Author Topic: when do I make the allocation switch from accumulation to preservation?  (Read 1217 times)

Late_Bloomer

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There are a few threads floating around touching on this, but I wanted to ask a similar question based on my long term hypothetical...I have a 15 year time horizon until FIRE. Until that time, I am comfortable having all my investments in 100% stocks. The way I diversify is to have the stocks split within large/mid cap, small cap, and international. I know I "should" have bonds for preservation, as well as easing market corrections over the years. So my question is, WHEN do I bring in bonds? Is it wise to buy in a little now, and continue contributing in bonds for the next 15 years to build up a healthy pool? Or, is it just as well to buy in at my 15 year mark and just change my allocation to something like 40 stock/60 bond?

I don't fully understand the complications of these options. For example, I know if I buy into bonds now, and continue to do so for the next 15 years, I will not accumulate as fast as I would being 100% stocks. However, if I wait, and rearrange my allocation at FIRE date to add the bonds, will that transfer eat a lot of my stock conversion? Or does it even matter when re allocating?

Late_Bloomer

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i guess I'll do more research on this issue before posting here again.

MustacheAndaHalf

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Vanguard Target Retirement 2030 holds 28% bonds.  That might be a good starting point for deciding your bond allocation.

One problem with the 100% stocks retirement is that you can't count on your retirement assets.  If the stock market plunges 20%, do you have to delay retirement and keep working?  If you just retired, a stock correction also means your spending eats away at your portfolio faster than you expected.

Villanelle

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I would figure out what % bonds you want to hold when you retire in 15 years.  I'd start acquiring those about 10 years out, so divide that by 120 (roughly the number of months until retirement) and start buying those as part of your monthly investments when you are roughly 10 years away from retirement.  You shouldn't have to actually sell anything to do that.  You just funnel some of your monthly dollars into bonds instead of stocks. (You'll likely have to adjust those amounts over time--likely upward--since as the market grows, the simple /120 math won't be quite right, but it's a place to start.)

Sure, your portfolio will grow slightly more slowly.  But in the first few years, you will probably be at 1-5% bonds, so it isn't going to make that much of a difference. 

But so much of this is personal comfort levels regarding risk, and how conservative you want to be vs. how much you are willing to cut spending in FIRE.  So while 10 years makes sense for me, your number might be higher or lower.  And the % you allocate to bonds will be different than other people's may be.

GreatLaker

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I also believe in gradually moving to your retirement allocation starting at least 10 years prior. Markets can stay disconnected from fundamentals for a long time, and go through long-term bull and bear markets. Imagine if you retired in late 2008 and had planned to reallocate from stocks to bonds at that time. Or in 2000, or 1987, or 1973... The market crashes and goes through bear markets frequently enough that waiting until you are retired to switch to your retirement allocation in the hopes of retiring with a little more money is picking up nickels in front of steam rollers.
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Ocinfo

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One problem with the 100% stocks retirement is that you can't count on your retirement assets.  If the stock market plunges 20%, do you have to delay retirement and keep working?  If you just retired, a stock correction also means your spending eats away at your portfolio faster than you expected.

A 20%+ drop would make me want to keep working a bit longer even if I didn't need to but I'm still pretty young so OMY isn't much of a sacrifice. Basically, if you can keep buying after a large dip, you've eliminated a lot of the early retirement sequence of returns risk and I can't pass up a good sale.


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aceyou

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There are a few threads floating around touching on this, but I wanted to ask a similar question based on my long term hypothetical...I have a 15 year time horizon until FIRE. Until that time, I am comfortable having all my investments in 100% stocks. The way I diversify is to have the stocks split within large/mid cap, small cap, and international. I know I "should" have bonds for preservation, as well as easing market corrections over the years. So my question is, WHEN do I bring in bonds? Is it wise to buy in a little now, and continue contributing in bonds for the next 15 years to build up a healthy pool? Or, is it just as well to buy in at my 15 year mark and just change my allocation to something like 40 stock/60 bond?

I don't fully understand the complications of these options. For example, I know if I buy into bonds now, and continue to do so for the next 15 years, I will not accumulate as fast as I would being 100% stocks. However, if I wait, and rearrange my allocation at FIRE date to add the bonds, will that transfer eat a lot of my stock conversion? Or does it even matter when re allocating?

Keep in mind that if you are using the 4% rule, that rule is based on the Trinity Study.  The study found that you have a 96% chance of surviving a 30 year retirement based on historical data.  However, to get to that 96% number, they selected 75% stocks and 25% bonds. 

Mathematically, I think the numbers would say to be 100% stocks until FIRE to increase the probability of getting there as fast as possible, then switch to the 75/25 split to maximize the likelihood of preserving your wealth for the remainder of you life. 

moof

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My thought is to have any money you will need in a year in cash, any money you need in the next 5-10 in bonds (hence 20-40% bonds for 25x earnings) depending on your paranoia level, and the rest in stocks.  Being 100% in stocks up to your FIRE date leaves you open to a correction derailing your target date during the last couple years.

