With 25x Annual Expenses in Bonds, Does Asset Allocation Really Matter?

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Random Poster
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With 25x Annual Expenses in Bonds, Does Asset Allocation Really Matter?

Post by Random Poster » Sat Feb 10, 2018 3:41 pm

Background:

I'm 41, wife is 38. Our current annual expenses are in the $45k range, but to be conservativewe plan for them to be $60k a year. We have roughly $3 million in investments, with roughly $1,500,000 of that in a mix of total bond market and intermediate term tax-exempt funds. The remainder is total stock market (40% of total) and total international (10% of total). By my math, that means we've got around 25 times our inflated annual expenses in bonds.

Question:

Considering our ages, and our current bond holdings and amounts, does it make sense to keep investing at a 50/50 allocation, or would it be reasonably safe to start upping the stock portion of our investments, so long as we continued to keep at least 25 times expenses in bonds?

Thus, from here on out, should we just invest only in stock funds, even if it means that we end up with a 60/40 or 70/30 allocation, as long as the bond portion at least equals 25 times our annual expenses? Or would doing that be stupid and foolish?

I don't envision our annual expenses ever exceeding $75k a year, so I guess it might make sense to keep buying a bit more bonds just in case, but I'm not sure what we should do and any thoughts or advice would be appreciated.

Thanks.

Mike Scott
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Re: With 25x Annual Expenses in Bonds, Does Asset Allocation Really Matter?

Post by Mike Scott » Sat Feb 10, 2018 3:49 pm

It probably does not matter much either way. Maybe buy stocks when they are "cheap" and more bonds when stocks are "high" as long as you stay within a 50/50 + or - 5% band? You could go "crazy" and shift to a 60/40 and probably not make much difference.

*Remember how you got to this point. Why change now?

delamer
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Re: With 25x Annual Expenses in Bonds, Does Asset Allocation Really Matter?

Post by delamer » Sat Feb 10, 2018 3:56 pm

Are you currently working and adding to investments? If so, when do you plan to retire?

Random Poster
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Re: With 25x Annual Expenses in Bonds, Does Asset Allocation Really Matter?

Post by Random Poster » Sat Feb 10, 2018 4:02 pm

delamer wrote:
Sat Feb 10, 2018 3:56 pm
Are you currently working and adding to investments? If so, when do you plan to retire?
Yes and yes.

I don't know when I will retire. I keep wanting to leave, but I'm too afraid to do so and so I keep sticking around for another year, mostly so that I can cash out RSU grants and get 401k matching amounts and employer-provided contributions to a separate retirement account, all of which is worth around $85k a year.

delamer
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Re: With 25x Annual Expenses in Bonds, Does Asset Allocation Really Matter?

Post by delamer » Sat Feb 10, 2018 4:13 pm

Random Poster wrote:
Sat Feb 10, 2018 4:02 pm
delamer wrote:
Sat Feb 10, 2018 3:56 pm
Are you currently working and adding to investments? If so, when do you plan to retire?
Yes and yes.

I don't know when I will retire. I keep wanting to leave, but I'm too afraid to do so and so I keep sticking around for another year, mostly so that I can cash out RSU grants and get 401k matching amounts and employer-provided contributions to a separate retirement account, all of which is worth around $85k a year.

If you are working and not drawing down your retirement assets, then why have you targeted 25X expenses in bonds?

That can make sense for a retirement portfolio that you are spending down (or are about to). But not so much when you are in the accumulation phase.

dbr
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Re: With 25x Annual Expenses in Bonds, Does Asset Allocation Really Matter?

Post by dbr » Sat Feb 10, 2018 4:15 pm

If you have 25 times your annual expenses in bonds plus 25 times your annual expenses in stocks, you can retire now at that asset allocation or plan retiring later at any asset allocation you want. The one question is are you playing games with expenses and you really plan to spend more than you say. You could try running some of the retirement planning models and see what kind of outcome you are getting. Put in a healthy contingency for spending more than you think and consider that some kind of annuitization might be a good thing if only Social Security.

