Asset Allocation for Recent Retiree

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BluesH
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Asset Allocation for Recent Retiree

Post by BluesH » Mon Nov 19, 2018 2:00 pm

I thought I knew what would be an appropriate AA for me. But since retiring this past April (and living off assets), I appear to be getting more conservative. Appropriately so, though I'm now questioning whether it's conservative enough.

For the last 3 years before retirement, I varied between 65% and 70% stocks. Upon retirement, while consolidating assets and moving 401k to an IRA, I took the opportunity to dial down to 60/40. But that still felt a little too high, so a few months later, I went to 55/45. My gut was still saying to dial down, so just as the market had shed a few points in early October, I shot for 50/50. Due to rounding and a miscalculation, I overshot, going to 47% stocks. This overshoot on my AA didn't bother me. Upon a further gut check, I was happy about that.

I've spent the last several months reading, primarily this board but other sources as well, to try to determine an appropriate AA. Much of the literature on 4% SWR references 60/40 allocations. Bernstein's 60/40 Solution article also. But on reading these boards, it appears that many retirees are closer to 40/60 than 60/40. And this morning, another BH post referenced Ferri's article at
https://www.etf.com/sections/index-inve ... nopaging=1
This article says that the center of gravity for retirees should start at 30/70. So now I'm thinking I'm actually invested too aggressively. Also,
https://www.kitces.com/blog/managing-po ... -red-zone/
Kitces says a recent retiree should have a bond tent with just 30% stock, and then slowly go back up to 60% stock.

Background: I was always a very aggressive investor, until I lost my butt in the dot-bomb downturn in 2000. That was stupid on my part. I was trying to early-retire at age 48. I was about 5% below "my number", so although I knew we were in a bubble, I doubled down on tech with the intention of reaching my number and then bailing. I lost that bet.

After that, I consulted for a few years while my wife continued to work. Eventually, I tired of that and got a real job again in late 2006. That turned out to be great timing, as the recession also killed the technical consulting market. I had intended to re-retire about 5 years later. The '08 recession delayed that. Then I decided to stay longer to qualify for some extra bennies. Just as I was about to retire in 2016, some personal and family tragedies set it back again.

I finally retired this past April. Because I still aggressively saved during those delays, we're in good shape. Our current spend rate can be supported with a bit over a 2% withdrawal rate. IOW, we're sitting pretty well. As part of my reading on this board, I came across the quote (Larrimore, I think) "when you've won the game, quit playing".

I have two opposing reactions: (1) we don't need to take chances, so perhaps I should reduce AA, and
(2) at 50/50 allocation, I can still live on the fixed income allocation, and can afford to "play" with 50% stocks.

So although I thought I knew investing fairly well, clearly I'm confused about my AA. My gut says we should go down to 45% stock, and over the next few years even dial back to 40%.

Comments? Help?
Last edited by BluesH on Mon Nov 19, 2018 3:55 pm, edited 1 time in total.

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Sandtrap
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Re: Asset Allocation for Recent Retiree

Post by Sandtrap » Mon Nov 19, 2018 2:16 pm

More comprehensive suggestions might be had if you post a portfolio review for better context.
Format:

https://www.bogleheads.org/forum/viewt ... =1&t=6212
(edit original post)
Last edited by Sandtrap on Mon Nov 19, 2018 2:31 pm, edited 1 time in total.

2pedals
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Re: Asset Allocation for Recent Retiree

Post by 2pedals » Mon Nov 19, 2018 2:24 pm

DW and I just retired 59 year old and I am at 45% stocks 55% bonds with a pension that will cover most expenses (but not discretionary spending). I tend to be risk adverse and AA feels about right.
Last edited by 2pedals on Mon Nov 19, 2018 5:23 pm, edited 1 time in total.

Ben Mathew
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Re: Asset Allocation for Recent Retiree

Post by Ben Mathew » Mon Nov 19, 2018 2:28 pm

BluesH wrote:
Mon Nov 19, 2018 2:00 pm
(2) at 50/50 allocation, I can still live on the fixed income allocation, and can afford to "play" with 50% stocks.
What would playing with stocks buy you? If you can live comfortably on bonds and still have a large reserve for unexpected expenses, and you don't wish to leave a large inheritance, 100% bonds would be the way to go. No need to gamble unnecessarily.

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Taylor Larimore
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Re: Asset Allocation for Recent Retiree

Post by Taylor Larimore » Mon Nov 19, 2018 2:37 pm

BluesH:

Welcome to the Bogleheads Forum!

You might try doing what I have done in retirement: Put the money you cannot afford to lose into safe fixed-income securities (I use Vanguard Total Bond Market). Put the rest into a broad stock market index fund.

Read my "Simplicity" link below.

