Early retirement - when to start thinking about less equity?

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jjunk
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Early retirement - when to start thinking about less equity?

Post by jjunk »

I'm 45, almost 46 and have been bouncing around the idea of retiring on and off for a while now. As I've done so, the two largest questions I keep coming back to are:
  • 1. How much is healthcare going to cost me pre-Medicare?
  • 2. When do I start getting more conservative with my AA, especially towards equities?
I feel like I'm getting a better handle on #1, its #2 thats giving me the problem.

I've seen plenty of threads and articles about sequence of returns risk. To wit, I've recently started moving my allocation from 70/30 to 60/40 and I'm a little more than halfway there now. If my wife had her way, I'd be retired now since she's convinced my job is killing me (she's probably right). I am of the mind we're more likely to retire in 4-5 more years because I need my current, excellent healthcare and I feel like we need more of a buffer. From a planning perspective, my current holdings would give me a 4% SWR which easily pays all of my required and discretionary spending. I'd like that to be closer to a 3.5% SWR for the added safety and buffer. We can easily cut our spending by 20% if we need to and not be disappointed.

This creates a bit of a paradox as I need/want the security of a higher bond allocation to reduce overall risk as we inch closer to retirement but I need (or feel I need) the higher risk/return potential of the extra equity holdings. When is a good time to consider taking that additional risk off the table and simply stock piling additional fixed income/cash? Now? In another couple years? Should I even be considering a move to 50/50?

Neither of us plan to live much past our late 70s, early 80s (based on our family history) so I've been planning a 40yr retirement at the long end. We dont have kids nor a desire to leave a legacy. I also dont have a desire to die eating cat food, so I'm trying to be well planned without looking for too perfect a plan. Any advice is appreciated.
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Re: Early retirement - when to start thinking about less equity?

Post by aristotelian »

The numbers say your chances of portfolio survival are better with higher stock allocation the earlier your retirement. A high bond allocation subjects you to inflation risk. The best protection against both inflation and market risk is low withdrawal rate. If you can get your withdrawal rate to 3%, it doesn't matter what you do. https://earlyretirementnow.com/2016/12/ ... t-1-intro/
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Re: Early retirement - when to start thinking about less equity?

Post by Stormbringer »

jjunk wrote: Thu Jul 25, 2019 2:48 pmmy current holdings would give me a 4% SWR which easily pays all of my required and discretionary spending. I'd like that to be closer to a 3.5% SWR for the added safety and buffer.
4% SWR is based on a 30-year retirement, and still fails 1 in 20 times in Monte Carlo tests. You need to be thinking more in terms of 3.5% for a 40 year retirement.

Kitces had an early retirement blog entry recently that you may find interesting.
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Re: Early retirement - when to start thinking about less equity?

Post by jjunk »

Stormbringer wrote: Thu Jul 25, 2019 3:05 pm
jjunk wrote: Thu Jul 25, 2019 2:48 pmmy current holdings would give me a 4% SWR which easily pays all of my required and discretionary spending. I'd like that to be closer to a 3.5% SWR for the added safety and buffer.
4% SWR is based on a 30-year retirement, and still fails 1 in 20 times in Monte Carlo tests. You need to be thinking more in terms of 3.5% for a 40 year retirement.

Kitces had an early retirement blog entry recently that you may find interesting.
Thanks for the link. I love Kitces work and I read the article when it came out. I definitely want to aim for closer to 3.5%, thus one of my reasons for waiting.
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Re: Early retirement - when to start thinking about less equity?

Post by jjunk »

aristotelian wrote: Thu Jul 25, 2019 3:01 pm The numbers say your chances of portfolio survival are better with higher stock allocation the earlier your retirement. A high bond allocation subjects you to inflation risk. The best protection against both inflation and market risk is low withdrawal rate. If you can get your withdrawal rate to 3%, it doesn't matter what you do. https://earlyretirementnow.com/2016/12/ ... t-1-intro/
Yeah, getting to 3% SWR would require me either moving to a LCOL area (not something I'm particularly motivated to do) or working for a longer period of time (which I can do until I'm aged out of my job). The thing I'm trying to balance is the need for protection from sequence of returns risk, which generally call for lower equity holdings and portfolio longevity.

