Increasing Risk in Retirement

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Cipro
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Increasing Risk in Retirement

Post by Cipro » Sat Apr 13, 2019 9:37 pm

Does it make sense in early retirement to minimize risk in the first several years and then barring unforeseen and early consequential downturns, increase risk as the impact of downturns has less overall impact on the portfolio?

sport
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Re: Increasing Risk in Retirement

Post by sport » Sat Apr 13, 2019 9:44 pm

In retirement, is your goal growth of capital, or preservation of capital? Your AA should be chosen with your goal in mind.

Grt2bOutdoors
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Re: Increasing Risk in Retirement

Post by Grt2bOutdoors » Sat Apr 13, 2019 10:00 pm

Cipro wrote:
Sat Apr 13, 2019 9:37 pm
Does it make sense in early retirement to minimize risk in the first several years and then barring unforeseen and early consequential downturns, increase risk as the impact of downturns has less overall impact on the portfolio?
How does the impact of downturns have less overall impact on a portfolio?
Let's say in years 1-10 of retirement, returns are 4% and withdrawals are 4%, net nominal effect is zero change in portfolio value. In year 11, you decide to increase equity allocations, but then an unforeseen downturn occurs that is extended. Would you still be under the belief that the impact of downturns have less overall impact on the portfolio? For the vast majority of pre-retirees and retirees, the goal is to generate safe and consistent reliable income. Playing the market timing game when retired is a place few want/should go.
"One should invest based on their need, ability and willingness to take risk - Larry Swedroe" Asking Portfolio Questions

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Peter Foley
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Re: Increasing Risk in Retirement

Post by Peter Foley » Sat Apr 13, 2019 10:00 pm

Yes. This approach has been studied. It is called a "rising equity glide path." Wade Pfau is one of the authors of the study.

The theory is to slightly minimize risk near retirement and in early retirement to avoid a bad sequence of returns.

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David Jay
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Re: Increasing Risk in Retirement

Post by David Jay » Sat Apr 13, 2019 10:14 pm

Another description of this concept is Kitces’ “Bond tent”, here: https://www.kitces.com/blog/managing-po ... -red-zone/
Prediction is very difficult, especially about the future - Niels Bohr | To get the "risk premium", you really do have to take the risk - nisiprius

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Cipro
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Re: Increasing Risk in Retirement

Post by Cipro » Sat Apr 13, 2019 11:34 pm

Thanks for references. Seems like a good strategy to limit downside risk in early years of retirement while enabling measured equity reallocation as it becomes possible to more accurately assess the risk at later stages (ie, given shorter duration of remaining projections)

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Cipro
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Re: Increasing Risk in Retirement

Post by Cipro » Sat Apr 13, 2019 11:57 pm

Just read excellent Kitces article. Spending down ‘bond tent’ in early retirement makes sense,

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tennisplyr
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Re: Increasing Risk in Retirement

Post by tennisplyr » Sun Apr 14, 2019 6:34 pm

I retired in 2011 with a 50/50 AA; today I'm at 50/50...all is well.
Those who move forward with a happy spirit will find that things always work out.

gilgamesh
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Re: Increasing Risk in Retirement

Post by gilgamesh » Sun Apr 14, 2019 6:45 pm

If retirement is earlier than drawing SS, then there’s the added consequence of having to rely solely on portfolio early on for your entire income and later have SS base and relying on portfolio less - reverse of what you want.

Wouldn’t it be prudent to establish a SS like floor (low risk) for those early years? My plan is to set-up TIPS floor...this will create a bond tent as well.

dayzero
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Re: Increasing Risk in Retirement

Post by dayzero » Sun Apr 14, 2019 7:24 pm

Cipro wrote:
Sat Apr 13, 2019 9:37 pm
Does it make sense in early retirement to minimize risk in the first several years and then barring unforeseen and early consequential downturns, increase risk as the impact of downturns has less overall impact on the portfolio?
https://earlyretirementnow.com/2017/09/ ... lidepaths/

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Cipro
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Re: Increasing Risk in Retirement

Post by Cipro » Sun Apr 14, 2019 9:43 pm

Guess I’m rediscovering gravity.

