/our way which I've also purposely left out of the discussion.)

Thanks for asking, and for the good wishes!
Last edited by Teague on Sat Oct 28, 2017 3:57 pm, edited 2 times in total.
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Teague
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Re: What is the best AA for me?

Post by Teague » Sat Oct 28, 2017 3:56 pm

Hyperborea wrote:
Sat Oct 28, 2017 3:51 pm
Teague wrote:
Fri Oct 27, 2017 9:24 pm
Hyperborea wrote:
Fri Oct 27, 2017 9:17 pm
Teague wrote:
Fri Oct 27, 2017 9:00 pm
Hyperborea wrote:
Fri Oct 27, 2017 8:46 pm
I'm going to say that it just about doesn't matter. Your baseline spending is pretty much covered by your pension. You've got less than 10 years until your SS kicks in and that will more than cover the difference between fun and FUN! in your budget. So, you only need to cover 10 years and then the money is mostly irrelevant.

Does the pension have any top up that goes away once you hit full SS age? Do you have a spouse who will at least get half the amount of SS you do? Do you have plans to leave money to somebody or some charity?
Baseline spending is indeed just about covered by the Pension, but the taxes on that income are not.
Pension continues with COLA indexed to CPI indefinitely. Has been 2% COLA last few years.
Spouse is actually domestic partner, so she will rely on her own SS and other income. My retirement spending covers all basic needs for both of us.
No plans for charity, though I may revisit that if I get an (expected) inheritance.
Daughter, 13 years old. If I croak soon she gets pension income ($1500/month) until 22 years old, plus whatever I have left in investment funds. Whenever I expire, she gets whatever $ I have left, plus whatever exists of the expected inheritance.
Ok, I didn't realize taxes weren't included. So, that's maybe $10K / year in taxes on the pension if you are filing as head of household. Your party extra is $22K /year. That might cost you $6-7K in taxes depending on exactly how you take it out and from where. So, now you're talking about $38K / year needed from the investments. You only need that for 9 years. I'd say just take that money and spend it every single year and party right now while you are still able to. That will cost you $342K total in today's dollars. If you are risk averse then you could put that much aside to cover those costs and then dump the remainder of your investments into the equity market.

You could delay SS to 70 and get a bigger payout. That will require you to pull from the investments for 12 years. So that would need $456K in today's dollars.
Your numbers are very much in line with what I anticipated. Thank you, very helpful.
I'd suggest that you take your favourite tax software and run a couple of mock returns with the retirement numbers to get a better idea of what to expect.
Will do. I've already done a couple of basic scenarios that way, but will be exploring fine tuning possible Roth conversions and RMD's / SS.
Semper Augustus

MJS
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Re: What is the best AA for me?

Post by MJS » Sat Oct 28, 2017 4:56 pm

Teague wrote:
Sat Oct 28, 2017 3:54 pm
MJS wrote:
Sat Oct 28, 2017 3:48 pm
Do you plan to fund 4-10 years of college for your 13 year old, ...
Great question. My "dirty little secret" - to keep this discussion simpler - is that I have $120K sitting in 2.5% 5 year CD's for 4 years of college which I had not disclosed until now.
Given the way you plan, retirement should be easy-peasy! Wishing you contentment and moderate challenges.

Teague
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Re: What is the best AA for me?

Post by Teague » Sat Oct 28, 2017 5:04 pm

MJS wrote:
Sat Oct 28, 2017 4:56 pm
Teague wrote:
Sat Oct 28, 2017 3:54 pm
MJS wrote:
Sat Oct 28, 2017 3:48 pm
Do you plan to fund 4-10 years of college for your 13 year old, ...
Great question. My "dirty little secret" - to keep this discussion simpler - is that I have $120K sitting in 2.5% 5 year CD's for 4 years of college which I had not disclosed until now.
Given the way you plan, retirement should be easy-peasy! Wishing you contentment and moderate challenges.
Thank you! We all need a few moderate challenges I suppose. :wink:
Semper Augustus

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Re: What is the best AA for me?

