Are Higher Stock Allocations the Only Option for Retirees?

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Are Higher Stock Allocations the Only Option for Retirees?

Post by Always passive »

Retirees typically hold a high allocation of bonds. In my case 70%. Given the disastrous outlook for bonds, already showing negative returns in real term for the future, what are the options to retirees short of letting the portfolio erode or taking more risk in the equity market?
I have search for the answer to this question, concluding that it is a losing battle, meaning that there is no solution. Is that right? Are there any bright ideas that I have not considered?

Note: Returns from bonds, unlike stocks, are known (present yields tell the bulk of the story); thus, let us agree not to challenge my premise on bonds.
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Re: Are Higher Stock Allocations the Only Option for Retirees?

Post by CurlyDave »

Always passive wrote: Mon Jul 27, 2020 12:36 am ...I have search for the answer to this question, concluding that it is a losing battle, meaning that there is no solution. Is that right? Are there any bright ideas that I have not considered?...
I have been retired for 12 years. DW and I hold a significant part of our portfolio in brick and mortar rental real estate. It took quite a while to become profitable, but with me doing much of the management (which is sort of a part time job) I consider it a way to diversify into a reasonably uncorrelated asset class.

This being mostly a stock and bond board, I will take incoming for this, but it is still a great diversifier. One has to have the right temperament to manage property, and just giving it over to a property manager is liable to be costly, but it is a possibility.
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Re: Are Higher Stock Allocations the Only Option for Retirees?

Post by Always passive »

Can you accomplish the same with REITs? If I may ask, what is your % allocation in RE?
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Re: Are Higher Stock Allocations the Only Option for Retirees?

Post by Watty »

Always passive wrote: Mon Jul 27, 2020 12:36 am Note: Returns from bonds, unlike stocks, are known (present yields tell the bulk of the story); thus, let us agree not to challenge my premise on bonds.
Changing interest rates and inflation are also huge factors in bonds performance but with a low as interest rates and inflation are now I see bonds as being pretty risky. In a bad economy bonds can also be downgraded or have more than expected defaults.

There can be bear markets in bonds too. It is a mistake to think of bonds as being inherently safe investments.

Right or wrong I moved most of my bond asset allocation into short term TIPS mutual funds earlier this year just to more or less park it somewhere relatively safe.
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Re: Are Higher Stock Allocations the Only Option for Retirees?

Post by minimalistmarc »

I thought the main point of bonds was that they zig when stocks zag?
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Re: Are Higher Stock Allocations the Only Option for Retirees?

Post by visualguy »

CurlyDave wrote: Mon Jul 27, 2020 12:46 am
Always passive wrote: Mon Jul 27, 2020 12:36 am ...I have search for the answer to this question, concluding that it is a losing battle, meaning that there is no solution. Is that right? Are there any bright ideas that I have not considered?...
I have been retired for 12 years. DW and I hold a significant part of our portfolio in brick and mortar rental real estate. It took quite a while to become profitable, but with me doing much of the management (which is sort of a part time job) I consider it a way to diversify into a reasonably uncorrelated asset class.

This being mostly a stock and bond board, I will take incoming for this, but it is still a great diversifier. One has to have the right temperament to manage property, and just giving it over to a property manager is liable to be costly, but it is a possibility.
+1

Rental real estate is the way to go for people who find it to be not too much of a bother. It doesn't work for people who want something that's purely passive, though.
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Re: Are Higher Stock Allocations the Only Option for Retirees?

Post by MikeG62 »

To my way of thinking, it's not the stated (nominal) yield on fixed income that matters, but the incremental yield above inflation (real yield). So while nominal yields are very low today, so is inflation. Not sure real yields are dramatically lower than in the past.

I'd add in that nominal yields may not remain this low forever. So as bonds mature in the future there will be opportunity to reinvest at potentially higher yields (hopefully real) in the future. It's not like low nominal bond yields today are a death blow to retirement savers leaving us only with risky equities as the solution.

Another option is to save more before retiring - and accept a somewhat lower withdrawal rate.
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Re: Are Higher Stock Allocations the Only Option for Retirees?

Post by nisiprius »

Of course not. Another available option is exploring one's ability to have a "comfortable" retirement on less money than you had formerly planned.

The only experience I had with a retirement expert was the long session I had with a CFP at Fidelity, as part of the no-cost "annual retirement checkups" offered with my 401(k) plan. Before we even got into the Fidelity Retirement Income Planner, he was talking about my "goals" and such, and I felt then, and I felt know, that he was actively pushing me toward high aspirations. Encouraging me to think about travel abroad, new cars, and such.

Similarly, some retirement book, nominally written by Charles R. Schwab himself has some throwaway remarks urging people to plan for 100% replacement of income in retirement, rather than the traditional planning number of 70%. The only real reason for the higher number is, basically, "wouldn't you rather have 100% than 70%?"

So if you've been planning on 100% replacement, consider 70%.

