Nick (Yobria), others: reducing equity alloc b4 retirement

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jefmafnl
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Nick (Yobria), others: reducing equity alloc b4 retirement

Post by jefmafnl » Sun Apr 01, 2007 3:25 pm

Nick (Yobria) and others have argued persuasively for lowering one's allocation to equities before beginning retirement.

If one wants to reduce equities/bonds from 70/30 to 60/40, should one reduce by 1% per year beginning 10 years before retirement? 2% per year beginning 5 years before retirement? Or on some other schedule?

Joel

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I'm not sure that there is a right answer to that one

Post by Cubsfan » Sun Apr 01, 2007 4:05 pm

I'm in a similar situation. Here's what I'm doing:

1. Best investment choice in our 401K's are balanced funds. We're putting new 401K money into funds that are about 60% stocks and 40% fixed.
2. New Roth money goes to whatever puts us closer to target allocations.
3. We rebalance about once a year. At that time, we increase the fixed allocation by 1% each year.
4. After an exceptional year in the market, I recalculate the return that I really need to stay on track for retirement at 62. For example, we made 24% in the market in 2006. We raised the fixed allocation by 5% earlier this year. Our need to take risks was diminished by the unusually high returns in 2006, and we realize that a portfolio capable of gaining 24% in a year is also capable of losing 24% in a year.

This is probably not the best approach, but it seems to be working OK for now.

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Taylor Larimore
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Reducing equities when approaching retirement

Post by Taylor Larimore » Sun Apr 01, 2007 4:14 pm

Hi Joel:
Nick (Yobria) and others have argued persuasively for lowering one's allocation to equities before beginning retirement.
Every knowledgeable authority recommends reducing stock allocations as we approach retirement.

The Vanguard experts who put together the Target Retirement Funds use this allocation based on the year we plan to retire:

2010=60% stocks/40% bonds
2015=77% stocks/33% bonds
2020=75% stocks/25% bonds
2025=83% stocks/17% bonds
2030=90% stocks/10% bonds
2040=90% stocks/10% bonds
2050=90% stocks/10% bonds

Mr. Bogle suggests that, as a starting point, our allocation in bonds should equal our age or age -10. This would call for a a decrease in stocks of about 1% a year.

It is also important to understand that investing does not stop at retirement. It is not unusual for investing to continue 30 years or more after retiring, so you should probably continue to reduce your stock allocation in your retirement years.

Best wishes.
Taylor

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Post by chaz » Sun Apr 01, 2007 4:50 pm

For some, to insure an adequate sum for heirs, keep a fair amount of equity in your allocation. If leaving to heirs is not a concern, then select the appropriate target retirement fund.
Chaz | | “Money is better than poverty, if only for financial reasons." Woody Allen | | http://www.bogleheads.org/wiki/index.php/Main_Page

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TnGuy
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Post by TnGuy » Sun Apr 01, 2007 6:35 pm

I'm ~18 years away from retiring, continue to invest 100% equity - and plan on staying that way until age 65. My thoughts are that since my investing days will not be ending come retirement day and I hope it to go on for 20+ more years, my investing time horizon is still very long from today (38+ years). The main concern for me come retirement day is if that particular time happens to coincide with an extended bear. With that in mind, my plan is to 'over-accumulate' between now and 65 - with the 'extra' being the insurance policy against the initial withdrawl years where things may be tight. I also plan on having a flexible withdrawl rate, adjustable to yearly market conditions, but not planned to exceed 4-5% - so that there will also be years that we 'under-withdraw'. If the bear never comes - or never causes a deep hit - then the 'extra' becomes more for the 'legacy' side of our retirement portfolio, to be left to heirs and charities.


David
"Money will not make you happy. And happy will not make you money." - Groucho Marx

BrianTH
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Post by BrianTH » Sun Apr 01, 2007 7:29 pm

Joel,

I think more important than years to retirement is the estimated size of your remaining contributions as compared to your total portfolio (and obviously years to retirement is only one factor necessary to make the latter calculation). The basic idea would be that the more you will still be contributing in relative terms, the less harm an asset crisis would cause, since your remaining contributions could make up some of any shortfall.

jefmafnl
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Years to retirement

Post by jefmafnl » Tue Apr 03, 2007 4:45 am

BrianTH,

good point. However, if one assumes that salary will rise with inflation and contribution rate will remain constant, then perhaps years to retirement gives a good approximation.

Joel

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Post by BrianTH » Tue Apr 03, 2007 12:10 pm

Joel,

But you still need to figure out the size of your future contributions relatively to the size of your portfolio. Of course, you could maybe estimate the latter given the same assumptions (although you would also need to make assumptions about returns), but there is no real reason to try to estimate this--you should be able to just look and see how big your portfolio is.

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Post by Sidney » Tue Apr 03, 2007 1:30 pm

TnGuy wrote: With that in mind, my plan is to 'over-accumulate' between now and 65 - with the 'extra' being the insurance policy against the initial withdrawl years where things may be tight.
David:

Keep in mind that the magic day could come at a time when your equity is down as much as 50%. This means you would need to "over accumulate" by 100%. Is that really your intention? Seems like you are paying a pretty big price for insurance that could be had with better diversification.
I always wanted to be a procrastinator.

