AA for someone 2 years from retirement

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grace2020
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AA for someone 2 years from retirement

Post by grace2020 »

What are the percentages of stock, bonds, inflation protection securities (?), cash, to shoot for in your portfolio as you move to retirement, and in this current market? For now lets assume no debt.
sailaway
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Re: AA for someone 2 years from retirement

Post by sailaway »

It depends...

We chose 70/30 about 4 years out and rode it through retirement.

Others choose a liability matching portfolio, which pretty much requires that you have saved beyond your needs.

Have you read through the AA wikis?
Topic Author
grace2020
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Re: AA for someone 2 years from retirement

Post by grace2020 »

sailaway wrote: Sun Apr 04, 2021 2:56 pm It depends...

We chose 70/30 about 4 years out and rode it through retirement.

Others choose a liability matching portfolio, which pretty much requires that you have saved beyond your needs.

Have you read through the AA wikis?
Thanks, for clarity do you mean 70/30 Stock/Bonds? I will read that wiki!
KlangFool
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Re: AA for someone 2 years from retirement

Post by KlangFool »

OP,

Depending on your comfort level, you should keep 10 to 20 years of annual expense in bonds. And, 1 to 3 years of expense in CASH. This is independent of any market level.

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Johnsson
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Re: AA for someone 2 years from retirement

Post by Johnsson »

I personally think Phineas J. Whoopee's premise is a good place to start... viewtopic.php?t=126809&start=50#p1862535

Adjusted by your overall desire/willingness to assume risk.

Further adjusted for your ability to emotionally and financially navigate a black swan event.

It's a very personal question that only you and your spouse (if any) can answer.

We're planning to bail out in July of this year at 55/45 with enough cash in CDs for 4 years or so and enough in bonds for about 20 yrs spending (assuming some level of SS that we plan to start in 10 yrs at 70).
'In theory there is no difference between theory and practice. In practice there is.' Yogi Berra
rockstar
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Re: AA for someone 2 years from retirement

Post by rockstar »

No idea. I'm about 10 years, and I'm close to being 100% in equities right now.

I'm trying to figure this out now for myself too. I expect my expenses to go up with inflation over time.

It's tough to buy and hold bonds when they aren't keeping up with inflation. That's where I struggle now. And at some point we should go into a bear market, which also has me concerned. No idea when this will happen. But I'd rather retire in one or after one than before one starts.

Let me know what you figure out.

I'm reading this site a lot for ideas:

https://earlyretirementnow.com/

I've settled on a 3% withdraw rate.
delamer
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Re: AA for someone 2 years from retirement

Post by delamer »

A factor in deciding on your retirement allocation is the extent to which you’ll be dependent on withdrawals to cover your expenses.

If you have a $500,000 portfolio from which you’ll need to withdraw $10,000/year then you might invest differently than if you’ll need to withdraw $20,000/year.

One option is to put 20/25 years of expenses in cash equivalents (CDs, TIPS, short-term bonds, etc.) and the rest in stocks. But again, whether that works depends on how much you’ll be withdrawing annually.

See “How Much Is Enough?”: https://www.whitecoatinvestor.com/berns ... -the-game/
Zetorman
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Re: AA for someone 2 years from retirement

Post by Zetorman »

Ours.
3M ish total with 1.6M tax def, 800k Roth, 600k cash. Current AA is 50/35/15 give or take a % or two. We need the cash to cover yrs until I am 59.5 (54.5 now and quitting 2/22). Last yr we spent 46.2k all in, but there was a pandemic. We will probably spend much more immediately after leaving our j*bs so that's why we have a lot set aside. Also, we will need to manage our incomes for ACA purposes and lots of cash sure helps there. If you do the math then you will see that some of the cash is deployed in stocks/bonds. For that we use VWIAX. Roth is all stock.

Long-term which is what I assume you are asking, max 50% stock, 3yrs cash, and the remainder in bonds.

I can still feel the tech and financial crashes. Fully employed in a recession-proof industry during both periods, I still did not like those events. Without a steady paycheck, I want to make sure that we can comfortably make it until I am 70yo when SS kicks in.
Last edited by Zetorman on Mon Apr 05, 2021 10:33 am, edited 1 time in total.
Dandy
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Re: AA for someone 2 years from retirement

Post by Dandy »

What percent of your investments will you have to withdraw to fund your retirement? If less than 4% you are in good shape and don't have a major need to have an aggressive overall allocation.

