Asset Allocation At or Near Retirement?

[countdown]

We are hopefully 1 to 2 years from retirement.
Very conservative.
Have been 35-37% equities throughout this amazing market.
However, have also slept quite well every night , which is ultimately our first priority and trumps higher return (potential).

My question is actually, what is the most commonly recommended asset allocation going into--in retirement?

I read scenarios across the board from the 50/50 base, to no less than 30 percent, to up to 60-70 percent equity.
I realize this is a personal decision along with a realistic look at one's need and ability to take risk.

I'm hoping others might share their asset allocation at this period of their lives with their perspective and comment.
Thank you.

[Professor Emeritus]

How high is up? how far is down?

no one can answer an asset allocation question without knowing all your assets and/or income streams, your liabilities and insurance cover E.g. LTC and your life expectancy

Of course the spreadsheet zombies will give you a number to 5 decimal places and assume the rest of it does not exist.

[Rodc]

As the good professor says in order to say much a lot more of your situation would need to be known.

In general though, presuming you are more or less in a "typical" situation, the reason you see so much variability is that over a wide range of allocations you are like to do fine if you have a decent nest egg relative to your income needs.

If you do not have a sufficient nest egg, asset allocation is not likely to help.

If you have a ton saved relative to your desired income you can do almost anything half reasonable.

Nothing wrong with staying in the range you have now.

[countdown]

Thanks professor, yes you are right. I was actually looking more for an average range of those in this category.

But I will posit a scenario:

$1,000,000 tax-deferred retirement account. Say: 35 stock/50 bonds/15 cash

$1,000,000 home equity. No mortgage.

Nominal after tax accounts.

No debt.

No LTC.

No pensions.

Social security estimate: $40-50k year

Beyond the obvious they should sell home.....thoughts?

[Rodc]

Thanks professor, yes you are right. I was actually looking more for an average range of those in this category.

But I will posit a scenario:

$1,000,0000 tax-deferred retirement account. Say: 35 stock/50 bonds/15 cash

$1,000,000 home equity. No mortgage.

Nominal after tax accounts.

No debt.

No LTC.

No pensions.

Social security estimate: $40-50k year

Beyond the obvious they should sell home.....thoughts?

What is your income need?

What is your income desire?

[countdown]

Rod: thanks for responses.

Still uncertain but probably around $80,000-$90,000.
Perhaps less when no longer working.

[Pocanutin]

RodC

We established 23 years of residual expenses (those that remain after SS, SPIAs etc). This is our liability matching portfolio currently 100% in 5-year double rung laddered cds and I will add treasuries when/if appropriate.

Our risk portfolio is 70% equity (Total Stock index, Global ex US, extended market index--small/mid cap) and 30 % Total bond index. Included in the equity allocation we have roughly 7% total of gold miner shares, emerging markets and energy etfs. Currently,I am taking MRDs from my portfolio and she will begin hers in 3 years or so.(I am 72--she 67), been retired for 10 years.

This arrangement allows us to sleep well at night, yet provides opportunity for (possible)growth of capital--most likely for our heirs.

Best,
Pocanutin

[ourbrooks]

If you look at the studies in the Wiki, anywhere from 30% stocks to 70% stocks is about equally likely to sustain a 4% withdrawal rate for 30 years. There's some evidence that higher equity percentages are more likely to be effective for very long retirements (more than 30 years) or if you wan to leave a legacy.

There's some more recent thinking by Wade Pfau and Michael Kitces that suggest starting out with a relatively low percentage of stocks and then increasing the percentage through retirement. One way to follow that advice would be to start where you are now and spend your bonds first.

[Rodc]

There's some more recent thinking by Wade Pfau and Michael Kitces that suggest starting out with a relatively low percentage of stocks and then increasing the percentage through retirement. One way to follow that advice would be to start where you are now and spend your bonds first

.

Unfortunately their data don't support their conclusions.

[Rodc]

Rod: thanks for responses.

Still uncertain but probably around $80,000-$90,000.
Perhaps less when no longer working.

If you need something like $50K from $1M that might be tough. (if SS is only $40K and you need $90K). But if you can downsize you could easily boost your nest egg and possibly reduce costs (say reduce upkeep and taxes on your home). You could wait to see how things go, no need to jump now. If you downsize to a paid for $500K house that is a bit more than a 3% withdrawal rate and you have some reserve (say could sell house latter for buying into assisted living).

