Your age in bonds minus ten? Not according to Vanguard

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Admiral
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Your age in bonds minus ten? Not according to Vanguard

Post by Admiral »

I'm curious as to what the general consensus here is in terms of stock/bond asset allocation based on age/expected age at retirement. My sense is that Bogleheads are fairly conservative: many suggest "your age in bonds" or, less conservatively, "your age in bonds minus 10."

What I find interesting is that in looking at the prospectus for Vanguard's Target Retirement Funds, the stock:bond ratio is much more aggressive.

For example, here are several of the holding ratios for the various Target Retirement Funds:

VITRX (Income Fund, assumes currently retired): Stocks: 30%, Bonds and TIPS: 70%
VITWX (Target Retirement 2020, so a person who is 58-60): Stocks: 59.1%, Bonds and TIPS: 40.9%
VITFX (Target Retirement 2035, so a person who is appx 45-47): Stocks: 81.9%, Bonds: 19.1

I'm 45 and currently am about 70/30, considerably more conservative than what is reflected above for someone my age. I plan to retire early, but it is interesting what they recommend.
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Re: Your age in bonds minus ten? Not according to Vanguard

Post by JoinToday »

I am 60% equity, 40% bonds. Equity is 70% US : 30% international. I plan to keep this for the long haul.

Late 50's, retired.

Do a google search for the 60:40 Solution, an article written by Peter Bernstein (2002). Guys a lot smarter than me have given this a lot of thought. I am too scared to go above 60% equity. But there is a pretty broad maximum where it doesn't matter much in terms of portfolio failure/success (30% to 70% equity).
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Re: Your age in bonds minus ten? Not according to Vanguard

Post by Hector »

I agree that bogleheads(users here) are fairly conservative when comparing to Target Retirement Funds.
I aim for age in bond generally, but deviate from it time to time by doing non-boglehead moves. For example I had age in bond at the beginning of the year. But I bought more stock in Jan/Feb when market was tanking. So I hold more stock right now; 7-8% more than 'age in bond' rule. I am in the accumulation phase and I mostly re-balance with new money.
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Re: Your age in bonds minus ten? Not according to Vanguard

Post by StevieG72 »

I noticed that as well!

I am 44 and have become a little more agressive with my portfolio, however I think 75/25 will be my limit. I am currently fluctuating around 72-73% stocks.

I agree with the previous poster about the 60/40 being the sweet spot. I am venturing out a little further since I am still in the accumulation phase. I will certainly reel it in once I get closer to retirement.

It seems that size of portfolio is often left out of the asset allocation equation. For example if I had already won the race I would be much more conservative. I guess for many the race is never over.
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Re: Your age in bonds minus ten? Not according to Vanguard

Post by nisiprius »

Admiral wrote:I'm curious as to what the general consensus here is in terms of stock/bond asset allocation based on age/expected age at retirement. My sense is that Bogleheads are fairly conservative: many suggest "your age in bonds" or, less conservatively, "your age in bonds minus 10."

What I find interesting is that in looking at the prospectus for Vanguard's Target Retirement Funds, the stock:bond ratio is much more aggressive...
Yes. And what I find interesting is that before 2006 it was much less aggressive. From a 2011 Ibbotson Associates report:
...during the Vanguard Target Retirement Funds family’s much shorter history, there are clearly two distinct regimes depicted in Figure 2. Prior to 2006, the Vanguard glide paths were much more conservative than they were starting in 2006. This graph does not explain what the cause of this shift was, nor does it tell why it occurred. But it does alert investors that a relatively dramatic one-time change occurred and could potentially occur again in the future.
Their chart shows that for investors in their fifties who continued to hold the same fund they had held, the percentage of the portfolio allocated to stocks increased by almost a full 20%.

A 2006 Vanguard press release notes:
The existing funds’ current asset allocation path will be modified to provide increased exposure to equities over a longer period of time. The result will be a larger equity allocation of roughly 10 to 20 percentage points, depending on the fund.
The result is that a 45-year-old who bought a Target Retirement fund when they were introduced would, at age 65, have about the same asset allocation as when he begun. He would have experienced a reduction down the glide path, then almost a 20 percent boost in 2006--leaving him more aggressive than before--and then a slow glide down to about the same as at the beginning. So much for "becoming more conservative over time."