You need to give your age, investment total etc. to get a better overall answer.
sailaway
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Re: AA for someone 2 years from retirement

Post by sailaway »

grace2020 wrote: Sun Apr 04, 2021 2:59 pm
sailaway wrote: Sun Apr 04, 2021 2:56 pm It depends...

We chose 70/30 about 4 years out and rode it through retirement.

Others choose a liability matching portfolio, which pretty much requires that you have saved beyond your needs.

Have you read through the AA wikis?
Thanks, for clarity do you mean 70/30 Stock/Bonds? I will read that wiki!
For us, it is stocks/bonds+cash
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Watty
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Re: AA for someone 2 years from retirement

Post by Watty »

grace2020 wrote: Sun Apr 04, 2021 2:45 pm What are the percentages of stock, bonds, inflation protection securities (?), cash, to shoot for in your portfolio as you move to retirement, and in this current market? For now lets assume no debt.
When figuring out what asset allocation to use I like to check target date funds to see what they use as a starting point.

The Vanguard 2025 fund is about 58% stocks and 42% bonds.

https://investor.vanguard.com/mutual-fu ... olio/vttvx

You may want to modify that though if you are doing something like retiring and will have higher expenses for the first five years until you start Social Security and Medicare.
Marseille07
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Re: AA for someone 2 years from retirement

Post by Marseille07 »

50/50 then glide back up. This is how one would mitigate SORR: https://www.kitces.com/blog/managing-po ... -red-zone/
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beernutz
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Re: AA for someone 2 years from retirement

Post by beernutz »

I'm 421 days from retirement and we're 73/27 with 75% in tax deferred, 2% Roth (will grow to 3% by retirement date), and 23% in taxable. I have 2 years expenses, about 2% of net worth, over and above my pension in cash in taxable.

The 27% FI is a combination of TIAA traditional, muni bond mutual funds, and Vanguard VTSPX and Wellington funds.

I sleep well and have no plans to adjust my AA post retirement.
Don't gamble; take all your savings and buy some good stock and hold it till it goes up, then sell it. If it don't go up, don't buy it. --Will Rogers
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tennisplyr
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Re: AA for someone 2 years from retirement

Post by tennisplyr »

Here’s a Vanguard tool for some broad guidance.

https://retirementplans.vanguard.com/VG ... -YYA4-CW3H
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Re: AA for someone 2 years from retirement

Post by Jack FFR1846 »

I'll be retiring this year...once Covid is at bay. I'm at 50/50 and have just about $100k in cash in anticipation of buying a stupid car when I call it quits. I have over 50 times spending already. The reason for 50/50 is that I've realized that I have won the game, so I don't need anything overly risky, but I do want equities to keep earning for me. Note that because of the 50/50, equities could go to zero and I'd still have over 25 times spending available.
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Topic Author
grace2020
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Re: AA for someone 2 years from retirement

Post by grace2020 »

Thank you all for these most helpful replies!!!!
dbr
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Re: AA for someone 2 years from retirement

Post by dbr »

grace2020 wrote: Sun Apr 04, 2021 2:45 pm What are the percentages of stock, bonds, inflation protection securities (?), cash, to shoot for in your portfolio as you move to retirement, and in this current market? For now lets assume no debt.
There is no general answer but a range of possibilities depending on your situation and what you want compared to the consequences of what you do.

You can't decide anything without first knowing how much income you want/need from the portfolio over time. How much that is also changes depending on the presence of pensions and when you decide to start Social Security if you have it. Things also change if you change your life situation at retirement, such as downsizing, moving, getting kids out of the house and out of school, etc.

There are a number of models such as www.firecalc.com that show you how the whole thing is set up.

It is not necessary to worry about details such as TIPS, cash, etc. The outcome is not going to depend on that level of detail. It is also futile to try to make a plan "in this current market." You are trying to estimate how things will work out with a thirty year range of uncertainty. How much did you learn about where you would be today from the market 30, 20, and 10 years ago?

That said, if the question is how should you be invested, and you aren't doing a lot of thinking about where you stand and what you want, a three fund portfolio at a 60/40 asset allocation and 25% of stocks in international stocks is not going to be horribly wrong for a wide range of people.

https://www.bogleheads.org/wiki/Three-fund_portfolio

Reading books like the Bogleheads retirement books and authors such as Larry Swedroe in his retirement and investing books can be very helpful. I am a strong advocate of reading material presented systematically by a thoughtful expert as well as asking on a forum.

