Asset Allocation should consider fixed income

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staycalm
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Joined: Sun Nov 25, 2018 10:11 am

Asset Allocation should consider fixed income

Post by staycalm » Thu Mar 26, 2020 8:30 am

I've always questioned "age in bonds" as a determinant of bonds allocation in a portfolio. At age 70, that would put me at 70% bonds and 30% stocks. This seems too conservative and it has occurred to me that one must consider other streams of income in retirement before selecting a bond allocation.

Let's assume a 70 year old, a portfolio of $1,000,000, and Social Security of $40,000 per year. One could treat the SS stream of income as coming from a bond worth $1,000,000 (just a rough assumption to illustrate a point). So for calculating AA, I could consider myself to have a $2,000,000 portfolio made up of stocks and bonds (1MM) in the actual portfolio and the SS income treated as a bond worth 1MM.

If I use the age in bonds formula, my stock would be 30% of the portfolio and now look like this:

Fixed income 70%:
SS "bond" 1,000,000
Total Bond Market Fund 400,000

Stocks 30%:
Total Stock Market Fund 600,000

This would make my actual AA 60/40.

Does this make sense? Would this justify a retiree having a higher portion of stock in his portfolio other than the often recommended "age in bonds"

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jeffyscott
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Re: Asset Allocation should consider fixed income

Post by jeffyscott » Thu Mar 26, 2020 8:57 am

I'd not think that a $40,000 per year annuity would be worth $1,000,000 for a 70 year old, given average life expectancy would be 15 years or so at that age? But, anyway...

I would look at SS as what it is, rather than convert it to something else, especially since what it is is already the thing that the 70 year old actually is trying to provide for themselves, an income. The purpose of the assets is to supplement that income (or to provide for heirs), so it is the assets that (may) need to be converted to something else.

Then the question is how much does the 70 year old spend? If it is $40,000 or less then they can do whatever they like with the assets, they are investing for their heirs. If it is more than $40,000, then were it me, I would want to be as certain as possible to be able to cover my desired spending. So were I spending $60,000 per year, I might want a minimum of about $400,000 in safe investments (enough for 20 years). So I might go 60/40, with no rebalancing into stocks or I might go 50/50, with a limit on rebalancing, such that at least $400,000 remains relatively safe.
Time is your friend; impulse is your enemy. - John C. Bogle

dbr
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Joined: Sun Mar 04, 2007 9:50 am

Re: Asset Allocation should consider fixed income

Post by dbr » Thu Mar 26, 2020 9:04 am

This is an old discussion that has come up many times. You can read previous threads here:

https://www.google.com/search?sitesearc ... +as+a+bond

https://www.google.com/search?sitesearc ... +as+a+bond

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