Image
Last edited by nisiprius on Wed May 04, 2016 7:27 pm, edited 2 times in total.
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Re: Your age in bonds minus ten? Not according to Vanguard

Post by SimpleGift »

Admiral wrote:I'm curious as to what the general consensus here is in terms of stock/bond asset allocation based on age/expected age at retirement. My sense is that Bogleheads are fairly conservative: many suggest "your age in bonds" or, less conservatively, "your age in bonds minus 10."
There was a survey last summer of Bogleheads’ age and their stock allocations, with over 200 respondents. These were the average results (but with a wide dispersion obviously):
  • Image
  • Image
It could be that the fairly aggressive average equity allocations, even in the over-60 age groups, are a function of today’s extremely low interest rates.
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Re: Your age in bonds minus ten? Not according to Vanguard

Post by GreenGrowTheDollars »

I wonder if some of that is based on considering Social Security income as having bond-like characteristics? That's one key reason my asset allocation is less weighted towards bonds.
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Re: Your age in bonds minus ten? Not according to Vanguard

Post by nisiprius »

GreenGrowTheDollars wrote:I wonder if some of that is based on considering Social Security income as having bond-like characteristics? That's one key reason my asset allocation is less weighted towards bonds.
I don't think anything about Social Security can explain why Vanguard goosed up the stock allocation in the target retirement funds by almost 20% in 2006. Social Security was there in 2003 when the funds were launched, Vanguard knew all about Social Security in 2003. Nothing dramatic happened to Social Security in 2006. Whatever effect Social Security should have on asset allocation, it was the same in 2003 as it was in 2007.
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Re: Your age in bonds minus ten? Not according to Vanguard

Post by aj44 »

I recently changed from age minus 20 to age minus 15. I originally started with age minus 20 and have been that way for a while, I debated year after year to go to age minus 10 and finally decided to split the difference. That has been the extent of my "tinkering" for a while and I'm totally comfortable where I am at now, 80% stock at 35.
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Re: Your age in bonds minus ten? Not according to Vanguard

Post by grabiner »

Simplegift wrote:
Admiral wrote:I'm curious as to what the general consensus here is in terms of stock/bond asset allocation based on age/expected age at retirement. My sense is that Bogleheads are fairly conservative: many suggest "your age in bonds" or, less conservatively, "your age in bonds minus 10."
There was a survey last summer of Bogleheads’ age and their stock allocations, with over 200 respondents. These were the average results (but with a wide dispersion obviously):
  • Image
It could be that the fairly aggressive average equity allocations, even in the over-60 age groups, are a function of today’s extremely low interest rates.
Many of the stock-heavy older investors are not investing for their own retirement; they have enough to retire on already, and are investing with an appropriate allocation for their children and grandchildren. (In several surveys, this has come up in the comments.)
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Re: Your age in bonds minus ten? Not according to Vanguard

Post by Toons »

65,
70/30
:mrgreen:
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Re: Your age in bonds minus ten? Not according to Vanguard

Post by JW-Retired »

Simplegift wrote:
It could be that the fairly aggressive average equity allocations, even in the over-60 age groups, are a function of today’s extremely low
interest rates.
We looked pretty similar back in 2007 when interest rates were high.
viewtopic.php?p=1224012#p1224012
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Re: Your age in bonds minus ten? Not according to Vanguard

Post by TheTimeLord »

I can't believe I have changed so much in the past 3 years. Several factors have contributed to my journey from a belief that 60/40 would be my lifetime floor to being almost exactly age in bonds today.
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Re: Your age in bonds minus ten? Not according to Vanguard

Post by leod »

Started investing with age in bonds @ 30
Never change the allocation since: 70 (equities) / 30 (bonds)
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Re: Your age in bonds minus ten? Not according to Vanguard

Post by Grogs »

I'm at age - 30 right now. That's because I didn't really start investing seriously until a few years ago. The whole point of becoming more conservative with your AA over time is IMO to protect the large nest egg you've accumulated. Since I don't have much saved yet, I'm not worried about being stock heavy. As I start hitting account balances that are several multiples of my annual expenses, I'll start moving toward something more conservative.
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Re: Your age in bonds minus ten? Not according to Vanguard

Post by AlohaJoe »

Admiral wrote:I'm curious as to what the general consensus here is in terms of stock/bond asset allocation based on age/expected age at retirement.
There was never any research or empirical basis to these "rules of thumb". I think what you're seeing is that as more research comes to light, people realise the rule of thumb was wrong, so they're going with what the research says instead. As an example, as far as I know "age in bonds" was touted before sequence of returns risk was even a known thing.

