There have been a couple threads on the forum (bottom) that have discussed recent research by Wade Pfau and Michael Kitces on using a Rising Equity Glide Path (REGP) in the first decade or so of retirement. I feel like I might have read another thread with REGP content in it some time ago but I could be wrong. I was hoping maybe some other here who have looked at REGP might chime in on my train of thought that follows.
I'm no longer working, though we're not drawing on our stash yet. My wife's income currently supports our expenses but she may quit at the end of the year so our transition to living off our investments is somewhat imminent. Our stash is basically all stocks and bonds, allocated 85 stocks/10 bonds/5 cash. We have some real estate that may contribute in the long-term future but for all intents and purposes we are retiring on our $1 million in investments ($40k in planned expenses). We're in our early 30's so we also hope to see two 30-year "retirement periods," though we expect Social Security income to reduce the drain on our portfolio by a healthy amount, even after expected future reductions.
Most folks in the financial world tend to agree that the US equities market looks overvalued at the moment. For the sake of this conversation I don't want to get hung up in how overvalued it could be based on CAPE, the recent changes to how they measure CAPE, etc. I tend to look at the broader strokes. When lots of professionals in any one field say X, it's usually relevant to some degree. I've been thinking about the odds of lower returns in the near future, and what that could mean for someone retiring in their 30's now-ish (us). I also consider the psychological aspect of this from the standpoint of someone who has left a career he would not go back to, which seems to be a common theme for many people.
When considering a shift to the REGP (something like 30 stocks/70 bonds at the moment of retirement) in such an early retirement, I wonder about the potential scenario where a reduced return early on due to REGP might cause a portfolio failure later in life, given the longevity of the retirement. Obviously we're talking about a scenario that's really on the margins, almost worst case scenario type stuff. Perhaps the infusion of SS into the second retirement period would make this a non-issue. Conversely, the thought occurred to me that sticking with an equities heavy allocation while young might be better in that if there is a bad sequence of returns in the first ten years, we're more able to earn income while young to shore up the portfolio for a few years, as opposed to the potential scenario described above where reduced returns with REGP early on leave us facing the prospect of work later in life.
Again, we're really on the margins here but it's just something I was thinking about. The potential difference is that the smaller losses in a bad sequence of returns with REGP might keep us comfortable drawing money from our portfolio, causing a greater draw down over the long run, instead of a pause in withdrawals during a couple bad years while we resumed working to pay for expenses.
Naturally, we have safety margins built in. We can reduce spending, etc. I don't plan to blindly take our 4% regardless of what the market does. I'm looking at this more from the thought exercise point of view, though it obviously has practical application. Maybe I'm totally overthinking it, given just how on the margins these scenarios would be. Yet that's kinda why we make asset allocation choices and study different concepts like REGP, to try and better cover the unfavorable scenarios. Thoughts?
https://forum.mrmoneymustache.com/post-fire/using-the-rising-equity-glidepath-to-reduce-sequence-of-returns-risk/https://forum.mrmoneymustache.com/investor-alley/changing-asset-allocation-as-fire-approaches/