When 60/40 just isn't appropriate

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bloom2708
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Re: When 60/40 just isn't appropriate

Postby bloom2708 » Mon May 15, 2017 1:19 pm

Bill1952 wrote:tibbitts,

What it does do, however, is psychologically I look forward to market down turns - I get excited about buying and increasing my percentage allocations when markets are down. Having said that, the Aug 2008 to March 2009 drop was dizzying - not only was I selling bonds and buying stocks as the market fell, but my formula had me steadily increasing my percentage allocation to stocks - buying more and more stocks as the market tumbled - seeing my life savings cut in half by a couple hundred thousand dollars - was not an easy ride - but I stuck with it.


It still is market time with unknowns. When a 52-week low is followed by another 52-week low or a 52-week high is followed by more 52-week high periods. You are kind of guessing that a low is a low and a high is a high.
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tuffy7222
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Re: When 60/40 just isn't appropriate

Postby tuffy7222 » Mon May 15, 2017 3:03 pm

I've been reading these posts and getting a headache
no one gives their age (as this can make a difference in allocation)
no one mentions they are receiving social security and pensions
no one mentions that their ss and pensions cover basic household bills and food
no one mentions that they spend all of their rmd's
no one mentions do they re-invest rmd after taxes in a taxable account.
as retirre's all of the above comments should tell you what your asset allocation should be.

So if your already retired or soon to be base your question/comments on asset allocation after considering answers to the above.
Not as 90 % of the people on this thread who are still working who can recover if there was a
down turn in stocks or bonds.

itstoomuch
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Re: When 60/40 just isn't appropriate

Postby itstoomuch » Mon May 15, 2017 5:11 pm

^Tuffy,
I do list important info. I virtually ignore all other posts, comments, recommendations and advice :oops:
YMMV.
4 buckets: SS+pension;dfr'd GLWB VA & FI anntys, by time & $$ laddered; Discretionary; Rental. Do OK any 2 bkts. LTCi. Own, not asset. Tax 25%. Early SS. FundingRatio (FR) >1.1 Age 67/70

nova1968
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Re: When 60/40 just isn't appropriate

Postby nova1968 » Tue May 16, 2017 8:25 am

tuffy7222 wrote:I've been reading these posts and getting a headache
no one gives their age (as this can make a difference in allocation)
no one mentions they are receiving social security and pensions
no one mentions that their ss and pensions cover basic household bills and food
no one mentions that they spend all of their rmd's
no one mentions do they re-invest rmd after taxes in a taxable account.
as retirre's all of the above comments should tell you what your asset allocation should be.

So if your already retired or soon to be base your question/comments on asset allocation after considering answers to the above.
Not as 90 % of the people on this thread who are still working who can recover if there was a
down turn in stocks or bonds.


I agree with you, Its a good topic but feedback is very vague. Hopefully some of the BHs will provide more detailed info.

tuffy7222
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Re: When 60/40 just isn't appropriate

Postby tuffy7222 » Tue May 16, 2017 11:31 am

Sorry to bump
What a waste of time reading pages upon pages of comments on this thread
by most people who are still working.
Need to see what retire or about to retire people are thinking about asset allocation.
These are people with social security and/or pension. That makes a hell of decisions on asset allocation.

feh
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Re: When 60/40 just isn't appropriate

Postby feh » Tue May 16, 2017 11:45 am

tuffy7222 wrote:Sorry to bump
What a waste of time reading pages upon pages of comments on this thread
by most people who are still working.
Need to see what retire or about to retire people are thinking about asset allocation.
These are people with social security and/or pension. That makes a hell of decisions on asset allocation.


I'm 51, and went part-time last year (call me semi-retired, if you want). Will likely stop working altogether in the next 18 months.

Our AA is 60/40, and I plan on keeping it there.

itstoomuch
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Re: When 60/40 just isn't appropriate

Postby itstoomuch » Tue May 16, 2017 1:56 pm

tuffy7222 wrote:Sorry to bump
What a waste of time reading pages upon pages of comments on this thread
by most people who are still working.
Need to see what retire or about to retire people are thinking about asset allocation.
These are people with social security and/or pension. That makes a hell of decisions on asset allocation.