Another example, all of the SWR research is based on annual reallocation to a fixed ratio. What SWR should you use if you're doing an "age in bonds" glide path?

It turns out you to have use a much lower SWR, usually on the order of 1.5% less than a 60/40 portfolio with annual rebalancing:

Image

Did you even know that? Have you been planning your retirement around that? But my guess is that no one using "age in bonds" (or any variant) even knows what its actual performance characteristics are like or took them into account when they made the decision to follow it: It just sounded nifty in theory.
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Re: Your age in bonds minus ten? Not according to Vanguard

Post by boglephreak »

Vanguard recommended 100% stocks to me. 60 total us, 40 total intl.

https://personal.vanguard.com/us/funds/ ... mmendation

i am 36 (wife is 29) going for 90/10, but we have significant RE assets.
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Re: Your age in bonds minus ten? Not according to Vanguard

Post by JerseyBoy »

Age in bonds minus ten is right where I am (age 62, 50% bonds, 50% stocks). I plan to make changes in 5-year increments with a floor of 70% bonds at age 80. Quite comfortable with this decision!
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Re: Your age in bonds minus ten? Not according to Vanguard

Post by GoldenFinch »

Age 49 and 77/23. So age minus 26.

Edit: it's late, I can't add.
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Re: Your age in bonds minus ten? Not according to Vanguard

Post by Big Dog »

I'm 45 and currently am about 70/30, considerably more conservative than what is reflected above for someone my age.
I'm [much older] and currently am about 70/30, considerably more aggressive than what is reflected above for someone my age. I only recently started buying bonds. When I was your age, I was 100% into equities.
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Re: Your age in bonds minus ten? Not according to Vanguard

Post by pkcrafter »

nisiprius wrote:
GreenGrowTheDollars wrote:I wonder if some of that is based on considering Social Security income as having bond-like characteristics? That's one key reason my asset allocation is less weighted towards bonds.
I don't think anything about Social Security can explain why Vanguard goosed up the stock allocation in the target retirement funds by almost 20% in 2006. Social Security was there in 2003 when the funds were launched, Vanguard knew all about Social Security in 2003. Nothing dramatic happened to Social Security in 2006. Whatever effect Social Security should have on asset allocation, it was the same in 2003 as it was in 2007.
TR funds took a lot of heat after 2008 performance. I think Vanguard's AAs were better before they increased risk in 2006, but I believe Vanguard increased equity to keep up with the competition's returns.

Article on TR funds from 2010

http://www.nytimes.com/2010/04/11/busin ... .html?_r=0


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Re: Your age in bonds minus ten? Not according to Vanguard

Post by tetractys »

I'm 25% in fixed income until 5 years before retirement, or until I spontaneously decide to retire--or, who knows?, until I go 100% house. The math is right for me. -- Tet
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Re: Your age in bonds minus ten? Not according to Vanguard

Post by Will do good »

grabiner wrote:
Simplegift wrote:
Admiral wrote:I'm curious as to what the general consensus here is in terms of stock/bond asset allocation based on age/expected age at retirement. My sense is that Bogleheads are fairly conservative: many suggest "your age in bonds" or, less conservatively, "your age in bonds minus 10."
There was a survey last summer of Bogleheads’ age and their stock allocations, with over 200 respondents. These were the average results (but with a wide dispersion obviously):
  • Image
It could be that the fairly aggressive average equity allocations, even in the over-60 age groups, are a function of today’s extremely low interest rates.
Many of the stock-heavy older investors are not investing for their own retirement; they have enough to retire on already, and are investing with an appropriate allocation for their children and grandchildren. (In several surveys, this has come up in the comments.)
I'm minus 25 because my current cash and bonds will carry me to 73, SS kicks in at 70 and at that point I can withdraw 2% or 1.5% and still be comfortable. I'm investing for future generations.
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Re: Your age in bonds minus ten? Not according to Vanguard

Post by nps »

AlohaJoe wrote: Another example, all of the SWR research is based on annual reallocation to a fixed ratio. What SWR should you use if you're doing an "age in bonds" glide path?