Now that I typed that out, I guess what you're saying is the answer. I simply need more money (thus lowering the SWR) and then it wont matter. Ironically, by the time I can put together a 3% SWR, I will no longer have a "long" retirement as its likely a 10yr timeframe. Then I'll end up with more money than I want. Some would see that as a good problem to have, I see it as wasted time when I could have been retired.
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Re: Early retirement - when to start thinking about less equity?

Post by Artsdoctor »

Trying to get control of healthcare costs is one of the most debated topics in America right now. Generally, many would acknowledge that trying to predict out-of-pocket healthcare expenses in this turbulent environment is not possible. The one thing that most experts would agree on is that the volatility at this time is not sustainable. How did you come to an estimated budget for healthcare costs for the 15+ years ahead of you?
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Re: Early retirement - when to start thinking about less equity?

Post by bloom2708 »

How about a different job/career?

When you are ahead of the game, you have options. You don't need to save as much or work as much or take as much stock risk.

Dying is a retirement killer. I moved out of a higher stress career to a lower stress career. Lost some stock options. $10k less salary. Not going to make a bit of difference in the long run except for lowering my blood pressure. :wink:

Retiring is one solution. It can always be un-done or adjusted or modified.
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Re: Early retirement - when to start thinking about less equity?

Post by KlangFool »

OP,

In my opinion, you need to look at your AA another way too. Is 40% of your portfolio equal to 10 years of your annual expense? If not, 60/40 might be too aggressive for you.

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Re: Early retirement - when to start thinking about less equity?

Post by DouroBound »

Personally, I've decided to set my target bond allocation at retirement to 40% (around 11 years of spending at a 3.85% withdrawal rate), and I plan to increase bonds along a straight-line glidepath from my current allocation (30%) until targeted retirement. I'll redraw the glidepath each year depending on how far away retirement looks (the target year will change depending on market performance, which can increase or decrease the slope of the glidepath) and rebalance once a year. For what it's worth, given the range I have to cover (30% bonds now to 40% at retirement), delaying or accelerating the taper doesn't seem to make a massive difference in projected account size at retirement (using simple, deterministic modeling). But having a logical rule (logical to me anyway) keeps me from being tempted to market time the shift out of equities. At the moment, I'm comfortable that a 3.85% withdrawal rate should be safe for us given SS, other income, expected length of retirement, and the amount of "flex" in our budget, but I might adjust this downward as we get closer (though the thought of trying to get to 3.5% is a bit depressing as it likely means 2+ extra years of work). I think we're more likely to stop when 3.85% of our accounts would cover our desired standard of living, then take the first 2-3 years to live cheaper than that somewhere (Mexico, Costa Rica, Thailand, etc.) to take some pressure off and reduce sequence of return risk.
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Re: Early retirement - when to start thinking about less equity?

Post by jjunk »

Artsdoctor wrote: Thu Jul 25, 2019 3:30 pm Trying to get control of healthcare costs is one of the most debated topics in America right now. Generally, many would acknowledge that trying to predict out-of-pocket healthcare expenses in this turbulent environment is not possible. The one thing that most experts would agree on is that the volatility at this time is not sustainable. How did you come to an estimated budget for healthcare costs for the 15+ years ahead of you?
Agreed that its near impossible but how I did my planning is by taking the most expensive ACA plan and then added the highest OOP amount to it. Using this as an annual expense is as close as I think I could get to an estimate (and its pretty high so I'm going to hope I'm close enough).
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Re: Early retirement - when to start thinking about less equity?

Post by jjunk »

bloom2708 wrote: Thu Jul 25, 2019 3:30 pm How about a different job/career?

When you are ahead of the game, you have options. You don't need to save as much or work as much or take as much stock risk.