By the way, I believe--and studies have shown--that happiness tends to be based on how you are doing relative to others. I think a big factor in our satisfaction with our retirement income so far is that, as I verified before retirement, our income in retirement is just about smack dab at the median for the community we are living in. So if we are really heading into a long period of hard times, being "all in the same boat" is likely to mitigate the pain somewhat.
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Re: Are Higher Stock Allocations the Only Option for Retirees?

Post by bayview »

minimalistmarc wrote: Mon Jul 27, 2020 1:05 am I thought the main point of bonds was that they zig when stocks zag?
I thought that the point was that they don't zag to the same degree as stocks, and that sometimes they in fact zig. Low correlation, rather than negative correlation.
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Re: Are Higher Stock Allocations the Only Option for Retirees?

Post by grabiner »

MikeG62 wrote: Mon Jul 27, 2020 7:57 am To my way of thinking, it's not the stated (nominal) yield on fixed income that matters, but the incremental yield above inflation (real yield). So while nominal yields are very low today, so is inflation. Not sure real yields are dramatically lower than in the past.
Real yields are lower than in the past.

To check this, go to Daily Treasury Real Yield Curve Rates. Current yields on TIPS are negative, all the way out to 30 years. The ten-year yield is -0.92%, while it was +0.08% in January, and +0.96% in January 2019.

You can mitigate this risk somewhat by using I-Bonds, which have a real yield of zero, but the amount you can purchase is limited.
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Re: Are Higher Stock Allocations the Only Option for Retirees?

Post by Outer Marker »

Always passive wrote: Mon Jul 27, 2020 12:36 am Are there any bright ideas that I have not considered?
You might consider a Single Premium Immediate Annuity for a portion of your fixed income.
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Re: Are Higher Stock Allocations the Only Option for Retirees?

Post by Rick Ferri »

minimalistmarc wrote: Mon Jul 27, 2020 1:05 am I thought the main point of bonds was that they zig when stocks zag?
Not in the 1970s. Everything zagged together.

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Re: Are Higher Stock Allocations the Only Option for Retirees?

Post by dbr »

Based on the various studies of retirement withdrawal 30% stocks is probably the edge of the cliff in not having enough stocks to safely sustain a moderate (4%) withdrawal rate in the worst cases. But those studies assume that in the worst case the portfolio is drawn down over thirty years or so. If you expect to not draw down the portfolio, then the worst case safe withdrawal rate might be nearer 2.5%. The more optimum asset allocation, but not by a lot is closer to 60% stocks. That withdrawal is defined as a fraction if initial portfolio value and increased by inflation.

In the not worst case scearios more can be spent and/or the portfolio grows quite a bit.

But, you won't know if you are a worst case example until thirty years from now. It is a chance current conditions in bonds indicated you will not be in one the best cases for sure, but that also depends on what stocks do for the next three decades, even at only 30%.

So the question is, how much money are you trying to spend. What % is that of your starting portfolio. The strongest lever on portfolio survival is to spend less. At 30% stocks asset allocation is not a strong lever, though it might help a little to increase allocation to stocks.

TL:DR You may not actually be in trouble depending on how much you are spending, but if you are in trouble the action plan is to spend less.

You might want to take a look at the modeling in the Variable Percentage Withdrawal write-up in the Wiki: https://www.bogleheads.org/wiki/Variabl ... withdrawal
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Re: Are Higher Stock Allocations the Only Option for Retirees?

Post by dbr »

Outer Marker wrote: Mon Jul 27, 2020 9:24 am
Always passive wrote: Mon Jul 27, 2020 12:36 am Are there any bright ideas that I have not considered?
You might consider a Single Premium Immediate Annuity for a portion of your fixed income.
Yes, Otar in his book looks at that and suggests the SPIA might be an idea for people just on the edge of being able to spend what they want. However, at low interest rates an SPIA is expensive. When bonds don't look good neither does an SPIA. The fixed SPIA is at risk to inflation, but it is probably the most efficient way to supply lifetime income from the use of assets.
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Re: Are Higher Stock Allocations the Only Option for Retirees?

Post by dodecahedron »

dbr wrote: Mon Jul 27, 2020 9:30 am
Outer Marker wrote: Mon Jul 27, 2020 9:24 am
Always passive wrote: Mon Jul 27, 2020 12:36 am Are there any bright ideas that I have not considered?
You might consider a Single Premium Immediate Annuity for a portion of your fixed income.
Yes, Otar in his book looks at that and suggests the SPIA might be an idea for people just on the edge of being able to spend what they want. However, at low interest rates an SPIA is expensive. When bonds don't look good neither does an SPIA. The fixed SPIA is at risk to inflation, but it is probably the most efficient way to supply lifetime income from the use of assets.
For most folks (there are special situations involving spousal and/or survivors), deferring filing to claim SS benefits is the cheapest way to effectively purchase an inflation-adjusted SPIA.
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Re: Are Higher Stock Allocations the Only Option for Retirees?