Dandy
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Re: Increasing Risk in Retirement

Post by Dandy » Mon Apr 15, 2019 6:04 am

If you generally follow the suggested asset placement of mostly fixed income in your TIRA and mostly equities in your taxable account then when RMDs occur you will be facing a rising equity allocation. You will be depleting mostly fixed income to fund RMDs and your equity heavy taxable account will likely be enjoying better overall performance than your TIRA.

Keep that in mind as you decide on other moves to increase risk. If that might impact you maybe consider taking taxable equity distributions in cash vs reinvest.

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birdog
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Re: Increasing Risk in Retirement

Post by birdog » Mon Apr 15, 2019 7:08 am

David Jay wrote:
Sat Apr 13, 2019 10:14 pm
Another description of this concept is Kitces’ “Bond tent”, here: https://www.kitces.com/blog/managing-po ... -red-zone/
Good article. Thanks for sharing.

Ybsybs
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Re: Increasing Risk in Retirement

Post by Ybsybs » Mon Apr 15, 2019 7:22 am

If at retirement, I end up with a lot more than I expect to spend in my remaining lifetime, I might choose to use a bucket approach with one bucket being designed for heirs and invested either 90% stock / 10% bonds or even 100% stock.

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midareff
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Re: Increasing Risk in Retirement

Post by midareff » Mon Apr 15, 2019 7:28 am

tennisplyr wrote:
Sun Apr 14, 2019 6:34 pm
I retired in 2011 with a 50/50 AA; today I'm at 50/50...all is well.
I retired 4/2012 at 48% equities. 48% bonds and 4% cash. Right now it's 48% equities, 49% bonds and 3% cash. All is well here too.

Cody
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Re: Increasing Risk in Retirement

Post by Cody » Mon Apr 15, 2019 7:54 am

Peter Foley said The theory is to slightly minimize risk near retirement and in early retirement to avoid a bad sequence of returns.
I might slightly modify the term "slightly". That would depend on where you were before you reduced your equity holdings. No biggy but...

Cody

dbr
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Re: Increasing Risk in Retirement

Post by dbr » Mon Apr 15, 2019 7:59 am

Cipro wrote:
Sat Apr 13, 2019 9:37 pm
Does it make sense in early retirement to minimize risk in the first several years and then barring unforeseen and early consequential downturns, increase risk as the impact of downturns has less overall impact on the portfolio?
Minimize risk of what? In general the meaning of risk is impact on the portfolio and increasing risk is increasing impact.

There has been long discussion of tactics like you suggest for minimizing the risk of a retiree running out of money before he dies, but that might be a different discussion.

As other posters also said, it is a question of objectives.

The best answer would be to run a model that allows one to change the asset allocation at some point and see what the range of possible portfolio outcomes looks like and decide which alternatives would make sense to anyone in particular. My usual recommendation to look at FireCalc to see the dynamics of that does not work here because that model does not include changing the asset allocation over time. Someone may have a suggestion.

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Re: Increasing Risk in Retirement

Post by RadAudit » Mon Apr 15, 2019 8:07 am

Cipro wrote:
Sat Apr 13, 2019 9:37 pm
Does it make sense in early retirement to minimize risk in the first several years ...
I've observed - probably incorrectly - that as long as people have money, they'll have opinions on how they should spend it and maybe how you should spend yours.

But, since you asked, I sort of side with the idea of need, ability and willingness to accept risk point of view. One danger in having an AA that is too aggressive is that it may lead you to sell stocks at an inappropriate time / early in retirement - thus endangering your chances of recovery and limiting spending throughout the rest of retirement. So, yes it make sense to minimize risks in early retirement. How you do that sort of depends on your portfolio size and your expenses. Lot of applicable ideas on that one.

