Risk averse portfolio for an early retiree?

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deskpilot65
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Risk averse portfolio for an early retiree?

Post by deskpilot65 » Tue Mar 12, 2019 9:23 pm

Hi,

My wife and I are 53. Our megacorp got rid of me 2 months ago, and my wife
will soon follow (not voluntarily). We'd like to retire early. We are novice investors.

I have only 12% of my money in stocks and probably 15% in bonds. The rest is
cash/MM. We are super risk averse to begin with and my severance and cash-balance pension were just delivered into cash/MM accounts. So, a lot of money is in the wrong place right now.

Given my numbers below, how risk averse can/should my portfolio be and is there an
example somewhere in the forums of such portfolios?

And is there a strategy for moving into stocks over time? Perhaps moving all
cash into bonds/cds at first and then periodically putting it into stocks?
I am worried that the market is set for a fall.

My numbers:

Tax-deferred: 2M
After-Tax: 1.5M
Own a house, No Debt, No Mortgage
SS combined: ~60K at 67 (using 45K in my planning)

Base expenses 60K
Medical: 30K until age 65, 10K after 65
So, 90K expenses until 65, 70K after that


thanks,
Mike

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Wiggums
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Re: Risk averse portfolio for an early retiree?

Post by Wiggums » Tue Mar 12, 2019 10:02 pm

Welcome to the forum. Sorry to hear about your job loss.

The first step would be to identify your AA. This is definitely the hardest part.

Have you taken the Vanguard questionnaire? https://personal.vanguard.com/us/FundsInvQuestionnaire

I understand that you are very risk adverse, but you have to be concerned with inflation risk as well. You would want at least 30% equities. That would be a very conservative number. time in the markets is your friend and You have 30+ years in retirement. Since most of your money would be in some form of low risk, fixed assets, you are really not taking must risk at all. Total Bond Market has done a very good job of providing safety for a portfolio.

It might be easier for you to get your money back into the market if you went with the lifestrategy all in one fund and dollar cost back into the market by automating the investments?
Similar to your 401k contributions. The three fund portfolio is another good option.

The good news is that your portfolio is large enough to cover your projected expenses.
Last edited by Wiggums on Tue Mar 12, 2019 10:52 pm, edited 9 times in total.

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tc101
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Re: Risk averse portfolio for an early retiree?

Post by tc101 » Tue Mar 12, 2019 10:19 pm

You will be fine financially. You have more than enough. I will let some others here talk about the details of how you invest. You have just had a windfall from the severance and cash-balance pension. Normal advice when you have a windfall is to do nothing and just study and plan for six months or more. Letting that money sit in a MMF for a while is just fine.
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averagedude
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Re: Risk averse portfolio for an early retiree?

Post by averagedude » Tue Mar 12, 2019 10:26 pm

Sorry to hear about you two losing your job. Pretty amazing that you have 3.5 million with only 12% in stocks. I would suggest that you contact someone at the Garrett Planning Network if you have one in your area. They are a fee only financial planning firm that acts as a fiduciary. They should give you a financial plan for less than $1500. Please be sure to tell them that you are a boglehead member that believes in simple low cost investing. If for any small chance, if they don't know what a boglehead is, disregard this advice. If you decide to go with someone like Edward Jones, and they put you in their "best" 5.75% front end load funds, they will only charge you $201,250 on 3.5 million dollars. If you seek financial advice from a wealth manager that charges you a 1% assets under management fee of 1%, you will pay $35000 on your first year and every year after. Please don't do these two things.

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Re: Risk averse portfolio for an early retiree?

Post by Tyler Aspect » Tue Mar 12, 2019 10:28 pm

Perhaps 40% stock / 60% bond can be your target asset allocation. Retirement asset allocations usually range between 60% stock / 40% bond, and 40% stock / 60% bond.
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willthrill81
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Re: Risk averse portfolio for an early retiree?

Post by willthrill81 » Tue Mar 12, 2019 10:43 pm

Your withdrawal rate will be under 3% based on your current spending, which has historically been good enough to literally last forever, with no long-term reduction in the inflation-adjusted value of your portfolio, as long as you have a reasonably balanced asset allocation.

Historically speaking, a 25% stock / 75% bond portfolio has had about the same volatility as a 100% bond portfolio but with a significantly higher return, so I believe that that's a good starting point for someone describing themselves as risk averse. In the financial crisis a decade ago, such a portfolio would have only seen a peak to trough maximum drawdown of just over 10%.

If you want a fund that already has a similar asset allocation, Vanguard's Wellesley Income fund is an excellent choice (35% stock / 65% bonds).
“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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FrugalInvestor
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Re: Risk averse portfolio for an early retiree?

Post by FrugalInvestor » Tue Mar 12, 2019 11:33 pm

Providing your estimated expenses are correct then you should be in good shape. Some things to think about in terms of spending requirements are large non-recurring expenses like new cars and large home repairs/remodels. In addition, expenses often increase in retirement because you have more time to fill which can result in much higher discretionary spending for travel, hobbies, etc.

We were in a somewhat similar situation as you and a Boglehead 3-fund approach with a roughly 50/50 asset allocation has served us extremely well. We've now been retired for over 15 years. It appears that you have a nice balance between taxable and tax deferred dollars which can make a 3-fund portfolio very tax efficient with proper placement (taxable in stocks and tax deferred in bonds to the extent possible).

A couple of tax opportunities to be aware of are tax-loss harvesting and Roth conversions. Both can be very beneficial in your situation. We've utilized both and are much better off as a result.

