Retirement Asset Allocation

[filbert]

I am trying to settle into a goal asset allocation for retirement as I am only about 3 years away from starting my glide path (5 years) to my retirement asset allocation. Initially I was planning to just do only US Equity 80% and US Bonds 20% in retirement. However, Bonds dropping with Equity in 2020 gave me pause in this regard. Therefore, I am hoping to find something with more diversification, but also with good growth as our retirement duration needs will hopefully be 45-50 years. Below is my proposed plan.

64% Vanguard Total Stock Mkt Idx Adm (VTSAX) 0.04%ER
16% Vanguard Total Intl Stock Index Admiral (VTIAX) 0.12%ER
10% Vanguard Total Bond Market Index Adm (VBTLX) 0.05%ER
10% Vanguard Shrt-Term Infl-Prot Sec Idx Adm (VTAPX) 0.06%ER

I am up for suggestions as I don't know what I don't know. Thanks you for your time.

[retired@50]

I am trying to settle into a goal asset allocation for retirement as I am only about 3 years away from starting my glide path (5 years) to my retirement asset allocation. Initially I was planning to just do only US Equity 80% and US Bonds 20% in retirement. However, Bonds dropping with Equity in 2020 gave me pause in this regard. Therefore, I am hoping to find something with more diversification, but also with good growth as our retirement duration needs will hopefully be 45-50 years. Below is my proposed plan.

64% Vanguard Total Stock Mkt Idx Adm (VTSAX) 0.04%ER
16% Vanguard Total Intl Stock Index Admiral (VTIAX) 0.12%ER
10% Vanguard Total Bond Market Index Adm (VBTLX) 0.05%ER
10% Vanguard Shrt-Term Infl-Prot Sec Idx Adm (VTAPX) 0.06%ER

I am up for suggestions as I don't know what I don't know. Thanks you for your time.

You'll likely get suggestions that are all over the map.

The allocation you outline above is fine, assuming you want to be 80% equity during retirement. Many retirees don't want that much volatility in their portfolio. I think asset allocation is the bigger decision. I'd lean toward 70/30 which would mean you'd have to use 15% in each of the bond funds you mention.

Regards,

[mhadden1]

I am trying to settle into a goal asset allocation for retirement as I am only about 3 years away from starting my glide path (5 years) to my retirement asset allocation. Initially I was planning to just do only US Equity 80% and US Bonds 20% in retirement. However, Bonds dropping with Equity in 2020 gave me pause in this regard. Therefore, I am hoping to find something with more diversification, but also with good growth as our retirement duration needs will hopefully be 45-50 years. Below is my proposed plan.

64% Vanguard Total Stock Mkt Idx Adm (VTSAX) 0.04%ER
16% Vanguard Total Intl Stock Index Admiral (VTIAX) 0.12%ER
10% Vanguard Total Bond Market Index Adm (VBTLX) 0.05%ER
10% Vanguard Shrt-Term Infl-Prot Sec Idx Adm (VTAPX) 0.06%ER

I am up for suggestions as I don't know what I don't know. Thanks you for your time.

Everything depends on your expenses and how you plan to get the money. Is everything covered by pension/SS? Then AA doesn't matter quite so much. Do you have 25x your expenses, not covered by SS etc., in retirement savings? 50x? Another thing to think about - if markets crash 30%, will you be ok? How about 50%? Will you be able to stay the course? Only you know how you will feel and react as markets go up and down.

[steadyosmosis]

I am retired, and my AA is 50/50.
You propose 80/20 AA for yourself (maybe in retirement?).

Suppose you and I both have $1 million portfolios, and the stock market drops 50% (assume bonds stay flat).
My portfolio would then look like this ..... $250k stocks + $500k bonds = $750k total.
Your portfolio would then look like this ... $400k stocks + $200k bonds = $600k total.

[livesoft]

Your proposed portfolio allocation is well within the typical ranges of portfolio allocations presented on bogleheads.org. I don't think there is anything wrong with it. Only you know if it will be suitable for you and even then I don't think you will know until many years into using it.

[SquawkIdent]

I am trying to settle into a goal asset allocation for retirement as I am only about 3 years away from starting my glide path (5 years) to my retirement asset allocation. Initially I was planning to just do only US Equity 80% and US Bonds 20% in retirement. However, Bonds dropping with Equity in 2020 gave me pause in this regard. Therefore, I am hoping to find something with more diversification, but also with good growth as our retirement duration needs will hopefully be 45-50 years. Below is my proposed plan.