@tuffy7222. You, too, need to describe where you are. :oops:
4 buckets: SS+pension;dfr'd GLWB VA & FI anntys, by time & $$ laddered; Discretionary; Rental. Do OK any 2 bkts. LTCi. Own, not asset. Tax 25%. Early SS. FundingRatio (FR) >1.1 Age 67/70

tuffy7222
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Re: When 60/40 just isn't appropriate

Postby tuffy7222 » Tue May 16, 2017 8:29 pm

To ITSTOOMUCH
I agree so here is my statement:
I recently changed my asset allocation to 40 stocks 60 bonds (all index funds.(
Why?
I get Social Security and a pension every month.
That basically covers house bills and Costco food purchases.
Wife gets SS and small pension. She contributes to local groceries if in need.
Otherwise she spends her money going to bingo every week, her medicines, her gas and what ever she wants to do. I do not keep track of her expenses.
No Dept,what so ever.
Credit cards are paid off in full every month.
Rmd's after taxes are re-invested in a taxable account or put in a money market
Emergency fund consist always $5,000 to $10,000.
We are both 80 years old.
Portfolio Ira and taxable accounts combined = about $500,000.

Ths is how a retirre should answer questions about asset allocation.
Same goes for working people.
I paid 20090 thousand for house i,m living in

mindboggling
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Re: When 60/40 just isn't appropriate

Postby mindboggling » Tue May 16, 2017 10:03 pm

I retired in 2013, but worked part-time for a few years after. Only fully retired about six months. I just turned 64.
Asset allocation: 30% equities/70% fixed income. Why? I feel comfortable there. Not a quant. I understand there may be some inflation risk.
Fixed pension: about 36k.
No SS yet. Will probably take at FRA (66). At 66, SS would be about 30k.
Right now, living off the pension plus savings in taxable to get a small ACA subsidy for health insurance until I turn 65 for Medicare.
No debt, LCOL area.
I've had a variable annuity through Vanguard for over fifteen years. May annuitize it after I turn 65 to increase my income floor.
Total investment portfolio at current valuations: $1.6 million.
I may increase my equities percentage slightly in a few years depending on my income and expenses.
In broken mathematics We estimate our prize, --Emily Dickinson

tuffy7222
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Re: When 60/40 just isn't appropriate

Postby tuffy7222 » Wed May 17, 2017 3:12 pm

TO MINDBOGLLING
Thanks ,that is the way to respond to this thread.
I'm happy i took the lead on how to respond.

WHERE are THE REST of you guys. This thread is very important to retirre's

BigJohn
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Re: When 60/40 just isn't appropriate

Postby BigJohn » Wed May 17, 2017 5:43 pm

I retired two years ago and am currently age 60. Deferred for two years and then chose a lump sum in lieu of a pension a few months ago. As a result, 100% of current income comes from interest/dividends/liquidation. Planning to wait until age 70 to start SS, doing Roth conversions until that time. Current living expense and taxes on Roth conversions coming out of taxable account which should last the next 10 years. LCOL area, only debt is low interest rate mortgage which I choose to keep.

Target asset allocation is about 35/65. My plan going into retirement was to hold 60/40 forever but.... after reading Dr Bernstein's "The Ages of the Investor" and "Deep Risk" I decided to make a change using his LMP approach. I reset my bond allocation to represent 30 years of minimal living expenses which moved my stock allocation from 60% to a bit over 35% stock.

Current allocation is closer to 20/80 as I was uncomfortable investing the entire lump sum at my target allocation all at once due to both high valuations and potential for sequence of return risk. Decide to invest monthly over 3-5 years to get to that target. I may consider a higher stock allocation at some point once the worst sequence of return risk period is behind me.

I recognize that I'll likely give up some return taking this approach. While I''m not sure I've won the game, I have a big lead going into the 4th quarter and think it prudent to play conservatively to protect that lead :beer

aum
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Re: When 60/40 just isn't appropriate

Postby aum » Wed May 17, 2017 5:59 pm

Just retired late last year. Age 52 and AA is 60/40. Will keep 60/40 until SS at age 67 and then cut some equity. Currently on 3% WR.

protagonist
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Re: When 60/40 just isn't appropriate

Postby protagonist » Wed May 17, 2017 7:05 pm

nisiprius wrote:Rick, I would really like to know the origins of "60/40." It was a "traditional" allocation long before Peter L. Bernstein's paper, and incidentally I do not agree that his paper presents any real rationale for 60/40. He asks the obvious question and then doesn't answer it!
Then why not 50/50, or even 40/60? The answer is in how markets work. Rational investors buy stocks only when they can expect to make enough extra in the stock market to compensate for the greater risks involved in owning stocks. This dynamic process of pricing stocks relative to less risky assets explains why, over the long run, stocks have returned more than bonds and why, therefore, more stocks than bonds makes good sense.
Even if you agree that this handwaving explanation explains why someone should have "more stocks than bonds," why 60/40 rather than 55/45 or 67/33 or 75/25?