It turns out you to have use a much lower SWR, usually on the order of 1.5% less than a 60/40 portfolio with annual rebalancing:

Image
AlohaJoe,

Interesting chart. Can you say where it came from?
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Re: Your age in bonds minus ten? Not according to Vanguard

Post by Admiral »

nisiprius wrote:
GreenGrowTheDollars wrote:I wonder if some of that is based on considering Social Security income as having bond-like characteristics? That's one key reason my asset allocation is less weighted towards bonds.
I don't think anything about Social Security can explain why Vanguard goosed up the stock allocation in the target retirement funds by almost 20% in 2006. Social Security was there in 2003 when the funds were launched, Vanguard knew all about Social Security in 2003. Nothing dramatic happened to Social Security in 2006. Whatever effect Social Security should have on asset allocation, it was the same in 2003 as it was in 2007.
I feel like their AA changed to more stocks because they realized that with bonds paying so little, they needed to goose returns in order for their TR funds to have a SWR of 4% (or thereabouts). I can't imagine any other reasonable explanation.
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Re: Your age in bonds minus ten? Not according to Vanguard

Post by nisiprius »

AlohaJoe wrote:Another example, all of the SWR research is based on annual reallocation to a fixed ratio. What SWR should you use if you're doing an "age in bonds" glide path?

It turns out you to have use a much lower SWR, usually on the order of 1.5% less than a 60/40 portfolio with annual rebalancing:

Did you even know that?
Not only didn't I know it, I am very skeptical about it. I would like to know the source of that chart and in particular what failure rate was taken as the criterion. I'll bet it's relatively high. Because the one feature that that's been constant in every SWR I've looked at that presented enough data to explore the relation between a) stock allocation, b) failure rate, and c) withdrawal rate is that if the failure rate is low, say, 3%, and if the stock allocation isn't extreme, say somewhere in between 20% and 80%, then for any fixed withdrawal rate there's very little difference in failure rate, and for any fixed failure rate there's very little difference in withdrawal rate.

You only see higher "safe" withdrawal rates for stocks if the underlying assumption is that retirees are willing to accept, let's say, a 10% chance of running out of money. The reason is that bonds by their nature have a fairly predictable performance. They have a certain withdrawal rate they can support and if you stay below it they have very high success, and if you increase it above that, the chart falls off a cliff and you have a very high rate of failure. Stocks, on the other hand, have a wide, soft curve with a good chance, but much less than certainty, of delivering a really worthwhile jackpot. The result is that if you insist on a high withdrawal rate and can tolerate a high failure rate, then more stocks--in whatever form, steady, age in bonds, standard glide path, Pfau and Kitces minimum at retirement age and increasing, whatever--the more stocks the better. The reason is that you are withdrawing too much for the portfolio to deliver with high certainty, but with luck stocks can deliver it and bonds can't, so more stocks are better.
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Re: Your age in bonds minus ten? Not according to Vanguard

Post by CT-Scott »

Hey, I just wrote this same post a few days ago:
viewtopic.php?p=2890514#p2890514

:)
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Re: Your age in bonds minus ten? Not according to Vanguard

Post by SimpleGift »

grabiner wrote:Many of the stock-heavy older investors are not investing for their own retirement; they have enough to retire on already, and are investing with an appropriate allocation for their children and grandchildren. (In several surveys, this has come up in the comments.)
This make good sense, David, and is a much more likely explanation than today’s low interest rates for older Bogleheads somewhat aggressive equity allocations — since older Bogleheads were apparently also stock-heavy back in the days of higher rates.

