Best allocation once FIRED?

[purplish]

I'm considering selling rental properties, and putting the money into index funds instead.  I'm looking at Target Retirement funds... but I'm not sure which to put it in?  Technically I could be FIREd at that point, but I'm not going to be living off it (I get enough money from other rentals and a part time job that I don't need to).  However, the Target Retirement Income looks really high in bonds, which obviously means lower interest.  For my Roth, I have it set to 80 Stocks/20 Bonds.  Should I just stick with that?  Or are the stocks too high to FIRE with?  As far as amounts, I'd be putting possibly $400,000.  I'm only 37 though, so nowhere near SSI age.

[Radagast]

A while ago I thought about this and came up with these guidelines:
Not less than 50% should be in stocks
Not more than 50% should be in US Stocks
International should be 50% to 30% of stocks (talking US people here)
Bonds should be at least 10% but not more than 40%

The center of that range is 45% US, 30% international, 25% bonds.

[MustacheAndaHalf]

purplish - What is the goal for this money?  If it's your retirement nest egg, then when you have enough you should switch to defending it.  Instead of growing it with an 80% stock allocation, you could switch to 40% bonds to keep it whole.  Put another way, if you have 2x your retirement amount you don't get twice the retirement.  But if your assets dwindle by half, you could be forced out of retirement.

Radagast - You gave no reasons for any of your guidelines.

[Frankies Girl]

The answer is actually: there is no "best" allocation since it is dependent on whatever your personal risk assessment/goals can stand.

Over the long term, the market always goes up. The next 50+ years you will be invested could be a wild ride with lots of dips and rises and the more you have in stocks, the crazier it will be, but you'll make ever so much more. The thing to keep in mind here is that risk is not equal to volatility. If you can't stomach crazy drops and slow rebounds, then you adjust over to the safer allocations. But the actual numbers are completely arbitrary really other than the "in the know" folks advocating for a higher-than-you'd-think percentage in stocks, so you get as close as you personally can stand and lets you sleep at night.

Warren Buffett recommended a 90/10 split. Go Curry Cracker has discussed his plans for 100% stocks in their portfolio, and I agree with him in theory, but because I know that going all the way in won't suit me psychologically right now, I trust in Buffet's recommendation.

I am currently in my 2rd year FIREd, and I'm at roughly 85% stocks/15% bonds (there is something like 2% cash in a savings account, but I figure that into my bond totals). Close enough for me at the moment. ;)

From Warren Buffet's 2014 Berkshire Hathaway letter

What I advise here is essentially identical to certain instructions I’ve laid out in my will. One bequest provides that cash will be delivered to a trustee for my wife’s benefit…My advice to the trustee could not be more simple: Put 10% of the cash in short-term government bonds and 90% in a very low-cost S&P 500 index fund. (I suggest Vanguard’s.) I believe the trust’s long-term results from this policy will be superior to those attained by most investors…

From GoCurryCracker's blog

Most people will argue that a small increase in annual return is not worth the vastly increased volatility [of going 100% stocks]. This is especially true when the success rate of our portfolio over a 60 year period is roughly the same whether we have 70% equities or 100% equities

So why accept the greater volatility? Because over a 60 year period, even a small increase in return results in massive differences in total assets.

[Mr Mark]

I like Warren Buffett's 90/10 split for accumulation. Once FIRE I'll target probably 80/20 thinking I'll get a few years of funding a 4% SWR without a forced fire sale in equities post crash and a bit of rebalancing at lower stock prices.

Also look within that to have a stock allocation that has a dividend bias wrt 15% REITs and 10% quality dividend stocks. 

[MrGville]

Over the long term, the market always goes up.

Has always gone up =/= will always go up. 

For example, there is a good chance that the Japanese market will never reach its 1989 high again because of demographic changes and a shift in the global markets.

Sure would have sucked to be a passive investor in 1980s Japan.  Maybe you'd be on track by now to retire in 2050.

This is something that certainly scares me.  Although, I don't think it scares me enough to deter me from having at least 80% of my portfolio in stocks.  The odds of something like that happening are so slim that it shouldn't have an effect on my FIRE plan...