It's not that I'm against 60/40 or anything, I just can't figure out where it comes from or in what way it's supposed to be optimum. I've been fooling around with efficient frontier charts based on the SBBI data back to 1926 for "large-company stocks," "long-term government bonds," "long-term corporate bonds," and "intermediate-term government bonds," and I can't find any time period for which 60/40 was optimum unless I do some [b]very very deliberate cherry-picking[b]. It doesn't matter whether or not I correct for inflation, by the way.

The results usually show the optimum to be at 50% stocks or less--sometimes much less. For example, if we consider 1926 to 1952, the year in which CREF was founded, I am seeing this. 35/65 was the optimum.

Image


+1

The bottom line is that future prediction is not very scientific, and as a result, academics often treat it as religion but give it the appearance of science.

AA is optimized based on one's risk tolerance and best guesses about the unknowable future.

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siamond
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Re: When 60/40 just isn't appropriate

Postby siamond » Wed May 17, 2017 9:08 pm

Back to the original article, I remember being quite shocked when I read it the first time. Rick Ferri is a well-known author, usually coming up with sound advice, and... well, making 30/70 the 'center of gravity', i.e. the starting point for most retirees (while dissing the age-old 60/40 recommendation) is NOT sound advice, this is actually truly atrocious advice.

Peter Bernstein's reasoning wasn't too hard to follow, keep a solid engine of growth in your portfolio for several decades of retirement (60% stocks), while including a solid ballast (40% bonds) to manage one's emotions and navigate the inevitable crisis along the way, while benefitting from bull markets that typically follow bears. Anybody running backtesting (e.g. cFIREsim, Firecalc, Excel, etc) on such allocation over 30 to 40 years of retirement would quickly see the wisdom of such recommendation, to provide solid sustainable purchasing power to the retirees during the entire retirement period. The optimal AA for a given individual (or couple) may of course be different, everybody has their own specific circumstances, but 60/40 is undoubtedly a solid and wise starting point. And with retirement periods getting longer and longer (cf. progress of medicine, more early retirees, etc), keeping a solid engine of growth will be crucial for most retirees.

Unfortunately, Mr Ferri only looked at the first 5 years of retirement, and drew hasty conclusions from those. Of course, with such narrow perspective, short-term issues get exacerbated, more bonds seem like the answer, and here we end up with 30/70, while totally ignoring the longer-term consequences of such choice. Oh, and also while totally ignoring the fact that bonds in real terms proved absolutely disastrous to a generation of retirees during WW-I and after WW-II, in the US and in Europe alike. As to the sequence of returns (SoR) risk, this is a way overblown issue, due to researchers using a flat withdrawal rate, it doesn't take much flexibility in one's withdrawals to largely mitigate consequences of SoR, a point which seems completely lost on the author. Reasonings based on efficient frontiers make exactly the same fundamental mistake, only looking at the short-term instead of looking at the entire retirement period. Overall, a very misguided article, I'm afraid.

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willthrill81
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Re: When 60/40 just isn't appropriate

Postby willthrill81 » Thu May 18, 2017 10:08 am

siamond wrote:Back to the original article, I remember being quite shocked when I read it the first time. Rick Ferri is a well-known author, usually coming up with sound advice, and... well, making 30/70 the 'center of gravity', i.e. the starting point for most retirees (while dissing the age-old 60/40 recommendation) is NOT sound advice, this is actually truly atrocious advice.

