Asset Allocation - retirement date versus age?

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Topic Author
BuckyBadger
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Asset Allocation - retirement date versus age?

Post by BuckyBadger » Mon Oct 07, 2019 9:44 am

I was reviewing my IPS and I'm trying to determine if I should change my AA glide path.

Our numbers: 39F/40M,1YO baby.

Current gross approx $360k per year. Probably no huge raises: expect 2.5% - 3% inflation adjusted raises in the future.

Saving $96k this year in tax advantaged and taxable accounts earmarked for retirement (includes company matches). Will increase this by 3% every year. Currently have $1.22M in these accounts.

Owe approx $270k on a house worth $490k.

No debt except $20k car loan (just bought new 3 row SUV) and will add another $30k car loan toward the end of this year (planning on buying another new car for my commute). First time we've bought new cars and we plan on keeping for a long long time.

Have about $50k in various checking accounts for monthly spending, upcoming expenses, vacations etc, and EF.

529 contributions on track, with assumed 3% annual growth, to have about $250k by baby's 18th birthday.

Expect eventual inheritance in the $1M range in maybe 25 years. Obviously not planning on that, but just putting it here for full disclosure if anyone thinks it's relevant.


My current IPS (started in 2013, added to upon birth of child) says:

Investment Objectives:
These are the main objectives for our investment program. I have developed them after a review of our financial resources, financial goals, asset allocation, risk tolerance and time horizon.


Objective 1: To retire between the ages of 52 and 55


Objective 2: To have an annual income from our investments of $100,000 to $120,000 after taxes and in today’s dollars


Objective 3: To increase total retirement contributions by at least 3% each year, starting at $80,000 in 2013, increasing to $144,500 by 2033

Objective 4: To contribute a 529 plan a minimum of $600 per month starting June 2018 and increase monthly contributions by 3% annually. To be invested in total stock market. Will reassess upon possible early retirement.
And:

Asset Allocation:
Begin with overall 70% stock + 30% bond. Assets should be diversified across major asset classes including domestic equity, international equity (30% of equities), and total bond index fund. Plan is to “glide path” into a more conservative asset allocation of approximately (age – 5) percent in bonds as time progresses. As planned early retirement becomes a real possibility, begin transitioning some money (~10 percent) into cash and cash equivalents.
Following this, we are currently 30% in bonds, but in 2020 when I turn 40, my IPS says I should move to 35%.

This is a long winded way to ask if this seems too conservative. I was torn between basing my AA on age or on my "desired" retirement age, meaning that when I'm 50, should I have the same conservative AA that a retiree at 65 would have?

I'm considering changing it to maybe age - 10 in bonds rather than age - 5, and change every 5 years. That means I'd stay at 30% bonds for another 5 years, then go to 35% at 45 years old, and be at 40% bonds at 50 years old when we'd be seriously thinking about retiring soon.

What are your thoughts?

GmanJeff
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Re: Asset Allocation - retirement date versus age?

Post by GmanJeff » Mon Oct 07, 2019 9:51 am

What caused you to set your asset allocation originally? What has changed to cause a change in your thinking?

If your income seems fairly secure, you may indeed be too conservative if you anticipate a conventional retirement horizon with no major unplanned expenses on the way.

An exercise like this might help: https://personal.vanguard.com/us/FundsInvQuestionnaire

bloom2708
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Re: Asset Allocation - retirement date versus age?

Post by bloom2708 » Mon Oct 07, 2019 10:00 am

Saving a big amount trumps your asset allocation. You are doing great on that front. I think you can meet your goals with Age - 5 in bonds.

Age - 5 is on the conservative side, but well within reason. If you wanted to adjust to Age - 10 for this next period, I think that is also well within reason.

I'd probably just stay the course as there is a lot of negative information out there. If you get off by 5%, then move back to your 65-35 or 70-30 allocation.
"People want confirmation, not advice" Unknown | "We are here to provoke thoughtfulness, not agree with you" Unknown | Four words. Whole food, plant based. Bing it.

KlangFool
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Re: Asset Allocation - retirement date versus age?

Post by KlangFool » Mon Oct 07, 2019 10:02 am

OP,

AA allocation based on retirement date and age is both wrong. The correct answer is AA should be based on the portfolio size.

It is easy to prove this.

A) If we hit a bad bear market, both date and age will be off.

B) If you have a windfall of 1 million, your AA needs to be adjusted immediately.