In fact, I find myself personally in the very same category you describe — in retirement, with a heavier stock allocation than even Age-10 in bonds would suggest (actually Age-18 in bonds), simply because I’m now mainly investing for heirs and other eventual bequests.
Last edited by SimpleGift on Thu May 05, 2016 8:43 am, edited 1 time in total.
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Re: Your age in bonds minus ten? Not according to Vanguard

Post by coachz »

I don't see 60/40 making sense in retirement as the swings appear too great during crashes UNLESS you have much more money than you need and the withdrawls during retirement don't take so much out that the money can't recover. This article is a fav of mine lately. 30/70 makes more sense to me.

https://portfoliosolutions.com/latest-l ... y-retirees

Also, google "bad sequence of returns". This shows how critical it is to protect your money at the beginning of retirement especially.
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Re: Your age in bonds minus ten? Not according to Vanguard

Post by longinvest »

nisiprius wrote:
AlohaJoe wrote:Another example, all of the SWR research is based on annual reallocation to a fixed ratio. What SWR should you use if you're doing an "age in bonds" glide path?

It turns out you to have use a much lower SWR, usually on the order of 1.5% less than a 60/40 portfolio with annual rebalancing:

Did you even know that?
Not only didn't I know it, I am very skeptical about it. I would like to know the source of that chart and in particular what failure rate was taken as the criterion. I'll bet it's relatively high. Because the one feature that that's been constant in every SWR I've looked at that presented enough data to explore the relation between a) stock allocation, b) failure rate, and c) withdrawal rate is that if the failure rate is low, say, 3%, and if the stock allocation isn't extreme, say somewhere in between 20% and 80%, then for any fixed withdrawal rate there's very little difference in failure rate, and for any fixed failure rate there's very little difference in withdrawal rate.

You only see higher "safe" withdrawal rates for stocks if the underlying assumption is that retirees are willing to accept, let's say, a 10% chance of running out of money. The reason is that bonds by their nature have a fairly predictable performance. They have a certain withdrawal rate they can support and if you stay below it they have very high success, and if you increase it above that, the chart falls off a cliff and you have a very high rate of failure. Stocks, on the other hand, have a wide, soft curve with a good chance, but much less than certainty, of delivering a really worthwhile jackpot. The result is that if you insist on a high withdrawal rate and can tolerate a high failure rate, then more stocks--in whatever form, steady, age in bonds, standard glide path, Pfau and Kitces minimum at retirement age and increasing, whatever--the more stocks the better. The reason is that you are withdrawing too much for the portfolio to deliver with high certainty, but with luck stocks can deliver it and bonds can't, so more stocks are better.
I agree with Nisiprius.

Another way too look at it is to consider SAFEMAX, the highest SWR with 0% failure. It is interesting to discover that the safest allocation was not 100% stocks. Here's a chart SAFEMAX across stock allocations:

(Source: http://retirementresearcher.com/william ... s-safemax/)
Image
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Re: Your age in bonds minus ten? Not according to Vanguard

Post by Da5id »

I wonder if Vanguard's asset allocations in the Target Retirement are market driven to any extent. If Company A has Target Retirement 2025 at 90% stocks, and Company B has its variant of Target Retirement 2025 at 60% stocks, the 90% stock fund will on average have rather better returns (as it should, it assumes more risk). But if consumers are comparing two funds that are ostensibly competitors, they will look at the long term performance numbers and often go with the higher return without fully weighing the risk. Just a theory, but it would explain tendency to ratchet up the stock percentage...
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Re: Your age in bonds minus ten? Not according to Vanguard

Post by CT-Scott »

coachz wrote:I don't see 60/40 making sense in retirement as the swings appear too great during crashes UNLESS you have much more money than you need and the withdrawls during retirement don't take so much out that the money can't recover. This article is a fav of mine lately. 30/70 makes more sense to me.

https://portfoliosolutions.com/latest-l ... y-retirees
That article was apparently written in Feb 2015 but the graph they show covers the date range of Oct 2007 to Feb 2009. If you want to goose the numbers and make a heavy bond allocation look like optimal, that's a great timeframe to use.
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Re: Your age in bonds minus ten? Not according to Vanguard

Post by midareff »

longinvest wrote:
Another way too look at it is to consider SAFEMAX, the highest SWR with 0% failure. It is interesting to discover that the safest allocation was not 100% stocks. Here's a chart SAFEMAX across stock allocations:

(Source: http://retirementresearcher.com/william ... s-safemax/)
Image

Now that's interesting. It would seem there is no advantage to be gained, regarding SWR, going past 40% or so equities. OTOH, it would seem you have to derive a chart like this from historical data and today's government bond is not your father's.
Last edited by midareff on Thu May 05, 2016 7:29 am, edited 1 time in total.
longinvest
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Re: Your age in bonds minus ten? Not according to Vanguard

Post by longinvest »

Here's an international perspective on SAFEMAX:

Image

Source: Pfau, Wade D. 2010. “An International Perspective on Safe Withdrawal Rates from Retirement Savings: The Demise of the 4 Percent Rule?" GRIPS Discussion Papers 10-12, National Graduate Institute for Policy Studies, revised Oct 2010.