If that is only a desire and you need less or even if that is more like $50K from SS and need $80K that is $30K from your portfolio which at 3% is very like to go well.

At least historically you would not have wanted to be below about where you are now in stocks. Unfortunately a lot of uncertainty in the future, but even so personally I probably would not go below 35% in stocks from what I can see of your situation.

Later too if you a drawing down farther than you like you could consider buying an annuity.

Sounds like you are in a pretty good spot to me. And you have some options for adjusting along the way if needed.

[VictoriaF]

I am two and a half months away from retirement. Instead of considering the asset allocation, I am keeping a large amount in safe assets that would provide me with sufficient cash while I am waiting to collect Social Security at the age of 70.

Victoria

[Rodc]

I am two and a half months away from retirement. Instead of considering the asset allocation, I am keeping a large amount in safe assets that would provide me with sufficient cash while I am waiting to collect Social Security at the age of 70.

Victoria

That is a good point. My plan is to do the same.

[countdown]

Thanks for comments so far. Interesting that anywhere 30-70% likely to sustain 4% withdrawal.

Thank you especially, Rod. I was writing the below as you just posted.
This idea really seems the most prudent, although not as well said and explained as in your writing :

"Another option might be to sell residence, realize a down-sized home-no mortgage, and approximately $400-500k in after tax account. In that situation, assume the LMP would be prudent in after tax acct?, and a perhaps slightly higher equity allocation in pre-tax accts? Or am I way off base?"


Thanks to all respondents to date. Appreciate all of the excellent minds on this site.

[friar1610]

We (ages 69 and 67) recently had a VG financial plan done and they recommended 50-50. This is consistent with the answer I get when I do the on-line asset allocation quiz at VG.

But I might be a little more comfortable with a bit less than 50% equities although I understand that the difference between 40% and 50% doesn't make that much difference in the big scheme of things.

I think we're in the category of having "won the game" in that I have a very nice inflation adjusted pension, we both have SS and my wife will continue to receive about a third of my pension as a survivor benefit (also inflation adjusted) if I predecease her. Our portfolio is not as large as some I read about here but certainly well above the averages I see in the various articles I read about how poorly Americans have saved for retirement. My main concern right now is my wife's financial viability in the absence of me and my pension. So, bottom line, if I do any tweaking at all as a result of the financial plan it'll probable end up 45% equity/50% bond/5% cash.

[livesoft]

I suggest that one become very familiar with the calculator at http://www.firecalc.com or its close sibling http://www.cfiresim.com

Run the first one with the "How will changing the allocation -- putting more or less into stocks -- affect the results?" check box checked.
You should see something like this:


See how the success rate of a given sustained withdrawal rate drops if the fraction of equities goes below 50%, but does not increase much if the fraction of equities goes above 50%. That is about 50% equities is a sweet spot. This is why 50% equities appears so much in asset allocations: It is about the lowest amount of equities one can have for long-term success.

[Professor Emeritus]

Thanks professor, yes you are right. I was actually looking more for an average range of those in this category.

But I will posit a scenario:

$1,000,000 tax-deferred retirement account. Say: 35 stock/50 bonds/15 cash

$1,000,000 home equity. No mortgage.

Nominal after tax accounts.

No debt.

No LTC.

No pensions.

Social security estimate: $40-50k year

Beyond the obvious they should sell home.....thoughts?

simple heuristic approach
Your SS is worth about 500K under simple assumptions. Your house is a million and your portfolio is a million.
If you annuitized your portfolio it would yield about 6-7 percent per year call it 65 K
A little over a Hundred k with SS. plus you have a house.
You cannot withstand a lot of portfolio risk with these numbers. You are probably "over housed" i.e. far too much of your assets are tied up in your house.

Your real risk is one of you needing 100K per year LTC

[countdown]

Professor. I like the 'heuristic' approach.
Even as an educated professional, I'm embarrassed to admit I ran to my dictionary.

Yes, good summary. Yes, also agree 'probably over housed'. Difficult attachment to unthether, although I am imagining very freeing, and also brings more margin for error and safety.

Appreciate all responses so far.....and will try to figure out firecalc, livesoft.

Responses very, very helpful.