PS - I remember Mr. Bogle in one of his early books had a portfolio AA for the late retirement phase. IIRC, it indicated 70 to 75 was late retirement. Sort of makes you wonder about a number of things.
FI is the best revenge. LBYM. Invest the rest. Stay the course. - PS: The cavalry isn't coming, kids. You are on your own.

aristotelian
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Re: Increasing Risk in Retirement

Post by aristotelian » Mon Apr 15, 2019 8:20 am

sport wrote:
Sat Apr 13, 2019 9:44 pm
In retirement, is your goal growth of capital, or preservation of capital? Your AA should be chosen with your goal in mind.
OP mentions early retirement specifically. The problem is that early retirees need large stock allocation to stay ahead of inflation. Of course, that exposes you to sequence of returns risk. There is some literature on starting with a "bond tent" and gradually increasing risk although I am not sure how it applies to early retirement. https://www.kitces.com/blog/managing-po ... -red-zone/

MnD
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Re: Increasing Risk in Retirement

Post by MnD » Mon Apr 15, 2019 8:30 am

The problem I see with a variable and bidirectional AA on the basis of "what if's" is getting whip-sawed with higher than expected returns in earlier retirement when one has less equity exposure followed by lower than expected returns when one has increased risk. I'm exceeding comfortable with risk but would be very frustrated with being "in the tent" when the sun is shining only to emerge later and a big storm hits.

A fixed AA that one is comfortable with in all weather suits me just fine in early retirement, coupled with the knowledge that rule based rebalancing results in spending from equity during good times for stocks and vice-versa for fixed income. My entire IPS including withdrawal strategy in retirement is two sentences and I plan to keep it that way.

dbr
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Re: Increasing Risk in Retirement

Post by dbr » Mon Apr 15, 2019 8:36 am

MnD wrote:
Mon Apr 15, 2019 8:30 am
The problem I see with a variable and bidirectional AA on the basis of "what if's" is getting whip-sawed with higher than expected returns in earlier retirement when one has less equity exposure followed by lower than expected returns when one has increased risk. I'm exceeding comfortable with risk but would be very frustrated with being "in the tent" when the sun is shining only to emerge later and a big storm hits.

A fixed AA that one is comfortable with in all weather suits me just fine in early retirement, coupled with the knowledge that rule based rebalancing results in spending from equity during good times for stocks and vice-versa for fixed income.
I agree. It is OK to change an investment policy position when circumstances have actually changed, but I don't think seeing what the early fraction of the realized return sequence turns out to be is one of those circumstances. Maybe after sufficient accumulation of time, such as 15 years of a 30 year retirement that might work.

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Cipro
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Re: Increasing Risk in Retirement

Post by Cipro » Mon Apr 15, 2019 9:00 am

In referring to early retirement I meant in the early 'part' of my retirement (e.g., from 61 to 71 yo). Also, when I refer to risk, I do mean risk of running out of money. Really only concerned with downside risk - not risk of leaving too much $$ to children (good but not necessary).

The question for me is that while decreasing equity exposure makes sense to avoid depleting portfolio should there be a bad sequence of equity returns early in my retirement, later in my retirement, I may no longer have the need or desire to spend money like I'm able to earlier in retirement. Therefore, while going to 30% equity around retirement for first few years good for me, yet it may force a more conservative life style when I can most enjoy fruit of my working labor.

I guess it's a good problem to have.

dbr
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Re: Increasing Risk in Retirement

Post by dbr » Mon Apr 15, 2019 9:02 am

Cipro wrote:
Mon Apr 15, 2019 9:00 am
In referring to early retirement I meant in the early 'part' of my retirement (e.g., from 61 to 71 yo). Also, when I refer to risk, I do mean risk of running out of money. Really only concerned with downside risk - not risk of leaving too much $$ to children (good but not necessary).