Also, to dispel a common alternative, I will remind one that if you have 25 or 30 times your expected portfolio withdrawals in assets and you invest at 60/40 or 50/50 stocks/bonds then you also have ten to fifteen years of expenses in fixed income at the start, willy nilly.
Last edited by dbr on Wed Apr 07, 2021 9:54 am, edited 1 time in total.
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BolderBoy
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Re: AA for someone 2 years from retirement

Post by BolderBoy »

KlangFool wrote: Sun Apr 04, 2021 3:03 pmDepending on your comfort level, you should keep 10 to 20 years of annual expense in bonds. And, 1 to 3 years of expense in CASH. This is independent of any market level.
I like this advice and am sort of following it myself. Been retired 10 years.

Think of it this way, "Use stocks to build wealth and bonds/cash to preserve wealth." (snitched and paraphrased from another thread)
"Never underestimate one's capacity to overestimate one's abilities" - The Dunning-Kruger Effect
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grace2020
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Re: AA for someone 2 years from retirement

Post by grace2020 »

Marseille07 wrote: Sun Apr 04, 2021 11:43 pm 50/50 then glide back up. This is how one would mitigate SORR: https://www.kitces.com/blog/managing-po ... -red-zone/
This is such an interesting article, thank you for posting. Currently bonds funds have negative returns. Comments from this article (which is 5 years old so we have some historical perspective) mentions that bond funds were low then too, someone ask about using Bond ETF's. What are your thoughts on using bond funds that bring negative returns? It is hard to understand why we would put money in bonds in this case, over savings accounts. What am I missing?

Thanks!
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Re: AA for someone 2 years from retirement

Post by KlangFool »

grace2020 wrote: Wed Apr 07, 2021 10:02 am
It is hard to understand why we would put money in bonds in this case, over savings accounts. What am I missing?

Thanks!
grace2020,

It is not hard to understand if you know that you cannot predict the future.

Why do you think you can predict the future? Aka, the interest rate can go up or down? If you cannot predict the future, how do you know the bond will do better or worse than CASH in the future? If the answer is you do not know, why do you decide CASH is better based on what is happening NOW?

I know that I know nothing. I know that I cannot predict the future. Hence, I am diversified. I have CASH, BOND, US Stock, and International Stock. I do not invest based on what the asset class is doing NOW.

KlangFool
40% VWENX | 12.5% VFWAX/VTIAX | 11.5% VTSAX | 16% VBTLX | 10% VSIAX/VTMSX/VSMAX | 10% VSIGX| 40% Wellington 40% 3-funds 20% Mini-Larry
Marseille07
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Re: AA for someone 2 years from retirement

Post by Marseille07 »

grace2020 wrote: Wed Apr 07, 2021 10:02 am
Marseille07 wrote: Sun Apr 04, 2021 11:43 pm 50/50 then glide back up. This is how one would mitigate SORR: https://www.kitces.com/blog/managing-po ... -red-zone/
This is such an interesting article, thank you for posting. Currently bonds funds have negative returns. Comments from this article (which is 5 years old so we have some historical perspective) mentions that bond funds were low then too, someone ask about using Bond ETF's. What are your thoughts on using bond funds that bring negative returns? It is hard to understand why we would put money in bonds in this case, over savings accounts. What am I missing?

Thanks!
The aim here is to avoid something called SORR (you can search this forum if you don't know what this is).

I mean, if you're chasing returns only then the correct answer is simply 100% stocks...but there's an important condition here that is "2 years from retirement," hence the bond-tent approach might make sense.
dbr
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Re: AA for someone 2 years from retirement

Post by dbr »

grace2020 wrote: Wed Apr 07, 2021 10:02 am
Marseille07 wrote: Sun Apr 04, 2021 11:43 pm 50/50 then glide back up. This is how one would mitigate SORR: https://www.kitces.com/blog/managing-po ... -red-zone/
This is such an interesting article, thank you for posting. Currently bonds funds have negative returns. Comments from this article (which is 5 years old so we have some historical perspective) mentions that bond funds were low then too, someone ask about using Bond ETF's. What are your thoughts on using bond funds that bring negative returns? It is hard to understand why we would put money in bonds in this case, over savings accounts. What am I missing?

Thanks!
You are missing that the property that matters is the return and variation in return from year to year (called risk) of the whole portfolio. While bond returns may be low for now, which is not helpful, the dilution of risk by an apportionment to bonds is still required. See below re the optimum allocation at 60/40.