Note a possible misrepresentation of the general analysis of safe withdrawal rates in retirement says that infamous 4% for 30 years doesn't work if the portfolio is all bonds. So it is a sort of odd process to talk about having 25x expenses in bonds. A wrinkle on that is advice to keep 25 times baseline expenses in bonds and discretionary expenses in stocks. I'm not sure that is what you really mean. I get totally lost at the concept of a baseline vs a discretionary expense. I have no significant expenses that aren't subject to some discretion and the total is certainly subject to a lot of discretion.

Random Poster
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Re: With 25x Annual Expenses in Bonds, Does Asset Allocation Really Matter?

Post by Random Poster » Sat Feb 10, 2018 4:25 pm

delamer wrote:
Sat Feb 10, 2018 4:13 pm
Random Poster wrote:
Sat Feb 10, 2018 4:02 pm
delamer wrote:
Sat Feb 10, 2018 3:56 pm
Are you currently working and adding to investments? If so, when do you plan to retire?
Yes and yes.

I don't know when I will retire. I keep wanting to leave, but I'm too afraid to do so and so I keep sticking around for another year, mostly so that I can cash out RSU grants and get 401k matching amounts and employer-provided contributions to a separate retirement account, all of which is worth around $85k a year.

If you are working and not drawing down your retirement assets, then why have you targeted 25X expenses in bonds?

That can make sense for a retirement portfolio that you are spending down (or are about to). But not so much when you are in the accumulation phase.
I don't know how to answer that question.

I wouldn't say that we "targeted" 25X expenses in bonds, but by having a 50/50 allocation and with our expenses what they are and our investment account balance what it is, that is how we've ended up.

I just don't know if it makes sense to keep a 50/50 allocation once you've got a relatively substantial amount in bonds. That's all.

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TomatoTomahto
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Re: With 25x Annual Expenses in Bonds, Does Asset Allocation Really Matter?

Post by TomatoTomahto » Sat Feb 10, 2018 4:31 pm

When I saw the title question, I was prepared to say “No, AA doesn’t matter.” Then I saw how young you are. I personally have a Liability Matching Portfolio (LMP) with around 30x residual living expenses (I.e., post SS and pensions) in fixed income. However, that’s more than our life expectancy, but it’s (hopefully) not yours.

Between inflation, and a possible unexpected run on the hedonic treadmill (your expenses might surprise you if you’re no longer working), I’d bump up my equities for a while, and then do a LMP.

dbr
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Re: With 25x Annual Expenses in Bonds, Does Asset Allocation Really Matter?

Post by dbr » Sat Feb 10, 2018 4:33 pm

Random Poster wrote:
Sat Feb 10, 2018 4:25 pm
delamer wrote:
Sat Feb 10, 2018 4:13 pm
Random Poster wrote:
Sat Feb 10, 2018 4:02 pm
delamer wrote:
Sat Feb 10, 2018 3:56 pm
Are you currently working and adding to investments? If so, when do you plan to retire?
Yes and yes.

I don't know when I will retire. I keep wanting to leave, but I'm too afraid to do so and so I keep sticking around for another year, mostly so that I can cash out RSU grants and get 401k matching amounts and employer-provided contributions to a separate retirement account, all of which is worth around $85k a year.

If you are working and not drawing down your retirement assets, then why have you targeted 25X expenses in bonds?

That can make sense for a retirement portfolio that you are spending down (or are about to). But not so much when you are in the accumulation phase.
I don't know how to answer that question.

I wouldn't say that we "targeted" 25X expenses in bonds, but by having a 50/50 allocation and with our expenses what they are and our investment account balance what it is, that is how we've ended up.

I just don't know if it makes sense to keep a 50/50 allocation once you've got a relatively substantial amount in bonds. That's all.
You set your asset allocation according to your need/ability/willingness to take risk. 25X in bonds has nothing directly to do with it and "relatively substantial" is not an actionable condition. That said, from the little you say about yourself 50/50 would probably be the neutral point from which you would depart only for a good reason. What are you planning to do with all that money (which is where substantial might come in)?

delamer
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Re: With 25x Annual Expenses in Bonds, Does Asset Allocation Really Matter?