If you'll be depending on ACA insurance you will also want learn about the income cliff and methods to manage your income below that number. It can save you a great deal in health insurance premiums.

Continuing to contribute to HSAs can also be very beneficial both for income management and providing tax-free funds for any large medical expenses that may come up without jeopardizing health insurance premiums under the ACA. Of course, the availability of HSA qualifying ACA plan(s) is necessary. Be aware the non-itemized medical expenses can also be accumulated for future tax-free reimbursement while the HSA funds invested grow tax-free.

We've learned about all of the things mentioned above and more here on the Bogleheads site and utilized them to provide ourselves with a much more robust and secure retirement. With a little homework I think that you're in a good position to do the same.

Good luck!
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miket29
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Re: Risk averse portfolio for an early retiree?

Post by miket29 » Wed Mar 13, 2019 12:33 am

deskpilot65 wrote:
Tue Mar 12, 2019 9:23 pm
Tax-deferred: 2M
After-Tax: 1.5M
Own a house, No Debt, No Mortgage
SS combined: ~60K at 67 (using 45K in my planning)

Base expenses 60K
Medical: 30K until age 65, 10K after 65
So, 90K expenses until 65, 70K after that
Sorry to hear about your job loss.

Your expenses may be 70K after 65, but once you turn 67 (full retirement age I assume) you are assuming 45K in SS so your remaining need from your portfolio is 25K. This is less than 1%. Your current portfolio of 3.5 million should last forever under just about any scenario. Even if you need more than 25K before taxes, it should still be fine.

If your funds are at Vanguard then you are a Flagship client and can get a free plan annually, also can talk to a financial planner anytime you need about specific questions. If elsewhere or you don't want to talk to them then you should consider hiring a fee-only financial planner.

I think this quote is apropos
In other words, once the game has been won by accumulating enough safe assets to retire on, it makes little sense to keep playing it, at least with the “number”: the pile of safe assets sufficient to directly provide or indirectly purchase an adequate lifetime income stream.

Bernstein, William J (2012-06-18). The Ages of the Investor: A Critical Look at Life-cycle Investing (Investing for Adults) (Kindle Locations 51-52). Efficient Frontier Publications. Kindle Edition.
You describe yourself as risk averse. So I don't see much point in having more than a nominal exposure to the market. Certainly not 30-40%. Maybe hardly any all all. Talk to a financial planner but I think you can construct a ladder of TIPS to guard against inflation for the next 30 years and easily meet your cash requirements, then consider putting some of the remainer in the market.

jbranx
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Re: Risk averse portfolio for an early retiree?

Post by jbranx » Wed Mar 13, 2019 1:38 am

You might check out the Three Fund Portfolio thread here or purchase the book by the same title on Amazon (Taylor Larrimore, author). Vanguard.com also has lots of education material on allocation/returns. Take a look at the Vanguard Lifestrategy Conservative fund, for ex., and maybe the Wellesley and Wellington funds. Those allocations give you a good idea of what a balanced portfolio would look like with various allocations. You would want some growth from stocks, and, don't think bonds at the current historically low yields are necessarily as conservative as they once were at higher yields. With bonds, don't go further out than intermediate ones, like BND, the bond index fund. CD's, US treasuries, and money market funds are available at most discount brokers.

Dollar cost averaging might make you less nervous over putting all the funds to work at once. Vanguard and Fideltiy, for ex.,make it easy to do that over various time periods that you can set and forget. Spend a few months educating yourself on the markets and allocations before feeling rushed into doing something quickly. Avoid brokerages and active mutual funds for the most part. It's pretty easy to construct a portfolio that makes you comfortable using the advice on this forum. Keep costs very low with index funds, don't trade, don't watch CNBC, and avoid all financial porn.

pascalwager
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Re: Risk averse portfolio for an early retiree?

Post by pascalwager » Wed Mar 13, 2019 2:03 am

According to Estrada study, 100% stocks.

Topic Author
deskpilot65
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Re: Risk averse portfolio for an early retiree?

Post by deskpilot65 » Wed Mar 13, 2019 8:42 am

Thanks for the replies :D I have lots of homework to do.

I took the vanguard questionnaire and it recommended 30/70. The VG analysis page modeled 20/80 at 6.7% return and 100% bonds at 5.4% return. If I plug these results into the flexible retirement planner, then I am very comfortable with either AA. The problem is that I just don't believe these rates. I've been modeling a return equal to inflation in all of my planning. Do people really believe the historical rates will be achieved over the next 30 years?
Haven't we pumped up the markets with low interest rates, deficit spending, and irrational exuberance? (as opposed to actual economic accomplishments).

Much of my pessimism comes from years at my megacorp, which created little of value for the last 2 decades and stayed in business by downsizing and off-shoring. I worry that the US economy is doing what my megacorp did and that a reckoning is coming.
averagedude wrote:
Tue Mar 12, 2019 10:26 pm
Pretty amazing that you have 3.5 million with only 12% in stocks
Even with a low stock percentage, I was able to accumulate money in the cash balance pensions. There were also guaranteed interest funds in my 401K that were very generous (and are long gone :( )

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Re: Risk averse portfolio for an early retiree?

Post by willthrill81 » Wed Mar 13, 2019 8:49 am

deskpilot65 wrote:
Wed Mar 13, 2019 8:42 am
Thanks for the replies :D I have lots of homework to do.

