Asset allocation for 50 year retirement?

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JacobTeach
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Asset allocation for 50 year retirement?

Post by JacobTeach » Thu Nov 14, 2019 9:18 pm

Estimated non-tax expenses per year: $40k; this is roughly expected to increase with inflation and health insurance is the biggest variable.

Current asset allocation:
$1.25M in equity index funds (70/30 domestic/international splits)
$1.25M in real estate generating $84k in rent annually, net income would be $40k (which I think is very conservative)

No liabilities (except taxes already factored in to the net income from property)

——————

1) For a 50 year retirement, is this asset allocation too risky? I know many of you don’t like real estate, but please assume being a landlord is not an issue. It’s currently generating ~3.2% per year and covers the annual expenses, but of course rent is not guaranteed.

2) Is selling the real estate and investing it into a more boglehead-friendly portfolio better? Why or why not? Sale of real estate would incur taxes on $0.3M of appreciation.

3) Any other asset allocation suggestions/considerations for a 50 year retirement?

mhalley
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Re: Asset allocation for 50 year retirement?

Post by mhalley » Thu Nov 14, 2019 9:24 pm

I don’t think it’s that bogleheads don’t like real estate, it’s that most don’t want a second job. If you like being a landlord and have Good income from it, great. With that much passive income, I imagine any portfolio over 30% stocks should be fine.

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calmaniac
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Re: Asset allocation for 50 year retirement?

Post by calmaniac » Thu Nov 14, 2019 9:51 pm

Generally looks OK to me. Many more questions. What are your expenses? Can't figure your portfolio without that. Retirement is ultimately an equation balancing income & expenses. Also, how are you going to handle health insurance?

Assuming 50 year duration of retirement:

1. Real estate is a great idea for income. I have a U.S. Gov't pension as a source of retirement income, no desire to be bothered with real estate at this point. But I can see how it could be of value for the right person.

2. I would not necessarily sell your real estate and switch to stocks. Having a steady stream of income is not as easy to generate in equities. You are generating about 0.5% of the cost of the real estate per month. Not quite up to the "1% rule", but not bad.

3. I would consider fixed income in your asset allocation. You are essentially 100% equities.

BTW, how old are you? 50 years is an eternity. There is a good chance you will have a different life perspective 20-30 years from now. Make your current decisions with that in mind and when thinking about current financial decisions, maintaining flexibility in the years ahead is important. Having financial independence gives you choices in your life.

MarkVH0518
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Re: Asset allocation for 50 year retirement?

Post by MarkVH0518 » Thu Nov 14, 2019 9:52 pm

My thoughts are:
1) As long as your expense estimate is even modestly close and you aren't gambling on the side, it's probably hard for you the screw this up.
2) Nevertheless, you might want to consider 20% (i.e. $250K) bonds, as a kind of emergency fund.
If, after 5 years experience, you don't need the bonds, then switch to all equity.
3) Perhaps more in line with your preferences, keep 2 years expenses - including taxes, in a short bond fund.
Assuming 20% average tax rate, that would mean 40K * 1.2 * 2 years = $96K in short bonds.

Congratulations,
Mark

venkman
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Re: Asset allocation for 50 year retirement?

Post by venkman » Thu Nov 14, 2019 10:28 pm

If your expenses are only $40k, that's 1.6% of a $2.5M portfolio. You could easily live off the dividends from a balanced portfolio without ever needing to sell anything.

If you like being a landlord, I don't think there's anything wrong with what you're doing now. But from a BH perspective, I'd say that concentrating half your wealth into one economic sector (and, I'm assuming, one localized area) is exposing yourself to added risk that you don't need to take.

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9-5 Suited
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Re: Asset allocation for 50 year retirement?

Post by 9-5 Suited » Thu Nov 14, 2019 10:52 pm

I mean the math is what it is. You’ve accomplished the mission if your assumptions on expenses hold true. Any reasonable investment strategy would work.

I’m a lazy investor, so if I wanted to go heavy on real estate (which I don’t) I’d go with VNQ (REIT ETF) which funny enough is yielding 3.1% though that is pre-tax if you don’t have space in retirement accounts. Residential real estate not only has the hassle factor which you aren’t bothered by but also idiosyncratic risk due to geography.

Topic Author
JacobTeach
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Re: Asset allocation for 50 year retirement?