KlangFool
Last edited by KlangFool on Mon Oct 07, 2019 10:09 am, edited 1 time in total.

Topic Author
BuckyBadger
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Re: Asset Allocation - retirement date versus age?

Post by BuckyBadger » Mon Oct 07, 2019 10:04 am

GmanJeff wrote:
Mon Oct 07, 2019 9:51 am
What caused you to set your asset allocation originally? What has changed to cause a change in your thinking?

If your income seems fairly secure, you may indeed be too conservative if you anticipate a conventional retirement horizon with no major unplanned expenses on the way.

An exercise like this might help: https://personal.vanguard.com/us/FundsInvQuestionnaire
I didn't think too much about it at the beginning. In 2013 I was new to the very concept of an ISP so I took someone's rule of thumb (age-5 in bonds) and just went with it. The only think that has caused a change is that I've thought about it when I modified to add 529 information to my ISP and now that I've gotten used to my comfort level with (granted, smallish and temporary as of yet) the ups and downs of the market it just seems too conservative.

It's not based on any particular expectation I have of the market to do one thing or another. I don't even know what happens in the market until someone posts something dramatic on this board. I am *very* good at ignoring market news!

Topic Author
BuckyBadger
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Re: Asset Allocation - retirement date versus age?

Post by BuckyBadger » Mon Oct 07, 2019 10:07 am

bloom2708 wrote:
Mon Oct 07, 2019 10:00 am
Saving a big amount trumps your asset allocation. You are doing great on that front. I think you can meet your goals with Age - 5 in bonds.

Age - 5 is on the conservative side, but well within reason. If you wanted to adjust to Age - 10 for this next period, I think that is also well within reason.

I'd probably just stay the course as there is a lot of negative information out there. If you get off by 5%, then move back to your 65-35 or 70-30 allocation.
Thanks! I agree that anywhere around there is going to b pretty okay. It's not like either number is too far from the median. Maybe I could do Age - 7.5 in bonds, but I do like round numbers!! :wink:

It's good to hear confirmation that I'm not too far out of whack no matter what I do.

Topic Author
BuckyBadger
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Re: Asset Allocation - retirement date versus age?

Post by BuckyBadger » Mon Oct 07, 2019 10:09 am

KlangFool wrote:
Mon Oct 07, 2019 10:02 am
OP,

AA allocation based on retirement date and age is both wrong. The correct answer is AA should be based on the portfolio size.

It is easy to prove this.

A) If we hit a bad bear market, both date and age will be off.

B) If you have a windfall of 1 million, your AA needs to be adjusted immediately.

KlangFool
While I agree with B, I'm not sure I quite understand A? Are you suggesting that if we hit a bear market everyone should change their asset allocations? How is that not just a straight-up reaction to the market? I don't plan on changing my asset allocation every time the market soars or dives...

KlangFool
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Re: Asset Allocation - retirement date versus age?

Post by KlangFool » Mon Oct 07, 2019 10:19 am

BuckyBadger wrote:
Mon Oct 07, 2019 10:09 am
KlangFool wrote:
Mon Oct 07, 2019 10:02 am
OP,

AA allocation based on retirement date and age is both wrong. The correct answer is AA should be based on the portfolio size.

It is easy to prove this.

A) If we hit a bad bear market, both date and age will be off.

B) If you have a windfall of 1 million, your AA needs to be adjusted immediately.

KlangFool
While I agree with B, I'm not sure I quite understand A? Are you suggesting that if we hit a bear market everyone should change their asset allocations? How is that not just a straight-up reaction to the market? I don't plan on changing my asset allocation every time the market soars or dives...
BuckyBadger,

The age-based AA assumes a return rate of X%. If we have a market that stays flat or negative for years, that assumption would be wrong. Then, the portfolio will not grow as much. In that case, you do not have to adjust your AA as frequently.

For example, if your portfolio does not grow for the next 5 years, there is no reason to adjust your AA. There are years when the return rate is negative and it wipes out your annual contribution and more.

This is not market timing.

KlangFool

GmanJeff
Posts: 512
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Re: Asset Allocation - retirement date versus age?

Post by GmanJeff » Mon Oct 07, 2019 10:29 am

BuckyBadger wrote:
Mon Oct 07, 2019 10:04 am
GmanJeff wrote:
Mon Oct 07, 2019 9:51 am
What caused you to set your asset allocation originally? What has changed to cause a change in your thinking?