Dying is a retirement killer. I moved out of a higher stress career to a lower stress career. Lost some stock options. $10k less salary. Not going to make a bit of difference in the long run except for lowering my blood pressure. :wink:

Retiring is one solution. It can always be un-done or adjusted or modified.
I've considered it but I honestly dont know how my skillset translates into a different field. I'm in software but have a highly specialized, specific skillset that isnt used anywhere else in the industry. I'm in the process of switching to a new role internally in my company in an attempt to broaden that and give myself more options but it's not clear to me how long I can keep up with that pacing without sacrificing a lot of personal time. I anticipate a minimum of 60hr weeks to start, likely higher. The faster I can get that under 60, the more I'll know about longevity. If I can stay in my new role for a couple of years, there's a chance I can parlay that into a role within industry where it might be lower stress (at a massive pay cut).
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Re: Early retirement - when to start thinking about less equity?

Post by jjunk »

KlangFool wrote: Thu Jul 25, 2019 3:30 pm OP,

In my opinion, you need to look at your AA another way too. Is 40% of your portfolio equal to 10 years of your annual expense? If not, 60/40 might be too aggressive for you.

KlangFool
Thanks for the response. Yes, 40% of my portfolio covers 10yrs of expenses (at my higher QOL number).
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Re: Early retirement - when to start thinking about less equity?

Post by bluquark »

You've expressed you don't want to 1) work longer or 2) move to a LCOL area or 3) have a riskily high withdrawal rate. If you hold a high proportion of stocks, then on average, you're more likely to avoid these compromises -- but you also increase your chance of incurring a particularly severe version of one of them. If a market crash strikes in 2 years and recovery is not quick this time (stock markets in non-US countries have been known to sometimes take 30 years before they finally recover), you'll have to pick one of them.

Backtesting on US financial history tends to give specific stock-heavy-ish answers along the lines of 80/20, but I don't think overfitting to historical data necessarily will lead to the optimal plan in the 21st century. If severe inflation strikes, you'll wish you had more TIPS (or international stocks in whatever country is unaffected by inflation, if any). If a Japan 1990s-style crash followed by several lost decades happens, you'll wish you had more bonds (or international stocks in whatever country is still growing, if any). I don't see any reason to expect either kind of disaster in our lifetimes, but if we're focusing on "SWR failure", those two extreme scenarios are the ones to consider, since the 4% rule has enough headroom for mildly bad scenarios.

So to me, SWR failure planning doesn't wind up answering the question of stock/bond AA much at all. Ultimately, I can't conclude anything more specific than anything in the range from 70/30 to 40/60 seems very reasonable for someone in your position at this time, as those all have a good Sharpe ratio and leave you with a reasonable amount of money in either type of disaster. And you should just pick an AA in there you're comfortable with (and will remain comfortable with) and hope for the best.
Last edited by bluquark on Thu Jul 25, 2019 7:02 pm, edited 1 time in total.
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Re: Early retirement - when to start thinking about less equity?

Post by Retirement Nerd »

One source you might find helpful is Michael H McClung's Living Off Your Money. The author has a computer science background and his deep dives on AA and variable withdrawal strategies are very interesting. :sharebeer
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Re: Early retirement - when to start thinking about less equity?

Post by Tamarind »

I wonder if you could split the difference with your wife. Since you have a lot of discretionary spending, could you cut spending by 10% so that you could save more and retire earlier? No amount of money will replace your health.
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Re: Early retirement - when to start thinking about less equity?

Post by Day9 »

jjunk wrote: Thu Jul 25, 2019 2:48 pm ...my current holdings would give me a 4% SWR which easily pays all of my required and discretionary spending. I'd like that to be closer to a 3.5% SWR for the added safety and buffer. We can easily cut our spending by 20% if we need to and not be disappointed.
Someone please slap me in the face if I am wrong about this. But doesn't this snippet here mean you should cut spending by 20% and retire today? Reducing 20% of a 4% SWR results in a 3.2% SWR. This seems so obvious to me that I must be missing something.
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Re: Early retirement - when to start thinking about less equity?