Post by JacobTeach » Fri Nov 15, 2019 2:30 am

For those recommending bonds, is it wrong of me to view the real estate as somewhere between bonds/stocks?

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JacobTeach
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Re: Asset allocation for 50 year retirement?

Post by JacobTeach » Fri Nov 15, 2019 2:32 am

MarkVH0518 wrote:
Thu Nov 14, 2019 9:52 pm
My thoughts are:
1) As long as your expense estimate is even modestly close and you aren't gambling on the side, it's probably hard for you the screw this up.
2) Nevertheless, you might want to consider 20% (i.e. $250K) bonds, as a kind of emergency fund.
If, after 5 years experience, you don't need the bonds, then switch to all equity.
3) Perhaps more in line with your preferences, keep 2 years expenses - including taxes, in a short bond fund.
Assuming 20% average tax rate, that would mean 40K * 1.2 * 2 years = $96K in short bonds.

Congratulations,
Mark
Maybe do it backwards? If after 5 years I think I need bonds I can get some?

Why 2Y emergency fund? Given the rental income, perhaps only 6 months is enough?

Topic Author
JacobTeach
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Re: Asset allocation for 50 year retirement?

Post by JacobTeach » Fri Nov 15, 2019 2:34 am

calmaniac wrote:
Thu Nov 14, 2019 9:51 pm
Generally looks OK to me. Many more questions. What are your expenses? Can't figure your portfolio without that. Retirement is ultimately an equation balancing income & expenses. Also, how are you going to handle health insurance?

Assuming 50 year duration of retirement:

1. Real estate is a great idea for income. I have a U.S. Gov't pension as a source of retirement income, no desire to be bothered with real estate at this point. But I can see how it could be of value for the right person.

2. I would not necessarily sell your real estate and switch to stocks. Having a steady stream of income is not as easy to generate in equities. You are generating about 0.5% of the cost of the real estate per month. Not quite up to the "1% rule", but not bad.

3. I would consider fixed income in your asset allocation. You are essentially 100% equities.

BTW, how old are you? 50 years is an eternity. There is a good chance you will have a different life perspective 20-30 years from now. Make your current decisions with that in mind and when thinking about current financial decisions, maintaining flexibility in the years ahead is important. Having financial independence gives you choices in your life.
50 years is indeed long and probably the biggest “risk” here. If after 20-30 years of “retirement” there’s a desire/necessity to work again, I’m not sure how possible that’ll be.

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augryphon
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Re: Asset allocation for 50 year retirement?

Post by augryphon » Fri Nov 15, 2019 9:20 am

JacobTeach wrote:
Fri Nov 15, 2019 2:30 am
For those recommending bonds, is it wrong of me to view the real estate as somewhere between bonds/stocks?
It is wrong. Although it throws off income, real estate should be viewed as an equity investment. If the world goes to heck, like 2007, your real estate will drop 25% and won’t be liquid.

MarkVH0518
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Re: Asset allocation for 50 year retirement?

Post by MarkVH0518 » Fri Nov 15, 2019 6:02 pm

I suggest you study 'Sequence of Returns Risk'. The premise is that the riskiest period of retirement is the first 5 years.
If disaster doesn't hit in the first 5 years (of course, it usually doesn't) then your portfolio will grow further (and you have 5 fewer years to live)
so you are especially blessed.
If, on the other hand, disaster does hit, the bonds are insurance for living expenses while your equity (and real estate) begin to recover.

My suggestion to hold bonds for 5 years is the 'bond tent' investment strategy - another strategy you might want to understand.

To repeat my earlier post, it's going to be hard for you to screw this up.
But, if you almost certainly won the game, why would you want to risk in it the first 5 years of retirement.

Mark

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Hodor
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Re: Asset allocation for 50 year retirement?

Post by Hodor » Fri Nov 15, 2019 8:25 pm

When you have over 60x annual expenses, the asset allocation doesn't matter all that much.

livesoft
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Re: Asset allocation for 50 year retirement?

Post by livesoft » Fri Nov 15, 2019 8:51 pm

Read this series from start to finish:
https://earlyretirementnow.com/2016/12/ ... t-1-intro/
Wiki This signature message sponsored by sscritic: Learn to fish.

HomeStretch
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Re: Asset allocation for 50 year retirement?