I took the vanguard questionnaire and it recommended 30/70. The VG analysis page modeled 20/80 at 6.7% return and 100% bonds at 5.4% return. If I plug these results into the flexible retirement planner, then I am very comfortable with either AA. The problem is that I just don't believe these rates. I've been modeling a return equal to inflation in all of my planning. Do people really believe the historical rates will be achieved over the next 30 years?
Haven't we pumped up the markets with low interest rates, deficit spending, and irrational exuberance? (as opposed to actual economic accomplishments).
The whole 'irrational exuberance' argument started way back in 1996. Stocks never fell below the levels set at that time. Don't let pessimism rule the day when it comes to your investment strategy.

Over the next decade, you probably won't get those kinds of returns. But beyond that, no one really knows. What's your alternative, just to sit on cash for a decade or more?
“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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Wiggums
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Re: Risk averse portfolio for an early retiree?

Post by Wiggums » Wed Mar 13, 2019 8:59 am

deskpilot65 wrote:
Wed Mar 13, 2019 8:42 am
Thanks for the replies :D I have lots of homework to do.

I took the vanguard questionnaire and it recommended 30/70. The VG analysis page modeled 20/80 at 6.7% return and 100% bonds at 5.4% return. If I plug these results into the flexible retirement planner, then I am very comfortable with either AA. The problem is that I just don't believe these rates. I've been modeling a return equal to inflation in all of my planning. Do people really believe the historical rates will be achieved over the next 30 years?
Haven't we pumped up the markets with low interest rates, deficit spending, and irrational exuberance? (as opposed to actual economic accomplishments).

Much of my pessimism comes from years at my megacorp, which created little of value for the last 2 decades and stayed in business by downsizing and off-shoring. I worry that the US economy is doing what my megacorp did and that a reckoning is coming.
averagedude wrote:
Tue Mar 12, 2019 10:26 pm
Pretty amazing that you have 3.5 million with only 12% in stocks
Even with a low stock percentage, I was able to accumulate money in the cash balance pensions. There were also guaranteed interest funds in my 401K that were very generous (and are long gone :( )
Very good suggestions from branx. Take a look at the Vanguard Lifestrategy Conservative fund, for ex., and maybe the Wellesley and Wellington funds.

No, I don’t believe you will see those returns at this time.
But don’t lose sight that from a portfolio standpoint, you are in good shape. That is the most important thing. It’s not uncommon to feel more risk adverse after retirement. You have switched from accumulation to spending. I totally get that. Take your time and don’t make any rash decisions. Ask questions - we are here to support you.

CurlyDave
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Re: Risk averse portfolio for an early retiree?

Post by CurlyDave » Wed Mar 13, 2019 9:09 am

1. You are in great shape. I know it is hard, but stop worrying and think about what you are going to do with the rest of your lives, without having to work and without financial worry.

2. The greatest financial risk you face is inflation, which is closer to a guarantee than a risk. And, there is no "safe" investment which will keep up with inflation. A lot of people like TIPS but the reality is that the "inflation protection" is taxed just like any other income, and this means that your capital erodes with inflation.

3. I think you need to develop an Asset Allocation you are comfortable with, but at least 30% stocks and up to 50% is appropriate.

Wanderingwheelz
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Re: Risk averse portfolio for an early retiree?

Post by Wanderingwheelz » Wed Mar 13, 2019 9:51 am

Annuities are normally frowned upon by confident long-term investors, and for lots of good reasons.

You didn’t mention if you have any kids, but if I was in your position, being risk averse, and especially if I didn't have children, I’d be considering an annuity from Vanguard for a portion of my money. It’ll give you steady monthly income while reducing your worry about the stock and bond markets.

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Re: Risk averse portfolio for an early retiree?

Post by pascalwager » Wed Mar 13, 2019 3:31 pm

The Estrada retirement (not accumulation) study showed that fixed 100% and 60% stocks were lowest risk and a declining equity glidepath could also be effective. The study covered 30-year retirements, so they don't necessarily apply to me (age 76), but at age 53 it would take you to your mid-80's. You should study this in detail as part of your survey. Give yourself six months before a final decision.

retiredjg
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Re: Risk averse portfolio for an early retiree?

Post by retiredjg » Wed Mar 13, 2019 4:58 pm

Like some others, I suggest a portfolio with about 25% to 30% in stocks, the rest in some kind of fixed income assets (bonds, money market, CDs, etc.)

My understanding is that a portfolio with a low percentage of stocks is less risky than a portfolio of all fixed income assets. It also returns more than 100% in fixed income assets. So if you are risk averse as you say, you definitely want some stocks, just not a whole lot in stocks. I'd say 30% tops.

What kind of portfolio? Unless you have things in a taxable account that you don't want to get rid of, I'd suggest a simple 3 fund portfolio of Total Stock Index, Total International Index, and bonds (mostly or all total bond index). There are some other things you could add such as international bonds and that would be fine too.

You are currently at 12% stocks. Moving to 20% stocks in one day is not a big change. Just do it. Add the rest over the next 6 months.

Yes, the market will certainly fall, maybe several times over the rest of your lifetime, but with only 25% to 30% in stocks, your portfolio is not going to decline significantly. You need to expect this drop. It's part of the process and it does not mean the sky is falling. It's just the market doing its thing.

I think you might consider a SPIA - an immediate income annuity (not any other kind of annuity) for some of all of your base spending. It is essentially like buying a pension. You would use only a small portion of your money and in 5 or 10 years, you might need another one depending on inflation and your expenses. With a "paycheck" coming in every month, this would relieve you of having to tap into your nest egg every month. That might make your risk averse self more comfortable.