If your income seems fairly secure, you may indeed be too conservative if you anticipate a conventional retirement horizon with no major unplanned expenses on the way.

An exercise like this might help: https://personal.vanguard.com/us/FundsInvQuestionnaire
I didn't think too much about it at the beginning. In 2013 I was new to the very concept of an ISP so I took someone's rule of thumb (age-5 in bonds) and just went with it. The only think that has caused a change is that I've thought about it when I modified to add 529 information to my ISP and now that I've gotten used to my comfort level with (granted, smallish and temporary as of yet) the ups and downs of the market it just seems too conservative.

It's not based on any particular expectation I have of the market to do one thing or another. I don't even know what happens in the market until someone posts something dramatic on this board. I am *very* good at ignoring market news!
Well, this is an example of the potential pitfalls of taking generalized rules of thumb and other general guidance which are not necessarily related to your individual, personal circumstances.

It might be helpful to consider your time horizon, reliability of future income, anticipated expenses in retirement, amounts you expect to add annually to your investments, tax implications, your risk tolerance, and other considerations in getting a general sense of an appropriate asset allocation. The specific investments you choose will play into that as well - relative proportions of domestic versus international, equity (large-cap, small-cap, mid-cap, value, growth), debt (short, intermediate, long duration) and so on. Each type of investment carries its own volatility and prospects for the medium and longer terms. Self-directed investors often just "buy the market", which simplifies asset selection greatly, but which also ensures you will do neither materially better nor worse than the market as a whole. Others, including robo advisors, hybrid robos like Vanguard's PAS, and individual advisors, attempt to use econometric forecasting to develop a more refined allocation, which may or may not produce superior returns after expenses with lower (or higher) volatility.

Topic Author
BuckyBadger
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Re: Asset Allocation - retirement date versus age?

Post by BuckyBadger » Mon Oct 07, 2019 10:40 am

GmanJeff wrote:
Mon Oct 07, 2019 10:29 am
BuckyBadger wrote:
Mon Oct 07, 2019 10:04 am
GmanJeff wrote:
Mon Oct 07, 2019 9:51 am
What caused you to set your asset allocation originally? What has changed to cause a change in your thinking?

If your income seems fairly secure, you may indeed be too conservative if you anticipate a conventional retirement horizon with no major unplanned expenses on the way.

An exercise like this might help: https://personal.vanguard.com/us/FundsInvQuestionnaire
I didn't think too much about it at the beginning. In 2013 I was new to the very concept of an ISP so I took someone's rule of thumb (age-5 in bonds) and just went with it. The only think that has caused a change is that I've thought about it when I modified to add 529 information to my ISP and now that I've gotten used to my comfort level with (granted, smallish and temporary as of yet) the ups and downs of the market it just seems too conservative.

It's not based on any particular expectation I have of the market to do one thing or another. I don't even know what happens in the market until someone posts something dramatic on this board. I am *very* good at ignoring market news!
Well, this is an example of the potential pitfalls of taking generalized rules of thumb and other general guidance which are not necessarily related to your individual, personal circumstances.

It might be helpful to consider your time horizon, reliability of future income, anticipated expenses in retirement, amounts you expect to add annually to your investments, tax implications, your risk tolerance, and other considerations in getting a general sense of an appropriate asset allocation. The specific investments you choose will play into that as well - relative proportions of domestic versus international, equity (large-cap, small-cap, mid-cap, value, growth), debt (short, intermediate, long duration) and so on. Each type of investment carries its own volatility and prospects for the medium and longer terms. Self-directed investors often just "buy the market", which simplifies asset selection greatly, but which also ensures you will do neither materially better nor worse than the market as a whole. Others attempt to use econometric forecasting to develop a more refined allocation, which may or may not produce superior returns with lower (or higher) volatility.
I see what you're saying, but making the requirements to "enter" Boglehead nation too high will scare people off. It might have scared me off in 2013. I don't think it's a bad idea for someone (like me) to take a middle of the road rule of thumb (like age-5 in bonds) and get started. If you told me in 2013 that I had to figure all that other stuff out before I could set up an asset allocation and glide path and start investing who knows what I wold have done. I think it would scare a lot of people off. I don't think starting out with age-5 or age-10 is a bad thing to start with. That and what I guessed my risk tolerance and time horizon to be are all people like I was have to start with.