Post by delamer » Sat Feb 10, 2018 4:49 pm

dbr wrote:
Sat Feb 10, 2018 4:33 pm
Random Poster wrote:
Sat Feb 10, 2018 4:25 pm
delamer wrote:
Sat Feb 10, 2018 4:13 pm
Random Poster wrote:
Sat Feb 10, 2018 4:02 pm
delamer wrote:
Sat Feb 10, 2018 3:56 pm
Are you currently working and adding to investments? If so, when do you plan to retire?
Yes and yes.

I don't know when I will retire. I keep wanting to leave, but I'm too afraid to do so and so I keep sticking around for another year, mostly so that I can cash out RSU grants and get 401k matching amounts and employer-provided contributions to a separate retirement account, all of which is worth around $85k a year.

If you are working and not drawing down your retirement assets, then why have you targeted 25X expenses in bonds?

That can make sense for a retirement portfolio that you are spending down (or are about to). But not so much when you are in the accumulation phase.
I don't know how to answer that question.

I wouldn't say that we "targeted" 25X expenses in bonds, but by having a 50/50 allocation and with our expenses what they are and our investment account balance what it is, that is how we've ended up.

I just don't know if it makes sense to keep a 50/50 allocation once you've got a relatively substantial amount in bonds. That's all.
You set your asset allocation according to your need/ability/willingness to take risk. 25X in bonds has nothing directly to do with it and "relatively substantial" is not an actionable condition. That said, from the little you say about yourself 50/50 would probably be the neutral point from which you would depart only for a good reason. What are you planning to do with all that money (which is where substantial might come in)?
Right.

There are good reasons to increase your stock allocation, or to leave it alone or decrease it for that matter, but having 25X expenses in bonds isn’t one of them. If you want a 50/50 allocation, then add your contributions and/or rebalance to keep it that way.

Ron Scott
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Re: With 25x Annual Expenses in Bonds, Does Asset Allocation Really Matter?

Post by Ron Scott » Sat Feb 10, 2018 4:53 pm

The only hole in the story I see is your early estimation of retirement expenses. I'm assuming you're going to work another 15-25 years here so...

I am 61 and retired in 2017. I could not know it at 41 but more than 90% of my current net worth would be earned in the past 20 years of my life and my outlook on spending is far different than what it was back then. Stuff happens.

Rather than starting with future expenses (and the resultant 25X logic) it might be more helpful to keep your options open and don't plan for a $75k limit.

Bottom line, I would advise you NOT to use your current assumptions about retirement spending levels to modify your asset allocations. It sounds like you've been thinking smartly about your investments so stay the course.
Retirement is a game best played by those prepared for more volatility in the future than has been seen in the past. Preparing for financial challenges is more fruitful than trying to predict them.

JBTX
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Re: With 25x Annual Expenses in Bonds, Does Asset Allocation Really Matter?

Post by JBTX » Sat Feb 10, 2018 5:23 pm

Random Poster wrote:
Sat Feb 10, 2018 3:41 pm
Background:

I'm 41, wife is 38. Our current annual expenses are in the $45k range, but to be conservativewe plan for them to be $60k a year. We have roughly $3 million in investments, with roughly $1,500,000 of that in a mix of total bond market and intermediate term tax-exempt funds. The remainder is total stock market (40% of total) and total international (10% of total). By my math, that means we've got around 25 times our inflated annual expenses in bonds.

Question:

Considering our ages, and our current bond holdings and amounts, does it make sense to keep investing at a 50/50 allocation, or would it be reasonably safe to start upping the stock portion of our investments, so long as we continued to keep at least 25 times expenses in bonds?

Thus, from here on out, should we just invest only in stock funds, even if it means that we end up with a 60/40 or 70/30 allocation, as long as the bond portion at least equals 25 times our annual expenses? Or would doing that be stupid and foolish?

I don't envision our annual expenses ever exceeding $75k a year, so I guess it might make sense to keep buying a bit more bonds just in case, but I'm not sure what we should do and any thoughts or advice would be appreciated.

Thanks.
A $3 million portfolio historically has been able to spit off at least 3.0% or $90k per year for an early retiree. Whether you are 50/50 or 60/40 probably doesn’t make a lot of difference.

If your expenses truly won’t exceed $60k which includes your taxes you are in very good shape.