64% Vanguard Total Stock Mkt Idx Adm (VTSAX) 0.04%ER
16% Vanguard Total Intl Stock Index Admiral (VTIAX) 0.12%ER
10% Vanguard Total Bond Market Index Adm (VBTLX) 0.05%ER
10% Vanguard Shrt-Term Infl-Prot Sec Idx Adm (VTAPX) 0.06%ER

I am up for suggestions as I don't know what I don't know. Thanks you for your time.

Not sure how you feel about this but there are many other options for diversification other than stocks and bonds/tips. Maybe something to think about.

[bonesly]

Initially I was planning to just do only US Equity 80% and US Bonds 20% in retirement. However, Bonds dropping with Equity in 2020 gave me pause in this regard. Therefore, I am hoping to find something with more diversification...

I would caution against changes solely because of the simultaneous decline in both stocks in bonds in 2022. That's not new and suggests you didn't understand the risk/rewards associated with bonds (funds or ladders which have the same risk at maturity when you rollover the T-Note).

Stocks and bonds are uncorrelated (not negatively correlated). They move independently (not inversely) and can, by chance, move the same direction. Stocks & bonds both had negative returns in 1931, 1941, 1969, 2018, and 2022. They will likely both have negative returns in the same year at some point in the future.

Individual bonds, held to maturity, do not lose value as long as there's no default involved (near impossible when the bonds are issued by the US Treasury rather than a corporate bond). Bond mutual funds (and ETFs) certainly can lose value because bond fund managers routinely sell bonds before they reach maturity to maintain a target duration identified in the prospectus and prices of individual bonds that they're buying/selling is changing inversely with the yield/price curve. If the idea of a bond fund losing value is unacceptable, then individual bonds are likely better for you psychologically (you still have that same price movement risk when you have to rollover/reinvest a maturing T-Note). The benefit of a ladder is real, not psychological, if you have a specific date to spend the bond funds (i.e., duration matching).

I am trying to settle into a goal asset allocation for retirement as I am only about 3 years away from starting my glide path (5 years) to my retirement asset allocation. Initially I was planning to just do only US Equity 80% and US Bonds 20% in retirement. ... Below is my proposed plan.

64% Vanguard Total Stock Mkt Idx Adm (VTSAX) 0.04%ER
16% Vanguard Total Intl Stock Index Admiral (VTIAX) 0.12%ER
10% Vanguard Total Bond Market Index Adm (VBTLX) 0.05%ER
10% Vanguard Shrt-Term Infl-Prot Sec Idx Adm (VTAPX) 0.06%ER

Simply breaking up the bond allocation from 100% Total Bond Market into 50% Total Bond + 50% TIPS seems fine, although I'm not sure that future-proofs your portfolio against a simultaneous decline of stock & bond funds if an inflationary spike happens again in the future. If the yield goes up as rates follow the spike in inflation, the price of both VBTLX and VTAPX should go down. Buying TIPS on the assumption that the price won't go down is likely a bad rationale. Buying TIPS to have real (inflation-adjusted) returns vs nominal returns (which are likely to outpace inflation, but not guaranteed) is likely a good rationale.

As a point of comparison, Vanguard TDF 2040 (VFORX) is about 77/23 (close to your 80/20) and has bonds split 70% Vanguard Total Bond II Index + 30% Vanguard Total International Bond II Index; no TIPS. TIPS don't get introduced until TDF 2025 (VTTVX) with 60% US + 26% Int'l + 14% TIPS and eventually transitions to Target Retirement Income (VTINX) with 53% US + 23% Int'l + 24% TIPS.

There's no right or wrong answer as long as you understand what "diversification" you are getting with your choice to add inflation-adjusted bonds to nominal bonds and that diversification is worth it to your "peace of mind / Sleep Well At Night (SWAN)" factor.

----------
Edit: I'll also reiterate Retired@50's comment that 80/20 seems a bit risky if you're 5 years out from retirement, but I'll temper that with "it's perfectly fine" if that's well matched to your personal risk tolerance. If you're at all unsure of your basic AA, then you should probably do one or both of the exercises below.