And as a true lazy portfolio investor I have no desire to use any sort of "economic forecasting" to do anything. I want to buy the market and take what the market, on average, will give me.

I think that placing so many barriers to entry will discourage people from the Boglehead investment strategy and make them feel like it's all too complicated and they should go pay someone to do it for them. Good rules of thumb are a much better idea than that.
Last edited by BuckyBadger on Mon Oct 07, 2019 2:13 pm, edited 1 time in total.

KlangFool
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Re: Asset Allocation - retirement date versus age?

Post by KlangFool » Mon Oct 07, 2019 10:48 am

OP,

The reality is this. The rule of thumb works okay and quite well in the early accumulation part. It does not work as well as the compounding/exponential growth takes off as you get closer to retirement/targeted portfolio size and your portfolio grows bigger. As a result, the AA adjustment can be infrequent in an early age but needs to be frequent in the latter part. A fixed age-based adjustment does not take this into account.

My plan is/was

1) AA of 70/30 until portfolio size of 1 million.

B) Move AA from 70/30 to 60/40 from 1 million to 1.5 million

KlangFool

retired@50
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Re: Asset Allocation - retirement date versus age?

Post by retired@50 » Mon Oct 07, 2019 10:51 am

Bucky,
As an early retiree wannabe, I suspect you should think about what you want your portfolio to look like before you give your two weeks notice at work. For now, you may want to use some Excel spreadsheet projections, or something along those lines, to imagine how much money you'll have in 12 to 15 years assuming a variety of growth rates and/or savings rates. As an early retiree you'll want to be certain you can be comfortable on a withdrawal rate under 4% since you may be retired for 40 years, perhaps more. Of course, all of this is guesswork and nobody knows the future, but that never seems to prevent us from trying to take a swag at how things will look years from now. Best of luck and nice work on the savings rate! I never earned as much as you, but I did have an extraordinary savings rate, which is what did the trick for me.

Admiral
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Re: Asset Allocation - retirement date versus age?

Post by Admiral » Mon Oct 07, 2019 10:57 am

You have $1.22m. You are in the top 5% of earners. You're saving nearly 6 figures per year. You're barely 40. At 50 you could easily have $3m.

Your AA is mostly irrelevant (or at least irrelevant if it's 5% one way or the other). In general I think anyone over 40 should have at least 20% in bonds. In your case, you are wealthy, and are saving so much you will be fine.

GmanJeff
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Re: Asset Allocation - retirement date versus age?

Post by GmanJeff » Mon Oct 07, 2019 3:04 pm

BuckyBadger wrote:
Mon Oct 07, 2019 10:40 am

I see what you're saying, but making the requirements to "enter" Boglehead nation too high will scare people off. It might have scared me off in 2013. I don't think it's a bad idea for someone (like me) to take a middle of the road rule of thumb (like age-5 in bonds) and get started. If you told me in 2013 that I had to figure all that other stuff out before I could set up an asset allocation and glide path and start investing who knows what I wold have done. I think it would scare a lot of people off. I don't think starting out with age-5 or age-10 is a bad thing to start with. That and what I guessed my risk tolerance and time horizon to be are all people like I was have to start with.

And as a true lazy portfolio investor I have no desire to use any sort of "economic forecasting" to do anything. I want to buy the market and take what the market, on average, will give me.

I think that placing so many barriers to entry will discourage people from the Boglehead investment strategy and make them feel like it's all too complicated and they should go pay someone to do it for them. Good rules of thumb are a much better idea than that.
Even if you want to buy the market, you have to decide what that means. Global, U.S.-only, developed or emerging markets? Extremely simplistic guidelines are of little help in making such decisions.

You certainly can use a general guideline without regard to whether or not it's really suitable for your circumstances, but you also might have found you'd have obtained better results all along by in fact paying for advice from the outset. It's not necessarily the case that those who are unable or unwilling to devise and maintain their own well-informed AA are necessarily better off by not using paid advice - paid advice does not have to be anathema unless the costs exceed the value of what you get. In some cases the costs of advice fail to result in superior performance relative to self-management, but in other situations it very likely does result in better outcomes, particularly when the cost of the advice is low (i.e, robos or PAS) and the investment vehicles chosen have very low expenses (e.g., Vanguard index funds). More expensive advice and more expensive investments obviously have to perform proportionally better to justify their cost.