Post by Sandtrap » Sat Oct 28, 2017 5:08 pm

Followed your other thread. Congratulations on retirement. :sharebeer
36/65 is what I have right now.
Looks great.
How about giving it some time for now and don't mess with it. Adjust down the road as needed.
Ease into retirement. No big changes. No sudden moves.
J :D

Teague
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Re: What is the best AA for me?

Post by Teague » Sat Oct 28, 2017 5:11 pm

Sandtrap wrote:
Sat Oct 28, 2017 5:08 pm
Followed your other thread. Congratulations on retirement. :sharebeer
36/65 is what I have right now.
Looks great.
How about giving it some time for now and don't mess with it. Adjust down the road as needed.
Ease into retirement. No big changes. No sudden moves.
J :D
Sounds good. No sudden uncontrolled "movements" as I grow older. I'll try for that. :D
Semper Augustus

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Re: What is the best AA for me?

Post by sergeant » Sun Oct 29, 2017 12:09 am

I read your other thread. Congrats on the retirement. Your AA sounds good for you. I'm 50/50, 54 years old and retired last year with a pension that supplies 3 times our expenses. I don't think you need to increase your AA.
Lincoln 3 EOW!

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Re: What is the best AA for me?

Post by Teague » Sun Oct 29, 2017 12:23 am

sergeant wrote:
Sun Oct 29, 2017 12:09 am
I read your other thread. Congrats on the retirement. Your AA sounds good for you. I'm 50/50, 54 years old and retired last year with a pension that supplies 3 times our expenses. I don't think you need to increase your AA.
Thanks much!
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Re: What is the best AA for me?

Post by my name » Sun Oct 29, 2017 8:06 am

Excellent topic. While my pension - income sources are tinier, so are my expenses. I did "max the max" on social security - at FRA 66 I was just a hair under the max that can be paid, then delayed to 70 which I am this year. The concepts posted here are just as valuable, great food-for-thought. Thank you!

An added thought about spending needs that should be covered. My investments are for long term care should I need that, when I pass anything left goes to charity. LTC insurance is not really that great - life time cap may be $200,000. In my state (NJ), assisted living is about $125,000 a year, this could go on for many years and medical costs rise a lot. I suspect the state of CA is worse. Skilled nursing is about $165,000 a year. Even if I had family/friends willing, I would not want to do this at home, and know the brutal burden of being a caregiver, certainly over years. Planning for Medicaid, well who knows what that will look like in 10 years. Now, even if you qualify, you may be on a state waiting list, so how will that work out. Advise talking with an elder law attorney - and not one geared to selling insurance products or someone getting ready to retire. Ideally one who is modern and has a network in place to help manage your care as you age.

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Re: What is the best AA for me?

Post by retiredjg » Sun Oct 29, 2017 8:43 am

You picked 35%/65% for a reason, presumably after years of investing experience. I see no reason to change it because some people think they would be more aggressive in your position.

Why not start your retirement adventure in a more conservative stance? There is always talk about a poor early sequence of returns - a conservative stance offers you some protection from that. I got hit with a poor sequence and it took years for my portfolio to recover.

You can always go more aggressive if you want after you see how things go. I suggest starting at 35/65 and re-evaluating in 5 years.

Teague
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Re: What is the best AA for me?

Post by Teague » Sun Oct 29, 2017 10:26 am

retiredjg wrote:
Sun Oct 29, 2017 8:43 am
You picked 35%/65% for a reason, presumably after years of investing experience. I see no reason to change it because some people think they would be more aggressive in your position.

Why not start your retirement adventure in a more conservative stance? There is always talk about a poor early sequence of returns - a conservative stance offers you some protection from that. I got hit with a poor sequence and it took years for my portfolio to recover.

You can always go more aggressive if you want after you see how things go. I suggest starting at 35/65 and re-evaluating in 5 years.
Sounds good to me, thanks!
Semper Augustus

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