P.S. It's all in our Wiki: https://www.bogleheads.org/wiki/Trinity_study_update
Last edited by longinvest on Thu May 05, 2016 7:32 am, edited 1 time in total.
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Re: Your age in bonds minus ten? Not according to Vanguard

Post by CT-Scott »

Da5id wrote:I wonder if Vanguard's asset allocations in the Target Retirement are market driven to any extent. If Company A has Target Retirement 2025 at 90% stocks, and Company B has its variant of Target Retirement 2025 at 60% stocks, the 90% stock fund will on average have rather better returns (as it should, it assumes more risk).
But that's only true when stocks are on the rise. If the stock market is doing poorly, the fund that is 60% stocks would look better.
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Re: Your age in bonds minus ten? Not according to Vanguard

Post by Da5id »

CT-Scott wrote:
Da5id wrote:I wonder if Vanguard's asset allocations in the Target Retirement are market driven to any extent. If Company A has Target Retirement 2025 at 90% stocks, and Company B has its variant of Target Retirement 2025 at 60% stocks, the 90% stock fund will on average have rather better returns (as it should, it assumes more risk).
But that's only true when stocks are on the rise. If the stock market is doing poorly, the fund that is 60% stocks would look better.
That agrees exactly with what I said, so perhaps I'm missing your point. But if you are looking at 10 year averages, the 90% stock will very often beat the 60% stock, as it is expected to do so to compensate for the additional risk. My question is whether the stock percentage in target retirement funds is at all driven by marketing and competition for consumer dollars, rather than by a sober analysis of what percentage of stocks is appropriate for someone who is retiring in X years.
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Re: Your age in bonds minus ten? Not according to Vanguard

Post by longinvest »

midareff wrote:Now that's interesting. It would seem there is no advantage to be gained, regarding SWR, going past 40% or so equities. OTOH, it would seem you have to derive a chart like this from historical data and today's government bond is not your father's.
Might not be your father's bonds, but might be your grand father's bonds. Bonds didn't exactly fare well in the 1940-1980 period. The chart includes this time frame.
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Re: Your age in bonds minus ten? Not according to Vanguard

Post by coachz »

CT-Scott wrote:
coachz wrote:I don't see 60/40 making sense in retirement as the swings appear too great during crashes UNLESS you have much more money than you need and the withdrawls during retirement don't take so much out that the money can't recover. This article is a fav of mine lately. 30/70 makes more sense to me.

https://portfoliosolutions.com/latest-l ... y-retirees
That article was apparently written in Feb 2015 but the graph they show covers the date range of Oct 2007 to Feb 2009. If you want to goose the numbers and make a heavy bond allocation look like optimal, that's a great timeframe to use.
Are you saying our own Rick Ferri was not being transparent ?
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Re: Your age in bonds minus ten? Not according to Vanguard

Post by AlohaJoe »

nps wrote:Interesting chart. Can you say where it came from?
It is from the book Living Off Your Money: The Modern Mechanics of Investing During Retirement with Stocks and Bonds, which comes out shortly. The author provided me with a review copy.
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Re: Your age in bonds minus ten? Not according to Vanguard

Post by Dandy »

What allocation you have at various ages is very personal. How large is your nest egg? What debts do your have or are on the horizon? Will you have a pension? Will you wait to collect SS? How is your health and longevity genes? What is your risk tolerance? What are your ongoing basic expenses? When do you plan to retire? Will you work part time? etc.

Age is bond is a nice starting point. If you vary a lot from that you should do some thinking to make sure you know why. I feel Vanguard and other firms are much more aggressive in their allocation recommendations than is warranted.