Topic Author
BuckyBadger
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Re: Asset Allocation - retirement date versus age?

Post by BuckyBadger » Mon Oct 07, 2019 3:12 pm

GmanJeff wrote:
Mon Oct 07, 2019 3:04 pm
BuckyBadger wrote:
Mon Oct 07, 2019 10:40 am

I see what you're saying, but making the requirements to "enter" Boglehead nation too high will scare people off. It might have scared me off in 2013. I don't think it's a bad idea for someone (like me) to take a middle of the road rule of thumb (like age-5 in bonds) and get started. If you told me in 2013 that I had to figure all that other stuff out before I could set up an asset allocation and glide path and start investing who knows what I wold have done. I think it would scare a lot of people off. I don't think starting out with age-5 or age-10 is a bad thing to start with. That and what I guessed my risk tolerance and time horizon to be are all people like I was have to start with.

And as a true lazy portfolio investor I have no desire to use any sort of "economic forecasting" to do anything. I want to buy the market and take what the market, on average, will give me.

I think that placing so many barriers to entry will discourage people from the Boglehead investment strategy and make them feel like it's all too complicated and they should go pay someone to do it for them. Good rules of thumb are a much better idea than that.
Even if you want to buy the market, you have to decide what that means. Global, U.S.-only, developed or emerging markets? Extremely simplistic guidelines are of little help in making such decisions.

You certainly can use a general guideline without regard to whether or not it's really suitable for your circumstances, but you also might have found you'd have obtained better results all along by in fact paying for advice from the outset. It's not necessarily the case that those who are unable or unwilling to devise and maintain their own well-informed AA are necessarily better off by not using paid advice - paid advice does not have to be anathema unless the costs exceed the value of what you get. In some cases the costs of advice fail to result in superior performance relative to self-management, but in other situations it very likely does result in better outcomes.
I'm afraid I disagree with you. I think going with two "simplistic" rules will get you close enough. Certainly closer than getting expensive advice tailored to your advisers pocketbook rather than yours.

There are few people who couldn't be serviced with a lazy 3-fund portfolio and age-5or10 in bonds. Those outliers can be addressed separately.

Buy it all - Total US stock, Total international Stock, Total US bonds. Keep ER low and don't listen to the noise. In this case, extremely simplistic guidelines may very well be the best kinds.

I'm not claiming that I know more than other people - just saying that I think your advice in this thread is flawed.

GmanJeff
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Re: Asset Allocation - retirement date versus age?

Post by GmanJeff » Mon Oct 07, 2019 3:28 pm

BuckyBadger wrote:
Mon Oct 07, 2019 3:12 pm

I'm afraid I disagree with you. I think going with two "simplistic" rules will get you close enough. Certainly closer than getting expensive advice tailored to your advisers pocketbook rather than yours.

There are few people who couldn't be serviced with a lazy 3-fund portfolio and age-5or10 in bonds. Those outliers can be addressed separately.

Buy it all - Total US stock, Total international Stock, Total US bonds. Keep ER low and don't listen to the noise. In this case, extremely simplistic guidelines may very well be the best kinds.

I'm not claiming that I know more than other people - just saying that I think your advice in this thread is flawed.
Advice is cheap if it provides better returns and lower volatility than unadvised investing. It's a simple as that. Since you believe you obtained better returns going it alone than you would had if you received advice from the outset through a robo, PAS, or alternative, your approach is working for you.
Last edited by GmanJeff on Mon Oct 07, 2019 3:47 pm, edited 2 times in total.

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vineviz
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Re: Asset Allocation - retirement date versus age?

Post by vineviz » Mon Oct 07, 2019 3:43 pm

BuckyBadger wrote:
Mon Oct 07, 2019 3:12 pm
GmanJeff wrote:
Mon Oct 07, 2019 3:04 pm
BuckyBadger wrote:
Mon Oct 07, 2019 10:40 am

I see what you're saying, but making the requirements to "enter" Boglehead nation too high will scare people off. It might have scared me off in 2013. I don't think it's a bad idea for someone (like me) to take a middle of the road rule of thumb (like age-5 in bonds) and get started. If you told me in 2013 that I had to figure all that other stuff out before I could set up an asset allocation and glide path and start investing who knows what I wold have done. I think it would scare a lot of people off. I don't think starting out with age-5 or age-10 is a bad thing to start with. That and what I guessed my risk tolerance and time horizon to be are all people like I was have to start with.