Peter Bernstein's reasoning wasn't too hard to follow, keep a solid engine of growth in your portfolio for several decades of retirement (60% stocks), while including a solid ballast (40% bonds) to manage one's emotions and navigate the inevitable crisis along the way, while benefitting from bull markets that typically follow bears. Anybody running backtesting (e.g. cFIREsim, Firecalc, Excel, etc) on such allocation over 30 to 40 years of retirement would quickly see the wisdom of such recommendation, to provide solid sustainable purchasing power to the retirees during the entire retirement period. The optimal AA for a given individual (or couple) may of course be different, everybody has their own specific circumstances, but 60/40 is undoubtedly a solid and wise starting point. And with retirement periods getting longer and longer (cf. progress of medicine, more early retirees, etc), keeping a solid engine of growth will be crucial for most retirees.

Unfortunately, Mr Ferri only looked at the first 5 years of retirement, and drew hasty conclusions from those. Of course, with such narrow perspective, short-term issues get exacerbated, more bonds seem like the answer, and here we end up with 30/70, while totally ignoring the longer-term consequences of such choice. Oh, and also while totally ignoring the fact that bonds in real terms proved absolutely disastrous to a generation of retirees during WW-I and after WW-II, in the US and in Europe alike. As to the sequence of returns (SoR) risk, this is a way overblown issue, due to researchers using a flat withdrawal rate, it doesn't take much flexibility in one's withdrawals to largely mitigate consequences of SoR, a point which seems completely lost on the author. Reasonings based on efficient frontiers make exactly the same fundamental mistake, only looking at the short-term instead of looking at the entire retirement period. Overall, a very misguided article, I'm afraid.


+1

If retirees' goal is minimal volatility, then 30/70 or even more bonds is certainly appropriate. But that seems to smack of myopic loss aversion, assuming that they are actually dependent on the portfolio for future income. Unless it's tilted like a Larry Portfolio, inflation can substantially erode the value of a 30/70 portfolio, particularly over a 30 year retirement.

To maximize the success of a 4% withdrawal rate over a 30 year period, I believe that 70/30 has the highest success rate.
“It's a dangerous business, Frodo, going out your door. You step onto the road, and if you don't keep your feet, there's no knowing where you might be swept off to.” J.R.R. Tolkien,The Lord of the Rings

protagonist
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Re: When 60/40 just isn't appropriate

Postby protagonist » Thu May 18, 2017 10:35 am

willthrill81 wrote:To maximize the success of a 4% withdrawal rate over a 30 year period, I believe that 70/30 has the highest success rate.


You BELIEVE that 70/30 is best. Rick BELIEVES that 30/70 is best. There are others in this forum who BELIEVE that 100% stocks is best in the long run (highest return). And others BELIEVE that stocks and bonds are overvalued and due for a fall, and are thus in a quandary re: what to do with their money.

This is the whole point. What we are talking about is religion, not science.

We are basing our BELIEFS of what will happen in the next 50 or so years on the scanty evidence of what has happened in the past 100 years, with no solid theoretical basis. That is statistically unsound. Not to mention what a remarkable 100 years it has been.

It is like saying that if it hadn't rained on Monday or Tuesday, I BELIEVE it will not rain on Wednesday.

We are all, in essence, bozos on this bus, and Rick's guess or Willthrill's guess is probably as good as mine. I really am at a loss to guess. I just keep what I anticipate I may need for survival in as safe investments as possible and gamble the remainder in the stock market, hoping I will win as I have in the past. That is easy to do when one is retired and financially comfortable. If I were in my 20s or 30s I don't know what my approach might be.

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willthrill81
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Re: When 60/40 just isn't appropriate

Postby willthrill81 » Thu May 18, 2017 11:28 am

protagonist wrote:
willthrill81 wrote:To maximize the success of a 4% withdrawal rate over a 30 year period, I believe that 70/30 has the highest success rate.


You BELIEVE that 70/30 is best. Rick BELIEVES that 30/70 is best. There are others in this forum who BELIEVE that 100% stocks is best in the long run (highest return). And others BELIEVE that stocks and bonds are overvalued and due for a fall, and are thus in a quandary re: what to do with their money.

This is the whole point. What we are talking about is religion, not science.

We are basing our BELIEFS of what will happen in the next 50 or so years on the scanty evidence of what has happened in the past 100 years, with no solid theoretical basis. That is statistically unsound. Not to mention what a remarkable 100 years it has been.

It is like saying that if it hadn't rained on Monday or Tuesday, I BELIEVE it will not rain on Wednesday.