Goldielocks

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Worst case scenario is a 10 year negative return (net of inflation).   I would start with planning what you would do if you hit a patch of returns like that for an extended period of time.


Many people plan to pull 3 years of expenses from equity investments into bonds or guaranteed returns, to help mitigate the sequence of returns risk.  If a year or two are low for equity increases, you defer pulling any more from equities and keep to your bonds or cash.  If equities are good, then you can keep topping up your 3 year fund.     (Others choose to move 5 years of expenses, or even 10 years into a guaranteed return.  A few actually put some money into annuities to have a guaranteed minimum that they can live off, if everything turns to crap.)

MustacheAndaHalf

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One problem with the 100% stocks retirement is that you can't count on your retirement assets.  If the stock market plunges 20%, do you have to delay retirement and keep working?  If you just retired, a stock correction also means your spending eats away at your portfolio faster than you expected.
A 20%+ drop would make me want to keep working a bit longer even if I didn't need to but I'm still pretty young so OMY isn't much of a sacrifice. Basically, if you can keep buying after a large dip, you've eliminated a lot of the early retirement sequence of returns risk and I can't pass up a good sale.
That's mixing two time frames: being near retirement and being young.  As a young investor starting to accumulate, you don't need much bonds for the very reason you stated: you make up for losses by purchasing more each year.  But I would even advise a person in their first year of working to have some bonds (even 5%) to get into the habit of having bonds in your portfolio.

Unlike you, OP is closing in on retirement.  For those wanting to fix their date of retirement and avoid delaying it, bonds can help soften the impact of market corrections.  That's why Vanguard holds 28% bonds in a target date fund aimed for those retiring in 13 years.

Ocinfo

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when do I make the allocation switch from accumulation to preservation?
« Reply #10 on: March 20, 2017, 06:18:33 AM »
One problem with the 100% stocks retirement is that you can't count on your retirement assets.  If the stock market plunges 20%, do you have to delay retirement and keep working?  If you just retired, a stock correction also means your spending eats away at your portfolio faster than you expected.
A 20%+ drop would make me want to keep working a bit longer even if I didn't need to but I'm still pretty young so OMY isn't much of a sacrifice. Basically, if you can keep buying after a large dip, you've eliminated a lot of the early retirement sequence of returns risk and I can't pass up a good sale.
That's mixing two time frames: being near retirement and being young.  As a young investor starting to accumulate, you don't need much bonds for the very reason you stated: you make up for losses by purchasing more each year.  But I would even advise a person in their first year of working to have some bonds (even 5%) to get into the habit of having bonds in your portfolio.

Unlike you, OP is closing in on retirement.  For those wanting to fix their date of retirement and avoid delaying it, bonds can help soften the impact of market corrections.  That's why Vanguard holds 28% bonds in a target date fund aimed for those retiring in 13 years.

Not really, can be both young and near retirement (planning on FI in 2022 at age 37 but will likely work part time at current job a few years after that because I like it and pays well).

The point is that if someone is retiring even a bit early that a 20% drop in stocks is a pretty good excuse to keep working another year or two. There are situations where this wouldn't work (e.g., health issue forcing early retirement) where having more bonds would be smart.

Now, if like you said, they have significant bonds then they could just rebalance into stocks at that time but then they would lose some protection against any further drops in the near future until stocks recovered enough to rebalance or they have another source of income to buy more bonds.

As I've said earlier, bonds are necessary and useful, especially if your intention is to never work again or if you're retiring closer to traditional age. However, if you are willing and able to work a bit then their utility drops for someone retiring at an earlier than normal age.As an early retiree, we're in a weird position where age wise we are still in the accumulation phase but we also need to preserve. How one chooses to do that (e.g., bonds, buying rentals, or working a side hustle) has a lot of flexibility. Key thing is diversifying but it doesn't have to be low return bonds.

Edited: Mustacheandahalf, I read one of your other posts and I really think we're saying the same thing in general. I think the difference is how we define retirement (shocking, right?). In the case of this OP, your view of never having to work again might be more right since they are aiming for retirement at 58. I view retirement as not having to work for money but will likely make as much or more after I retire than before. For people like me, we don't actually enter the preservation phase for several years after we no longer need to work. Also, the extra money has value to me because I would like to endow a scholarship fund of some sort and selfishly buy a new Tesla every few years. I think this is the key difference.




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« Last Edit: March 20, 2017, 06:32:55 AM by Ocinfo »

Retire-Canada

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I'm 100% equities. I will buy something like $150K - $200K bonds as I roll up on the date I want to FIRE. I don't need the bonds now and I am not worried if there is a huge market drop right before I want to FIRE. I'll be working PT at that point and a huge crash will mean a bit more PT work. It's not like I'd have the stomach to quit working right after a 40% drop just because I had some bonds in my portfolio.

I won't increase that bond allocation as my portfolio grows. It will stay at a fixed $$ value and if I make it through the first 10yrs or so of FIRE without a sequence of returns risk event then I'll sell most of the bonds and go back to a high equities portfolio for the remainder of my FIRE.