And as a true lazy portfolio investor I have no desire to use any sort of "economic forecasting" to do anything. I want to buy the market and take what the market, on average, will give me.

I think that placing so many barriers to entry will discourage people from the Boglehead investment strategy and make them feel like it's all too complicated and they should go pay someone to do it for them. Good rules of thumb are a much better idea than that.
Even if you want to buy the market, you have to decide what that means. Global, U.S.-only, developed or emerging markets? Extremely simplistic guidelines are of little help in making such decisions.

You certainly can use a general guideline without regard to whether or not it's really suitable for your circumstances, but you also might have found you'd have obtained better results all along by in fact paying for advice from the outset. It's not necessarily the case that those who are unable or unwilling to devise and maintain their own well-informed AA are necessarily better off by not using paid advice - paid advice does not have to be anathema unless the costs exceed the value of what you get. In some cases the costs of advice fail to result in superior performance relative to self-management, but in other situations it very likely does result in better outcomes.
I'm afraid I disagree with you. I think going with two "simplistic" rules will get you close enough. Certainly closer than getting expensive advice tailored to your advisers pocketbook rather than yours.

There are few people who couldn't be serviced with a lazy 3-fund portfolio and age-5or10 in bonds. Those outliers can be addressed separately.

Buy it all - Total US stock, Total international Stock, Total US bonds. Keep ER low and don't listen to the noise. In this case, extremely simplistic guidelines may very well be the best kinds.

I'm not claiming that I know more than other people - just saying that I think your advice in this thread is flawed.
Simple rules of thumb are great if they have a basis in some deeper context.

The problem is that “age in bonds” is ludicrously off-the-mark for most investors. “Recklessly conservative” is the term.

“Age minus 30” would be far closer, but it’s still kind of a goofy way to approach allocation.

The relevant concept really is your human capital (the present value of expected future savings). Yours is higher than average (because your income and saving rate are above average) but it is depleting at a faster rate (because you intend to retire early).

I’d have to run numbers to do anything other than guess, but my bet is that you should be 90% or 100% in stocks up until 10 years before retirement with a rapid glide to 60/40 or similar by retirement.
"Far more money has been lost by investors preparing for corrections than has been lost in corrections themselves." ~~ Peter Lynch

KlangFool
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Re: Asset Allocation - retirement date versus age?

Post by KlangFool » Mon Oct 07, 2019 3:46 pm

vineviz wrote:
Mon Oct 07, 2019 3:43 pm
BuckyBadger wrote:
Mon Oct 07, 2019 3:12 pm
GmanJeff wrote:
Mon Oct 07, 2019 3:04 pm
BuckyBadger wrote:
Mon Oct 07, 2019 10:40 am

I see what you're saying, but making the requirements to "enter" Boglehead nation too high will scare people off. It might have scared me off in 2013. I don't think it's a bad idea for someone (like me) to take a middle of the road rule of thumb (like age-5 in bonds) and get started. If you told me in 2013 that I had to figure all that other stuff out before I could set up an asset allocation and glide path and start investing who knows what I wold have done. I think it would scare a lot of people off. I don't think starting out with age-5 or age-10 is a bad thing to start with. That and what I guessed my risk tolerance and time horizon to be are all people like I was have to start with.

And as a true lazy portfolio investor I have no desire to use any sort of "economic forecasting" to do anything. I want to buy the market and take what the market, on average, will give me.

I think that placing so many barriers to entry will discourage people from the Boglehead investment strategy and make them feel like it's all too complicated and they should go pay someone to do it for them. Good rules of thumb are a much better idea than that.
Even if you want to buy the market, you have to decide what that means. Global, U.S.-only, developed or emerging markets? Extremely simplistic guidelines are of little help in making such decisions.

You certainly can use a general guideline without regard to whether or not it's really suitable for your circumstances, but you also might have found you'd have obtained better results all along by in fact paying for advice from the outset. It's not necessarily the case that those who are unable or unwilling to devise and maintain their own well-informed AA are necessarily better off by not using paid advice - paid advice does not have to be anathema unless the costs exceed the value of what you get. In some cases the costs of advice fail to result in superior performance relative to self-management, but in other situations it very likely does result in better outcomes.
I'm afraid I disagree with you. I think going with two "simplistic" rules will get you close enough. Certainly closer than getting expensive advice tailored to your advisers pocketbook rather than yours.