Origin of my question, Asset allocation, sounds like probably in ballpark +/- 5-10% of where it should be,

but scope of the respondents answers is enlightening, and where my real questions should have been originally.

Thank you all.

[Toons]

I am 63 ,retired,,,I was sleeping fairly well in 2008-2009 when I was about 80/20 stock/bond and if you listened to the news the world was coming to an end financially.Currently I am about 73/35 stock bond and continually purchasing more bonds.Still sleeping well,but having been heavily weighted on the stock side the last 5 years,the assets have grown substantially.
Couple points.You have to find what makes you comfortable regarding asset allocation(sleep well point)and adjust accordingly.
2nd thought is the risk in risk reward spectrum is that you will run out of money before you run out of time so keep a portion of your assets ,like you have mentioned in equities.

[countdown]

Thanks Toon.
I wish we would have benefited from a 70/80 equity allocation, but I also know we could not have slept with the risk of 40% loss.

I would feel differently if we were among those with a defined benefit pension plan.
Those are golden.
If only...... Choices....

Creating your own pension is pretty daunting, even for moderately informed. For uninformed I can't imagine.

[LongerPrimer]

A few years out and from retirement is the most dangerous time for your retirement assets.
FWIW, YMMV, IMO, TIOLI: 30/30/40, +/- 20 in each AA, assuming you do not gave a risk management strategy. For My money, current long bonds are too risky, Intermediates are not even competitive to my local regulated natural gas utility, and why bother with short term. Reading Berstein, Rational Expectations, Asset Allocations...chapter 5: Risk is not reaching your goal, not your allocation model.

[BigPrince]

This firecalc at http://www.firecalc.com/ is really freaking amazing. Thank you.

[countdown]

Just want to thank everyone for chiming in. It is really helpful in processing and understanding the possible approaches and schools of thought which exist to hopefully increase the chances of successful retirement.

Interested also in Victoria's approach irrespective of asset allocation: keeping some years of 'safe assets' until soc sec @ 70.
Seems similar to a LMP approach, in stages, which is interesting and something I'd like to consider.
Depending on your 'floor' amount in LMP, covering essentials, then equity portion of remaining portfolio could increase.
Although I guess it's still a lower equity allocation of the whole, while a higher percentage of the remainder bucket, unless those safe assets are removed from portfolio as ER fund....semantics I guess.

[derosa]

Keep in mind there is no magic answer my friend. Be cautious on spending.

Go to bogleheads wiki. Look for financial calculators. There are 40 or so free and for sale ones.

Pick 2 or 3 or 4 and use them each year over the next 1 - 35 years or so to see where you are possibly going.

Personally i use the ones from vanguard including their financial plan which is a historical based tool; firecalc which is also historical based; flexible retirement planner which is a monte carlo based; and the tools on dinkytown.net which are straightline siimple calculators. Financial engines is on vg site and is also monte carlo based.

So you have a straightline calculator, a monte carlo calculator and a historical calculator. I want all 3 to be around each other -- in the same ballpark.

If you have used calculators on different websites your may have been using tools from dinkytown.net. Their business is developing financial calculators. They have 100s on their site for use - they are all java based tools.

[pascalwager]

I follow Charles Ellis' recommendation to have 0% FI until age 70 and then gradually increase FI if you think you need it. At age 71 (just fully retired) I have 12% FI (cash, CDs, I-Bonds) and may or may not add some CDs in my IRA down-the-line. I have always preferred a stock-dominant portfolio and don't like IT bonds.

[Leif]

You know yourself best. I think the conservative range is 20-40% equities.

Vanguard has some asset allocation models. They list 0-30% stock as income, 40-60% as balanced, and 70-100% growth. They list average, best, worst, and number of years with a loss.

Vanguard Allocation Models

[Leif]

I am two and a half months away from retirement. Instead of considering the asset allocation, I am keeping a large amount in safe assets that would provide me with sufficient cash while I am waiting to collect Social Security at the age of 70.

Victoria

Isn't that an asset allocation? Or perhaps a bucket strategy?