Best wishes.
Taylor
"Simplicity is the master key to financial success." -- Jack Bogle

delamer
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Re: Asset Allocation for Recent Retiree

Post by delamer » Mon Nov 19, 2018 2:53 pm

Bill Bernstein, who is well respected on this forum, has recommended a retirement portfolio of 25 years of net expenses (total expenses minus any Social Security and/or pension benefits) in cash equivalents. The remainder of the portfolio is invested in stocks.

Something to consider for your situation. The advantage is that you aren’t dependent on fluctuating stock assets to cover your expenses.

BluesH
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Re: Asset Allocation for Recent Retiree

Post by BluesH » Mon Nov 19, 2018 3:00 pm

Emergency funds: Yes, included in Taxable cash bucket below.
Debt: None
Tax Filing Status: MFJ
Tax Rate: 12% Federal, 6% State
State of Residence: CA
Age: 67 (me), 70 (wife)
Desired Asset allocation: That's the question.
Desired International allocation: Another good question

Current retirement assets

Taxable
6% cash bucket to carry us over until I file my own SS in 3 years (currently drawing on spousal claim. Spouse is drawing in full)
9% cash investable
8% individual stocks
1% VFINX

His Traditional IRA at Fidelity
2% individual stocks
23% Total stock funds, largely FSKAX
7% FSPSX Int'l stock fund
4% PIMIX
3% VCSH
11% CD ladder
7% Bond ladder in Invesco Bulletshares
7% cash, mostly FZDXX

His Roth IRA at TD Ameritrade
1%, mostly VTI

Her Traditional IRA at Fidelity
2% VIPSX
1% VFSTX
2% VBINX
4% FBGRX

Her Roth IRA at Fidelity
1%, VTI and FBGRX

My current calculations show us at 48% equities.

Contributions - None, both retired

Current cash flow: 30% Social Security, 70% from cash bucket. More specifically, we're maxing the 12% tax bracket by doing Roth conversions from her IRA (she's older, better benefit for conversion, she starts RMDs next year). While doing that, we're spending our taxable assets.

Cash flow starting 2022, when my RMDs start and I file on my own Social security (late 2021), and increasing expenses for inflation:
50% Social Security, 75+% of spending needs from RMDs. Meaning we'll have an additional 25+% to save in taxable account. Or decide to spend it, depending how things go.

Leaving an inheritence not a priority. Though we have one child (her son, my step-son) and one grandchild as our heirs. Also intend to leave a large portion to charity.
Last edited by BluesH on Mon Nov 19, 2018 4:06 pm, edited 1 time in total.

bhsince87
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Re: Asset Allocation for Recent Retiree

Post by bhsince87 » Mon Nov 19, 2018 3:14 pm

My personal opinion, if you can live comfortably on 2% withdrawal, and plan to do so, you should probably shift to more bonds.

But in reality, you will probably be fine with anything between 70/30 and 30/70.
Retirement: When you reach a point where you have enough. Or when you've had enough.

BluesH
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Re: Asset Allocation for Recent Retiree

Post by BluesH » Mon Nov 19, 2018 3:24 pm

Ben Mathew wrote:
Mon Nov 19, 2018 2:28 pm
What would playing with stocks buy you? If you can live comfortably on bonds and still have a large reserve for unexpected expenses, and you don't wish to leave a large inheritance, 100% bonds would be the way to go. No need to gamble unnecessarily.
Well, my remaining risks would be (1) high inflation and (2) medical or long-term care needs. I feel I still need some stock allocation to mitigate those. But you make a good point.

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vineviz
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Re: Asset Allocation for Recent Retiree

Post by vineviz » Mon Nov 19, 2018 3:36 pm

delamer wrote:
Mon Nov 19, 2018 2:53 pm
Bill Bernstein, who is well respected on this forum, has recommended a retirement portfolio of 25 years of net expenses (total expenses minus any Social Security and/or pension benefits) in cash equivalents. The remainder of the portfolio is invested in stocks.
I’m quite sure that Bernstein does NOT recommend keeping 25 years worth of expenses in cash. That’d be a huge amount of cash, and recklessly conservative IMHO.

He’s recommended aiming to have a portfolio that is 25x annual expenses, I know, but most of that portfolio would be in stocks.
"Far more money has been lost by investors preparing for corrections than has been lost in corrections themselves." ~~ Peter Lynch

BluesH
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Re: Asset Allocation for Recent Retiree

Post by BluesH » Mon Nov 19, 2018 3:50 pm

Taylor Larimore wrote:
Mon Nov 19, 2018 2:37 pm
BluesH:

Welcome to the Bogleheads Forum!

You might try doing what I have done in retirement: Put the money you cannot afford to lose into safe fixed-income securities (I use Vanguard Total Bond Market). Put the rest into a broad stock market index fund.