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Nestegg_User
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Re: Risk averse portfolio for an early retiree?

Post by Nestegg_User » Wed Mar 13, 2019 5:07 pm

we are at 45% equities in retirement (early 60's, but also have a pension)... which is probably too high for your risk tolerance based on your post, but for a projected lifespan of 40+ years ( likely for only the surviving spouse) you do need some equities...and about 30% is the lowest that allows portfolio survival for that span.

VASIX ( Lifestrategy Income) is too low at only 20%, while VSCGX (Lifestrategy Conservative Growth) has 40%... and could be pared with a ladder of treasuries (to limit the tax hit) to establish the level of equities that you prefer and give you the stable portfolio that shouldn't lose much to inflation.

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Re: Risk averse portfolio for an early retiree?

Post by btenny » Wed Mar 13, 2019 6:58 pm

I suggest 50/50 or even 40/60 at worst for your asset allocation. Your big risk is inflation and interest rate increases over time. So you need stock to balance that risk. You have plenty of money to safely retire but you do need to manage it carefully. I would gradually enter the market over 2 years by buying stock and bonds in increments every 6 months.

I experienced a situation similar to yours. I retired at 52 right before the Dot Com bust and the stock market crash of 2001. I have been happily retired 20 years. I was 70/30 before I took the early out package from my Mega Corp. I went to 52/48 right away and stayed at that level through the market crash and recovery. It was hard watching my $$ shrink in 2001-3 but it recovered OK and it all worked out fine. I took about 4% from my $$ for many years. My wife worked for 4 more years before she retired and took her pensions to balance out our income vs spending. We reduced our asset allocation to 40/60 gradually after age 62 when my wife started SS. We also reduced our draw to 3% at that time and even further when we got on Medicare and when I took SS at age 69.

Hope this helps. Good Luck.

delamer
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Re: Risk averse portfolio for an early retiree?

Post by delamer » Wed Mar 13, 2019 7:15 pm

deskpilot65 wrote:
Wed Mar 13, 2019 8:42 am
Thanks for the replies :D I have lots of homework to do.

I took the vanguard questionnaire and it recommended 30/70. The VG analysis page modeled 20/80 at 6.7% return and 100% bonds at 5.4% return. If I plug these results into the flexible retirement planner, then I am very comfortable with either AA. The problem is that I just don't believe these rates. I've been modeling a return equal to inflation in all of my planning. Do people really believe the historical rates will be achieved over the next 30 years?
Haven't we pumped up the markets with low interest rates, deficit spending, and irrational exuberance? (as opposed to actual economic accomplishments).

Much of my pessimism comes from years at my megacorp, which created little of value for the last 2 decades and stayed in business by downsizing and off-shoring. I worry that the US economy is doing what my megacorp did and that a reckoning is coming.
averagedude wrote:
Tue Mar 12, 2019 10:26 pm
Pretty amazing that you have 3.5 million with only 12% in stocks
Even with a low stock percentage, I was able to accumulate money in the cash balance pensions. There were also guaranteed interest funds in my 401K that were very generous (and are long gone :( )
It is fine to be conservative in your planning, but assuming that you’ll get no real return over 30 years is pessimistic — not conservative.

It seems that you are extrapolating your experience at megacorp to the economy as a whole, and it is skewing your perspective.

All that said, you could meet your expenses if you shop carefully for CDs/Treasuries/TIPS because your expenses are so low relative to your portfolio plus Social Security.

Here are some recommended Boglehead funds: https://www.bogleheads.org/wiki/Lazy_portfolios

You could do 80% Treasuries and 20% Stocks to get some growth. (See Scott Burns’ Couch Potato 3 fund.)

Good luck.

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deskpilot65
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Re: Risk averse portfolio for an early retiree?

Post by deskpilot65 » Thu Mar 14, 2019 8:36 am

continued thanks for the advice :beer

I will gradually increase my stock percentage. I'll have to figure out the exact AA - probably 20-30.

As for the rest, do folks have any opinions on brokered CDs vs bonds vs bond funds? This is for my tax-deferred account. I live in Florida, so no state income tax. I was looking at 1-2yr CDs and spreading things out to insure FDIC coverage. I have no idea if this is the best choice or how this differs from bonds or bond funds with similar returns.

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Re: Risk averse portfolio for an early retiree?

Post by retiredjg » Thu Mar 14, 2019 8:52 am

You are going to have a lot of money in some kind of fixed income assets. If you stay under FDIC limits, that's a lot of different places to hold assets. For that reason, I'd suggest that a good portion of your money go into bond mutual funds because you can hold as much as you want at a custodian (no FDIC limits).

The most common fund suggested here is usually the Total Bond Index fund. Many places offer a low cost version of this fund. Total bond index funds contain funds from many sectors (government, corporate, etc) and all different terms (short term, intermediate term, and long term). The funds are "investment grade" which means not junk bonds.

Some people have preferences for only corporate bond funds or only government bond funds, etc. Some like a mix. Some think that total bond is good but too heavily invested in governmental bonds so they mix total bond and a corporate bond fund to get a "nice balance".

I would suggest bond funds over individual bonds as most people do not have the expertise to research and choose and manage a diversified portfolio of individual bonds.

I have no opinion on brokered CDs since I have never used one. It does seem that CDs, brokered or not, should have a place in your allocations.