[Hawkeye5]

I'm in the same spot, except my home is much more modest. I fully intend to downsize before retirement two years hence.
As I have been able to secure 20-25 years of residual living expenses, that portion has been placed in T notes and bills in my traditional IRA. I would rather suffer the low yield than risk significant loss in this portion of the portfolio. I understand the opportunity cost, but I no longer have the time to recover significant losses. I deem it prudent and I sleep just fine. I calculate this portion to be 60%, so I'm 40% stock.
The stock portion is invested as follows in Vanguard funds within a traditional IRA: 20% 500 Index, 20% International Index, 20% REIT Index, 15% Small-Cap Value, 12.5% Mid-Cap Value, 12.5% Emerging Markets. Rebalanced every year or two.
This works for me, but you will need to design a plan that works for you. Fewer or more asset classes, you may like different asset classes than I, less value more growth, more large less small, no emerging markets, etc.
Good luck and enjoy your retirement!! Planning is half the fun!

[fandango]

We are retired and have been maintaining a roughly 50/50 allocation.

The odds are that one of us (probably my wife) will live to be 90 years old. Therefore, I have a 50% stock allocation to help with inflation over that period of time and generate the income needed for longevity.
At some point, probably in the next 5 years or so, I will lower the stock allocation to 30% or 40%.

There is risk to investing in stocks but there is also risk in only investing in bonds (opportunity cost of not investing in the stock market).

Only you can determine your risk profile and what you will be comfortable with.

The only other comment that I will make is that your home equity is very high from my perspective. You could easily find very comfortable homes for retirees in the $200K range or less in many areas of the country. Selling you existing home and buying a lower cost home could free up capital for investing. You may, however, have good reasons for not selling your home.

Good luck with retirement. We have enjoyed every minute of ours.

[VictoriaF]

I am two and a half months away from retirement. Instead of considering the asset allocation, I am keeping a large amount in safe assets that would provide me with sufficient cash while I am waiting to collect Social Security at the age of 70.

Victoria

Isn't that an asset allocation? Or perhaps a bucket strategy?

It's similar to the bucket strategy, except that it consists of two periods:
(1) between now and the age of 70 and
(2) after the age of 70.

As I will be spending safe assets during period-1, my ratio of stocks/bonds will be increasing. During period-2, when I will be collecting Social Security, my LMP bucket will be smaller and my approach will be closer to the regular asset allocation.

Victoria

[Professor Emeritus]

Interested also in Victoria's approach irrespective of asset allocation: keeping some years of 'safe assets' until soc sec @ 70.

I do exactly the same thing Safe assets are in Wellesley and fidelity bonds . Everything else in the big Casino
However we have DB pensions

[pascalwager]

I am two and a half months away from retirement. Instead of considering the asset allocation, I am keeping a large amount in safe assets that would provide me with sufficient cash while I am waiting to collect Social Security at the age of 70.

Victoria

This seems like a formal M* two-or-three bucket method of allocating retirement assets. The safe assets could include bank checking, HY savings, and laddered CDs. If the time horizon is sufficiently long (three-to-five years), then ST bonds could make up a third bucket, depending on yields. Christine Benz has a M* series on the bucket method.

David Swensen recommends 100% cash upon reaching your time-horizon.

[The Wizard]

...David Swensen recommends 100% cash upon reaching your time-horizon.

Can you explain this further please?

[pascalwager]

In "Unconventional Success", Swensen recommends using what he calls the "Risky Portfolio" composed of domestic/int'l broad-based index funds, REITS, EM, and Treasuries. Then, ten years before reaching your personal time horizon, you begin to gradually convert the Risky Portfolio into the "Riskless Portfolio", or 100% cash. The graph on pg. 90 shows the gradual reduction in portfolio risk/return over the ten-year period. The cash assets minimize risk and maximize liquidity.

[stemikger]

We are hopefully 1 to 2 years from retirement.
Very conservative.
Have been 35-37% equities throughout this amazing market.
However, have also slept quite well every night , which is ultimately our first priority and trumps higher return (potential).

My question is actually, what is the most commonly recommended asset allocation going into--in retirement?

I read scenarios across the board from the 50/50 base, to no less than 30 percent, to up to 60-70 percent equity.
I realize this is a personal decision along with a realistic look at one's need and ability to take risk.

I'm hoping others might share their asset allocation at this period of their lives with their perspective and comment.
Thank you.