Control Your Risk
1) Read the Wiki article for Assessing Risk Tolerance, take the Vanguard Investor Questionnaire, then tailor the asset allocation (AA) that was recommended by the quiz based on your knowledge of your personal risk tolerance having read the Wiki article.

2) Alternatively (or in addition to), ask "How much of a drop in portfolio value as a % of total value can I handle?" cut that % in half to get standard deviation, then lookup that std. dev. on the X-Axis of the chart below, and finally scan up to see what AA that corresponds to. As an example, if you can only stomach a -24% drop in portfolio value, that's a ±12% std. dev, which corresponds to an AA of 60/40. The return you get is an average and you'll get what you get with your unique sequence of returns (there's a lot of variance in outcomes due to the associated volatility of stocks so it probably will NOT be the average, but something more or less).

[rockstar]

How many years of expenses do you have? The more you have the more risky you can be. For example, if you have 50x, you can handle a 50% drop.

What’s your expected PIA for social security? What percentage of your expenses is that?

Why do you need 45-50 years? Most calculators will have trouble with that long of a retirement. The history used becomes suspect since a lot has changed over even the last 50 years.

[Gecko10x]

Not sure how you feel about this but there are many other options for diversification other than stocks and bonds/tips. Maybe something to think about.

Agreed. If you truly want a more diversified portfolio, there are additional assets that could be considered. But bear in mind that holding something significantly different from the "norm" (at least as reported in most media) may result in occasional regret (or the opposite).

[minesweep]

I am trying to settle into a goal asset allocation for retirement as I am only about 3 years away from starting my glide path (5 years) to my retirement asset allocation. Initially I was planning to just do only US Equity 80% and US Bonds 20% in retirement. However, Bonds dropping with Equity in 2020 gave me pause in this regard. Therefore, I am hoping to find something with more diversification, but also with good growth as our retirement duration needs will hopefully be 45-50 years. Below is my proposed plan.

64% Vanguard Total Stock Mkt Idx Adm (VTSAX) 0.04%ER
16% Vanguard Total Intl Stock Index Admiral (VTIAX) 0.12%ER
10% Vanguard Total Bond Market Index Adm (VBTLX) 0.05%ER
10% Vanguard Shrt-Term Infl-Prot Sec Idx Adm (VTAPX) 0.06%ER

I am up for suggestions as I don't know what I don't know. Thanks you for your time.

Your fund choices look good to me. I don't believe you need any more diversification (keep it simple). Only you can determine the proper allocation for your investments that's based on your need, ability & willingness to take risk. Other than staying the course I don't believe there's a magic formula for long-term investment success (45-50 years).

P.S. Giving your expected time horizon I would use the Inflation Protected Securities Fund in lieu of the Short Term.

[Wiggums]

We are retired with an AA of 65/35. We hold more fixed income for Roth Conversions, lumpy expenses and special travel.

Edited to correct typo

[Lawrence of Suburbia]

Vanguard Target Retirement Fund 2030 (VTHRX).

One decision, done!

[delamer]

Your proposed portfolio allocation is well within the typical ranges of portfolio allocations presented on bogleheads.org. I don't think there is anything wrong with it. Only you know if it will be suitable for you and even then I don't think you will know until many years into using it.

Agreed.

Hiwever, I would drop the Total Bonds and just use the Short-Term TIPS for your non-equity allocation.

That will help stabilize your portfolio and make the inevitable declines in equities easier to tolerate.

[UM70]

Vanguard Charitable has published a set of "Preferred Portfolio Solutions" that are designed for people with different time frames and risk profiles; these asset allocations and their components might be a good source of ideas for your planning:

https://www.vanguardcharitable.org/investments

[Sandtrap]

I am trying to settle into a goal asset allocation for retirement as I am only about 3 years away from starting my glide path (5 years) to my retirement asset allocation. Initially I was planning to just do only US Equity 80% and US Bonds 20% in retirement. However, Bonds dropping with Equity in 2020 gave me pause in this regard. Therefore, I am hoping to find something with more diversification, but also with good growth as our retirement duration needs will hopefully be 45-50 years. Below is my proposed plan.

64% Vanguard Total Stock Mkt Idx Adm (VTSAX) 0.04%ER
16% Vanguard Total Intl Stock Index Admiral (VTIAX) 0.12%ER
10% Vanguard Total Bond Market Index Adm (VBTLX) 0.05%ER
10% Vanguard Shrt-Term Infl-Prot Sec Idx Adm (VTAPX) 0.06%ER

I am up for suggestions as I don't know what I don't know. Thanks you for your time.