Read my "Simplicity" link below.

Best wishes.
Taylor
Thank you, Taylor. I'm thrilled to receive a reply from a dignitary such as yourself. My gut feel is that I'm somewhere in the vicinity of what you suggest, but I'll do a closer analysis to make sure it's true. But basically, in 3 years at age 70, Social Security will cover our basic "needs". The rest of spending is for "wants", including travel.

Also, though I've never practiced market timing in the stock market, I must admit I'm currently trying to time the bond market. My plan is to stay primarily in CDs and MMs for the next year. The consensus seems to be that the Fed will finish tightening in just over a year. Then I'll go to Vanguard Total Bond (ETF version, BND, as Fidelity charges too much to buy Vanguard funds in my IRA).

BluesH
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Re: Asset Allocation for Recent Retiree

Post by BluesH » Mon Nov 19, 2018 3:52 pm

delamer wrote:
Mon Nov 19, 2018 2:53 pm
Bill Bernstein, who is well respected on this forum, has recommended a retirement portfolio of 25 years of net expenses (total expenses minus any Social Security and/or pension benefits) in cash equivalents. The remainder of the portfolio is invested in stocks.

Something to consider for your situation. The advantage is that you aren’t dependent on fluctuating stock assets to cover your expenses.
Thank you. That sounds very conservative, but I will consider it. But a quick question - 25 years of net expenses, or of withdrawals? I ask because RMDs will force a higher withdrawal rate than my spending requires.

golfer292
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Re: Asset Allocation for Recent Retiree

Post by golfer292 » Mon Nov 19, 2018 3:56 pm

This sustainability calculator from Fidelity is interesting. I plugged my numbers into it and it looks like I would be better off with the conservative allocation of 70% bonds 30% stock rather than a balanced or growth allocation. I would like the opinions of others about the value of this calculator. I am 70 yoa with all my needs taken care of by pension and SS. I have approximately 100k in Fidelity IRA balanced between total stock market index and total bond market


https://www.fidelity.com/misc/sustainab ... nable.html

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Peter Foley
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Re: Asset Allocation for Recent Retiree

Post by Peter Foley » Mon Nov 19, 2018 4:00 pm

Based on your assets and age at retirement you do not have a lot of need to take risk. That being said, with a 2% withdrawal rate your 50% bond allocation alone should carry you. So the question comes down to what do you want to do with half of your retirement savings (the equities half)? Use it for more travel and adventure while you are young enough to enjoy it? Set aside a portion of it as potential long term care insurance? Leave to heirs or charities?

I personally think you are fine at 50/50. Full disclosure - we are roughly the same age and have similar projected withdrawal rates. I started retirement at 45/55 six years ago and have crept up to about 55/45.

You might want to read Wade Pfau's article about the concept of a "rising equity glide path." It argues for being more conservative around the time you retire. It is consistent with the plan you have executed.

Edit: I was writing around the time Taylor was posting. I think the approach suggested above is consistent with Taylor's. Different words but we're both saying that setting aside enough in bonds to cover your basic needs is a viable approach.

delamer
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Re: Asset Allocation for Recent Retiree

Post by delamer » Mon Nov 19, 2018 4:09 pm

BluesH wrote:
Mon Nov 19, 2018 3:52 pm
delamer wrote:
Mon Nov 19, 2018 2:53 pm
Bill Bernstein, who is well respected on this forum, has recommended a retirement portfolio of 25 years of net expenses (total expenses minus any Social Security and/or pension benefits) in cash equivalents. The remainder of the portfolio is invested in stocks.

Something to consider for your situation. The advantage is that you aren’t dependent on fluctuating stock assets to cover your expenses.
Thank you. That sounds very conservative, but I will consider it. But a quick question - 25 years of net expenses, or of withdrawals? I ask because RMDs will force a higher withdrawal rate than my spending requires.
You certainly could cut back to 20 years (or fewer) if you think it is too conservative, using the same principle.

Regarding the RMDs, you always can just reinvest a portion of your RMDs in a taxable account in exactly the same way they were invested in your IRA/401(k). So the fact that your RMDs are larger than your expenses doesn’t affect the plan.

btenny
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Re: Asset Allocation for Recent Retiree

Post by btenny » Mon Nov 19, 2018 4:47 pm

I think you should reduce your AA right now to 35/65 bonds/stock at your age of 67 and low withdrawal needs. You have no need to take risks any longer so why keep so much in stocks. Then over time you can study and think about raising it slightly to 40/60 as you get more comfortable with the market and the risk you want to take. This approach gives you a lot of safety for the next few years but also gives you inflation protection over time.