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TnGuy
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Post by TnGuy » Tue Apr 03, 2007 2:11 pm

Sidney wrote:Keep in mind that the magic day could come at a time when your equity is down as much as 50%. This means you would need to "over accumulate" by 100%. Is that really your intention? Seems like you are paying a pretty big price for insurance that could be had with better diversification.

If across-the-board equity markets were to be down 50% at retirement time (i.e. - 18 years from now) it would mean a world-wide economic disaster has taken place and we would most likely be in the midst of a rather large social upheaval as a result (think Great Depression-esque, or worse). Me down-shifting from 100% equity to 60/40 between now and then would have little-to-no impact on our personal circumstances given such a dire situation.

I plan our retirement based upon neither the rosiest of outcomes, nor the grimmest. I base it upon the bet that all long-term equity investors end up having to make - that over the long-haul, markets rise.


David
"Money will not make you happy. And happy will not make you money." - Groucho Marx

BrianTH
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Post by BrianTH » Tue Apr 03, 2007 3:22 pm

David,

First, an individual country's stocks can experience that kind of sustained drop--Japan's basically did. So if US stocks are 50% or more of your stock portfolio, I would say a pretty big drop at least could be sustained.

Second, a 50% drop now followed by just normal returns for the next 18 years wold in fact leave you back above your original amount. But in that scenario, the 50% drop today still cut the part of your portfolio derived from today's stocks in half.

Finally, I believe Sidney was discussing a 50% drop at the time you retire, not a 50% drop that starts today and last through the time you retire. And that is relevant precisely because your stated plan is to stay with 100% equity until you retire.

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TnGuy
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Post by TnGuy » Tue Apr 03, 2007 4:03 pm

BrianTH wrote:First, an individual country's stocks can experience that kind of sustained drop--Japan's basically did. So if US stocks are 50% or more of your stock portfolio, I would say a pretty big drop at least could be sustained.
If by mentioning Japan you are implying that a repeat of that example (individual country) will be devastating to a 100% equity port, it seems that many well-diversified ones have survived - even thrived - over that same time-frame.
BrianTH wrote:Second, a 50% drop now followed by just normal returns for the next 18 years wold in fact leave you back above your original amount. But in that scenario, the 50% drop today still cut the part of your portfolio derived from today's stocks in half.
Again, I don't rely on worst-case-scenarios to reach my AA decisions. I prefer to live somewhere under the bell curve, rather than hide at either end of the the tails.
BrianTH wrote:Finally, I believe Sidney was discussing a 50% drop at the time you retire, not a 50% drop that starts today and last through the time you retire. And that is relevant precisely because your stated plan is to stay with 100% equity until you retire.
My reply to Sidney specifically stated:
If across-the-board equity markets were to be down 50% at retirement time (i.e. - 18 years from now)...
I took his:
Seems like you are paying a pretty big price for insurance that could be had with better diversification.
as meaning that if I were to "better diversify" via fixed-income between now and retirement day, the "pretty big price" he believes I could/would pay would somehow be lessened.


I do appreciate his - and by extension your - concern for our future financial well-being. I just happen to not be in agreement with what I perceive to be an overly cautious approach, though.


David
"Money will not make you happy. And happy will not make you money." - Groucho Marx

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Post by BrianTH » Tue Apr 03, 2007 5:11 pm

David,

Since this is getting a little heated, I will stop here. I will just note that stock returns do not in fact fall into a normal distribution, so it seems to me that you should be cautious about acting as if they did.

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Post by yobria » Tue Apr 03, 2007 5:17 pm

Joel,

As Taylor points out, many experts (though not the Lazy Portfolio crowd) agree that you should add bonds as you get older. Please don't credit me with figuring that one out.

My point is: there is an optimal rate at which you should change your AA toward bonds. For modeling purposes, I define optimal as the rate at which a 50% stock drop at any time during your working years has the same impact on your port value at retirement.

Lazy portfolios must not be optimal. Since your portfolio grows as you age, the impact of that 50% stock decline increases over time if you maintain a fixed AA, reaching maximum risk the day you retire.

What is optimal? Someone should build an online calculator for this. For now you can model it in Excel. Create a column of #s showing your portfolio each year considering new money and growth of the old. Shock the port at various points, changing the growth from 8% (or whatever) to -50% for that year for the stock portion. Don’t have time to play with it now, but as I recall starting at 100% stocks and moving 2%/year toward bonds over a 40 year period often worked out well. This is a place a “financial advisor” could add value.

Nick

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TnGuy
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Post by TnGuy » Tue Apr 03, 2007 7:13 pm

BrianTH wrote:Since this is getting a little heated, I will stop here.

No 'heat' - perceived or otherwise - on this end. Just 'coolly' investing along.


Hope all is well with Brian, family and portfolio.


David
"Money will not make you happy. And happy will not make you money." - Groucho Marx

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