There are few people who couldn't be serviced with a lazy 3-fund portfolio and age-5or10 in bonds. Those outliers can be addressed separately.

Buy it all - Total US stock, Total international Stock, Total US bonds. Keep ER low and don't listen to the noise. In this case, extremely simplistic guidelines may very well be the best kinds.

I'm not claiming that I know more than other people - just saying that I think your advice in this thread is flawed.
Simple rules of thumb are great if they have a basis in some deeper context.

The problem is that “age in bonds” is ludicrously off-the-mark for most investors. “Recklessly conservative” is the term.

“Age minus 30” would be far closer, but it’s still kind of a goofy way to approach allocation.

The relevant concept really is your human capital (the present value of expected future savings). Yours is higher than average (because your income and saving rate are above average) but it is depleting at a faster rate (because you intend to retire early).

I’d have to run numbers to do anything other than guess, but my bet is that you should be 90% or 100% in stocks up until 10 years before retirement with a rapid glide to 60/40 or similar by retirement.
vineviz,

<<Our numbers: 39F/40M,1YO baby.>>

<<Objective 1: To retire between the ages of 52 and 55>>

OP is planning to retire in 13 to 16 years.

KlangFool

gr7070
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Joined: Fri Oct 28, 2011 10:39 am

Re: Asset Allocation - retirement date versus age?

Post by gr7070 » Mon Oct 07, 2019 4:14 pm

BuckyBadger wrote:
Mon Oct 07, 2019 3:12 pm
I think going with two "simplistic" rules will get you close enough. Certainly closer than getting expensive advice tailored to your advisers pocketbook rather than yours.

There are few people who couldn't be serviced with a lazy 3-fund portfolio and age-5or10 in bonds. Those outliers can be addressed separately.
Completely agree. As great as this forum is and as well-meaning as its members are Bogleheads don't always do a great job with perspective and divorcing themselves and their situation and bias from the needs of the person seeking advice.

E.g. I've read Bogleheads talking about the need for liquidity and concern for being laid off to an OP with *four* *years* of emergency fund! Four years. Bogleheads are great, but sometimes a little dose of reality is needed.

The majority of people won't touch their own finances! They sure won't with a ton of extra complexity, work, and other impediments added.

I tell countless of folks to just pick their "Target Dated Retirement Fund" with zero consideration to *anything* else; it's fees, other options, it's AA and glide, etc. I'm quite certain the extreme majority of typical investor would benefit greatly from doing just that and nothing else.

That advice can change depending upon the person asking and what they're asking and their ability and desire to learn.

Topic Author
BuckyBadger
Posts: 1014
Joined: Tue Nov 01, 2011 11:28 am

Re: Asset Allocation - retirement date versus age?

Post by BuckyBadger » Mon Oct 07, 2019 10:27 pm

gr7070 wrote:
Mon Oct 07, 2019 4:14 pm
BuckyBadger wrote:
Mon Oct 07, 2019 3:12 pm
I think going with two "simplistic" rules will get you close enough. Certainly closer than getting expensive advice tailored to your advisers pocketbook rather than yours.

There are few people who couldn't be serviced with a lazy 3-fund portfolio and age-5or10 in bonds. Those outliers can be addressed separately.
Completely agree. As great as this forum is and as well-meaning as its members are Bogleheads don't always do a great job with perspective and divorcing themselves and their situation and bias from the needs of the person seeking advice.

E.g. I've read Bogleheads talking about the need for liquidity and concern for being laid off to an OP with *four* *years* of emergency fund! Four years. Bogleheads are great, but sometimes a little dose of reality is needed.

The majority of people won't touch their own finances! They sure won't with a ton of extra complexity, work, and other impediments added.

I tell countless of folks to just pick their "Target Dated Retirement Fund" with zero consideration to *anything* else; it's fees, other options, it's AA and glide, etc. I'm quite certain the extreme majority of typical investor would benefit greatly from doing just that and nothing else.

That advice can change depending upon the person asking and what they're asking and their ability and desire to learn.
We were in Target date funds until 2013 when we were finally able to start a taxable account, and i didn't want bonds in taxable so it seemed a good time to reorganize everything across all our accounts. As both of us are PhDs, we were in school for a long time and then had a very fast ramp up of retirement savings, so Target date funds worked very well for us for a long time.