Post by bhsince87 »

I started to ramp down from 90/10 to 55/45 about 5 years before I expected to retire. Slowly eased my way into it.
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Re: Early retirement - when to start thinking about less equity?

Post by stlutz »

jjunk wrote: Thu Jul 25, 2019 6:08 pm
bloom2708 wrote: Thu Jul 25, 2019 3:30 pm How about a different job/career?

When you are ahead of the game, you have options. You don't need to save as much or work as much or take as much stock risk.

Dying is a retirement killer. I moved out of a higher stress career to a lower stress career. Lost some stock options. $10k less salary. Not going to make a bit of difference in the long run except for lowering my blood pressure. :wink:

Retiring is one solution. It can always be un-done or adjusted or modified.
I've considered it but I honestly dont know how my skillset translates into a different field. I'm in software but have a highly specialized, specific skillset that isnt used anywhere else in the industry. I'm in the process of switching to a new role internally in my company in an attempt to broaden that and give myself more options but it's not clear to me how long I can keep up with that pacing without sacrificing a lot of personal time. I anticipate a minimum of 60hr weeks to start, likely higher. The faster I can get that under 60, the more I'll know about longevity. If I can stay in my new role for a couple of years, there's a chance I can parlay that into a role within industry where it might be lower stress (at a massive pay cut).
What the "right" allocation will be for a long retirement (let's say 40 years) is unknowable. Over longer periods of time, either financial assets as whole do well or they don't. Bonds vs. stocks doesn't drive it as much. 1966 was a bad year to retire in the US because both stocks and bonds provided poor future returns. 1989 was a bad year to retire in Japan because stocks provided poor returns and interest rates were miniscule.

In terms of withdrawal failure in various scenarios, 50/50 is not *that* much different from 70/30.

But it sounds to me like you really just need a career break. You can do anything. That doesn't mean you have to do nothing. It seems like you're limiting your options too much. I personally wouldn't take any job that requires 60 hours/week. Technical skills are transferrable to a different type of role; they just aren't always transferrable at the same salary. But you have flexibility in this area.
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Re: Early retirement - when to start thinking about less equity?

Post by MP123 »

jjunk wrote: Thu Jul 25, 2019 6:04 pm
Artsdoctor wrote: Thu Jul 25, 2019 3:30 pm Trying to get control of healthcare costs is one of the most debated topics in America right now. Generally, many would acknowledge that trying to predict out-of-pocket healthcare expenses in this turbulent environment is not possible. The one thing that most experts would agree on is that the volatility at this time is not sustainable. How did you come to an estimated budget for healthcare costs for the 15+ years ahead of you?
Agreed that its near impossible but how I did my planning is by taking the most expensive ACA plan and then added the highest OOP amount to it. Using this as an annual expense is as close as I think I could get to an estimate (and its pretty high so I'm going to hope I'm close enough).
Unclear whether you used the highest premium for your age or the highest premium for a 64+ year old. I'd recommend at least looking at the later. ACA premiums really start to rise in your 50s into 60s (pre - Medicare).

This still isn't a great estimate but don't plan on paying 45 year old ACA premiums for the next twenty years. They'll go up substantially every year even with no overall rate increases and no changes in current policies just because you're a year older.
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Re: Early retirement - when to start thinking about less equity?

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Day9 wrote: Thu Jul 25, 2019 8:01 pm
jjunk wrote: Thu Jul 25, 2019 2:48 pm ...my current holdings would give me a 4% SWR which easily pays all of my required and discretionary spending. I'd like that to be closer to a 3.5% SWR for the added safety and buffer. We can easily cut our spending by 20% if we need to and not be disappointed.
Someone please slap me in the face if I am wrong about this. But doesn't this snippet here mean you should cut spending by 20% and retire today? Reducing 20% of a 4% SWR results in a 3.2% SWR. This seems so obvious to me that I must be missing something.
What I meant with that comment is that, in the case of a large economic event, we could cut our spending by 20% and be ok with our lifestyle for a while. I dont know what I'd want to live at that reduction for the remainder of my life. Sorry for not stating that more clearly.
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Re: Early retirement - when to start thinking about less equity?