I went to 50/50 or so right when I retired in 1999 in my 50s. That low AA saved my bu** in the 2000-2003 crash and let me sleep well. I stayed there as we started into the recovery and up to about 2007 at age 60. Then I went down even more to 38/62 over time to age 70. This year at age 71 I went back up a little to 40/60 to get more returns for my heirs. I plan to stay at 40/60.

Congratulations on finally getting to retirement. Good luck and Enjoy.

BluesH
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Re: Asset Allocation for Recent Retiree

Post by BluesH » Mon Nov 19, 2018 5:15 pm

Peter Foley wrote:
Mon Nov 19, 2018 4:00 pm
You might want to read Wade Pfau's article about the concept of a "rising equity glide path." It argues for being more conservative around the time you retire. It is consistent with the plan you have executed.
Yes, this appears to be a similar concept to Kitce's "bond tent" that I referenced before:
https://www.kitces.com/blog/managing-po ... -red-zone/

I'm thinking about that idea. But 70% bonds sounds so conservative ;-)

Dandy
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Re: Asset Allocation for Recent Retiree

Post by Dandy » Mon Nov 19, 2018 5:59 pm

I’m quite sure that Bernstein does NOT recommend keeping 25 years worth of expenses in cash. That’d be a huge amount of cash, and recklessly conservative IMHO.
I roughly follow Dr. Bernstein's idea. He recommends to have 20 to 25 years worth drawdown dollars in "safe" (my word) fixed income and invest the rest any way you want even 100% equities. For "safe" I believe he would recommend a TIPS ladder, Short Term bond funds especially Treasuries, FDIC products, I bonds etc. The idea was safety vs growth or yield. And I believe that he said this was geared to people who had "enough" assets. So, I would imagine that would assure that there was enough "risk" assets to provide growth/some inflation protection.

The idea was to secure your retirement with the "safe" assets and then decide on your allocation for "risk" assets. i.e. only assets you can afford to lose. Obviously, you need to keep an eye on your expenses and inflation. It is not for everyone. I found it better than just guessing what overall allocation was right for me or using some formula or rule of thumb.

delamer
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Re: Asset Allocation for Recent Retiree

Post by delamer » Mon Nov 19, 2018 10:57 pm

Dandy wrote:
Mon Nov 19, 2018 5:59 pm
I’m quite sure that Bernstein does NOT recommend keeping 25 years worth of expenses in cash. That’d be a huge amount of cash, and recklessly conservative IMHO.
I roughly follow Dr. Bernstein's idea. He recommends to have 20 to 25 years worth drawdown dollars in "safe" (my word) fixed income and invest the rest any way you want even 100% equities. For "safe" I believe he would recommend a TIPS ladder, Short Term bond funds especially Treasuries, FDIC products, I bonds etc. The idea was safety vs growth or yield. And I believe that he said this was geared to people who had "enough" assets. So, I would imagine that would assure that there was enough "risk" assets to provide growth/some inflation protection.

The idea was to secure your retirement with the "safe" assets and then decide on your allocation for "risk" assets. i.e. only assets you can afford to lose. Obviously, you need to keep an eye on your expenses and inflation. It is not for everyone. I found it better than just guessing what overall allocation was right for me or using some formula or rule of thumb.
I was not able to find any reference where he recommended “cash equivalents” so I should not have used that term in my earlier post.

What he does suggest is low risk, fixed income like Treasury bonds and avoiding corporate bonds (for the net expenses portfolio). His recommendation is 25 years if retiring at age 60 or 20 years if at age 65.

bltn
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Re: Asset Allocation for Recent Retiree

Post by bltn » Tue Nov 20, 2018 6:34 am

BluesH
With a 2% withdrawal rate and basic expenses covered by SS and pensions and no desire to leave a large inheritance, you can be invested in whatever AA allows you to sleep best at night, as the experts put it.
If ,with a 45-50 %stock allocation, you are still uneasy about your position, go down to 30-40%. Personally I would never go below 30% stocks.
My thought about your retirement spending is that you ve saved all your life for this retirement. You should be able to spend 3% of your savings and still be very safe. Why shortchange yourself, especially with your SS and pension income?
Think about the two goals, investment performance or security with fund value maintenance. Find the balance that allows you to relax. You're able to be as conservative as you wish.
Market timing will always be a temptation. It is unnecessary, and may be harmful. No need to gamble.

Good luck.

rkhusky
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Re: Asset Allocation for Recent Retiree

Post by rkhusky » Tue Nov 20, 2018 7:30 am

The Vanguard Target Retirement funds level off at 30/70 (TR Income). Vanguard LifeStrategy Income is 20/80. LifeStrategy Conservative Growth is 40/60. Unless you like monkeying around with your portfolio, I would recommend moving all your IRA's to something like one of the above (Fidelity Freedom Index Income (FIKFX) is about 20/80, FJIFX is currently 28/72 and FKIFX is currently 37/63).

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