Post by dbr »

dodecahedron wrote: Mon Jul 27, 2020 9:36 am
dbr wrote: Mon Jul 27, 2020 9:30 am
Outer Marker wrote: Mon Jul 27, 2020 9:24 am
Always passive wrote: Mon Jul 27, 2020 12:36 am Are there any bright ideas that I have not considered?
You might consider a Single Premium Immediate Annuity for a portion of your fixed income.
Yes, Otar in his book looks at that and suggests the SPIA might be an idea for people just on the edge of being able to spend what they want. However, at low interest rates an SPIA is expensive. When bonds don't look good neither does an SPIA. The fixed SPIA is at risk to inflation, but it is probably the most efficient way to supply lifetime income from the use of assets.
For most folks (there are special situations involving spousal and/or survivors), deferring filing to claim SS benefits is the cheapest way to effectively purchase an inflation-adjusted SPIA.
Absolutely so.
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Re: Are Higher Stock Allocations the Only Option for Retirees?

Post by randomguy »

visualguy wrote: Mon Jul 27, 2020 2:39 am
CurlyDave wrote: Mon Jul 27, 2020 12:46 am
Always passive wrote: Mon Jul 27, 2020 12:36 am ...I have search for the answer to this question, concluding that it is a losing battle, meaning that there is no solution. Is that right? Are there any bright ideas that I have not considered?...
I have been retired for 12 years. DW and I hold a significant part of our portfolio in brick and mortar rental real estate. It took quite a while to become profitable, but with me doing much of the management (which is sort of a part time job) I consider it a way to diversify into a reasonably uncorrelated asset class.

This being mostly a stock and bond board, I will take incoming for this, but it is still a great diversifier. One has to have the right temperament to manage property, and just giving it over to a property manager is liable to be costly, but it is a possibility.
+1

Rental real estate is the way to go for people who find it to be not too much of a bother. It doesn't work for people who want something that's purely passive, though.
Rental real estate is hard to evaluate as it is very local. My big concern is that I don't have much faith that I am going to mentally be in a place where I or my spouse can manage a real estate portfolio from ages 85 -100.
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Re: Are Higher Stock Allocations the Only Option for Retirees?

Post by dodecahedron »

nisiprius wrote: Mon Jul 27, 2020 8:49 am Of course not. Another available option is exploring one's ability to have a "comfortable" retirement on less money than you had formerly planned.

The only experience I had with a retirement expert was the long session I had with a CFP at Fidelity, as part of the no-cost "annual retirement checkups" offered with my 401(k) plan. Before we even got into the Fidelity Retirement Income Planner, he was talking about my "goals" and such, and I felt then, and I felt know, that he was actively pushing me toward high aspirations. Encouraging me to think about travel abroad, new cars, and such.

Similarly, some retirement book, nominally written by Charles R. Schwab himself has some throwaway remarks urging people to plan for 100% replacement of income in retirement, rather than the traditional planning number of 70%. The only real reason for the higher number is, basically, "wouldn't you rather have 100% than 70%?"

So if you've been planning on 100% replacement, consider 70%.

By the way, I believe--and studies have shown--that happiness tends to be based on how you are doing relative to others. I think a big factor in our satisfaction with our retirement income so far is that, as I verified before retirement, our income in retirement is just about smack dab at the median for the community we are living in. So if we are really heading into a long period of hard times, being "all in the same boat" is likely to mitigate the pain somewhat.
Heartily endorse the above. Also, in light of the pandemic, there are many things I had *planned* to consume (travel, dining out) which I am not interested in right now. Also driving much less. For reasons unrelated to my future expected returns, my consumption spending is way down for the indefinite future. Only category that has noticeably gone up is charitable giving, which is flexible for me.

I am not changing my conservative asset allocation.
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Re: Are Higher Stock Allocations the Only Option for Retirees?

Post by Jack FFR1846 »

CurlyDave wrote: Mon Jul 27, 2020 12:46 am
Always passive wrote: Mon Jul 27, 2020 12:36 am ...I have search for the answer to this question, concluding that it is a losing battle, meaning that there is no solution. Is that right? Are there any bright ideas that I have not considered?...
I have been retired for 12 years. DW and I hold a significant part of our portfolio in brick and mortar rental real estate. It took quite a while to become profitable, but with me doing much of the management (which is sort of a part time job) I consider it a way to diversify into a reasonably uncorrelated asset class.

This being mostly a stock and bond board, I will take incoming for this, but it is still a great diversifier. One has to have the right temperament to manage property, and just giving it over to a property manager is liable to be costly, but it is a possibility.
Holding real estate in the form of rentals is correctly thought of as taking on a part time job. But it's also a part time job where you own significant stock in your employer. So when things go wrong, they really go wrong.

An alternative? No, I'm not going to say REITs. Go down to Lowe's or Amazon and take on a part time job. That way, you directly get paid for the hours (no waiting for deadbeat tenants to finally decide to pay the late rent). You add to social security, get the ability to directly contribute to a Roth and can decide anytime that you want to stop. Try that with a rental...."I've decided to stop. Give me all my money back. I'll be in Hawaii for a month".

My son's working at Amazon in the warehouse. From his description of all the failed, fired employees or those who just quit, they really are in that 5% of people who are such clowns, they are unemployable.
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Re: Are Higher Stock Allocations the Only Option for Retirees?