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Unclear whether you used the highest premium for your age or the highest premium for a 64+ year old. I'd recommend at least looking at the later. ACA premiums really start to rise in your 50s into 60s (pre - Medicare).

This still isn't a great estimate but don't plan on paying 45 year old ACA premiums for the next twenty years. They'll go up substantially every year even with no overall rate increases and no changes in current policies just because you're a year older.
Sorry for the lack of clarity. I'm using the averages of the premiums from 45, 55 and 64 to build out my estimates and take into account the rise which will inevitably occur.
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Re: Early retirement - when to start thinking about less equity?

Post by jjunk »

Tamarind wrote: Thu Jul 25, 2019 7:12 pm I wonder if you could split the difference with your wife. Since you have a lot of discretionary spending, could you cut spending by 10% so that you could save more and retire earlier? No amount of money will replace your health.
Yes, we could do this fairly easily. I dont know how much difference that would make given that 10% is likely only ~15k/yr but I guess at some points it real money :happy
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Re: Early retirement - when to start thinking about less equity?

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But it sounds to me like you really just need a career break. You can do anything. That doesn't mean you have to do nothing. It seems like you're limiting your options too much. I personally wouldn't take any job that requires 60 hours/week. Technical skills are transferrable to a different type of role; they just aren't always transferrable at the same salary. But you have flexibility in this area.
This is definitely accurate in my case but I do so from a basis of fear. I'm a self educated person in tech. While not rare, the overall large software industry (where my skillset would be most transferable) has definitely changed towards a higher education and younger bias. Could I find another job? I feel that its highly likely I could, just at a much lower salary. The uncertainty of trading jobs and potentially making less money for the same (or more) stress is what keeps me in place today.
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Re: Early retirement - when to start thinking about less equity?

Post by jjunk »

Retirement Nerd wrote: Thu Jul 25, 2019 7:00 pm One source you might find helpful is Michael H McClung's Living Off Your Money. The author has a computer science background and his deep dives on AA and variable withdrawal strategies are very interesting. :sharebeer
I love Michael's work! Glad to see so many others have read his book, its fantastic. I may need to revisit his modeling to see how it works in my current situation given I havent done that in a while.
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Re: Early retirement - when to start thinking about less equity?

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aristotelian wrote: Thu Jul 25, 2019 3:01 pm The numbers say your chances of portfolio survival are better with higher stock allocation the earlier your retirement. A high bond allocation subjects you to inflation risk. The best protection against both inflation and market risk is low withdrawal rate. If you can get your withdrawal rate to 3%, it doesn't matter what you do. https://earlyretirementnow.com/2016/12/ ... t-1-intro/
Spot on. For retirements longer than 40 years, roughly 3% should probably be the sought-after withdrawal rate. But even so, I wouldn't recommend that an early retiree have less than a 50% allocation to stocks.
jjunk wrote: Thu Jul 25, 2019 9:43 pm
Day9 wrote: Thu Jul 25, 2019 8:01 pm
jjunk wrote: Thu Jul 25, 2019 2:48 pm ...my current holdings would give me a 4% SWR which easily pays all of my required and discretionary spending. I'd like that to be closer to a 3.5% SWR for the added safety and buffer. We can easily cut our spending by 20% if we need to and not be disappointed.
Someone please slap me in the face if I am wrong about this. But doesn't this snippet here mean you should cut spending by 20% and retire today? Reducing 20% of a 4% SWR results in a 3.2% SWR. This seems so obvious to me that I must be missing something.
What I meant with that comment is that, in the case of a large economic event, we could cut our spending by 20% and be ok with our lifestyle for a while. I dont know what I'd want to live at that reduction for the remainder of my life. Sorry for not stating that more clearly.
So just to be crystal clear, you're delaying retirement because you don't want to cut your current spending by around 10%? I'm not saying that that is unreasonable at all. Truth be told, I'll probably work at least 3-4 years later than I need to for this same reason. However, you need to be very conscientious about whether the trade-off of more time working for a larger portfolio is worth it. The compulsion to continue working for more 'safety' is so common that it has it's own moniker and acronym: 'one more year' syndrome or OMY.