The question for me is that while decreasing equity exposure makes sense to avoid depleting portfolio should there be a bad sequence of equity returns early in my retirement, later in my retirement, I may no longer have the need or desire to spend money like I'm able to earlier in retirement. Therefore, while going to 30% equity around retirement for first few years good for me, yet it may force a more conservative life style when I can most enjoy fruit of my working labor.

I guess it's a good problem to have.
Among other searches for much previous discussion on the forum is this: https://www.google.com/search?sitesearc ... =bond+tent

The Wizard
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Re: Increasing Risk in Retirement

Post by The Wizard » Mon Apr 15, 2019 9:08 am

gilgamesh wrote:
Sun Apr 14, 2019 6:45 pm
If retirement is earlier than drawing SS, then there’s the added consequence of having to rely solely on portfolio early on for your entire income and later have SS base and relying on portfolio less - reverse of what you want.

Wouldn’t it be prudent to establish a SS like floor (low risk) for those early years? My plan is to set-up TIPS floor...this will create a bond tent as well.
I've had a seven year gap to deal with before starting SS at age 70, just eleven months to go.
I funded my "floor" with lifetime immediate annuities and withdraw monthly from portfolio in lieu of SS.
I've been letting my stock percentage drift upward the past few years since I won't need regular portfolio withdrawals once SS starts...
Attempted new signature...

gilgamesh
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Re: Increasing Risk in Retirement

Post by gilgamesh » Mon Apr 15, 2019 9:30 am

The Wizard wrote:
Mon Apr 15, 2019 9:08 am
gilgamesh wrote:
Sun Apr 14, 2019 6:45 pm
If retirement is earlier than drawing SS, then there’s the added consequence of having to rely solely on portfolio early on for your entire income and later have SS base and relying on portfolio less - reverse of what you want.

Wouldn’t it be prudent to establish a SS like floor (low risk) for those early years? My plan is to set-up TIPS floor...this will create a bond tent as well.
I've had a seven year gap to deal with before starting SS at age 70, just eleven months to go.
I funded my "floor" with lifetime immediate annuities and withdraw monthly from portfolio in lieu of SS.
I've been letting my stock percentage drift upward the past few years since I won't need regular portfolio withdrawals once SS starts...
I would think at age 63 the "mortality credit" will be very low and what about inflation risk? even with say a constant 2% COLA adjustment (the typical nominal vs TIPS yield difference ???) there is unexpected inflation risk...I am thinking of doing an SPIA ladder after age 80 - higher mortality credit thus no other guaranteed returns will match it, plus the ladder mitigates some of the inflation risk (this is, if a floor above SS is needed)...

I am not saying SPIA's at age 60 is bad - just giving my take on it.

The Wizard
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Re: Increasing Risk in Retirement

Post by The Wizard » Mon Apr 15, 2019 9:43 am

gilgamesh wrote:
Mon Apr 15, 2019 9:30 am
...I would think at age 63 the "mortality credit" will be very low and what about inflation risk? even with say a constant 2% COLA adjustment (the typical nominal vs TIPS yield difference ???) there is unexpected inflation risk...I am thinking of doing an SPIA ladder after age 80 - higher mortality credit thus no other guaranteed returns will match it, plus the ladder mitigates some of the inflation risk (this is, if a floor above SS is needed)...

I am not saying SPIA's at age 60 is bad - just giving my take on it.
Regular SPIAs would indeed have inflation issues to be dealt with.
But I was fortunate to have my 403(b) with TIAA and the majority of my immediate annuities are based on the performance of broad stock market and real estate funds, so that income has outpaced inflation since 2013.
There's some risk in doing this -- my income has declined some months -- but there's also risk in doing a 4% SWR from a 50/50 portfolio...
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Cipro
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Re: Increasing Risk in Retirement

Post by Cipro » Mon Apr 15, 2019 10:08 am

Thanks dbr. Link has good prior discussions.

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