I would not get too wrapped up in esoteria such as sequence of returns risk. The basic background to this issue is the original Trinity study (ca. 1990) and work by others building an understanding of what happens to portfolios when people are withdrawing money from them. The point is that returns are not constant but vary every year and as a result worst cases can be experienced where returns are quite poor early in retirement and perhaps better later on. Withdrawals early on combined with poor returns knock down the portfolio and reduce the future ability to maintain withdrawals. As a result one cannot use the average return expected from investments to assure rates of spending that will be nearly guaranteed to be safe. An outcome is the infamous 4% rule which describes the highest withdrawal rate (as a fraction of initial portfolio value increased annually by inflation) even when the portfolio returns on average more than 4%. This can be called the sequence of returns risk which combines with the fact that we can't know for sure what average return we will get to suggest caution in the rate of withdrawal.

The relationship of asset allocation to this is that stocks offer more variable returns than bond, and hence could be victim of a more severe sequence of returns problem. Stocks also offer higher average return than bonds. These effects are offsetting and the result is that asset allocation does not have a strong effect on safe withdrawal rate . There is a mild optimum withdrawal rate at maybe 60/40 and a withdrawal around 4%. Letting stocls fall very low drives this rate down considerably while going to 100% stocks results in only a mild depression on average. For a withdrawal rate below 3% it simply doesn't matter what the asset allocation is. The result is sensitive more than anything else to the year of retirement ranging from a worst of around 4% in 1966 to perhaps twice that if you retired in 1982. The difference is the bear market conditions in stocks and high inflation for the 1966 retiree and the beginning of the stock bull market and decline of inflation from 1982.

The Kitces paper is a recent attempt to investigate whether or not some adjustment to the asset allocation early in retirement can significantly benefit the retiree by holding more in bonds for awhile. There is a result there, but it is not large, unless one is temporarily spending at a high rate such as delaying the start of Social Security and SS being a large part of one's income. It is also not a result that helps in the case the retiree is going to be affected by a low average return for his retirement distinct from a bad sequence. One must underline the case that SORR is already built into the analysis such as Trinity and its successors as is the huge variation in the average return for the period of retirement depending on the starting year. A planning tool such as FireCalc is an embodiment of the basic methodology of Trinity. You can use that tool to see the outcomes for over a hundred starting years and for different asset allocations. FireCalc does not allow the asset allocation to be altered, however. For that you can go decide what you think of Kitces, Pfau, Milevsky and other authors.

Another approach altogether to the problem is to recognize that a portfolio with highly variable investment returns is not a good match to a known constant liability. The best match is an inflation indexed single premium immediate annuity. Why so few people choose to annuitize is an academic finance puzzle called the "annuity puzzle." The situation is not helped by the fact that inflation indexed annuities pretty much do not exist and the only effective way to buy one is to delay initiation of SS benefits to age 70. A poor man's alternative is to set up a ladder of 30 year TIPS. This is where the historical bad luck of low interest rates really comes home to roost. At 0% real yield on TIPS the withdrawal rate for that ladder is only 3.33%. At a more normal real yield of 2.0% the payout is 4.4% safe inflation indexed and at 3.0% real yield you can get 5%. There is no meaningful device by which investors and retirees can escape the iron grip of history and history to be.
Topic Author
grace2020
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Re: AA for someone 2 years from retirement

Post by grace2020 »

[/quote]

grace2020,

It is not hard to understand if you know that you cannot predict the future.

Why do you think you can predict the future? Aka, the interest rate can go up or down? If you cannot predict the future, how do you know the bond will do better or worse than CASH in the future? If the answer is you do not know, why do you decide CASH is better based on what is happening NOW?

I know that I know nothing. I know that I cannot predict the future. Hence, I am diversified. I have CASH, BOND, US Stock, and International Stock. I do not invest based on what the asset class is doing NOW.

KlangFool
[/quote]

Thank you, yes, I am looking at this "short term" so to speak
Topic Author
grace2020
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Re: AA for someone 2 years from retirement

Post by grace2020 »

[/quote]

The aim here is to avoid something called SORR (you can search this forum if you don't know what this is).

I mean, if you're chasing returns only then the correct answer is simply 100% stocks...but there's an important condition here that is "2 years from retirement," hence the bond-tent approach might make sense.
[/quote]

Thank you for pointing this out!
Topic Author
grace2020
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Re: AA for someone 2 years from retirement

Post by grace2020 »

You are missing that the property that matters is the return and variation in return from year to year (called risk) of the whole portfolio. While bond returns may be low for now, which is not helpful, the dilution of risk by an apportionment to bonds is still required. See below re the optimum allocation at 60/40.