Post by dbr »

I can't comment that real estate is or isn't a good idea for retirees. Certainly for some it is. But the idea that someone already in retirement and worried that his stock and bond portfolio will fall to the lower end of possible retirement success should decide now to sell his bonds and start a business in real estate sounds awfully impractical to me. In any case it would also seem to me that a real estate business has enough risk that the replacement is to sell stocks and do real estate rather than sell bonds and do real estate. But that is just an off hand sense of what is involved.
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Re: Are Higher Stock Allocations the Only Option for Retirees?

Post by kraven »

Jack FFR1846 wrote: Mon Jul 27, 2020 9:57 am
CurlyDave wrote: Mon Jul 27, 2020 12:46 am
Always passive wrote: Mon Jul 27, 2020 12:36 am ...I have search for the answer to this question, concluding that it is a losing battle, meaning that there is no solution. Is that right? Are there any bright ideas that I have not considered?...
I have been retired for 12 years. DW and I hold a significant part of our portfolio in brick and mortar rental real estate. It took quite a while to become profitable, but with me doing much of the management (which is sort of a part time job) I consider it a way to diversify into a reasonably uncorrelated asset class.

This being mostly a stock and bond board, I will take incoming for this, but it is still a great diversifier. One has to have the right temperament to manage property, and just giving it over to a property manager is liable to be costly, but it is a possibility.
Holding real estate in the form of rentals is correctly thought of as taking on a part time job. But it's also a part time job where you own significant stock in your employer. So when things go wrong, they really go wrong.

An alternative? No, I'm not going to say REITs. Go down to Lowe's or Amazon and take on a part time job. That way, you directly get paid for the hours (no waiting for deadbeat tenants to finally decide to pay the late rent). You add to social security, get the ability to directly contribute to a Roth and can decide anytime that you want to stop. Try that with a rental...."I've decided to stop. Give me all my money back. I'll be in Hawaii for a month".

My son's working at Amazon in the warehouse. From his description of all the failed, fired employees or those who just quit, they really are in that 5% of people who are such clowns, they are unemployable.
All of this above is spot on. Good assessment of things, especially that last paragraph regarding unemployable clowns in that bottom 5% of the workforce. This is a concern as we watch what is going on around the country; that the unemployable class grows from 5% to 10% or more.

Regarding the OP question, and it's a very good one, I decided early this year while the market was tanking to move much of my bond position into equities (mostly too soon before the bottom, but good enough). Everyone's circumstances and disposition of course are different. I'm still in the accumulation phase and plan on working for a number of years to come. I do think real estate is a great class to be in, but as one poster wrote you have to have the right temperament, roll with the various personalities of the tenants. The way you write leases is critically important. There are clauses you can include such as a deductible of say $100 for each repair request to minimize/eliminate bogus requests. Always take payment via ACH, include your routing/account number in the lease as only way to pay. Accept only qualified tenants, don't rush to take just anyone. If you have no experience here, you will get some real fast and it may not be pleasant. For older folks with diminishing patience or tolerance for some ridiculous behavior from a minority of tenants, it should probably be a hard pass. For me, I decided to get out because it is a part time job you can never get away from, that next call or email from a tenant and you have to jump on it. Property managers are an option, but costly.

So what to do? As others have said, plan for a lower withdrawal rate/lifestyle if things go south with bonds as you would do in any year things weren't going your way with your portfolio. Or, allocate more to equities (ETFs such as S&P 500 or Total Stock Market) and again, adjust SWR as the situation warrants. Or, more toward money market accounts and accept less purchasing power over time. Or some combination of all of these that best fits your objectives and comfort levels. Of course there are other options including REITs which I think are good in small/appropriate portions.

I'll be interested to see how munis are, or are not, affected by some of the absolute fiscal mismanagement in some of our states. The MTA in New York is hurting bad right now and they are heavy issuers of munis.
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Re: Are Higher Stock Allocations the Only Option for Retirees?

Post by dbr »

I think a perspective is needed that all SWR studies include scenarios much worse than the presumed present. I would not assume anything needs to be done.

The OP talks about eroding the portfolio. Savings accumulated over a lifetime of work are intended to be spent in retirement. The presumption that one can spend in retirement and also guarantee the portfolio will not shrink, especially in real dollars, is a demanding target.

We really need to know at what rate the OP is intending to spend and whether or not they really intend to do this without spending down the portfolio.
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Re: Are Higher Stock Allocations the Only Option for Retirees?

Post by Fclevz »

This Morningstar interview with Bill Bernstein may be helpful to you: What's the Purpose of Your Fixed-Income Holdings?
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Re: Are Higher Stock Allocations the Only Option for Retirees?

Post by dbr »

Fclevz wrote: Mon Jul 27, 2020 11:28 am This Morningstar interview with Bill Bernstein may be helpful to you: What's the Purpose of Your Fixed-Income Holdings?
Good post.

A takeaway for me from 2012 already is this one: ". . . and then a clothes pin for your nose to be able to deal with those very low yields that you're going to be getting."