Post by HomeStretch » Fri Nov 15, 2019 11:11 pm

Are you asking for your friend with the bitcoin windfall that you posted about in another thread this week? Your friend should really consider posting himself. Retirement planning is too important to leave in the hands of someone else, even a good friend like you. You said in the other post your friend didn’t think he had enough to retire. Hopefully you aren’t pushing him too hard in that direction. You don’t want well-meaning advice to backfire on you.

Topic Author
JacobTeach
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Re: Asset allocation for 50 year retirement?

Post by JacobTeach » Fri Nov 15, 2019 11:26 pm

livesoft wrote:
Fri Nov 15, 2019 8:51 pm
Read this series from start to finish:
https://earlyretirementnow.com/2016/12/ ... t-1-intro/
Interesting, thank you! For longer retirements, higher equity allocations have a better rate of success!

Topic Author
JacobTeach
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Re: Asset allocation for 50 year retirement?

Post by JacobTeach » Fri Nov 15, 2019 11:29 pm

MarkVH0518 wrote:
Fri Nov 15, 2019 6:02 pm
I suggest you study 'Sequence of Returns Risk'. The premise is that the riskiest period of retirement is the first 5 years.
If disaster doesn't hit in the first 5 years (of course, it usually doesn't) then your portfolio will grow further (and you have 5 fewer years to live)
so you are especially blessed.
If, on the other hand, disaster does hit, the bonds are insurance for living expenses while your equity (and real estate) begin to recover.

My suggestion to hold bonds for 5 years is the 'bond tent' investment strategy - another strategy you might want to understand.

To repeat my earlier post, it's going to be hard for you to screw this up.
But, if you almost certainly won the game, why would you want to risk in it the first 5 years of retirement.

Mark
Sequence of returns risk (like you said, the riskiest are the first 5 years) vs livesoft’s post where higher equity allocations improves the rate of success. Hmmm...not sure, both sound right

Topic Author
JacobTeach
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Re: Asset allocation for 50 year retirement?

Post by JacobTeach » Fri Nov 15, 2019 11:33 pm

HomeStretch wrote:
Fri Nov 15, 2019 11:11 pm
Are you asking for your friend with the bitcoin windfall that you posted about in another thread this week? Your friend should really consider posting himself. Retirement planning is too important to leave in the hands of someone else, even a good friend like you. You said in the other post your friend didn’t think he had enough to retire. Hopefully you aren’t pushing him too hard in that direction. You don’t want well-meaning advice to backfire on you.
Good eye! :) do you also notice how the tone of the replies are so different? The forum definitely is very susceptible to framing biases.

I’m not pushing him at all, he just wanted my take and I gave it to him, and now I’m doing additional research (by asking this great forum). He’s read both threads already and can make an informed decision himself, or make an account and post if he wants to.

Topic Author
JacobTeach
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Re: Asset allocation for 50 year retirement?

Post by JacobTeach » Sun Nov 17, 2019 9:25 pm

JacobTeach wrote:
Fri Nov 15, 2019 11:29 pm
MarkVH0518 wrote:
Fri Nov 15, 2019 6:02 pm
I suggest you study 'Sequence of Returns Risk'. The premise is that the riskiest period of retirement is the first 5 years.
If disaster doesn't hit in the first 5 years (of course, it usually doesn't) then your portfolio will grow further (and you have 5 fewer years to live)
so you are especially blessed.
If, on the other hand, disaster does hit, the bonds are insurance for living expenses while your equity (and real estate) begin to recover.

My suggestion to hold bonds for 5 years is the 'bond tent' investment strategy - another strategy you might want to understand.

To repeat my earlier post, it's going to be hard for you to screw this up.
But, if you almost certainly won the game, why would you want to risk in it the first 5 years of retirement.

Mark
Sequence of returns risk (like you said, the riskiest are the first 5 years) vs livesoft’s post where higher equity allocations improves the rate of success. Hmmm...not sure, both sound right
Bump in hopes of getting more thoughts around this.

bluquark
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Re: Asset allocation for 50 year retirement?