For your taxable account, if you use bond funds you will need to get some idea of your future tax bracket. You may or may not need a tax-exempt bond fund there.

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Re: Risk averse portfolio for an early retiree?

Post by ruralavalon » Thu Mar 14, 2019 9:11 am

deskpilot65 wrote:
Wed Mar 13, 2019 8:42 am
Thanks for the replies :D I have lots of homework to do.

I took the vanguard questionnaire and it recommended 30/70. The VG analysis page modeled 20/80 at 6.7% return and 100% bonds at 5.4% return. If I plug these results into the flexible retirement planner, then I am very comfortable with either AA. The problem is that I just don't believe these rates. I've been modeling a return equal to inflation in all of my planning. Do people really believe the historical rates will be achieved over the next 30 years?
Haven't we pumped up the markets with low interest rates, deficit spending, and irrational exuberance? (as opposed to actual economic accomplishments).

Much of my pessimism comes from years at my megacorp, which created little of value for the last 2 decades and stayed in business by downsizing and off-shoring. I worry that the US economy is doing what my megacorp did and that a reckoning is coming.
averagedude wrote:
Tue Mar 12, 2019 10:26 pm
Pretty amazing that you have 3.5 million with only 12% in stocks
Even with a low stock percentage, I was able to accumulate money in the cash balance pensions. There were also guaranteed interest funds in my 401K that were very generous (and are long gone :( )
I agree with the others who have suggested a significant portion of your portfolio in equities. A high fixed income allocation sounds conservative, but actually has a higher risk of failure in the long-term.

Around 30-50% in equities seems reasonable in my opinion.

I don't try to predict future rates of return on any investment. Your concerns about rates of return may be correct, or not. I see that you miss the guarantees of the cash balance pension plans and the stable value funds.

To alleviate your anxiety perhaps you could use a Single Premium Immediate Annuity (SPIA) as part of your fixed income allocation. For rates and finding an annuity see
www.immediateannuities.com
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gmaynardkrebs
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Re: Risk averse portfolio for an early retiree?

Post by gmaynardkrebs » Thu Mar 14, 2019 10:53 pm

I guess we are all allowed an opinion. Speaking from the perspective of a risk averse, and perhaps a bit cranky 69 year old, I think the advice being offered here (with the best intentions), is awful. I'll wager that most of the people giving you advice here don't know what it's like to have worked a whole life and saved over $3.5M plus a paid off home. And after a 10 year bull market, fewer still have any idea what it's like to lose it. Here's my line of reasoning: You have enough to live well for the rest of your lives. Why are you being advised to take so much equity exposure??? Your biggest financial risk is inflation. IMO, you should be in 100% TIPS in your tax deferred; In taxable, no more than 15% equities just to catch some upside if the present madness continues for longer than I expect. The rest in taxable should probably Treasuries or FDIC bank accounts. I will add that it's scandalous if the Vanguard calculator is supplying 6%+ for equities. No one believes that, not even at Vanguard. It's the kind of sloppiness that passes for "advice" in the financial world today. Listen to me: you didn't get to where you are today by having poor judgment; you said you are risk averse -- that is your life story talking to you. Keep listening to it. It got you where you are today, and will do so tomorrow.

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Re: Risk averse portfolio for an early retiree?

Post by mindboggling » Thu Mar 14, 2019 11:34 pm

I agree with krebs above. It's more important to preserve what you have than to strive to get even more. I'm 65, have less than 3.5 million (a lot less, actually) and my equity allocation is just under 30%. FireCalc and other predictors show little difference in outcome for higher stock allocations.

Decades ago I bought a lifetime subscription to the AAII Journal. Their current conservative allocation is 50% stocks/50% fixed income. Really? Although, to be fair, they are probably looking at someone in the early/mid accumulation stage of life. However, for someone retired or approaching retirement, no, I can't buy it.
In broken mathematics, We estimate our prize, --Emily Dickinson

DJN
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Re: Risk averse portfolio for an early retiree?

Post by DJN » Fri Mar 15, 2019 12:12 am

Hi,
I appreciate these two alternative viewpoints from gmaynardkrebs and mindboggling, particularly when you are just at retirement age. Or approaching in a few years time.
I have a simple portfolio approach:
5% Cash (protected accounts)
45% fixed income (global aggregate hedged)
25% equities (global + em + world small cap)
25% property (good locations assuming defensive valuations i.e. low)
I will convert the property to fixed income at roughly 5 and 10 years after retirement. Its convenient and its going to take that long anyway.
When I check for safety and longevity over my 33 year horizon 25% equities is best when taking into account steep drawdowns, I have tested two drawdown events of -50% in equities and -15% in fixed income and the 25% equities seems to provide the best protection. First drawdown in next two years and another in about 10 years time. Who knows when they will happen.
Having no debt/mortgages this close to retirement is a given.
thanks for your thoughts.
DJN
Yah shure

DonIce
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Re: Risk averse portfolio for an early retiree?

Post by DonIce » Fri Mar 15, 2019 2:00 am

In all the above discussion it should be remembered that bonds are not "risk free" either, unless you're holding only short term treasuries/TIPS. Broad bond funds can and do fall in value routinely and their volatility is still 1/3-1/2 as high as stocks. If you are "super" risk averse even bond funds may be too volatile for your taste. For example, your $3.5 million portfolio would have lost $100k from September to November last year even with 0% equities and 100% bonds (BND).

Your portfolio size is more than sufficient to last you on just short term treasuries/TIPS. So if your risk aversion is high enough that it would keep you awake at night you may want to consider that.