I am 68 and feel that I have enough assets - very lucky. I like Dr. Bernstein's idea of having enough "safe" products to fund my retirement draw down expenses for 20+ years and invest the rest anyway you want. The "rest" could be very aggressive - for me not so much. I have about a 40/60 allocation.
I'm more into preservation of assets than striving fro growth.

So, my point is you need to look at your own personal factors including risk tolerance to make the allocation fit you.
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Re: Your age in bonds minus ten? Not according to Vanguard

Post by AlohaJoe »

longinvest wrote:Another way too look at it is to consider SAFEMAX, the highest SWR with 0% failure. It is interesting to discover that the safest allocation was not 100% stocks. Here's a chart SAFEMAX across stock allocations:

(Source: http://retirementresearcher.com/william ... s-safemax/)
Image
This chart agrees with what I'm saying; I'm not sure why you and Nisi think otherwise.

"age in bonds" means you're starting out retirement with 65% bonds and 35% stocks. That's pretty much exactly where the curve flattens out. Every year of retirement you're moving left on that curve, lowering your SAFEMAX. By the time you're 80, you have a 20% stock allocation, which your own chart says has a SWR of around 3.3%. By the time you're 90, your SAFEMAX is under 3%.
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coachz
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Re: Your age in bonds minus ten? Not according to Vanguard

Post by coachz »

nps wrote:
AlohaJoe wrote: Another example, all of the SWR research is based on annual reallocation to a fixed ratio. What SWR should you use if you're doing an "age in bonds" glide path?

It turns out you to have use a much lower SWR, usually on the order of 1.5% less than a 60/40 portfolio with annual rebalancing:

Image
AlohaJoe,

Interesting chart. Can you say where it came from?
And can it be extended to 2016 ?
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Re: Your age in bonds minus ten? Not according to Vanguard

Post by ruralavalon »

Here is the general consensus here over the years 2007 - 15. "Bogleheads Stock AA versus Age". At age 20 = 90/10, at age 50 = 65/35, and at age 80 = 40/60.

We are both age 70, asset allocation = 50/50.
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Re: Your age in bonds minus ten? Not according to Vanguard

Post by coachz »

longinvest wrote:
nisiprius wrote:
AlohaJoe wrote:Another example, all of the SWR research is based on annual reallocation to a fixed ratio. What SWR should you use if you're doing an "age in bonds" glide path?

It turns out you to have use a much lower SWR, usually on the order of 1.5% less than a 60/40 portfolio with annual rebalancing:

Did you even know that?
Not only didn't I know it, I am very skeptical about it. I would like to know the source of that chart and in particular what failure rate was taken as the criterion. I'll bet it's relatively high. Because the one feature that that's been constant in every SWR I've looked at that presented enough data to explore the relation between a) stock allocation, b) failure rate, and c) withdrawal rate is that if the failure rate is low, say, 3%, and if the stock allocation isn't extreme, say somewhere in between 20% and 80%, then for any fixed withdrawal rate there's very little difference in failure rate, and for any fixed failure rate there's very little difference in withdrawal rate.

You only see higher "safe" withdrawal rates for stocks if the underlying assumption is that retirees are willing to accept, let's say, a 10% chance of running out of money. The reason is that bonds by their nature have a fairly predictable performance. They have a certain withdrawal rate they can support and if you stay below it they have very high success, and if you increase it above that, the chart falls off a cliff and you have a very high rate of failure. Stocks, on the other hand, have a wide, soft curve with a good chance, but much less than certainty, of delivering a really worthwhile jackpot. The result is that if you insist on a high withdrawal rate and can tolerate a high failure rate, then more stocks--in whatever form, steady, age in bonds, standard glide path, Pfau and Kitces minimum at retirement age and increasing, whatever--the more stocks the better. The reason is that you are withdrawing too much for the portfolio to deliver with high certainty, but with luck stocks can deliver it and bonds can't, so more stocks are better.
I agree with Nisiprius.