We are all, in essence, bozos on this bus, and Rick's guess or Willthrill's guess is probably as good as mine. I really am at a loss to guess. I just keep what I anticipate I may need for survival in as safe investments as possible and gamble the remainder in the stock market, hoping I will win as I have in the past. That is easy to do when one is retired and financially comfortable. If I were in my 20s or 30s I don't know what my approach might be.


That's not at all what I meant. I wasn't sure of the precise AA that has historically maximized the success rate of a 4% withdrawal rate, hence I said "believe," but I will provide those data here.

Success rate of various AA using 4% WR over 30 years according to FIRECalc (U.S. TSM and LTT):
30/70: 87.1%
40/60: 93.1%
50/50: 94.8%
60/40: 95.7%
65/35: 95.7%
70/30: 95.7%
75/25: 94.8%
80/20: 94.8%
90/10: 94.8%

So anywhere from 60/40 to 70/30 has, historically and with these two major asset classes, had the highest success rate; the failure rate of 70/30 is one-third that of the 30/70 AA. That is not just my 'belief'.

You seem to be one of those who believe that 100+ years is not much data. That is a matter of opinion, and we all have various thoughts about how appropriate those data are to use going forward. We obviously do not know to what extent the future will look like the past, but saying that 30/70 is a "reasonable starting point" does not take into account the whole picture. Rick's suggestion seems to be largely, if not wholly, based on minimizing short-term volatility, though this has historically come with the price tag of lower success rates, lower withdrawal rates, a lower ending balance, or some combination thereof.
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Re: When 60/40 just isn't appropriate

Postby novicemoney » Thu May 18, 2017 11:52 am

Age 57, married. Debt free. Now at 35/65. Planning on retiring at 62(if I want to). I think we currently have enough that will allow us a 2% SWR once SS, pensions and annuities kick in. I sometimes think this is too conservative at this time, but maybe we are very close to "winning the game" so this thread is of interest to me. Meanwhile we are saving around 35% and adding to our "cushion".

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Re: When 60/40 just isn't appropriate

Postby willthrill81 » Thu May 18, 2017 12:20 pm

novicemoney wrote:Age 57, married. Debt free. Now at 35/65. Planning on retiring at 62(if I want to). I think we currently have enough that will allow us a 2% SWR once SS, pensions and annuities kick in. I sometimes think this is too conservative at this time, but maybe we are very close to "winning the game" so this thread is of interest to me. Meanwhile we are saving around 35% and adding to our "cushion".


Might I ask why you plan to use such a low WR?
“It's a dangerous business, Frodo, going out your door. You step onto the road, and if you don't keep your feet, there's no knowing where you might be swept off to.” J.R.R. Tolkien,The Lord of the Rings

BigJohn
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Re: When 60/40 just isn't appropriate

Postby BigJohn » Thu May 18, 2017 12:24 pm

There is no risk free decision so all of this a balancing act trying to manage multiple risks that drive your portfolio in opposing directions. Agree with comments above that 30/70 certainly increases the risk posed by inflation if you hold nominal bonds. However, this risk can be mitigated fairly easily by using a healthy proportion of TIPS in your bond allocation which is what Dr Bernstein advocates in his LMP approach.

siamond wrote:As to the sequence of returns (SoR) risk, this is a way overblown issue, due to researchers using a flat withdrawal rate, it doesn't take much flexibility in one's withdrawals to largely mitigate consequences of SoR, a point which seems completely lost on the author.

siamond, not sure I agree with your comments on SoR risk but will admit I've never seen an article or study on mitigation of that risk via lower withdrawal rate. Can you provide a link or reference so I can calibrate required flexibility vs size of market correction?

protagonist
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Re: When 60/40 just isn't appropriate

Postby protagonist » Thu May 18, 2017 12:31 pm

willthrill81 wrote:That's not at all what I meant. I wasn't sure of the precise AA that has historically maximized the success rate of a 4% withdrawal rate, hence I said "believe," but I will provide those data here.

Success rate of various AA using 4% WR over 30 years according to FIRECalc (U.S. TSM and LTT):
30/70: 87.1%
40/60: 93.1%
50/50: 94.8%
60/40: 95.7%
65/35: 95.7%
70/30: 95.7%
75/25: 94.8%
80/20: 94.8%
90/10: 94.8%

So anywhere from 60/40 to 70/30 has, historically and with these two major asset classes, had the highest success rate; the failure rate of 70/30 is one-third that of the 30/70 AA. That is not just my 'belief'.