As described on the wiki, your AA should be based on your need, ability, and willingness to take risk. You have the ability to take risk (since you could lose some of your portfolio and still be in good shape), but it sounds like you have neither the need nor the willingness to take it. So why take it? Presumably the only reason would be if you wanted to increase the probability of leaving more to your kids as an inheritance (if you have kids).

ncbill
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Re: Risk averse portfolio for an early retiree?

Post by ncbill » Fri Mar 15, 2019 11:15 am

retiredjg wrote:
Thu Mar 14, 2019 8:52 am
You are going to have a lot of money in some kind of fixed income assets. If you stay under FDIC limits, that's a lot of different places to hold assets. For that reason, I'd suggest that a good portion of your money go into bond mutual funds because you can hold as much as you want at a custodian (no FDIC limits).
Just a reminder, you can hold well in excess of $250,000/account (& still have FDIC insurance on the entire amount) at a single institution if it participates in:

https://www.insuredcashsweep.com/

ExitStageLeft
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Re: Risk averse portfolio for an early retiree?

Post by ExitStageLeft » Fri Mar 15, 2019 12:04 pm

The Early Retirement Now series on safe withdrawal rates explores the riks of early retirement in excruciating detail. The chart under the section Base Case Results highlights the differences in safe spending levels for a 30-year retirement and longer horizons with allocations ranging from 100% to 0% equities.

https://earlyretirementnow.com/2016/12/ ... t-1-intro/

btenny
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Re: Risk averse portfolio for an early retiree?

Post by btenny » Fri Mar 15, 2019 12:05 pm

Please go read this discussion about how bad bonds performed during the inflation spells of the early 1970s. Bond heavy portfolios got killed. Some people think TIPS will help with this case but at the low real yields offered by TIPS today most people here are unsure how much protection is offered. So a good amount of stocks are really important in inflation spells.....

viewtopic.php?t=253600

Good Luck.

pward
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Re: Risk averse portfolio for an early retiree?

Post by pward » Fri Mar 15, 2019 12:12 pm

Here are some great low risk and low volatility model portfolio options that you could consider, in no particular order:

The Larry Portfolio: https://portfoliocharts.com/portfolio/larry-portfolio/
The Permanent Portfolio: https://portfoliocharts.com/portfolio/p ... portfolio/
Golden Butterfly: https://portfoliocharts.com/portfolio/golden-butterfly/
Pinwheel Portfolio: https://portfoliocharts.com/portfolio/p ... portfolio/

Plenty of stats on those to show how they performed, and some nice calculators to show how they responded in different time periods to drawing down in retirement. Once you pick an AA I would just do it all at once.

snowox
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Re: Risk averse portfolio for an early retiree?

Post by snowox » Fri Mar 15, 2019 1:04 pm

This is a good thread so far so just posting to follow!

WhiteMaxima
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Re: Risk averse portfolio for an early retiree?

Post by WhiteMaxima » Fri Mar 15, 2019 1:22 pm

Do Roth conversion up to 12% tax bracket, use aft-tax for living expense. You will own zero tax on Roth conversion and zero LT capital gain tax. between now till 70.5. This is your golden time. Roth conversion into Vanguard and use indexed balance fund (30/30/40). Hold it forever. Done.

miket29
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Re: Risk averse portfolio for an early retiree?

Post by miket29 » Fri Mar 15, 2019 6:12 pm

Agree with krebs. A 40% stock portfolio is pretty agressive for someone who is risk averse.

Lets play with some numbers. Put 40% into US stock ($1400K) and put $2100K into bonds. Start taking the $90K/year you need and play it forward 5 years. But oops, it is February 2004 and the market will decline at an annualized rate of -6.6% each year. To simplify calculations lets ignore rebalancing for the moment. In 5 years you take $450K out of your bond holdings, leaving you with $1650K. Your stock holdings fall by 29% leaving you with $998K. Your total assets are now $2648K so you've burned thru 1/4 your total holdings in 5 years. Anyone want to guarantee the market doesn't go down any farther?

A plan that could let you go thru 1/4 your savings in just 5 years on market returns we just saw isn't one I'd call risk averse, and by no means is the 2004-2009 experience the worst imaginable. And while the market will come back someday (as it did after that time period) the risk is twofold. One, you sell at the bottom and lock in losses. Two, this scenario isn't the worst case and you continue to watch your savings erode with no bottom in sight.

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DanMahowny
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Re: Risk averse portfolio for an early retiree?

Post by DanMahowny » Fri Mar 15, 2019 7:03 pm

OP- put all of your money in TIPS.

Done.
Funding secured

rgs92
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Re: Risk averse portfolio for an early retiree?

Post by rgs92 » Fri Mar 15, 2019 7:18 pm

I would put a million dollars in a (joint-life) SPIA and all of the tax-sheltered funds in Vanguard Balanced Index (VBIAX), a 60/40 fund that rebalances continuously and has a .07% ER.

Leave a half million of the taxable in a good money market fund (like from Ally, C.I.T., or Fidelity SPRXX, the Fidelity Money Market fund).
Use the SPIA proceeds and needed-withdrawals from the money-market fund for income.

After age 59.5, you can start using the VBIAX fund as needed for income.

That gives you, overall, a pretty conservative allocation.
Fidelity offers an SPIA that will grow a fixed percentage a year (2% or 3%), so that will help a lot with inflation for income.

The VBIAX should be in a tax-sheltered account.