Another way too look at it is to consider SAFEMAX, the highest SWR with 0% failure. It is interesting to discover that the safest allocation was not 100% stocks. Here's a chart SAFEMAX across stock allocations:

(Source: http://retirementresearcher.com/william ... s-safemax/)
Image
From that chart, would 70% be a sweet spot for maximizing safe returns ?
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Re: Your age in bonds minus ten? Not according to Vanguard

Post by sls239 »

I can think of a couple reasons that have nothing to do with theory:

1) They looked at their average shareholder and found that on average they were significantly behind and would need to take more risk to reach their goal.
2) They may believe that the set-up works better if people who want to be more conservative shift to a sooner date rather than those who want to be more aggressive shifting to a later date. And that could be because people feel much better setting an earlier retirement date than a later one.
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Re: Your age in bonds minus ten? Not according to Vanguard

Post by Doc »

longinvest wrote:
midareff wrote:Now that's interesting. It would seem there is no advantage to be gained, regarding SWR, going past 40% or so equities. OTOH, it would seem you have to derive a chart like this from historical data and today's government bond is not your father's.
Might not be your father's bonds, but might be your grand father's bonds. Bonds didn't exactly fare well in the 1940-1980 period. The chart includes this time frame.
Ok back of the envelope idea. My ancestors earned 4% in intermediate term bonds. I can only earn 2%. Net annual income reduction: 60% of 2% is 1.2%.

The curve still applies as to the percent equities but the SWR at the plateau is now only 2.8%. :idea:

Hasn't 3% been thrown about recently?
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Re: Your age in bonds minus ten? Not according to Vanguard

Post by longinvest »

Doc wrote:
longinvest wrote:
midareff wrote:Now that's interesting. It would seem there is no advantage to be gained, regarding SWR, going past 40% or so equities. OTOH, it would seem you have to derive a chart like this from historical data and today's government bond is not your father's.
Might not be your father's bonds, but might be your grand father's bonds. Bonds didn't exactly fare well in the 1940-1980 period. The chart includes this time frame.
Ok back of the envelope idea. My ancestors earned 4% in intermediate term bonds. I can only earn 2%. Net annual income reduction: 60% of 2% is 1.2%.
Doc,

Aren't you forgetting about inflation? Our ancestors had higher inflation.
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CT-Scott
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Re: Your age in bonds minus ten? Not according to Vanguard

Post by CT-Scott »

coachz wrote:
CT-Scott wrote:
coachz wrote:I don't see 60/40 making sense in retirement as the swings appear too great during crashes UNLESS you have much more money than you need and the withdrawls during retirement don't take so much out that the money can't recover. This article is a fav of mine lately. 30/70 makes more sense to me.

https://portfoliosolutions.com/latest-l ... y-retirees
That article was apparently written in Feb 2015 but the graph they show covers the date range of Oct 2007 to Feb 2009. If you want to goose the numbers and make a heavy bond allocation look like optimal, that's a great timeframe to use.
Are you saying our own Rick Ferri was not being transparent ?
I probably shouldn't have used the term "goose the numbers." It seems like Rick was using that timeframe specifically for the purpose of showing a period where an extreme drop occurred which would have been hurtful to someone just starting out in their retirement who might have had "just enough" to enter retirement. The article title makes it clear that it's aimed at retirees, and I missed that and lazily skimmed over it before posting my reply.

That said, I'm not sure how far off the old advice is from Vanguard's Target fund allocations for retirees...a Vanguard 2040 fund might nearly 90% stocks today, but when someone in that fund approaches 65, their 2040 fund at that time should theoretically look more like how a Vanguard 2015 fund looks today, which has about 44% Bonds and another 9% in securities.
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Re: Your age in bonds minus ten? Not according to Vanguard

Post by dsmil »

I like the curved models that are currently followed in most of the target retirement funds, so I think I'll be at 90/10 until age 40.
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Re: Your age in bonds minus ten? Not according to Vanguard

Post by cpw84 »

I like the SAFEMAX approach and it makes a great case for landing around 60/40.

I just realized, looking closer though, that there is no international exposure. So, assuming it is wise to have international exposure (I have chosen 1/3 of stocks in international), would you necessarily be just as well off, or would you have more volatility? I guess it would require a more complicated analysis, introducing the international percentage parameter. I'm just thinking, if it is fairly common wisdom that investing in international helps your risk and returns, it may not necessarily translate to helping withdrawal rate if you go from a historical perspective. You could always just shift to Bengen's AA at retirement.

I guess what I'm saying is, an analysis is only as good as its assumptions.
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