Just as an observation the five year return (2014-2019) on TBM has actually been 4.31% and the one-year return 8.96%. Long bonds have returned 9% and 19% respectively. That does not mean people are supposed to go out and buy bonds now. It is supposed to mean that nobody knows what the timing is going to be.
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Re: Are Higher Stock Allocations the Only Option for Retirees?

Post by CurlyDave »

nisiprius wrote: Mon Jul 27, 2020 8:49 am Of course not. Another available option is exploring one's ability to have a "comfortable" retirement on less money than you had formerly planned.

The only experience I had with a retirement expert was the long session I had with a CFP at Fidelity, as part of the no-cost "annual retirement checkups" offered with my 401(k) plan. Before we even got into the Fidelity Retirement Income Planner, he was talking about my "goals" and such, and I felt then, and I felt know, that he was actively pushing me toward high aspirations. Encouraging me to think about travel abroad, new cars, and such.

Similarly, some retirement book, nominally written by Charles R. Schwab himself has some throwaway remarks urging people to plan for 100% replacement of income in retirement, rather than the traditional planning number of 70%. The only real reason for the higher number is, basically, "wouldn't you rather have 100% than 70%?"

So if you've been planning on 100% replacement, consider 70%.

By the way, I believe--and studies have shown--that happiness tends to be based on how you are doing relative to others. I think a big factor in our satisfaction with our retirement income so far is that, as I verified before retirement, our income in retirement is just about smack dab at the median for the community we are living in. So if we are really heading into a long period of hard times, being "all in the same boat" is likely to mitigate the pain somewhat.
When I retired both SS and medicare taxes stopped. That is ~7.5% right there. Plus no more 401(k) contributions saving for the future, the future was now. I was contributing 14% plus the match, so I could get to only replacing 78.5% of income with no pain at all.

The concept of relative well-being is widely accepted. This is how and why I got into RE. Good times and bad, inflation, depression, boom and bust, a house rents for about 1/3 of a family's income. First pass, if I own 3 houses outright I will have income which is about the average for my community. Start thinking about property taxes, maintenance, and all that stuff and I better make it 4. But that is about as dirt simple as it gets. 4 houses and I am doing as well as the average family. And, one of the houses can be the one I live in. (Not that I recommend owning RE outright with 30 year mortgages in the 3% range.)

Throw in a little SS and things can be pretty good.
Last edited by CurlyDave on Mon Jul 27, 2020 12:04 pm, edited 1 time in total.
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Re: Are Higher Stock Allocations the Only Option for Retirees?

Post by CurlyDave »

Always passive wrote: Mon Jul 27, 2020 12:55 am Can you accomplish the same with REITs? If I may ask, what is your % allocation in RE?
I don't think you can accomplish the same thing with REITs. There are many layers of management in a REIT, which IMHO represent a parasitic drag on the returns because of their salaries and employment costs. REITs are close to stocks in performance.

Our portfolio is 47% stocks, 11% bonds and 42% RE. I include the value of our home in the RE because it will be sold if we need to move into assisted living. It represents about 16% of the overall portfolio.
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Re: Are Higher Stock Allocations the Only Option for Retirees?

Post by tibbitts »

minimalistmarc wrote: Mon Jul 27, 2020 1:05 am I thought the main point of bonds was that they zig when stocks zag?
I don't think anyone here has ever claimed that.
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Re: Are Higher Stock Allocations the Only Option for Retirees?

Post by Seasonal »

There is a story of the comedian Groucho Marx, who while touring the New York Stock Exchange had a trader yell out at him, "Hey Groucho, where do you invest your money?" Groucho replied, "I keep my money in Treasury bonds." The trader said, "They don't make you much money." "They do," Groucho said, "if you have enough of them...."
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Re: Are Higher Stock Allocations the Only Option for Retirees?

Post by dbr »

tibbitts wrote: Mon Jul 27, 2020 12:11 pm
minimalistmarc wrote: Mon Jul 27, 2020 1:05 am I thought the main point of bonds was that they zig when stocks zag?
I don't think anyone here has ever claimed that.
And even if they did, it wouldn't help because the amount of zig in bonds in small compared to the size of the zag in stocks.

Some years ago Vanguard was caught putting up a tutorial on bonds where the presenter drew a chart that showed just exactly equal size and opposite zig-zags. That kind of naive misinformation is most unfortunate.
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Re: Are Higher Stock Allocations the Only Option for Retirees?

Post by tibbitts »

CurlyDave wrote: Mon Jul 27, 2020 12:46 am
Always passive wrote: Mon Jul 27, 2020 12:36 am ...I have search for the answer to this question, concluding that it is a losing battle, meaning that there is no solution. Is that right? Are there any bright ideas that I have not considered?...
I have been retired for 12 years. DW and I hold a significant part of our portfolio in brick and mortar rental real estate. It took quite a while to become profitable, but with me doing much of the management (which is sort of a part time job) I consider it a way to diversify into a reasonably uncorrelated asset class.

This being mostly a stock and bond board, I will take incoming for this, but it is still a great diversifier. One has to have the right temperament to manage property, and just giving it over to a property manager is liable to be costly, but it is a possibility.
You won't take any incoming, because unlike the people who post that they spend almost no time managing their array of properties, you say it's a part-time job. If you think of it that way then the competition for real estate isn't stocks or bonds, it's other part-time jobs or business ventures available to you.
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Re: Are Higher Stock Allocations the Only Option for Retirees?