Firecalc is also built on a system of belief. Not just your belief, but many people's belief.

There is no way to statistically justify predicting x years into the future when you have, at best, 2x or 3x worth of past data, and no sound, testable scientific hypotheses to suggest why the prediction would be valid. Especially because the past century has seen perhaps the most remarkable growth since the dawn of civilization (if not THE most remarkable, it is certainly a serious outlier).

And even if you do "believe", based on Firecalc's numbers, given the infinite number of possibilities as to how the world will look in 2047, do you really think the difference between 95.7% and 94.8%, or for that matter 95,7% and 87.1%, is statistically significant? WW1, WW2, The Roaring Twenties and the Great Depression all happened within 30 years.

In my view, asset allocation "theory" is useful to the extent that it keeps people disciplined. If you decide, based on your "risk tolerance" and your "beliefs" (reinforced by Firecalc or whatever), that 60/40 or any other fixed ratio makes you sleep the easiest at night, it keeps you on track and within your comfort zone. It forces you to monitor your finances, which is a good thing. If you are lucky you will have a lot of money at the end of the day. To paraphrase Shakespeare (via the Incredible String Band), all the world is but a play. Be thou the joyful player.
Last edited by protagonist on Thu May 18, 2017 8:37 pm, edited 2 times in total.

novicemoney
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Re: When 60/40 just isn't appropriate

Postby novicemoney » Thu May 18, 2017 12:47 pm

willthrill81 wrote:
novicemoney wrote:Age 57, married. Debt free. Now at 35/65. Planning on retiring at 62(if I want to). I think we currently have enough that will allow us a 2% SWR once SS, pensions and annuities kick in. I sometimes think this is too conservative at this time, but maybe we are very close to "winning the game" so this thread is of interest to me. Meanwhile we are saving around 35% and adding to our "cushion".


Might I ask why you plan to use such a low WR?

Unless I am making big mistakes on projecting our expenses this would be where we would be at. We have worked hard at "LBYM" for current expenses. Projected expenses includes travel, setting aside some money for big ticket items, eating out, etc., so hopefully we won't be depriving ourselves and be able to indulge wants (within reason).

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Re: When 60/40 just isn't appropriate

Postby tuffy7222 » Thu May 18, 2017 1:06 pm

OH BOy ! The thread is now rolling like it should be with more retirre or soon to be comments.
Keep the comments going guys

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Re: When 60/40 just isn't appropriate

Postby Explorer » Thu May 18, 2017 8:01 pm

As many posters noted in this thread, AA is a personal choice. I am currently closer to 35/65 with a plan to get to 30/70 in a year or so.

I am 5 or 6 years from retirement - with a comfortable nest egg... so I see no need to take undue risk in equities. I would rather be lender of money to good companies than being owner of good companies..

Plus, going into retirement I would rather be way conservative until I get a handle on retirement and then who knows I may go "all in" into equities.

The uninterrupted climb of the stock & bond markets for a number of years makes me pause and consider that it might rain tomorrow since it hasn't rained for so long (using another poster's analogy).

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Re: When 60/40 just isn't appropriate

Postby willthrill81 » Thu May 18, 2017 8:17 pm

Explorer wrote:As many posters noted in this thread, AA is a personal choice. I am currently closer to 35/65 with a plan to get to 30/70 in a year or so.

I am 5 or 6 years from retirement - with a comfortable nest egg... so I see no need to take undue risk in equities. I would rather be lender of money to good companies than being owner of good companies..

Plus, going into retirement I would rather be way conservative until I get a handle on retirement and then who knows I may go "all in" into equities.

The uninterrupted climb of the stock & bond markets for a number of years makes me pause and consider that it might rain tomorrow since it hasn't rained for so long (using another poster's analogy).


So you're considering a reverse glidepath (increasing equity allocation after retirement)?
“It's a dangerous business, Frodo, going out your door. You step onto the road, and if you don't keep your feet, there's no knowing where you might be swept off to.” J.R.R. Tolkien,The Lord of the Rings

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Re: When 60/40 just isn't appropriate

Postby siamond » Thu May 18, 2017 9:26 pm

BigJohn wrote:
siamond wrote:As to the sequence of returns (SoR) risk, this is a way overblown issue, due to researchers using a flat withdrawal rate, it doesn't take much flexibility in one's withdrawals to largely mitigate consequences of SoR, a point which seems completely lost on the author.

siamond, not sure I agree with your comments on SoR risk but will admit I've never seen an article or study on mitigation of that risk via lower withdrawal rate. Can you provide a link or reference so I can calibrate required flexibility vs size of market correction?