Post by bluquark » Sun Nov 17, 2019 10:57 pm

According to earlyretirementnow.com, if you go with a fixed AA, there is no point holding less than 75% of equity in such a long retirement because the overall returns are more important than the sequence of returns. And the optimum SWR tends to be around 80% equity in high valuation regimes (like we are in now). According to Bernstein there is no point in holding less than 7% bonds because that small amount of bonds decreases risk without decreasing returns thanks to the diversification "free lunch" effect.

So I would add 10% to 20% of investment grade bonds. But, at only $40K of expenses, you will probably do OK regardless. That's less than 2% of the portfolio and the historical 0% failure rate is around 3%.

randomguy
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Re: Asset allocation for 50 year retirement?

Post by randomguy » Sun Nov 17, 2019 11:32 pm

MarkVH0518 wrote:
Fri Nov 15, 2019 6:02 pm
I suggest you study 'Sequence of Returns Risk'. The premise is that the riskiest period of retirement is the first 5 years.
If disaster doesn't hit in the first 5 years (of course, it usually doesn't) then your portfolio will grow further (and you have 5 fewer years to live)
so you are especially blessed.
If, on the other hand, disaster does hit, the bonds are insurance for living expenses while your equity (and real estate) begin to recover.

My suggestion to hold bonds for 5 years is the 'bond tent' investment strategy - another strategy you might want to understand.

To repeat my earlier post, it's going to be hard for you to screw this up.
But, if you almost certainly won the game, why would you want to risk in it the first 5 years of retirement.

Mark
Bond tents (or rising glide paths, buckets, and whatever other scheme people post) do pretty much nothing to eliminate sequence of risk. The 1966 retiree doesn't get a 5% SWR (or even a 4.5%) because of a bond tent. They end up with the same ~4% as you would have from holding something like 60/40. You might end up with less volatility if that is something that bothers you.

OP should hold bonds cause real estate isn't bonds (correlations are different and you can't rebalance among other things) but some 80/20 type portfolio (note this would be like 6-7 years in bonds at the start) would be in the realm of reasonable. You probably don't want to go much below 50/50 (remember this is a very low SWR so you can go lower than you would want to at 4%).

As far as selling the real estate and going all equities, you can go either way. At some point you are going to pay those taxes unless you hold til death. It is one thing to be a real estate guy at say 60. It is another to be doing it at 90.

The biggest risk here is that 40k isn't the amount that is needed. None of us can help at quantifying that risk.

MathIsMyWayr
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Re: Asset allocation for 50 year retirement?

Post by MathIsMyWayr » Mon Nov 18, 2019 12:26 am

JacobTeach wrote:
Fri Nov 15, 2019 11:26 pm
livesoft wrote:
Fri Nov 15, 2019 8:51 pm
Read this series from start to finish:
https://earlyretirementnow.com/2016/12/ ... t-1-intro/
Interesting, thank you! For longer retirements, higher equity allocations have a better rate of success!
Not a better rate of success, but a higher probability of a better rate of success.

ignition
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Re: Asset allocation for 50 year retirement?

Post by ignition » Mon Nov 18, 2019 4:33 am

JacobTeach wrote:
Sun Nov 17, 2019 9:25 pm
JacobTeach wrote:
Fri Nov 15, 2019 11:29 pm
MarkVH0518 wrote:
Fri Nov 15, 2019 6:02 pm
I suggest you study 'Sequence of Returns Risk'. The premise is that the riskiest period of retirement is the first 5 years.
If disaster doesn't hit in the first 5 years (of course, it usually doesn't) then your portfolio will grow further (and you have 5 fewer years to live)
so you are especially blessed.
If, on the other hand, disaster does hit, the bonds are insurance for living expenses while your equity (and real estate) begin to recover.

My suggestion to hold bonds for 5 years is the 'bond tent' investment strategy - another strategy you might want to understand.

To repeat my earlier post, it's going to be hard for you to screw this up.
But, if you almost certainly won the game, why would you want to risk in it the first 5 years of retirement.

Mark
Sequence of returns risk (like you said, the riskiest are the first 5 years) vs livesoft’s post where higher equity allocations improves the rate of success. Hmmm...not sure, both sound right
Bump in hopes of getting more thoughts around this.
It's true that higher equity allocations have worked better in the past. You can simulate this yourself with cfiresim or firecalc.

Still, you could for example put 10% of your equity allocation in bonds and use these bonds to provide cash flow if equities crash and tenants stop paying rent simultaneously.

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