Post by sailaway »

tibbitts wrote: Mon Jul 27, 2020 12:11 pm
minimalistmarc wrote: Mon Jul 27, 2020 1:05 am I thought the main point of bonds was that they zig when stocks zag?
I don't think anyone here has ever claimed that.
I thought the point of bonds was that they neither zig nor zag, they hover in a small range of variance.
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Re: Are Higher Stock Allocations the Only Option for Retirees?

Post by Sandtrap »

Seasonal wrote: Mon Jul 27, 2020 12:14 pm There is a story of the comedian Groucho Marx, who while touring the New York Stock Exchange had a trader yell out at him, "Hey Groucho, where do you invest your money?" Groucho replied, "I keep my money in Treasury bonds." The trader said, "They don't make you much money." "They do," Groucho said, "if you have enough of them...."
Gosh this is so true.
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Re: Are Higher Stock Allocations the Only Option for Retirees?

Post by MikeG62 »

grabiner wrote: Mon Jul 27, 2020 9:13 am
MikeG62 wrote: Mon Jul 27, 2020 7:57 am To my way of thinking, it's not the stated (nominal) yield on fixed income that matters, but the incremental yield above inflation (real yield). So while nominal yields are very low today, so is inflation. Not sure real yields are dramatically lower than in the past.
Real yields are lower than in the past.

To check this, go to Daily Treasury Real Yield Curve Rates. Current yields on TIPS are negative, all the way out to 30 years. The ten-year yield is -0.92%, while it was +0.08% in January, and +0.96% in January 2019.

You can mitigate this risk somewhat by using I-Bonds, which have a real yield of zero, but the amount you can purchase is limited.
I don’t think that a fair comparison as Treasuries are “way overbought” now.

I’d like to see the data using nominal yields for investment grade corporates now vs. various time periods in the past. Do you have a source for that?
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Re: Are Higher Stock Allocations the Only OFor meption for Retirees?

Post by Nightowl99 »

I think the safest choices seem to be buying I bonds up to the annual limit and waiting as long as you can to claim SS benefits. Then, and I'm not necessarily recommending this for anyone else, maybe consider making a small adjustment to your asset allocation. After watching some YouTube videos of John Bogle's and reading a little here and there, I recently decided to increase my allocation to equities, from 52/48 to something like 60/40 because I do happen to have a pension. Only time will tell if that was a mistake or not. Now probably isn't the best time to do this but I convinced myself that I needed to.

On the riskier side, I invested a little more in a REIT fund, but that's only about 5% or so of total equities. I'm considering adding a little more to foreign funds and am also taking a look at TIPs and gold, but don't want to buy them at all time highs. I know this isn't typical Boglehead advice, it's just what I've been thinking about doing or what I have done lately. Lately I've been finding it hard to just do nothing but maybe that would be the best for now.

It seems like a really bad time to keep a lot of cash, though, with interest rates being as low as they are.
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Re: Are Higher Stock Allocations the Only Option for Retirees?

Post by minimalistmarc »

tibbitts wrote: Mon Jul 27, 2020 12:11 pm
minimalistmarc wrote: Mon Jul 27, 2020 1:05 am I thought the main point of bonds was that they zig when stocks zag?
I don't think anyone here has ever claimed that.
I guess I still don’t understand bonds then. Good thing I don’t own any!
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Re: Are Higher Stock Allocations the Only Option for Retirees?

Post by meowcat »

It's difficult for me to understand the fear in bonds. For example: Vanguards' Long-Term Treasury (VUSTX) fund is up YTD, 25.63%.
5 years, it's up 9.16%. And, since its inception in 1986 (that's 34 years) it's up 8.05%. Maybe it's me who's missing something. I mean, why wouldn't you want this fund in your bond allocation? I know it's looking backwards, but it's done quite well.
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Re: Are Higher Stock Allocations the Only Option for Retirees?

Post by livesoft »

Always passive wrote: Mon Jul 27, 2020 12:36 am Are there any bright ideas that I have not considered?
The most obvious option to me is to simply live on less and reduce expenses.
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Re: Are Higher Stock Allocations the Only Option for Retirees?

Post by visualguy »

randomguy wrote: Mon Jul 27, 2020 9:39 am
visualguy wrote: Mon Jul 27, 2020 2:39 am
CurlyDave wrote: Mon Jul 27, 2020 12:46 am
Always passive wrote: Mon Jul 27, 2020 12:36 am ...I have search for the answer to this question, concluding that it is a losing battle, meaning that there is no solution. Is that right? Are there any bright ideas that I have not considered?...
I have been retired for 12 years. DW and I hold a significant part of our portfolio in brick and mortar rental real estate. It took quite a while to become profitable, but with me doing much of the management (which is sort of a part time job) I consider it a way to diversify into a reasonably uncorrelated asset class.