Prettyfrtnt
Posts: 136
Joined: Fri Aug 23, 2019 6:28 pm

Re: Asset Allocation - retirement date versus age?

Post by Prettyfrtnt » Mon Oct 07, 2019 11:37 pm

BuckyBadger wrote:
Mon Oct 07, 2019 9:44 am
I was reviewing my IPS and I'm trying to determine if I should change my AA glide path.

Our numbers: 39F/40M,1YO baby.

Current gross approx $360k per year. Probably no huge raises: expect 2.5% - 3% inflation adjusted raises in the future.

Saving $96k this year in tax advantaged and taxable accounts earmarked for retirement (includes company matches). Will increase this by 3% every year. Currently have $1.22M in these accounts.

Owe approx $270k on a house worth $490k.

No debt except $20k car loan (just bought new 3 row SUV) and will add another $30k car loan toward the end of this year (planning on buying another new car for my commute). First time we've bought new cars and we plan on keeping for a long long time.

Have about $50k in various checking accounts for monthly spending, upcoming expenses, vacations etc, and EF.

529 contributions on track, with assumed 3% annual growth, to have about $250k by baby's 18th birthday.

Expect eventual inheritance in the $1M range in maybe 25 years. Obviously not planning on that, but just putting it here for full disclosure if anyone thinks it's relevant.


My current IPS (started in 2013, added to upon birth of child) says:

Investment Objectives:
These are the main objectives for our investment program. I have developed them after a review of our financial resources, financial goals, asset allocation, risk tolerance and time horizon.


Objective 1: To retire between the ages of 52 and 55


Objective 2: To have an annual income from our investments of $100,000 to $120,000 after taxes and in today’s dollars


Objective 3: To increase total retirement contributions by at least 3% each year, starting at $80,000 in 2013, increasing to $144,500 by 2033

Objective 4: To contribute a 529 plan a minimum of $600 per month starting June 2018 and increase monthly contributions by 3% annually. To be invested in total stock market. Will reassess upon possible early retirement.
And:

Asset Allocation:
Begin with overall 70% stock + 30% bond. Assets should be diversified across major asset classes including domestic equity, international equity (30% of equities), and total bond index fund. Plan is to “glide path” into a more conservative asset allocation of approximately (age – 5) percent in bonds as time progresses. As planned early retirement becomes a real possibility, begin transitioning some money (~10 percent) into cash and cash equivalents.
Following this, we are currently 30% in bonds, but in 2020 when I turn 40, my IPS says I should move to 35%.

This is a long winded way to ask if this seems too conservative. I was torn between basing my AA on age or on my "desired" retirement age, meaning that when I'm 50, should I have the same conservative AA that a retiree at 65 would have?

I'm considering changing it to maybe age - 10 in bonds rather than age - 5, and change every 5 years. That means I'd stay at 30% bonds for another 5 years, then go to 35% at 45 years old, and be at 40% bonds at 50 years old when we'd be seriously thinking about retiring soon.

What are your thoughts?
Car loans are a mistake....

Otherwise congrats you’re very smart and you are winning the game.

You’re sweating the details. You have the right approach and intellect to win.

Debating bond percentages by age is pointless. Do what you think is right. Save a bunch as you are in tax efficient low cost funds and gloat here in 10 years. You deserve to.

bltn
Posts: 562
Joined: Mon Feb 20, 2017 9:32 pm

Re: Asset Allocation - retirement date versus age?

Post by bltn » Tue Oct 08, 2019 2:38 pm

I agree that car loans are a mistake. Put a certain amount away each month into a fund that will be used with your proceeds from your car sale, and perhaps a bit of savings, to buy your new cars with cash. By making car payments to yourself, you are gaining the difference between the interest rate you pay on the loan and the after tax interest your make on your car savings for additional money toward your car.
One additional consideration. 4% of 3.5 million dollars is 140,000 dollars of annual income before taxes. That might be hard to accomplish with a 12-15 year time span with your savings rate. You might have to save a bit more or work a bit longer.
Your idea of taking market returns with low cost indexes is something I first realized when I was your age with less accumulated funds. It has worked well for me but I ved worked 10 more years than your planned retirement age and my margins are a little more comfortable. Early retirement was not one of my objectives. It is a trade off. Early retirement , less money, later retirement , more money. I was usually about 80-85% invested in the stock market. Now I m down to 55% in stocks.
Best of luck.

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