You are quite right, it is a little mind-boggling to see that retirement researchers did so little analysis of variable withdrawal methods, while the severe defects of a constant (flat, inflation-adjusted) withdrawal method are very well-known. And consequently I cannot provide such a reference. I did my own extensive research on the matter before early-retiring, based on my own spreadsheets, hence not a public source. Also, the outcome depends on the exact withdrawal method, of course.

As a case in point, the VPW author mathematically demonstrated that if you follow VPW to the letter, then the sequence of returns has actually zero impact on the outcome, which is quite amazing (I checked, he's right). This being said, VPW is a bit extreme in the withdrawal variability it allows, and I don't think most people would go for it without some adjustment (e.g. smoothing), which would then restore *some* risk associated with the sequence of return, but nowhere near as severe as with a constant withdrawal method.

To get an idea about this topic, one can play with cFireSim, entering your own numbers, and looking at VPW vs Guyton-Klinger (both variable methods) vs the regular constant withdrawal. Do include SS/Pension in your simulation to make it more realistic. At the end, it is kind of intuitive, if one is adaptive, things tend to work out...

Explorer
Posts: 90
Joined: Thu Oct 13, 2016 7:54 pm

Re: When 60/40 just isn't appropriate

Postby Explorer » Thu May 18, 2017 9:40 pm

willthrill81 wrote:
Explorer wrote:As many posters noted in this thread, AA is a personal choice. I am currently closer to 35/65 with a plan to get to 30/70 in a year or so.

I am 5 or 6 years from retirement - with a comfortable nest egg... so I see no need to take undue risk in equities. I would rather be lender of money to good companies than being owner of good companies..

Plus, going into retirement I would rather be way conservative until I get a handle on retirement and then who knows I may go "all in" into equities.

The uninterrupted climb of the stock & bond markets for a number of years makes me pause and consider that it might rain tomorrow since it hasn't rained for so long (using another poster's analogy).


So you're considering a reverse glidepath (increasing equity allocation after retirement)?


Possibly... but I don't know yet. My main point though is to enter retirement with risk-averse AA i.e., bond-heavy AA.

Gnirk
Posts: 613
Joined: Sun Sep 09, 2012 3:11 am
Location: Western Washington

Re: When 60/40 just isn't appropriate

Postby Gnirk » Fri May 19, 2017 12:04 am

FWIW.
Age- 73
Married, spouse 78
Second marriage of over 20 years, separate finances.
Retired for 10 years. Took SS @ 63
MY Stock/Bond allocation- 35/65 Why? This lets me sleep well at night.
Average SS
I have a small Pension, less than SS.
I have a small TIRA.
MY withdrawal rate from taxable account is 1% or a bit more.
Spouse retired for 10 years
Spouse took SS at FRA
Spouse has no pension.
Spouse has larger TIRA
Spouse has 50/50 allocation. He's not as risk averse as I am.
Spouse withdraws only tax-exempt interest on TE Bond funds and individual muni bonds from taxable account.
No debt

We are both fairly frugal, though we own and maintain two homes. One is a snowbird home to get away from our rainy winters.
I will probably change my allocation to 30/70 when I turn 75. Spouse has no plans to change his allocation.

itstoomuch
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Re: When 60/40 just isn't appropriate

Postby itstoomuch » Fri May 19, 2017 1:22 am

^@Gnirk.
heck, I could careless about your assets, All I want to know is where to go to get out of the rain. We made a short trip to Phoenix-Sedona last weekend on an invited from DS who was on business trip in that area. We left PDX on a rainy-windy 50deg and arrived in PHX in 2 hours with +90deg. We left PHX on a cooler day, expected high of 85, and arrived in PDX on a windy-rainy day with a expected high of 55. :oops:
Western Oregon, residence.
4 buckets: SS+pension;dfr'd GLWB VA & FI anntys, by time & $$ laddered; Discretionary; Rental. Do OK any 2 bkts. LTCi. Own, not asset. Tax 25%. Early SS. FundingRatio (FR) >1.1 Age 67/70

BigJohn
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Joined: Wed Apr 02, 2014 11:27 pm

Re: When 60/40 just isn't appropriate

Postby BigJohn » Fri May 19, 2017 6:53 am

siamond wrote:This being said, VPW is a bit extreme in the withdrawal variability it allows, and I don't think most people would go for it without some adjustment (e.g. smoothing), which would then restore *some* risk associated with the sequence of return, but nowhere near as severe as with a constant withdrawal method.