I would not get too wrapped up in esoteria such as sequence of returns risk. The basic background to this issue is the original Trinity study (ca. 1990) and work by others building an understanding of what happens to portfolios when people are withdrawing money from them. The point is that returns are not constant but vary every year and as a result worst cases can be experienced where returns are quite poor early in retirement and perhaps better later on. Withdrawals early on combined with poor returns knock down the portfolio and reduce the future ability to maintain withdrawals. As a result one cannot use the average return expected from investments to assure rates of spending that will be nearly guaranteed to be safe. An outcome is the infamous 4% rule which describes the highest withdrawal rate (as a fraction of initial portfolio value increased annually by inflation) even when the portfolio returns on average more than 4%. This can be called the sequence of returns risk which combines with the fact that we can't know for sure what average return we will get to suggest caution in the rate of withdrawal.

The relationship of asset allocation to this is that stocks offer more variable returns than bond, and hence could be victim of a more severe sequence of returns problem. Stocks also offer higher average return than bonds. These effects are offsetting and the result is that asset allocation does not have a strong effect on safe withdrawal rate . There is a mild optimum withdrawal rate at maybe 60/40 and a withdrawal around 4%. Letting stocls fall very low drives this rate down considerably while going to 100% stocks results in only a mild depression on average. For a withdrawal rate below 3% it simply doesn't matter what the asset allocation is. The result is sensitive more than anything else to the year of retirement ranging from a worst of around 4% in 1966 to perhaps twice that if you retired in 1982. The difference is the bear market conditions in stocks and high inflation for the 1966 retiree and the beginning of the stock bull market and decline of inflation from 1982.

The Kitces paper is a recent attempt to investigate whether or not some adjustment to the asset allocation early in retirement can significantly benefit the retiree by holding more in bonds for awhile. There is a result there, but it is not large, unless one is temporarily spending at a high rate such as delaying the start of Social Security and SS being a large part of one's income. It is also not a result that helps in the case the retiree is going to be affected by a low average return for his retirement distinct from a bad sequence. One must underline the case that SORR is already built into the analysis such as Trinity and its successors as is the huge variation in the average return for the period of retirement depending on the starting year. A planning tool such as FireCalc is an embodiment of the basic methodology of Trinity. You can use that tool to see the outcomes for over a hundred starting years and for different asset allocations. FireCalc does not allow the asset allocation to be altered, however. For that you can go decide what you think of Kitces, Pfau, Milevsky and other authors.

Another approach altogether to the problem is to recognize that a portfolio with highly variable investment returns is not a good match to a known constant liability. The best match is an inflation indexed single premium immediate annuity. Why so few people choose to annuitize is an academic finance puzzle called the "annuity puzzle." The situation is not helped by the fact that inflation indexed annuities pretty much do not exist and the only effective way to buy one is to delay initiation of SS benefits to age 70. A poor man's alternative is to set up a ladder of 30 year TIPS. This is where the historical bad luck of low interest rates really comes home to roost. At 0% real yield on TIPS the withdrawal rate for that ladder is only 3.33%. At a more normal real yield of 2.0% the payout is 4.4% safe inflation indexed and at 3.0% real yield you can get 5%. There is no meaningful device by which investors and retirees can escape the iron grip of history and history to be.
Thank you for taking the time to help me to understand your thinking and this research. I have read this over once and will read it at least once again! My initial take home is at this point it makes sense to have 60/40 allocation and if I retire in about 2 years, delay ss, and only withdraw 3% it may be the best way for me to preserves the most assets for the longest period of time.
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grace2020
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Re: AA for someone 2 years from retirement

Post by grace2020 »


grace2020,

It is not hard to understand if you know that you cannot predict the future.

Why do you think you can predict the future? Aka, the interest rate can go up or down? If you cannot predict the future, how do you know the bond will do better or worse than CASH in the future? If the answer is you do not know, why do you decide CASH is better based on what is happening NOW?

I know that I know nothing. I know that I cannot predict the future. Hence, I am diversified. I have CASH, BOND, US Stock, and International Stock. I do not invest based on what the asset class is doing NOW.

KlangFool
Thank you, yes, I am looking at this "short term" so to speak
[/quote]
Topic Author
grace2020
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Re: AA for someone 2 years from retirement

Post by grace2020 »


grace2020,

It is not hard to understand if you know that you cannot predict the future.

Why do you think you can predict the future? Aka, the interest rate can go up or down? If you cannot predict the future, how do you know the bond will do better or worse than CASH in the future? If the answer is you do not know, why do you decide CASH is better based on what is happening NOW?

I know that I know nothing. I know that I cannot predict the future. Hence, I am diversified. I have CASH, BOND, US Stock, and International Stock. I do not invest based on what the asset class is doing NOW.