This being mostly a stock and bond board, I will take incoming for this, but it is still a great diversifier. One has to have the right temperament to manage property, and just giving it over to a property manager is liable to be costly, but it is a possibility.
+1

Rental real estate is the way to go for people who find it to be not too much of a bother. It doesn't work for people who want something that's purely passive, though.
Rental real estate is hard to evaluate as it is very local. My big concern is that I don't have much faith that I am going to mentally be in a place where I or my spouse can manage a real estate portfolio from ages 85 -100.
Managing it in old age is a concern. My parents managed their rentals until their late 70s, and then let my sister do it. If you have kids, letting them do it is an option. Most likely it will be part of their inheritance anyway... If not, it's possible to sell it.
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Re: Are Higher Stock Allocations the Only Option for Retirees?

Post by aristotelian »

Are the real return expectations really that different than when total bond was yielding 2.5% and inflation was at Fed target 2%?
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Re: Are Higher Stock Allocations the Only Option for Retirees?

Post by CurlyDave »

tibbitts wrote: Mon Jul 27, 2020 12:18 pm
CurlyDave wrote: Mon Jul 27, 2020 12:46 am
Always passive wrote: Mon Jul 27, 2020 12:36 am ...I have search for the answer to this question, concluding that it is a losing battle, meaning that there is no solution. Is that right? Are there any bright ideas that I have not considered?...
I have been retired for 12 years. DW and I hold a significant part of our portfolio in brick and mortar rental real estate. It took quite a while to become profitable, but with me doing much of the management (which is sort of a part time job) I consider it a way to diversify into a reasonably uncorrelated asset class.

This being mostly a stock and bond board, I will take incoming for this, but it is still a great diversifier. One has to have the right temperament to manage property, and just giving it over to a property manager is liable to be costly, but it is a possibility.
You won't take any incoming, because unlike the people who post that they spend almost no time managing their array of properties, you say it's a part-time job. If you think of it that way then the competition for real estate isn't stocks or bonds, it's other part-time jobs or business ventures available to you.
It is much more of a business venture than a job. I could go down and work at Walmart, but I would not see capital appreciation like in RE, and I would not be in control of my own destiny. Think of it as the best-paying part time job you have ever heard about.
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Re: Are Higher Stock Allocations the Only Option for Retirees?

Post by heyyou »

Due to diversification, I always own some investments that are doing poorly.
Those long term graphs show that returns vary over time, and that neither the good nor the bad periods are permanent.
My spending can be reduced, far easier than trying to make my portfolio perform better.
Just being retired was joyous, it was more about freedom from work than it was about spending for entertainment.
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Re: Are Higher Stock Allocations the Only Option for Retirees?

Post by John Z »

meowcat wrote: Mon Jul 27, 2020 1:01 pm It's difficult for me to understand the fear in bonds. For example: Vanguards' Long-Term Treasury (VUSTX) fund is up YTD, 25.63%.
5 years, it's up 9.16%. And, since its inception in 1986 (that's 34 years) it's up 8.05%. Maybe it's me who's missing something. I mean, why wouldn't you want this fund in your bond allocation? I know it's looking backwards, but it's done quite well.
+1
Although I'm 70% Total Bond now and collecting my 7-9% per year but understand that the return will slide as older higher return bonds are removed from the index over time. As long as I can reap more than 4%, my withdrawal rate after 10 years in retirement, I'll be happy but then will have to find an alternative.
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Re: Are Higher Stock Allocations the Only Option for Retirees?

Post by mrspock »

Jack FFR1846 wrote: Mon Jul 27, 2020 9:57 am ...
An alternative? No, I'm not going to say REITs. Go down to Lowe's or Amazon and take on a part time job. That way, you directly get paid for the hours (no waiting for deadbeat tenants to finally decide to pay the late rent). You add to social security, get the ability to directly contribute to a Roth and can decide anytime that you want to stop. Try that with a rental...."I've decided to stop. Give me all my money back. I'll be in Hawaii for a month".
There's a simple solution for that: live in Hawaii and have an "Ohana" -- a small on-site 2nd property you rent out to vacationers. This is essentially my plan to diversify my income stream in retirement. I figure I should net another $20-30k/yr after expenses which is a nice bump for me. The only wrinkle in my plan is that short-term rentals take a hit in recessions, so it's not super recession proof, but I have sufficient cushion in my investment portfolio to manage this risk.

Worst case, I could change it to a long term rental -- and let's face it....who wouldn't want to live in Hawaii (until they get sick of it and move back to the mainland haha)?
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Re: Are Higher Stock Allocations the Only Option for Retirees?

Post by Seasonal »

meowcat wrote: Mon Jul 27, 2020 1:01 pm It's difficult for me to understand the fear in bonds. For example: Vanguards' Long-Term Treasury (VUSTX) fund is up YTD, 25.63%.
5 years, it's up 9.16%. And, since its inception in 1986 (that's 34 years) it's up 8.05%. Maybe it's me who's missing something. I mean, why wouldn't you want this fund in your bond allocation? I know it's looking backwards, but it's done quite well.
That fund is up because interest rates have gone down. That trend is not likely to continue indefinitely. The fund is now yielding 1.14% (SEC yield). How much lower do you believe it will go?