1
Consider your "risk tolerance" and "sleep factor" in the event of downturns.
IE: In May 2020, the market dropped over 30 percent in 30 days.
Consider how much of a drop in value the portfolio you propose at 80/20 would have compared to 60/40 or 50/50, etc.

2
You mention "glidepath".
What did you have in mind?
From the "initial 80/20" to what "X/X" at age "??", etc, etc, etc.???
3
What you have or have proposed in funds is already diversified.
4
Consider fund placement in tax advantaged space and non tax advantaged space.
Where are these funds?

j

[dogagility]

I am up for suggestions as I don't know what I don't know.

To make a recommendation, we will need to know your portfolio balance, expected yearly expenses, and expected social security and pensions.

In reality, you could use simple tools like the VPW Retirement Worksheet and TPAWPlanner to model different asset allocations.

viewtopic.php?t=120430
https://tpawplanner.com/

[filbert]

Thanks for all the good feedback. I guess I should have been more specific. I'm not really asking what my AA should be as far as 80/20 or 70/30, but I'm asking if the 4 funds I'm proposing to use makes sense? Do you think those four funds would give me good diversification to help smooth out the bumps in the road.

[dogagility]

Do you think those four funds would give me good diversification...

Vanguard Total Stock Mkt Idx Adm (VTSAX)
Vanguard Total Intl Stock Index Admiral (VTIAX)
Vanguard Total Bond Market Index Adm (VBTLX)
Vanguard Shrt-Term Infl-Prot Sec Idx Adm (VTAPX)

Yes, those four funds above are good choices.

[gavinsiu]

I feel that your asset is fine as is. I like to address your comment that you want to find something other than bond for diversification because it failed you in 2022. You cannot find an asset that will perfectly protect your portfolio. Any asset will fail eventually.

For example, from 2000, there have been 6 down market for 60% equity. In only 2 of the down market did cash out perform bonds in a 60% portfolio and your long term return would be lower. You are probably better with bonds in the long run.

Sometimes perfect is the enemy of good.

[dbr]

Thanks for all the good feedback. I guess I should have been more specific. I'm not really asking what my AA should be as far as 80/20 or 70/30, but I'm asking if the 4 funds I'm proposing to use makes sense? Do you think those four funds would give me good diversification to help smooth out the bumps in the road.

No, absolutely not. With those funds there will be bumps in the road. Risk in the stock funds alone can result in losing half or more of your wealth in one year or another with recovery over some indefinite degree and time. Stock and bond investing is not possible without experiencing bumps at all times.

As to diversification those bonds don't particularly contribute much reduction in risk at the same return at all, which is a definition of diversification, but you can dilute the risk at lower return by adding in significant fractions in bonds. 20% in bonds has little effect. 50% would be meaningful, but hardly free of bumps.

A good chart showing the range of prospects for portfolios of stocks and bonds as they evolved over different periods of time in the past is here:

https://engaging-data.com/visualizing-4-rule/

I think you don't understand the basic idea that investing is risky.

[retired@50]

Thanks for all the good feedback. I guess I should have been more specific. I'm not really asking what my AA should be as far as 80/20 or 70/30, but I'm asking if the 4 funds I'm proposing to use makes sense? Do you think those four funds would give me good diversification to help smooth out the bumps in the road.

Yes. Good diversification.

I think the suggestions you received were also trying to help smooth out some bumps by using more than 20% in bonds. Good diversification doesn't necessarily equate to smooth.

Regards,

[filbert]

Thanks for all the good feedback. I guess I should have been more specific. I'm not really asking what my AA should be as far as 80/20 or 70/30, but I'm asking if the 4 funds I'm proposing to use makes sense? Do you think those four funds would give me good diversification to help smooth out the bumps in the road.

No, absolutely not. With those funds there will be bumps in the road. Risk in the stock funds alone can result in losing half or more of your wealth in one year or another with recovery over some indefinite degree and time. Stock and bond investing is not possible without experiencing bumps at all times.

As to diversification those bonds don't particularly contribute much reduction in risk at the same return at all, which is a definition of diversification, but you can dilute the risk at lower return by adding in significant fractions in bonds. 20% in bonds has little effect. 50% would be meaningful, but hardly free of bumps.