KlangFool
Thank you, yes, I am looking at this "short term" so to speak
Last edited by grace2020 on Sat Apr 10, 2021 12:13 pm, edited 1 time in total.
Topic Author
grace2020
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Re: AA for someone 2 years from retirement

Post by grace2020 »


grace2020,

It is not hard to understand if you know that you cannot predict the future.

Why do you think you can predict the future? Aka, the interest rate can go up or down? If you cannot predict the future, how do you know the bond will do better or worse than CASH in the future? If the answer is you do not know, why do you decide CASH is better based on what is happening NOW?

I know that I know nothing. I know that I cannot predict the future. Hence, I am diversified. I have CASH, BOND, US Stock, and International Stock. I do not invest based on what the asset class is doing NOW.

KlangFool
Thank you, yes, I am looking at this "short term" so to speak
Topic Author
grace2020
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Re: AA for someone 2 years from retirement

Post by grace2020 »


The aim here is to avoid something called SORR (you can search this forum if you don't know what this is).

I mean, if you're chasing returns only then the correct answer is simply 100% stocks...but there's an important condition here that is "2 years from retirement," hence the bond-tent approach might make sense.
Thank you for pointing this out!
[/quote]
dbr
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Re: AA for someone 2 years from retirement

Post by dbr »

grace2020 wrote: Sat Apr 10, 2021 12:08 pm

Thank you, yes, I am looking at this "short term" so to speak
Retirement is not a short term proposition.

By and large your asset allocation would not change from years before retirement through years after retirement, possibly excepting a set aside for some special consideration.

Current market has nothing to do with it.

Are there particular issues that are of concern to you apart from getting spooked about low interest rates. Sequence of returns issues do not apply to low withdrawal rates that you mention ~3%. A person taking 10% a year for a few years to bridge to annuity income would make arrangements to manage that.
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grace2020
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Re: AA for someone 2 years from retirement

Post by grace2020 »

well that is why I proposed a 3% withdrawal rate. I'm acknowledging that if I stay at 3% I am probably very likely to be fine. That will certainly not make me rich! :) That's ok, I am learning what my options are and how much I can expect to remove each year.

Thanks again!
dbr
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Re: AA for someone 2 years from retirement

Post by dbr »

grace2020 wrote: Sat Apr 10, 2021 2:51 pm well that is why I proposed a 3% withdrawal rate. I'm acknowledging that if I stay at 3% I am probably very likely to be fine. That will certainly not make me rich! :) That's ok, I am learning what my options are and how much I can expect to remove each year.

Thanks again!
It will make you rich. That low withdrawal rate will give you a good chance of dying fabulously wealthy.

Did you know that in FireCalc while the withdrawal rate that only results in 5% failures is 4%, that a 6% withdrawal rate is still successful 50% of the time. Also one reaches no failures in 120 years of history at 3.5%. This is at 30 years and at least a minimum in stocks. People can, of course, assume that someone retiring in 2023 will have a worse time than experienced in any of that history.

This is not to say that your plan is not perfectly sound. I think you should be very confident.
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JoeRetire
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Re: AA for someone 2 years from retirement

Post by JoeRetire »

grace2020 wrote: Sun Apr 04, 2021 2:45 pm What are the percentages of stock, bonds, inflation protection securities (?), cash, to shoot for in your portfolio as you move to retirement, and in this current market? For now lets assume no debt.
How long do you expect retirement to last? For many, this is a 30-40 year time period.

There's no magic AA. It depends on your goals, the size of your nest egg, what other income streams you might have (social security, for example), etc.

We are currently about 65/35.
I am delaying social security benefits to 70 in order to maximize our inflation-protected income stream.
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watchnerd
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Re: AA for someone 2 years from retirement

Post by watchnerd »

We're 4.5 years from retirement:

Currently: 60/30/10
By Retirement Year 1: 50/25/25

The Sharpe and Sortino ratios for these ports are the same, but the SOR in early retirement is reduced.

Spending over time will put this on a rising equity glide path that reverts back to 65% equities in year 10 of early retirement.
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Marseille07
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Re: AA for someone 2 years from retirement

Post by Marseille07 »

watchnerd wrote: Sat Apr 10, 2021 3:25 pm We're 4.5 years from retirement:

Currently: 60/30/10
By Retirement Year 1: 50/25/25

The Sharpe and Sortino ratios for these ports are the same, but the SOR in early retirement is reduced.