A high interest rate is much better for bond holders than a history of increased value due to falling interest rates.
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Re: Are Higher Stock Allocations the Only Option for Retirees?

Post by Escapevelocity »

John Z wrote: Mon Jul 27, 2020 2:55 pm
meowcat wrote: Mon Jul 27, 2020 1:01 pm It's difficult for me to understand the fear in bonds. For example: Vanguards' Long-Term Treasury (VUSTX) fund is up YTD, 25.63%.
5 years, it's up 9.16%. And, since its inception in 1986 (that's 34 years) it's up 8.05%. Maybe it's me who's missing something. I mean, why wouldn't you want this fund in your bond allocation? I know it's looking backwards, but it's done quite well.
+1
Although I'm 70% Total Bond now and collecting my 7-9% per year but understand that the return will slide as older higher return bonds are removed from the index over time. As long as I can reap more than 4%, my withdrawal rate after 10 years in retirement, I'll be happy but then will have to find an alternative.
There is a considerable risk that your fund could have a negative return over a fairly long period of time within the next 5-10 years. Forget about keeping it above 4%. That ship has sailed my friend. At least for the portion that is invested right now. Maybe for new money if and when rates go up.
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Re: Are Higher Stock Allocations the Only Option for Retirees?

Post by abuss368 »

Simple. Not if it keeps one up at night!
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Re: Are Higher Stock Allocations the Only Option for Retirees?

Post by ScubaHogg »

tibbitts wrote: Mon Jul 27, 2020 12:11 pm
minimalistmarc wrote: Mon Jul 27, 2020 1:05 am I thought the main point of bonds was that they zig when stocks zag?
I don't think anyone here has ever claimed that.
Um, isn’t that the entire purpose of the structure of the Excellent Adventure?
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Re: Are Higher Stock Allocations the Only Option for Retirees?

Post by rich126 »

Depending on your investing style/time frame, I'd look at things like international stocks, international bonds (dollar may weaken), myga and even some CDs (at least 1% is better than any short term bond fund is doing). Of course gold and LT treasuries have been soaring but I'm not sure how long that will go on. Personally I feel pretty confident rates/inflation isn't going to be a problem for the short term but 5, 10 years down the road is another story.
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Re: Are Higher Stock Allocations the Only Option for Retirees?

Post by ruralavalon »

It's not possible to be very specific with no details (like age, any pension or annuity, Social Security, portfolio withdrawal rate, etc.) about your situation.

Always passive wrote: Mon Jul 27, 2020 12:36 am Retirees typically hold a high allocation of bonds. In my case 70%. Given the disastrous outlook for bonds, already showing negative returns in real term for the future, what are the options to retirees short of letting the portfolio erode or taking more risk in the equity market?
I have search for the answer to this question, concluding that it is a losing battle, meaning that there is no solution. Is that right? Are there any bright ideas that I have not considered?

Note: Returns from bonds, unlike stocks, are known (present yields tell the bulk of the story); thus, let us agree not to challenge my premise on bonds.
In my opinion a 30/70 asset allocation is within the range of what is reasonable for a retiree. Rick Ferri, Forbes (2/6/2015), "The Center of Gravity for Retirees".

A higher stock allocation is also reasonable in my opinion. See Trinity Study, table 3.

So if anxious because of current yields of bond funds, then increase the stock allocation, or decrease spending for a lower withdrawal rate.

For what it is worth we are age 74, retired, no pension or annuity, and our asset allocation is 50/50. The entire bond allocation is in Vanguard Intermediate-term Bond Index Fund (VBILX).

bayview wrote: Mon Jul 27, 2020 9:09 am
minimalistmarc wrote: Mon Jul 27, 2020 1:05 am I thought the main point of bonds was that they zig when stocks zag?
I thought that the point was that they don't zag to the same degree as stocks, and that sometimes they in fact zig. Low correlation, rather than negative correlation.
Correlations differ over time.

Currently Treasury bond funds have a negative correlation with the U.S. stock market.

Currently core intermediate-term bond funds, like U.S. Aggregate (total bond market) index funds have a very low correlation with the U.S. stock market.

In my opinion opinion the primary purpose is a bond allocation is to diversify and reduce portfolio risk.

Many people do consider real estate a third, different asset type. A REIT fund like Vanguard Real Estate Index Fund Admiral Shares (VGSLX) can be a diversifier. Currently it has a correlation of 46/100 with the U.S.stock market, so not as low a correlation as a core intermediate-term bond fund.
Last edited by ruralavalon on Mon Jul 27, 2020 6:27 pm, edited 4 times in total.
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Re: Are Higher Stock Allocations the Only Option for Retirees?

Post by grobertj »

Outer Marker wrote: Mon Jul 27, 2020 9:24 am
Always passive wrote: Mon Jul 27, 2020 12:36 am Are there any bright ideas that I have not considered?
You might consider a Single Premium Immediate Annuity for a portion of your fixed income.
Excuse my ignorance, but what is a Single Premium Immediate Annuity. I thought all Bogleheads were anathema to annuities.
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