JBTX
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Re: With 25x Annual Expenses in Bonds, Does Asset Allocation Really Matter?

Post by JBTX » Sat Feb 10, 2018 5:27 pm

In the other thread you said you are putting $175k to $250k per year in a taxable account. Presumably that means you have an income of $200k to $300k.

How can you have total expenses of $45k per year including taxes?

Olemiss540
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Re: With 25x Annual Expenses in Bonds, Does Asset Allocation Really Matter?

Post by Olemiss540 » Sat Feb 10, 2018 5:36 pm

At a 2% we rate it really doesn't matter either way. Even at 40 you are in great shape. Wonderful job keeping expenses so low with such a high income.
I hold index funds because I do not overestimate my ability to pick stocks OR stock pickers.

Random Poster
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Re: With 25x Annual Expenses in Bonds, Does Asset Allocation Really Matter?

Post by Random Poster » Sat Feb 10, 2018 6:49 pm

dbr wrote:
Sat Feb 10, 2018 4:33 pm
You set your asset allocation according to your need/ability/willingness to take risk. 25X in bonds has nothing directly to do with it and "relatively substantial" is not an actionable condition. That said, from the little you say about yourself 50/50 would probably be the neutral point from which you would depart only for a good reason. What are you planning to do with all that money (which is where substantial might come in)?
Other than live off of the money, nothing.

Random Poster
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Re: With 25x Annual Expenses in Bonds, Does Asset Allocation Really Matter?

Post by Random Poster » Sat Feb 10, 2018 6:55 pm

JBTX wrote:
Sat Feb 10, 2018 5:27 pm
In the other thread you said you are putting $175k to $250k per year in a taxable account. Presumably that means you have an income of $200k to $300k.

How can you have total expenses of $45k per year including taxes?
Including income taxes, our total expenses are not $45k. Last year, we spent around $39,000 on living expenses, but I expect that our 2017 income tax will be in the $105k range.

But if I stop working, our income taxes should be very low--perhaps $5k or less a year. So I don't really see the point in including our current income tax obligation in our living expenses.

Random Poster
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Re: With 25x Annual Expenses in Bonds, Does Asset Allocation Really Matter?

Post by Random Poster » Sat Feb 10, 2018 6:56 pm

Thanks to all who have responded. I'll just keep the 50/50 allocation and keep investing accordingly. Thanks.

JBTX
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Re: With 25x Annual Expenses in Bonds, Does Asset Allocation Really Matter?

Post by JBTX » Sat Feb 10, 2018 7:19 pm

Random Poster wrote:
Sat Feb 10, 2018 6:55 pm
JBTX wrote:
Sat Feb 10, 2018 5:27 pm
In the other thread you said you are putting $175k to $250k per year in a taxable account. Presumably that means you have an income of $200k to $300k.

How can you have total expenses of $45k per year including taxes?
Including income taxes, our total expenses are not $45k. Last year, we spent around $39,000 on living expenses, but I expect that our 2017 income tax will be in the $105k range.

But if I stop working, our income taxes should be very low--perhaps $5k or less a year. So I don't really see the point in including our current income tax obligation in our living expenses.
Agree putting in current taxation would be pointless, but a lot of people throw # X expenses threads and posts around here. To the extent they represent an inverse of a safe withdrawal rate they should include an estimate taxes during retirement. I’m not sure everybody gets that. To the extent you only have capital gains and no other income perhaps taxes won’t be that much. Many years down the road with retirement accounts RMDs and social security your taxes will likely go up at least some.

mega317
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Re: With 25x Annual Expenses in Bonds, Does Asset Allocation Really Matter?

Post by mega317 » Sun Feb 11, 2018 2:29 am

It doesn't make sense to keep investing at 50/50 because it doesn't make sense to keep piling up cash. Either retire or start doing some good with your money.

As an aside it's amazing to me that people can decide, at least claim to decide, what to do with hundreds of thousands of dollars after 3 hours of internet discussion.

HJG0989
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Re: With 25x Annual Expenses in Bonds, Does Asset Allocation Really Matter?