Spending over time will put this on a rising equity glide path that reverts back to 65% equities in year 10 of early retirement.
SOR is really overrated. It's a non-issue if you use some percentage-based withdrawal method.

It kills you if you're doing constant-dollar, the markets crash and your withdrawal ends up being 5%+.
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watchnerd
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Re: AA for someone 2 years from retirement

Post by watchnerd »

Marseille07 wrote: Sat Apr 10, 2021 3:35 pm
watchnerd wrote: Sat Apr 10, 2021 3:25 pm We're 4.5 years from retirement:

Currently: 60/30/10
By Retirement Year 1: 50/25/25

The Sharpe and Sortino ratios for these ports are the same, but the SOR in early retirement is reduced.

Spending over time will put this on a rising equity glide path that reverts back to 65% equities in year 10 of early retirement.
SOR is really overrated. It's a non-issue if you use some percentage-based withdrawal method.

It kills you if you're doing constant-dollar, the markets crash and your withdrawal ends up being 5%+.
Meh.

We're at 40x. We'll be at 50x in 4 years.

We can use whatever method we like, it doesn't make a difference. This is a preference that makes the marriage easier.

We're not going to run out of money unless we develop late in life drug addictions.
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Re: AA for someone 2 years from retirement

Post by Peter Foley »

Sequence of returns is a real issue. Just ask those who retired just before the last recession.

Pre Kitces article (also Wade Pfau) I went the "rising equity glide path" route entering retirement at 45/55 where just a couple years earlier I had been 70/30. I let stocks glide up to 55% before rebalancing to 50%.

Also note that beyond the Trinity Study there are a number of other studies regarding withdrawal rates. Guyton recommended 4% with guardrails in an article a number of years ago, i.e., do not give yourself an inflationary increase in years where the stock market is down. That helped increase the survivability rate of the portfolio. In addition, withdrawals from a portfolio do not necessarily equal spending.
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Re: AA for someone 2 years from retirement

Post by watchnerd »

Peter Foley wrote: Sat Apr 10, 2021 3:51 pm Sequence of returns is a real issue. Just ask those who retired just before the last recession.

Pre Kitces article (also Wade Pfau) I went the "rising equity glide path" route entering retirement at 45/55 where just a couple years earlier I had been 70/30. I let stocks glide up to 55% before rebalancing to 50%.

Also note that beyond the Trinity Study there are a number of other studies regarding withdrawal rates. Guyton recommended 4% with guardrails in an article a number of years ago, i.e., do not give yourself an inflationary increase in years where the stock market is down. That helped increase the survivability rate of the portfolio. In addition, withdrawals from a portfolio do not necessarily equal spending.
I find the rising equity glidepath intellectually appealing and like the improvement in risk reduction.

Even though we could probably use a static allocation and variable-withdrawals and be fine, too.
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Re: AA for someone 2 years from retirement

Post by Marseille07 »

watchnerd wrote: Sat Apr 10, 2021 3:58 pm I find the rising equity glidepath intellectually appealing and like the improvement in risk reduction.

Even though we could probably use a static allocation and variable-withdrawals and be fine, too.
It's safe but really, really boring to go from 50/50 to 90/10 over 5 years.
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Re: AA for someone 2 years from retirement

Post by watchnerd »

Marseille07 wrote: Sat Apr 10, 2021 5:31 pm
watchnerd wrote: Sat Apr 10, 2021 3:58 pm I find the rising equity glidepath intellectually appealing and like the improvement in risk reduction.

Even though we could probably use a static allocation and variable-withdrawals and be fine, too.
It's safe but really, really boring to go from 50/50 to 90/10 over 5 years.
Static AA is exciting?

Is rising bond glide path thrilling?
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Re: AA for someone 2 years from retirement

Post by Marseille07 »

watchnerd wrote: Sat Apr 10, 2021 5:50 pm
Marseille07 wrote: Sat Apr 10, 2021 5:31 pm
watchnerd wrote: Sat Apr 10, 2021 3:58 pm I find the rising equity glidepath intellectually appealing and like the improvement in risk reduction.

Even though we could probably use a static allocation and variable-withdrawals and be fine, too.
It's safe but really, really boring to go from 50/50 to 90/10 over 5 years.
Static AA is exciting?