Also, I urge you to look into the longevity research concerning the impact of family history on longevity. Surprisingly, family history of longevity or lack thereof does not have nearly as much of an impact on longevity as other factors, such as your own behaviors, health, etc.
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Re: Early retirement - when to start thinking about less equity?

Post by jjunk »

So just to be crystal clear, you're delaying retirement because you don't want to cut your current spending by around 10%? I'm not saying that that is unreasonable at all. Truth be told, I'll probably work at least 3-4 years later than I need to for this same reason. However, you need to be very conscientious about whether the trade-off of more time working for a larger portfolio is worth it. The compulsion to continue working for more 'safety' is so common that it has it's own moniker and acronym: 'one more year' syndrome or OMY.

Also, I urge you to look into the longevity research concerning the impact of family history on longevity. Surprisingly, family history of longevity or lack thereof does not have nearly as much of an impact on longevity as other factors, such as your own behaviors, health, etc.
In short, yes. I fully acknowledge that there's an element of OMY to this whole thing as well. It's possible I'm being overly conservative but I am definitely not an optimist when it comes to predicting things. Life's already thrown me enough inside heat that I expect things to break against me.

Since I didnt rehash the normal portfolio template like I probably should have. Here are my real numbers since I just updated them for my spreadsheet anyways.

My current annual spending has averaged $5,300/mo with my wife and I living "our best life". Over 50% of that is rent, which has a high likelihood of going up YoY due to where we live. Buying isnt an option since a comparable unit to what I rent today would be in the 1.5-3M range with heavy HOAs (1-2k/mo). However, we love the area we live in and moving out will have a large impact on our overall QoL since we'd have more traffic, lose walkability, etc. I dont know that its worth making that kind of trade. I also own an expensive car which has high maintenance costs but I would be giving that up in retirement, so some of those costs would also be removed. However, I max out at 5K OOP for health care costs per year today. To account for that, I budget our retirement needs at 8k/mo which includes things like those new health care costs, car replacements, etc.

My current portfolio is ~2.4M with 63% stock/37% bond. I only hold the S&P 500, Small Cap Value and Total Bond Market for funds. A high amount of my portfolio is in taxable. At a 3.5% SWR, I need ~400K (2.75M) more to get to where I'd be ok with retiring. My current asset levels at 3.5% leave me at 7k/mo which means I'd likely need to move as rent is our largest expense.

Again, to your original question, yes it's still worth it to me to stay where we are. I guess I have my answer, which is one I already knew but was hoping wasnt true.....I simply need to continue working.
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Re: Early retirement - when to start thinking about less equity?

Post by MoneyMarathon »

jjunk wrote: Thu Jul 25, 2019 2:48 pmI've seen plenty of threads and articles about sequence of returns risk.
jjunk wrote: Thu Jul 25, 2019 2:48 pmThis creates a bit of a paradox as I need/want the security of a higher bond allocation to reduce overall risk as we inch closer to retirement but I need (or feel I need) the higher risk/return potential of the extra equity holdings.
jjunk wrote: Thu Jul 25, 2019 2:48 pmNeither of us plan to live much past our late 70s, early 80s (based on our family history) so I've been planning a 40yr retirement at the long end.
https://www.kitces.com/blog/should-equi ... ly-better/

This is the most fascinating idea that I've come across here. I am not sure if it's the best idea, but it makes sense at first glance.

Image

It could reduce your sequence of returns risk, longevity risk of running out of money, and risk of staying longer in a job that's killing you because stocks take a dive right when you're ready to punch out for the last time. Maybe there's a problem with it, but I don't yet see what. (It is clearly based on the assumption that you know when you want to retire and really want to avoid delaying that, so if that's not the case then it's nowhere near optimal.)
Last edited by MoneyMarathon on Thu Jul 25, 2019 10:41 pm, edited 1 time in total.
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Re: Early retirement - when to start thinking about less equity?