This is a simple plan, which is what you need to keep you away from financial advisers.

When you are SS eligible, of course try to hold off on taking it, using your other funds for continued income as long as they don't get to an excessively low level.

StoneFeeler
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Re: Risk averse portfolio for an early retiree?

Post by StoneFeeler » Fri Mar 15, 2019 11:56 pm

Very nice thread, so I am posting just to follow this. I am a newbie, so apologies if this is an intrusion or if there is a better way to follow the thread.
"Crossing the steam by feeling the stones"

snowox
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Re: Risk averse portfolio for an early retiree?

Post by snowox » Sat Mar 16, 2019 6:48 am

rgs92 wrote:
Fri Mar 15, 2019 7:18 pm
I would put a million dollars in a (joint-life) SPIA and all of the tax-sheltered funds in Vanguard Balanced Index (VBIAX), a 60/40 fund that rebalances continuously and has a .07% ER.

Leave a half million of the taxable in a good money market fund (like from Ally, C.I.T., or Fidelity SPRXX, the Fidelity Money Market fund).
Use the SPIA proceeds and needed-withdrawals from the money-market fund for income.

After age 59.5, you can start using the VBIAX fund as needed for income.

That gives you, overall, a pretty conservative allocation.
Fidelity offers an SPIA that will grow a fixed percentage a year (2% or 3%), so that will help a lot with inflation for income.

The VBIAX should be in a tax-sheltered account.

This is a simple plan, which is what you need to keep you away from financial advisers.

When you are SS eligible, of course try to hold off on taking it, using your other funds for continued income as long as they don't get to an excessively low level.



After walking away from this thread yesterday it made me think a lot about your situation and I agree with this plan for what this is worth.

Admiral
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Re: Risk averse portfolio for an early retiree?

Post by Admiral » Sat Mar 16, 2019 7:10 am

rgs92 wrote:
Fri Mar 15, 2019 7:18 pm
I would put a million dollars in a (joint-life) SPIA and all of the tax-sheltered funds in Vanguard Balanced Index (VBIAX), a 60/40 fund that rebalances continuously and has a .07% ER.

Leave a half million of the taxable in a good money market fund (like from Ally, C.I.T., or Fidelity SPRXX, the Fidelity Money Market fund).
Use the SPIA proceeds and needed-withdrawals from the money-market fund for income.

After age 59.5, you can start using the VBIAX fund as needed for income.

That gives you, overall, a pretty conservative allocation.
Fidelity offers an SPIA that will grow a fixed percentage a year (2% or 3%), so that will help a lot with inflation for income.

The VBIAX should be in a tax-sheltered account.

This is a simple plan, which is what you need to keep you away from financial advisers.

When you are SS eligible, of course try to hold off on taking it, using your other funds for continued income as long as they don't get to an excessively low level.
I vote AGAINST an annuity. You are in zero danger of running out of money. Zero. You could put 1.5m in bonds earning 2% and that would cover your post-SS needs forever (30k vs the 25k--or less--than you will need). Annuities are appropriate for people who are risk averse but ALSO who are edge/margin cases in terms of possibly running out of money. That's not you.

Yes, I hate annuities generally, but I do recognize they are useful for some retirees. Just not someone with OP's requirements and assets. Keep your money, invest conservatively if you wish, and you will be fine.
Last edited by Admiral on Sat Mar 16, 2019 9:00 am, edited 1 time in total.

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Sandtrap
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Re: Risk averse portfolio for an early retiree?

Post by Sandtrap » Sat Mar 16, 2019 8:11 am

Excellent suggestions and advice already given! :D
++++1 on "ruralavalon"' suggestions. :happy

Additionally, consider diversification of the "fixed" side of your portfolio to ensure your "comfort one", "risk tolerance", aka: "sleep factor". You can change the makeup as you get more comfortable.

So, in increasing (or decreasing) degrees of the following: (from Money Market to CD/Treasuries to Bond Index Funds, etc)
1. Security of Principal
2. Liquidity
3. Accessibility

What is available to you might include the following. (not up to date Vanguard fixed rate chart)
Image

As already cautioned, beware the ACA Subsidy Cliff which can generate significant expenses.
Search the forum archives for that and also:
ACA Subsidy Cliff
Sequence of Returns Risk
Conservative Portfolio (examples)

Do establish an IPS (Personal investment policy statement) [long term strategy] before you move funds around.
Define General Investment Goals and Objectives (what is your plan?)
https://www.bogleheads.org/wiki/Invest ... statement

Suggested Reading List
https://www.bogleheads.org/RecommendedReading.php
Forum Library of Investing Advice with links
https://www.bogleheads.org/wiki/Main_Page
TAYLOR LARIMORE ON “SIMPLICTY”
https://www.bogleheads.org/forum/viewt ... p?t=156505

Some Tools.
ONLINE FINANCIAL TOOLS
PORFOLIO VISUALIZERS, PROJECTIONS, AND ANALYSIS
https://www.portfoliovisualizer.com
Firecalc. Retirement. How long will your money last?
https://www.firecalc.com
Morningstar Instant Xray
http://www.morningstar.com/portfolio.ht ... Entry.aspx
Optimal Retirement Planner (I-ORP)
https://www.i-orp.com/paper/index.html
http://www.calculator.net/investment-calculator.html

Condolences for your job lost.
Congratulations for your achievements and healthy position.