Is rising bond glide path thrilling?
I think the feeling is somewhat different between risking vs de-risking. Risking we want quick action to make money. De-risking can be nice & slow as you age and try to stay in the win column.
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Re: AA for someone 2 years from retirement

Post by watchnerd »

Marseille07 wrote: Sat Apr 10, 2021 5:58 pm
I think the feeling is somewhat different between risking vs de-risking. Risking we want quick action to make money. De-risking can be nice & slow as you age and try to stay in the win column.
You seem to have an emotional relationship to your portfolio very different from mine. ;)
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Re: AA for someone 2 years from retirement

Post by placeholder »

I had moved to 60/40 years before retirement and I didn't make any changes when I did but I have a pension that right now covers my spending so I didn't need to worry about the near term with the portfolio.
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Re: AA for someone 2 years from retirement

Post by Inframan4712 »

delamer wrote: Sun Apr 04, 2021 3:34 pm A factor in deciding on your retirement allocation is the extent to which you’ll be dependent on withdrawals to cover your expenses.

If you have a $500,000 portfolio from which you’ll need to withdraw $10,000/year then you might invest differently than if you’ll need to withdraw $20,000/year.

One option is to put 20/25 years of expenses in cash equivalents (CDs, TIPS, short-term bonds, etc.) and the rest in stocks. But again, whether that works depends on how much you’ll be withdrawing annually.

See “How Much Is Enough?”: https://www.whitecoatinvestor.com/berns ... -the-game/
The comments at the end are far better than the article. And contradictory to the article. And I believe them.

It’s 75/25 stocks/bonds for us until the end of time.

A heavy bond allocation in retirement will get killed by loss of purchasing power.
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Re: AA for someone 2 years from retirement

Post by delamer »

Inframan4712 wrote: Sat Apr 10, 2021 6:56 pm
delamer wrote: Sun Apr 04, 2021 3:34 pm A factor in deciding on your retirement allocation is the extent to which you’ll be dependent on withdrawals to cover your expenses.

If you have a $500,000 portfolio from which you’ll need to withdraw $10,000/year then you might invest differently than if you’ll need to withdraw $20,000/year.

One option is to put 20/25 years of expenses in cash equivalents (CDs, TIPS, short-term bonds, etc.) and the rest in stocks. But again, whether that works depends on how much you’ll be withdrawing annually.

See “How Much Is Enough?”: https://www.whitecoatinvestor.com/berns ... -the-game/
The comments at the end are far better than the article. And contradictory to the article. And I believe them.

It’s 75/25 stocks/bonds for us until the end of time.

A heavy bond allocation in retirement will get killed by loss of purchasing power.
I believe the article intentionally offered a couple different options.

There is no magic, one-size-fits-all answer.
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Re: AA for someone 2 years from retirement

Post by dogagility »

grace2020 wrote: Wed Apr 07, 2021 10:02 am
Marseille07 wrote: Sun Apr 04, 2021 11:43 pm 50/50 then glide back up. This is how one would mitigate SORR: https://www.kitces.com/blog/managing-po ... -red-zone/
This is such an interesting article, thank you for posting.
To balance the fear of SORR, please read this article from Estrada too. https://papers.ssrn.com/sol3/papers.cfm ... id=3685653

As a poster upthread mentioned, having an asset allocation of 60:40 (equities:fixed income) is a good place for many retirees.

I suggest you read about the Variable Portfolio Withdrawal method to help you determine asset allocation. viewtopic.php?f=10&t=284519 and viewtopic.php?p=4835777#p4835777

For any plan you develop around asset allocation, you will need to know your retirement spending needs AND have the flexibility to temporarily reduce that spending should the market enter a severe downturn. (The temporary reduction in spending is a better way, in my opinion, to mitigate any "sequence of returns risk".)
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Re: AA for someone 2 years from retirement

Post by HMSVictory »

From 0% to 70%. It depends on how much of a nest egg you have and how much you NEED to draw down from it.

For instance if pensions and SSI pay you more than you need each month you can easily be 100% stock - even at retirement! :shock:
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Re: AA for someone 2 years from retirement

Post by Woodchick77 »

We have just retired and are at 60% stock/35% bonds/5% cash and intend to keep it that way through retirement. I only rebalance if stocks get beyond 65%. That being said, your AA should depend on not just possible returns/losses but also how you handle temporary losses emotionally and also your overall financial situation. If you have more than your basic expenses covered with social security, pensions, other sources then you can be more aggressive (70/30, 80/20).Though I used to run at 100% stock until almost 50, in retirement unless you just absolutely don't need the money, I feel like you should have enough bonds and cash that if you need to withdraw that you don't need to sell stock when its down. If you are very dependent on your nest egg you may want to stay more conservative (50/50 or 60/40).If you are married, you also need to consider your spouse. On my own I would probably do 70% stocks - but I don't think my husband would sleep at night with that percentage!
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