Post by HJG0989 » Sun Feb 11, 2018 3:18 am

mega317 wrote:
Sun Feb 11, 2018 2:29 am
As an aside it's amazing to me that people can decide, at least claim to decide, what to do with hundreds of thousands of dollars after 3 hours of internet discussion.
I have a harder time understanding how people can turn their money over to someone they don't really know and ask them to manage their money for them while not understanding what is being done with their investments and how much it is costing them. :shock:

Random Poster
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Re: With 25x Annual Expenses in Bonds, Does Asset Allocation Really Matter?

Post by Random Poster » Sun Feb 11, 2018 10:03 am

mega317 wrote:
Sun Feb 11, 2018 2:29 am
It doesn't make sense to keep investing at 50/50 because it doesn't make sense to keep piling up cash. Either retire or start doing some good with your money.

As an aside it's amazing to me that people can decide, at least claim to decide, what to do with hundreds of thousands of dollars after 3 hours of internet discussion.
How is continuing to buy bond funds "piling up cash"?

I presume that at least some part of your second paragraph is directed at me. If so, all I can say is that I tend to believe that the educated masses here are wiser than the still-learning me and so I should listen to what they say.

dbr
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Re: With 25x Annual Expenses in Bonds, Does Asset Allocation Really Matter?

Post by dbr » Sun Feb 11, 2018 10:12 am

Random Poster wrote:
Sun Feb 11, 2018 10:03 am
mega317 wrote:
Sun Feb 11, 2018 2:29 am
It doesn't make sense to keep investing at 50/50 because it doesn't make sense to keep piling up cash. Either retire or start doing some good with your money.

As an aside it's amazing to me that people can decide, at least claim to decide, what to do with hundreds of thousands of dollars after 3 hours of internet discussion.
How is continuing to buy bond funds "piling up cash"?

I presume that at least some part of your second paragraph is directed at me. If so, all I can say is that I tend to believe that the educated masses here are wiser than the still-learning me and so I should listen to what they say.
I think there is some confusion about how much money you have and when you plan to retire. I have the impression you are talking about retiring now with about fifty times your annual expenses already saved. The reaction to that is that such a plan is plausible at 50/50 asset allocation.

A suggestion is that whatever the scenario you are considering, take a look at it in some retirement planners and see what you think.

mega317
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Re: With 25x Annual Expenses in Bonds, Does Asset Allocation Really Matter?

Post by mega317 » Sun Feb 11, 2018 11:03 am

dbr wrote:
Sun Feb 11, 2018 10:12 am
I have the impression you are talking about retiring now with about fifty times your annual expenses already saved.
Same. And if so you won't be earning more money to buy bonds with. And if not then you should do something with the money besides continuing to invest for yourself.

retiredjg
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Re: With 25x Annual Expenses in Bonds, Does Asset Allocation Really Matter?

Post by retiredjg » Sun Feb 11, 2018 11:12 am

Random Poster wrote:
Sat Feb 10, 2018 4:25 pm
I wouldn't say that we "targeted" 25X expenses in bonds, but by having a 50/50 allocation and with our expenses what they are and our investment account balance what it is, that is how we've ended up.

I just don't know if it makes sense to keep a 50/50 allocation once you've got a relatively substantial amount in bonds. That's all.
It makes sense to stay there because you must be a very conservative investor to have landed in this position in the first place. Why leave your comfort zone when nothing is to be gained by it?

Financially, it probably does not matter what your AA is. Emotionally, I think you should stay conservative. What's the point of increasing your stock allocation just because you can? It will likely make you uncomfortable to see a million dollars melt away in a good crash like the last one. You've worked hard and saved all this money - why let it now become a burden by making it into something you would worry about?


If you really enjoy your work, stay there. But it sounds like you are avoiding retirement because of fear of the unknown. Most of us retired folks had some of that. For me, it took about 1 week to go away. :happy

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Re: With 25x Annual Expenses in Bonds, Does Asset Allocation Really Matter?