Post by jjunk »

MoneyMarathon wrote: Thu Jul 25, 2019 10:38 pm
jjunk wrote: Thu Jul 25, 2019 2:48 pmI've seen plenty of threads and articles about sequence of returns risk.
jjunk wrote: Thu Jul 25, 2019 2:48 pmThis creates a bit of a paradox as I need/want the security of a higher bond allocation to reduce overall risk as we inch closer to retirement but I need (or feel I need) the higher risk/return potential of the extra equity holdings.
jjunk wrote: Thu Jul 25, 2019 2:48 pmNeither of us plan to live much past our late 70s, early 80s (based on our family history) so I've been planning a 40yr retirement at the long end.
https://www.kitces.com/blog/should-equi ... ly-better/

This is the most fascinating idea that I've come across here. I am not sure if it's the best idea, but it makes sense at first glance.

Image

It could reduce your sequence of returns risk, longevity risk of running out of money, and risk of staying longer in a job that's killing you because stocks take a dive right when you're ready to punch out for the last time. Maybe there's a problem with it, but I don't yet see what.
Funny you mention this article as its the exact one which started my move to 60/40 in the first place. I really like Kitces work and it does seem to make sense to me in the short term. I just dont know if I have the fortitude to be that test subject :sharebeer
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willthrill81
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Re: Early retirement - when to start thinking about less equity?

Post by willthrill81 »

jjunk wrote: Thu Jul 25, 2019 10:41 pm
MoneyMarathon wrote: Thu Jul 25, 2019 10:38 pm
jjunk wrote: Thu Jul 25, 2019 2:48 pmI've seen plenty of threads and articles about sequence of returns risk.
jjunk wrote: Thu Jul 25, 2019 2:48 pmThis creates a bit of a paradox as I need/want the security of a higher bond allocation to reduce overall risk as we inch closer to retirement but I need (or feel I need) the higher risk/return potential of the extra equity holdings.
jjunk wrote: Thu Jul 25, 2019 2:48 pmNeither of us plan to live much past our late 70s, early 80s (based on our family history) so I've been planning a 40yr retirement at the long end.
https://www.kitces.com/blog/should-equi ... ly-better/

This is the most fascinating idea that I've come across here. I am not sure if it's the best idea, but it makes sense at first glance.

Image

It could reduce your sequence of returns risk, longevity risk of running out of money, and risk of staying longer in a job that's killing you because stocks take a dive right when you're ready to punch out for the last time. Maybe there's a problem with it, but I don't yet see what.
Funny you mention this article as its the exact one which started my move to 60/40 in the first place. I really like Kitces work and it does seem to make sense to me in the short term. I just dont know if I have the fortitude to be that test subject :sharebeer
Further testing by others and Kitces himself has shown the reverse glidepath to pretty much be bunk. A fixed AA has done at least as well. There are threads you can find about it on this forum.
“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
marcopolo
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Re: Early retirement - when to start thinking about less equity?

Post by marcopolo »

jjunk wrote: Thu Jul 25, 2019 2:48 pm I'm 45, almost 46 and have been bouncing around the idea of retiring on and off for a while now. As I've done so, the two largest questions I keep coming back to are:
  • 1. How much is healthcare going to cost me pre-Medicare?
  • 2. When do I start getting more conservative with my AA, especially towards equities?
I feel like I'm getting a better handle on #1, its #2 thats giving me the problem.
Find what you are comfortable with, there is not much difference in outcome in the range from 60/40 to 40/60.

I am more curious how you are getting a handle on #1? That worries me a lot more than tweaking my AA.
Once in a while you get shown the light, in the strangest of places if you look at it right.
MoneyMarathon
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Re: Early retirement - when to start thinking about less equity?