Thanks siamond, I think we're on the same page. The concept of spending less in bad times works for me but the potentially extreme expenditure adjustments are why I'm not a big fan of the VPW tool itself. I may play with some scenarios to get a sense of SoR risk mitigation with modest adjustments. However, at an SWR less than 3% and a potential move of some of my bonds to TIPS for inflation protection, I suspect I'll stick with my LMP based 35/65 target.

Gnirk
Posts: 613
Joined: Sun Sep 09, 2012 3:11 am
Location: Western Washington

Re: When 60/40 just isn't appropriate

Postby Gnirk » Fri May 19, 2017 9:37 am

itstoomuch wrote:^@Gnirk.
heck, I could careless about your assets, All I want to know is where to go to get out of the rain. We made a short trip to Phoenix-Sedona last weekend on an invited from DS who was on business trip in that area. We left PDX on a rainy-windy 50deg and arrived in PHX in 2 hours with +90deg. We left PHX on a cooler day, expected high of 85, and arrived in PDX on a windy-rainy day with a expected high of 55. :oops:
Western Oregon, residence.

:D

Johnnie
Posts: 292
Joined: Sat May 28, 2016 3:18 pm
Location: Michigan

Re: When 60/40 just isn't appropriate

Postby Johnnie » Fri May 19, 2017 9:50 am

mindboggling wrote:I retired in 2013, but worked part-time for a few years after. Only fully retired about six months. I just turned 64.
Asset allocation: 30% equities/70% fixed income. Why? I feel comfortable there. Not a quant. I understand there may be some inflation risk.
Fixed pension: about 36k.
No SS yet. Will probably take at FRA (66). At 66, SS would be about 30k.
Right now, living off the pension plus savings in taxable to get a small ACA subsidy for health insurance until I turn 65 for Medicare.
No debt, LCOL area.
I've had a variable annuity through Vanguard for over fifteen years. May annuitize it after I turn 65 to increase my income floor.
Total investment portfolio at current valuations: $1.6 million.
I may increase my equities percentage slightly in a few years depending on my income and expenses.

Minor threadjack: Assuming one has no specific reasons to suspect one will come up short on longevity projections, and assuming one can afford to wait without having to forego post-retirement nice-to-haves while young enough to enjoy them, why not wait until age 70 to take SS?

In my mind it is axiomatic that absent those two factors - can afford to wait, have reasons to suspect waiting won't pay in your case - one simply does not forego the lucrative monthly benefit increase that comes from waiting.

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willthrill81
Posts: 1510
Joined: Thu Jan 26, 2017 3:17 pm
Location: USA

Re: When 60/40 just isn't appropriate

Postby willthrill81 » Fri May 19, 2017 2:48 pm

Johnnie wrote:Minor threadjack: Assuming one has no specific reasons to suspect one will come up short on longevity projections, and assuming one can afford to wait without having to forego post-retirement nice-to-haves while young enough to enjoy them, why not wait until age 70 to take SS?


Many recommend exactly that. SS is, essentially, an inflation-adjusted lifetime annuity. Delaying it until 70 provides a good income 'floor' and a measure of both real and psychological safety. For instance, I plan on retiring at around age 55, and SS will merely be a bonus for me. That being said, even if my SS benefits were cut by 25% from what they would be now, we could still do alright with nothing more than SS if I delay it until 70. That definitely provides a level of security to my thinking and planning about retirement.

OTOH, someone who doesn't think that they'll live into their 80s or has more immediate income needs that cannot be satisfied elsewhere might find it appropriate to start SS as early as possible.

Like most aspects of personal finance, it depends greatly on the situation. There aren't many universal recommendations in this topic.
“It's a dangerous business, Frodo, going out your door. You step onto the road, and if you don't keep your feet, there's no knowing where you might be swept off to.” J.R.R. Tolkien,The Lord of the Rings


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