Note:
I have been in a somewhat similar position. Over time, I began with a 30/70 allocation but over time moved to between a 35/65 to 40/60 position with investment of new funds. IMHO, the more you have to lose than to gain, and not need higher returns/volatility, and have substantial assets, changes your options. Although age 53, your options are far different than many others of the same age but different financial position. You can change things as you invest within your comfort zone. Step by step.

Your funds are in the "right place" because it gives you the most flexible options going forward.

Good luck :D
j
Wiki Bogleheads Wiki: Everything You Need to Know

Call_Me_Op
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Re: Risk averse portfolio for an early retiree?

Post by Call_Me_Op » Sun Mar 17, 2019 7:03 am

This is not even close. Almost any AA will do.
Best regards, -Op | | "In the middle of difficulty lies opportunity." Einstein

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gmaynardkrebs
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Re: Risk averse portfolio for an early retiree?

Post by gmaynardkrebs » Sun Mar 17, 2019 7:28 am

Call_Me_Op wrote:
Sun Mar 17, 2019 7:03 am
This is not even close. Almost any AA will do.
I agree. If the OP wants to take a lot of equity risk, it should be because he knows that even if he gets seriously nicked, it won't hurt his financial security.

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goodenyou
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Re: Risk averse portfolio for an early retiree?

Post by goodenyou » Sun Mar 17, 2019 9:26 am

It sounds like you have had forced retirement. Are you married to the idea of having no earned income? You both are young and still competent enough to have some earned income. For the very risk adverse and willing to work part time, continuing to have some earned income is a great risk hedge. There are two advantages; you get older (less years of need) and reduce the rate of de accumulation from your nest egg. It may be the lesser of two evils between fear of running out of money (and the hand-wringing of figuring out the right asset allocation) and having to set an alarm clock. The job market is currently fantastic for job seekers.
"Ignorance more frequently begets confidence than does knowledge" | Do you know how to make a rain dance work? Dance until it rains.

staustin
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Re: Risk averse portfolio for an early retiree?

Post by staustin » Sun Mar 17, 2019 9:54 am

I second the larry portfolio recommendation. It would seem very appropriate for someone in your particular situation.

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deskpilot65
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Re: Risk averse portfolio for an early retiree?

Post by deskpilot65 » Sun Mar 17, 2019 10:51 am

continued thanks for the advice. I will take my time and research all of the suggestions given and see what is right for me.
goodenyou wrote:
Sun Mar 17, 2019 9:26 am
It sounds like you have had forced retirement. Are you married to the idea of having no earned income?
My ancestors tend to not make it to their 80s. Also, I have seen so many seemingly healthy coworkers in their 50s die, become terminally ill, be crippled by strokes or begin a battle with cancer. I find it quite disturbing/motivating. My awareness of how precious each remaining year is is pretty intense.

I would definitely consider a work from home job, even at reduced pay. However, for me, life is too short to spend an hour a day in my car. Life is too short to finish my productive work by 1pm and then stare out an office window waiting for 5pm. I was a principal software engineer for 30 years and I still have some bleeding edge skills, so remote work is not an impossibility.

I am willing to take on the risk of early retirement with no earned income and I realize that I am very fortunate to be able to have the option.

hmmm...I'm not sure if other professionals can relate to some of that. whenever my megacorp had ample work, we'd spend the first half of the day in some intense and enjoyable coding frenzies until our brains stopped working. After that it was just free coffee and chit-chat. I couldn't stand that part. I had so many things that I'd rather be doing than just passing the time.

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goodenyou
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Re: Risk averse portfolio for an early retiree?

Post by goodenyou » Sun Mar 17, 2019 11:14 am

deskpilot65 wrote:
Sun Mar 17, 2019 10:51 am
continued thanks for the advice. I will take my time and research all of the suggestions given and see what is right for me.
goodenyou wrote:
Sun Mar 17, 2019 9:26 am
It sounds like you have had forced retirement. Are you married to the idea of having no earned income?
My ancestors tend to not make it to their 80s. Also, I have seen so many seemingly healthy coworkers in their 50s die, become terminally ill, be crippled by strokes or begin a battle with cancer. I find it quite disturbing/motivating. My awareness of how precious each remaining year is is pretty intense.

I would definitely consider a work from home job, even at reduced pay. However, for me, life is too short to spend an hour a day in my car. Life is too short to finish my productive work by 1pm and then stare out an office window waiting for 5pm. I was a principal software engineer for 30 years and I still have some bleeding edge skills, so remote work is not an impossibility.

I am willing to take on the risk of early retirement with no earned income and I realize that I am very fortunate to be able to have the option.

hmmm...I'm not sure if other professionals can relate to some of that. whenever my megacorp had ample work, we'd spend the first half of the day in some intense and enjoyable coding frenzies until our brains stopped working. After that it was just free coffee and chit-chat. I couldn't stand that part. I had so many things that I'd rather be doing than just passing the time.
It may not be a binary choice between working (misery) and retirement (happiness). If any work is holding you back from happiness, then retirement is the right decision. I am your age, and I have strived to establish a work-life balance. Although we appear to have enough to retire in the fashion we desire, my wife and I continue to earn income to have the additional privilege to consume at a time in our lives of intense cash-burn (expensive traveling, helping the kids etc.). For now, our jobs are tolerable and aren't holding us back. We have talked about dialing it back further by finding a different line of work that would allow us to ratchet up our free time. You have to decide if 100% free time is right at this time, but some earned income may take the edge off the worry of financial insolvency.
"Ignorance more frequently begets confidence than does knowledge" | Do you know how to make a rain dance work? Dance until it rains.

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