Post by whodidntante » Sun Feb 11, 2018 11:33 am

mega317 wrote:
Sun Feb 11, 2018 2:29 am

As an aside it's amazing to me that people can decide, at least claim to decide, what to do with hundreds of thousands of dollars after 3 hours of internet discussion.
Many posters have been pondering major decisions for some weeks already and want to avoid making an major mistake out of ignorance. I think the polite term is sanity check. You can see that many of the questions we get in these cases are leading questions, asking you to confirm a course of action they will probably do anyway or take a stand against it. Occasionally someone learns something, or broadly changes direction based on what they now know.

Random Poster
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Re: With 25x Annual Expenses in Bonds, Does Asset Allocation Really Matter?

Post by Random Poster » Sun Feb 11, 2018 1:28 pm

dbr wrote:
Sun Feb 11, 2018 10:12 am
A suggestion is that whatever the scenario you are considering, take a look at it in some retirement planners and see what you think.
Every retirement calculator that I've run (including a one-on-one session with a financial planner of sorts that was provided by my employer, which used $72k annual expenses, with medical costs increasing at around 8% a year and all other costs increasing at 2% or 3%, no social security ever, and living to 88) indicate that even in a worse-case scenario, my wife and I would die with at least $450k left.

But.....

Who really knows how accurate these calculators are? Who really knows what the real increases in health costs will be? Who really knows if what is thought of "worst case" now is actually going to be "incredibly optimistic" in the future?

I sorta admire those who can actually walk away from work retire (or even semi-retire); being able to overcome one's fears or never have such fear in the first place must be a rather freeing feeling.

Random Poster
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Re: With 25x Annual Expenses in Bonds, Does Asset Allocation Really Matter?

Post by Random Poster » Sun Feb 11, 2018 1:30 pm

retiredjg wrote:
Sun Feb 11, 2018 11:12 am
What's the point of increasing your stock allocation just because you can? It will likely make you uncomfortable to see a million dollars melt away in a good crash like the last one. You've worked hard and saved all this money - why let it now become a burden by making it into something you would worry about?
Thank you for your response. I appreciate the clarity that you have provided to me regarding this issue.

ImaBeginner
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Re: With 25x Annual Expenses in Bonds, Does Asset Allocation Really Matter?

Post by ImaBeginner » Sun Feb 11, 2018 3:36 pm

I think it is completely reasonable to use 25x or some other x to give a max dollars in bonds. Basically you are setting a floor expectation for spending over the course of 25 years. Unfortunately, depending on the rest of ones portfolio, this only gives you 25 years at current expenses with not much growth, unless paired with other investments.
In your case, you would only be 65 when you depleted that fund, and would then have to survive on whatever the rest of your portfolio spits out. Fortunately, you also have 25x expenses in stocks and would be fine, that money will grow, but if unchanged except matching inflation, it would get you to 90.
You would be fine doing really anything at your total account value and expenses, but could easily argue that investing any further funds for maximum growth will give you an excess when you die that can fund charity or be passed along to kids, or just used to increase your lifestyle.
The major point is that any further additions to your accounts are just gravy, and maybe you should look into reducing hours/retiring.

Finridge
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Re: With 25x Annual Expenses in Bonds, Does Asset Allocation Really Matter?

Post by Finridge » Sun Feb 11, 2018 4:01 pm

Random Poster wrote:
Sat Feb 10, 2018 6:49 pm
dbr wrote:
Sat Feb 10, 2018 4:33 pm
You set your asset allocation according to your need/ability/willingness to take risk. 25X in bonds has nothing directly to do with it and "relatively substantial" is not an actionable condition. That said, from the little you say about yourself 50/50 would probably be the neutral point from which you would depart only for a good reason. What are you planning to do with all that money (which is where substantial might come in)?
Other than live off of the money, nothing.
If you want to leave money for kids (kids you have or might have), or to other family members, or to charities, this would be reason to invest the funds that you don't think you will need in a high equity asset allocation.

However, even if you don't, I suggest running some scenarios in firecalc. All we have to go by is historic data, and I would argue that he historic data suggest that over the long-run, a higher equity portfolio is safer, in that you can expect higher returns for no additional risk of losing capital. But let me stress that this is over the long-run--and you would need to expect that the equities will be a lot more volatile. You would need to be prepared for the volatility. You would need the discipline to avoid selling after a market dip--but that is not enough: You need to be able to sleep well at night. If you can't, then the math doesn't matter.

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