A good chart showing the range of prospects for portfolios of stocks and bonds as they evolved over different periods of time in the past is here:

https://engaging-data.com/visualizing-4-rule/

I think you don't understand the basic idea that investing is risky.

Thank for the feedback. I understand that there are risk. I have yet to be drawing from my accounts during a down turn, but I have experienced a few down turns since I started investing in '06. I understand there are times equities will drop 50%, but my hope would be that at that time I own another asset class that is only down 20% that I could draw from.

I did plug my numbers into the website and AA didn't have much of a profound effect:
100% equity failed in 1906, 1929, 1965-69
90% equity failed in 1906, 1965-69
80% equity failed in 1906, 1964-69
70% equity failed in 1906, 1937, 1964-69
60% equity failed in 1906-07, 1909, 1911, 1912, 1937, 1964-69

All but the 60% Equity succeeded 90% of the time.

[bonesly]

A good chart showing the range of prospects for portfolios of stocks and bonds as they evolved over different periods of time in the past is here:

https://engaging-data.com/visualizing-4-rule/

I think you don't understand the basic idea that investing is risky.

I did plug my numbers into the website and AA didn't have much of a profound effect:
100% equity failed in 1906, 1929, 1965-69
90% equity failed in 1906, 1965-69
80% equity failed in 1906, 1964-69
70% equity failed in 1906, 1937, 1964-69
60% equity failed in 1906-07, 1909, 1911, 1912, 1937, 1964-69

All but the 60% Equity succeeded 90% of the time.

The idea that 60% stocks / 40% bonds had the most number of failures is a red-flag to me that the Engaging Data model may not be very representative (probably using a random index into the historical array of returns, which I think is flawed as noted HERE).

When I run my Withdrawal Monte Carlo, based on distribution modeling rather than random index, I see these portfolio survival rates for a 4% initial draw on a 30y period (these fluctuate for different sets of 1,000 trials, but are around the same magnitude):

100/0: 85±1.1%
90/10: 88.7±1.0%
80/20: 88.3±1.0%
70/30: 91.0±0.9%
60/40: 92.2±0.8%

When I run Portfolio Visualizer's Monte Carlo (using historical returns rather than distribution modeling), I see a similar increase in survival rate as the portfolio holds less stocks:

100/0: 87.73%
90/10: 89.49%
80/20: 90.48%
70/30: 91.98%
60/40: 92.61%

When I did this exercise for Engaging Data's site (historical returns), I got this:

100/0: 95.1%
90/10: 95.9%
80/20: 96.7%
70/30: 96.7%
60/40: 96.7%

The success rate for a 4% withdrawal at 100/0 is shown as 95.1% which seems unreasonably high, but for 90/10 through 60/40 the results are consistent with this comment from the Trinity Study Update (accounting for inflation-adjusted increases to withdrawal rate): "As well, already by 1996, William Bengen produced a figure showing that the safe withdrawal rate from a historical perspective varied very little for stock allocations between 35% and 90%. Using data for the S&P 500 and intermediate-term government bonds, he found that the historically-safe withdrawal rate was always above 4% for rolling 30-year periods since 1926 for stock allocations between 35% and 90%."

However, I still don't like that 80/20 through 60/40 all gave the exact same success rate (96.7%) when 60/40 should be higher than 80/20, which seems to be a limitation of how Engaging is using historical data compared to PV (TPAW also likely handles this better than Engaging).

[goblue100]

Thanks for all the good feedback. I guess I should have been more specific. I'm not really asking what my AA should be as far as 80/20 or 70/30, but I'm asking if the 4 funds I'm proposing to use makes sense? Do you think those four funds would give me good diversification to help smooth out the bumps in the road.

The number of good, low er funds that could be used to make a portfolio must number in the thousands if not 10's of thousands. The ways they could be combined is probably in the 10's of millions, but keep in mind math is not my strong suit. Hopefully I'm not overstating it. The funds you have are fine. I am not shying away from intermediate term bond funds because of what happened in 2020. You have to choose, but I wouldn't throw out many decades of portfolio theory because of one bond bear market. If a stock investor decided stocks were too risky because on one day in 1987 the market dropped 22% where would he be today? Not as well off, most likely.