Great question. First I will say I did not go through and read more than the first two replies. Now, let's see how this question was answered by two of the smartest guys around. First John Bogle. When asked by the motley fool how many funds does a person needs if they wanted to be 100% in index funds. His reply was a person can be all in the Vanguard Balanced Index Fund. He then said of course, there are nuisances if a person was very young they could be 80% in stocks and if they are older in retirement they could be 30% in stocks. He then went on to say that most people don't look at their social security and that can be counted toward your fixed income allocation. He suggested people stop focusing on the account value and look at the income they get from it year-to-year. He also noted he is currently 50/50 in his retirement account.

Warren was asked how should the average 55 year old person invest and he said they should have enough cash to feel secure then put the rest in a very cheap index fund that buys America. His choice was the Vangurad 500 Index.

Lastly, the one thing I don't understand with folks in retirement is they get too conservative the minute they declare there are retired. Now, the way I look it is a very large chunk of that money can be in that account for another 30 years or possibly more. Aren't you just taking out what you need to live on each year? I think 30% in equities is too conservative with that time horizon and that is why I would never go below 50% in equities.

[Gattamelata]

In "Unconventional Success", Swensen recommends using what he calls the "Risky Portfolio" composed of domestic/int'l broad-based index funds, REITS, EM, and Treasuries. Then, ten years before reaching your personal time horizon, you begin to gradually convert the Risky Portfolio into the "Riskless Portfolio", or 100% cash. The graph on pg. 90 shows the gradual reduction in portfolio risk/return over the ten-year period. The cash assets minimize risk and maximize liquidity.

And then what? Does the plan end the day you retire? Does the plan call for maintaining 100% cash from the day you retire until the day you die? Or do you ease back into equities at some point after retirement? This is a genuine question - it seems like any plan that ends at the day of retirement is only an accumulation plan, a plan for how to prepare for retirement and not a plan for how to manage retirement.

Doesn't 100% cash from retirement onward seem exceptionally risky? No growth whatsoever? Just let inflation and withdrawals devour your principal? I have a hard time accepting that plan unless the savings represents something really exceptional like 50x expenses or more.

[Dandy]

Lastly, the one thing I don't understand with folks in retirement is they get too conservative the minute they declare there are retired.


The OP was conservative well before retirement. For most people it makes sense to go conservative in retirement (how conservative is "too conservative" is debatable). Loss of earning power, lack of pensions and perhaps a long wait for SS or immediate annuity can force people to make a logical choice of conserving assets vs taking on more equity market risk.

The Op indicated that they slept well during the recent amazing market. Everyone sleeps well during a bull market it is the bear market that keeps awake those with more equities than their true risk tolerance. Actually, it often does more than that. It can be debilitating as they listen to the news and watch their nest egg ratchet down and prompts them to exit the market at or near its lows.

If you are very conservative during the accumulation years and feel you have a decent nest egg you probably should be in a Life Strategy Fund or Target Date fund that matches your equity tolerance. If none are conservative enough keep some outside of it in CDs or other low risk bond funds.

You need to address the equity risk you can tolerate as well as the emotional risk of panic moves.

[BigJohn]

I am two and a half months away from retirement. Instead of considering the asset allocation, I am keeping a large amount in safe assets that would provide me with sufficient cash while I am waiting to collect Social Security at the age of 70.

Countdown, you might get some benefit from this current thread, It discusses issues consistent with Victoria's approach of focusing more on how to safely bridge to SS/RMD age as the most important question.

http://www.bogleheads.org/forum/viewtop ... 1&t=142574

Victoria, my personal approach is in this thread. Would value your perspective, especially if you're taking a very different approach.

[midareff]

Retired and 66, pension and SS. 45/52.5/2.5 equities/bonds/cash. I let equities float to 50 then rebalance back down to 45%. Now have enough in ST/IT bonds to fund a CPI-U adjusted drawdown from bond funds for next 25 years or so provided inflation doesn't go nuts. If I does I will have to sell some equities . Sleep very well.

[Dandy]

Retired 66 with spousal SS and pension - waiting till 70 for full SS. equity allocation 42% fixed income 58%. While it is interesting to see how other retirees allocate so much depends on your risk tolerance, financial situation, health and expenses.