Post by MoneyMarathon »

willthrill81 wrote: Thu Jul 25, 2019 10:47 pm Further testing by others and Kitces himself has shown the reverse glidepath to pretty much be bunk. A fixed AA has done at least as well. There are threads you can find about it on this forum.
I found a few links.

viewtopic.php?t=165050

viewtopic.php?t=241198

viewtopic.php?t=237286

viewtopic.php?t=174429

But I have not found where it was shown that a fixed AA does at least as well.

I am entirely open to that conclusion... I only saw the Kitces thing for the first time today.

Edit: now found the "backpedaling" thread: viewtopic.php?f=10&t=160080&newpost=2406135

The change of conclusion by Pfau seems to be based on the assumption that past bond returns are too good (based on hist current expectations of the future) and that, in the absence of such good bond returns, they wouldn't have gotten the results they did.
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jjunk
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Re: Early retirement - when to start thinking about less equity?

Post by jjunk »

MoneyMarathon wrote: Thu Jul 25, 2019 11:02 pm
willthrill81 wrote: Thu Jul 25, 2019 10:47 pm Further testing by others and Kitces himself has shown the reverse glidepath to pretty much be bunk. A fixed AA has done at least as well. There are threads you can find about it on this forum.
I found a few links.

viewtopic.php?t=165050

viewtopic.php?t=241198

viewtopic.php?t=237286

viewtopic.php?t=174429

But I have not found where it was shown that a fixed AA does at least as well.

I am entirely open to that conclusion... I only saw the Kitces thing for the first time today.

Edit: now found the "backpedaling" thread: viewtopic.php?f=10&t=160080&newpost=2406135

The change of conclusion by Pfau seems to be based on the assumption that past bond returns are too good (based on hist current expectations of the future) and that, in the absence of such good bond returns, they wouldn't have gotten the results they did.
Wow, thanks a ton for this. I really appreciate it! Time to go back to the AA drawing board I guess :sharebeer
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Peter Foley
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Re: Early retirement - when to start thinking about less equity?

Post by Peter Foley »

I've read the articles by Kitces and Pfau regarding a "rising equity glide path" and personally believe this is a prudent approach. This thread is the first time I have seen the graph.

I'm wondering out loud - does this graph really apply to someone who retires early? In your case one who retires at age 50 rather than 60 or 65? If you retire at age 50, 20 years before retirement is age 30 - that's very early to start increasing one's bond allocation and that gives you very limited time in the market before retirement.

I went from 70/30 to about 50/50 a year or so before retiring. In retrospect that was probably cutting it a bit close, but I retired in mid 2011 and certainly would not have wanted to have moved from equities to bonds during the great recession.


Back to the graph. Way too conservative for me. During one's highest earning years, 10 - 15 years before retirement you drop to 35% to 40% equities? No thanks.
aristotelian
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Re: Early retirement - when to start thinking about less equity?

Post by aristotelian »

Peter Foley wrote: Thu Jul 25, 2019 11:35 pm I've read the articles by Kitces and Pfau regarding a "rising equity glide path" and personally believe this is a prudent approach. This thread is the first time I have seen the graph.
I think you have to be very careful about this. It makes sense in normal rising market conditions, once the sequence risk has passed but what if you experience a market crash early in your early retirement? You still have 30+ years to go. You have spent a couple years worth of expenses from your bond allocation while your stock allocation has been cut in half. I would not be increasing my stock allocation in that scenario. Truthfully, I would be hardpressed even to rebalance to my original allocation. If you did increase your allocation and the market dropped further, I think you would be toast.

In a rising market, sequence risk has passed, enabling you to take more risk but also reducing the need to take risk. I am not sure I would increase my allocation either.
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Phineas J. Whoopee
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Re: Early retirement - when to start thinking about less equity?

Post by Phineas J. Whoopee »

This is what I did, and a couple of years later I answered some questions about it.

For the record, I think an age-based asset allocation, or even one calculated with respect to intended retirement year, will be easier for most investors to commit to and implement.

PJW
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