30 percent equity allocation in retirement

[exodusing]

This is a question without any right or wrong answer.

If 30% equity suits you, it suits you. But I would run some Monte Carlo projections to make sure I have enough to last the estimated time frame of my retirement.

The amount needed at age 85 will be much less than at 60.

If you have enough to go with 30% right out the gate, go with it. But I might suggest (and this is probably heresy according to Boglehead dogma) that you might let your equity stake pecentage rise over time if you have a desire to leave a legacy. That is, no re-balancing back to 30%.

My thinking is that if the market takes a nasty dive later on - even 50% or more - you will be okay in light of the fact that you have fewer years left.

Monte Carlo projections will tell you that you're fine with high enough returns and not as good with low returns.

[rockstar]

Got to make sure you pick the right bonds. Time is different with much higher yields today. Don’t transfer you’re equity behavioral challenges to your bonds.

[gavinsiu]

If you want low volatility, 30/70 is probably a good idea.

• 30% equity is roughly the historical equity allocation for the efficient frontier where you get the highest risk adjusted return.
• 30% equity is also the allocation many of the Target Index fund terminates at.
• You get about 60% of a 100% equity return for 30% of the risk, a good trade off.
• Historically, it fall no more than 5% per year. Even in 2008, it fell only -2%. 2022 was an exemption where it fell about 13%.
• It does have lower return than a higher equity portfolio like 50/50 for example, so perhaps not a great portfolio if you have a fairly high withdraw rate.
• Does not do so well in high inflation environments. During the 70-80 era, a 30/70 portfolio lose about a quarter of the value from inflation. Perhaps this can be fixed with some TIPS?
• At 70% bonds, your choice of bond does matter. Personally I would stick with intermediate bonds such as either total bond or intermediate treasury.

My mom's allocation is at 30%. Back in the late 2000's, her financial advisor gave her a questionaire and then shifted her to a 40/60. However, after another decade, it appears she like 30/70 better. It's not too much different than what the advisor recommended. She sort of still complains about the volatility, but in the end she like that it made her quite a bit of money over the years.

My mom's portfolio seems to have lower duration bonds, so more like 2 year duration instead of 5 year typical of total stock market. As a result, her return is lower, but her withdraw rate is low. The 30% allows her to alleviate some of her other fear which is inflation.

Her portfolio seems to contain zero TIPS. May be her advisor doesn't like them or TIPS were not available when she sign up back in the late 90's? I notice that many of the Target fund contains TIPS, but in really small amounts and recently they have shifted TIPS to short term TIPS starting around 2013 for Vanguard.

[itnetpro]

When factoring in both risk and reward, I'm feeling best about a 30 percent equity allocation (well diversified across all asset classes and markets) in retirement. I've tested higher and lower, and this allocation seems to be my "no nervousness" happy place. Vanguard's own models shows 30 percent equities as providing both a good return and significantly lower volatility than for equity allocations that are higher:

https://investor.vanguard.com/investor-resources-education/education/model-portfolio-allocation

Clearly 2022 would be an outlier, when bonds cratered about as much as stocks.

But in retirement, I want the smoothest ride possible (=lower volatility), since I no longer have the sweat equity (salary) to recover from stock drawdowns that could end up being protracted (one never knows).

What's your take on this equity allocation? How does it match with your allocation in retirement or your thinking?

Do what’s best for you and your risk tolerance and don’t let anyone talk you out of it.

Recommendation, when benchmarking, throw Wellesley into your mix. Folks here hate it because it’s an actively managed fund but worth comparing to your index fund matchups since it’s pretty much 2/3 bonds/large cap value VWIAX (admiral shares) 0.16 cost.

Don’t only compare gains, look at the downsides, & time under water as well during various snapshots in time back to 71. You will need to benchmark VWINX (investor shares) since admiral only goes back to 2000 or so.

For me, 30/70 is to conservative and would have a hard time keeping up with my own drawdown strategy so I’m Wellington/Wellesley which essentially gives me a 50/50 ratio +/- with a 3 year cash buffer….

John

[gavinsiu]

Here's a backtest of 30/70, 50/50, and 70/30. LINK



Notice the huge dip around 1975. This seems like one of the weaknesses of the 30/70, it may not keep up with high inflation. Unfortunately, TIPS were not available back then so there was no way to back test if adding TIPS will help.

[rkhusky]

Here's a backtest of 30/70, 50/50, and 70/30.

Notice the huge dip around 1975. This seems like one of the weaknesses of the 30/70, it may not keep up with high inflation. Unfortunately, TIPS were not available back then so there was no way to back test if adding TIPS will help.

Didn’t 30/70 do the best of the three in 1975? And 2000? And 2008?

[rkhusky]

An interesting thing about 30/70 is, if you consider 20% drop for int bonds and 50% drop for stocks, you get about equal risk from the bond side and the stock side.

[GaryA505]

You should run that with a withdrawal, maybe 4% inflation-adjusted.