My fixed income allocation is allocated about 1/3 intermediate bond funds, 1/3 short term bond funds and 1/3 "safe" e.g. CDs etc.
The bond funds include TIPs, Corporate and muni funds. I periodically calculate the number of years in fixed income that are short term or "safe" and divide that total by my current drawdown for monthly expenses. Wm Bernstein's suggestion is that you should have 20-25 years worth of yearly drawdown of these relatively safe fixed income products. (I would say enough years to reach at least 90.)

In retirement, especially if you feel you have enough resources, it is better to focus on securing funding to say age 90 than to just look at your overall allocation. The priority isn't to get the largest portfolio number or to leave the largest amount to heirs. The priority to me is to make sure you have, at a minimum, a comfortable and secure retirement. The rest is gravy. Any excess, and I think there should be, can be invested anyway from 100% fixed income to 100% equities.

If you can afford to invest in this manner you can sleep well, enjoy retirement and use some of any excess to splurge on yourself, help heirs or charity while you are alive. And, most likely, you won't be a financial burden on your heirs.

[Leif]

It's similar to the bucket strategy, except that it consists of two periods:
(1) between now and the age of 70 and
(2) after the age of 70.

As I will be spending safe assets during period-1, my ratio of stocks/bonds will be increasing. During period-2, when I will be collecting Social Security, my LMP bucket will be smaller and my approach will be closer to the regular asset allocation.

Victoria

That is a smart approach. It gets you through the retirement red zone.

What do you consider "safe assets"? Does that include ST bonds?

[countdown]

Wonderful responses. Thanks to those for links to other informative threads as well.

One respondent noted, OP was conservative in accumulation phase as well, and easy to sleep well during bull market with low stock allocation. All true. Until the sky falls....and it's not a bull market.

2000 (pre-boglehead) had investment advisor and lost six figure in early 2000s.
Yes, panicked. No real understanding of markets, cycles, systemic failures, etc. etc.
Spent some period in cash....although even Vanguard Admiral Treasury at 4-5% wasn't so bad while it lastd.
But certainly, Missed much opportunity!

Would do much differently today in great deal thanks to this board, the published authors on this board (I have your books) and the unpublished mentors on this board......BUT.....we are grateful for where we are.
(Notwithstanding losses still put children through grad school, etc. and won't be eating cat food

So, best lesson to others younger than we: don't panic...again don't panic......find proper A/A
I think our advisor had us around 90 equities in 2000....we had no idea.

Finally, as I noted in an earlier post, it is a different ballgame when you don't have a DB plan. Some argue you must be more aggressive, some less.

Much appreciation for responses.

[freddie]

With a <3% SWR you should sleep well at night:) The question going forward is does it make sense to have more than 25x years of savings in bonds or do you let the stock ratio creep up (assuming good market years) and don't worry about your AA ratio. There are good arguments either way (for: you should end up with more cash Against: it will be more volatile. It shouldn't matter to you but people are rarely 100% rational about money).

Retired and 66, pension and SS. 45/52.5/2.5 equities/bonds/cash. I let equities float to 50 then rebalance back down to 45%. Now have enough in ST/IT bonds to fund a CPI-U adjusted drawdown from bond funds for next 25 years or so provided inflation doesn't go nuts. If I does I will have to sell some equities . Sleep very well.

[countdown]

Lastly, the one thing I don't understand with folks in retirement is they get too conservative the minute they declare there are retired.


If you are very conservative during the accumulation years and feel you have a decent nest egg you probably should be in a Life Strategy Fund or Target Date fund that matches your equity tolerance. If none are conservative enough keep some outside of it in CDs or other low risk bond funds.

You need to address the equity risk you can tolerate as well as the emotional risk of panic moves.

Actually, that is where it is to a degree, dispersed among vehicles.
Anticipate some large additions next 1-2 year and will then restructure and consolidate.

35%+ in Target Retire 30/70, Blackrock index retire 30/70, and W&W Adms
50%. VG ST treas adm, TR, Blackrock, W&W
15%. cash

Still learning.

[countdown]

Freddie: 'stock creep' to 40% has been in comfort zone, and I think would more certainly be when addition of principle next 2 yrs., and also when receipt of soc sec.

I think 50/50 may be wisest plan, but would not (emotionally could not) do that unless/until liquidated residence and down sized. Then LMP is attractive + perhaps 40/60 or even 50/50.

Gracie.

[pascalwager]

In "Unconventional Success", Swensen recommends using what he calls the "Risky Portfolio" composed of domestic/int'l broad-based index funds, REITS, EM, and Treasuries. Then, ten years before reaching your personal time horizon, you begin to gradually convert the Risky Portfolio into the "Riskless Portfolio", or 100% cash. The graph on pg. 90 shows the gradual reduction in portfolio risk/return over the ten-year period. The cash assets minimize risk and maximize liquidity.

And then what? Does the plan end the day you retire? Does the plan call for maintaining 100% cash from the day you retire until the day you die? Or do you ease back into equities at some point after retirement? This is a genuine question - it seems like any plan that ends at the day of retirement is only an accumulation plan, a plan for how to prepare for retirement and not a plan for how to manage retirement.

Doesn't 100% cash from retirement onward seem exceptionally risky? No growth whatsoever? Just let inflation and withdrawals devour your principal? I have a hard time accepting that plan unless the savings represents something really exceptional like 50x expenses or more.

Swensen leaves it to the investor to determine time horizon--reached when you determine that you no longer need to assume the risks associated specifically with stocks, REITs, and Treasury Notes.

(For cash, I suppose you would want to include maximum I-Bonds, making purchases during the entire ten-year flight-path.)

[oldwest]

I like some of the newer thinking. Slowly reduce stock exposure until you are almost all cash/bonds by the time you retire, since the biggest risk in the run-up to retirement is a devastating drop in the stock market right around the time you begin your retirement years.

Then, steadily increase your stock exposure every year during retirement. The older you are, the less a drop will be devastating, and the main risk during retirement is outliving your assets. If you live long enough, you may find yourself back at the stock exposure of a 20 year old!

[FelixTheCat]

I recently talked to a Vanguard CFP about asset allocation. He mentioned he's had a lot of conversations with clients regarding this subject. Young people that are afraid to loose money so they stick to bonds. Old people that are very risk tolerant and are mostly in stocks. It's a personal decision.

If the 35/65 portfolio lets you sleep at night, then stick with it.

[Austintatious]

I like some of the newer thinking. Slowly reduce stock exposure until you are almost all cash/bonds by the time you retire, since the biggest risk in the run-up to retirement is a devastating drop in the stock market right around the time you begin your retirement years.

Then, steadily increase your stock exposure every year during retirement. The older you are, the less a drop will be devastating, and the main risk during retirement is outliving your assets. If you live long enough, you may find yourself back at the stock exposure of a 20 year old!

This approach has gotten my attention, as well. Wade Pfau and Michale Kitces have done research suggesting that there may be a greater chance of one's money lasting though retirement afforded by this approach. To me, it makes sense, in view of the increasing longevity so many must contend with, though the very idea could be really hard to stomach for many, especially those without reliable income streams covering basic living expenses.

Here's a video wherein Pfau discusses the concept. http://link.videoplatform.limelight.com ... 205f7379fc

And here's a NYT article discussing it. http://www.nytimes.com/2013/09/14/your- ... rnard&_r=1&

[InvestorWD]

Hi everyone,
I am very new to bond fund investing, so PLEASE forgive me if my question is silly or ignorant...

Most people here seem to suggest that we should put more money to bond funds (about 50 - 70%) for very conservative investors (I am one of them). However, when I read the news allover, so many people warn that the bond fund share value will go DOWN starting next year, possibly just as bad as the stock funds. So how do we know switching to more bond funds is going to make us conservative investor feel safer? Please let me know what is wrong with my understanding on bond funds ?

This is my first post, and I am very new on investing. I am eager to learn. Thanks!

[livesoft]

So how do we know switching to more bond funds is going to make us conservative investor feel safer? Please let me know what is wrong with my understanding on bond funds ?

This is my first post, and I am very new on investing. I am eager to learn. Thanks!

Investing is never safe. So if one wants to feel safe, then one should not be investing.

OTOH, if one doesn't invest, then one will probably not keep up with inflation unless they have tons of money and use inflation-protected bonds or if they have inflation-protected pensions or social security.

Basically, one cannot have it both ways. So one must decide which is more important for them: safety or the possibility of more return with a chance of loss. For me, I am happy to lose money because the chance of gain in my experience easily outweighs the chance of loss. Also, even if I lose a million dollars, I've always made it back in a short time, so my experience is that risk pays off.

What is your experience with losing money?