[ysette9]

https://www.kitces.com/blog/should-equity-exposure-decrease-in-retirement-or-is-a-rising-equity-glidepath-actually-better/

I found this article some interesting food for thought. Basically it is discussing a "reverse glide path" approach to your asset allocation once retired. This means carrying more bonds in the beginning of retirement and slowly shifting that to a higher equities allocation over time. The reason for this is twofold: 1) The biggest risk in the first part of retirement (<10 years) is sequence of returns, where you hit a few bad years in a row and your portfolio can't recover; 2) the biggest risk over the long term is inflation eating away at your nest egg and your investments not keeping pace.

The theory of the article then is that carrying more bonds in the beginning helps to shelter you from sequence of returns risk. Then once you are past the stage where you are most likely to fail, you switch to more stocks to ensure your money will last as long as you do. To me this seems to be more relevant to the early retiree hoping for a long retirement than someone of a more traditional age with SS and pension coming in. This is something I plan on looking into more in a few years as we get close to pulling the trigger since we won't have any additional income coming in for many, many years.

[Tom Bri]

Which bond funds do folks here recommend?

[ysette9]

VBTLX and VTIBX for the win!

:)

[ysette9]

I don't have a link available at my fingertips right now, but I know someone did an analysis of when your portfolio becomes "too big to fail". Was it the Mad Fientist? Basically the conclusion was that if your portfolio is going to fail, it will happen in the first ten years. If you survive that period then you are home free, as much as one can be in this kind of game. At that point your are far more likely to die with massive sums of money.

[ysette9]

http://www.madfientist.com/safe-withdrawal-rate/

It turns out the Mad Fientist was rehashing work done by Kitces.

[boarder42]

i plan to do 50VTSAX 40VTIAX and 10VBTLX

i go back and forth on international exposure but figure i hsould have it incase we end up in a japan situation.

[ysette9]

I'm a fan of the international exposure. A vanguard person was the one who originally recommended it to me. Whenever there is a post with people wringing hands over the current CAPE, I can tune it all out because I have that international component.

[boarder42]

I'm a fan of the international exposure. A vanguard person was the one who originally recommended it to me. Whenever there is a post with people wringing hands over the current CAPE, I can tune it all out because I have that international component.

the counter arguement that bogle himself has posited is that the economy is so global now anyways that even VTSAX has all the international exposure you need.

[ysette9]

https://personal.vanguard.com/pdf/icrrhb.pdf
Vanguard did a white paper on the home bias topic that you may find interesting.

we conclude that, in general, U.S. investors may have some justi cation for marginal home bias, but investors in Australia and Canada might consider increasing their allocations to foreign securities. The results for U.K. investors are mixed, with less overall concentration in domestic securities but still room to diversify

[moof]

Which bond funds do folks here recommend?

PIMIX if it is in your 401k options, or if you can handle the 100k minimum buy.

[Eric]

The best AA is one that you will stick with.  It does no good to pick an AA if you constantly change your mind everytime the market hiccups.

A target date or lifestrategy fund would be a fine choice if you're committed to it.

[Radagast]

Radagast - You gave no reasons for any of your guidelines.

Yeah, I was about to go to bed and didn't do it. I first considered over the course of this thread: http://forum.mrmoneymustache.com/investor-alley/100-stocks-in-the-retirement-phase/ Maybe some time I'll add even more in-depth links and references. I fluctuate on what I think about the bottom end of US:International stocks should be. I try to be as inclusive as possible, but investing internationally somewhere between less than 30% of stocks or less than 10% of total just seems like a bad idea no matter how I think about it.

[Radagast]

The best AA is one that you will stick with.  It does no good to pick an AA if you constantly change your mind everytime the market hiccups.

A target date or lifestrategy fund would be a fine choice if you're committed to it.

Agreed.

[AdrianC]

Here's how I've been thinking about stock/bond allocation: if you’re FIRE’d and living off the portfolio only, wouldn’t it be better to have a set number of years of living expenses in bonds/cash? The idea being to have enough cash to ride out a stock market downturn, and not have to sell stocks at low prices.

Then, the bond or cash allocation is: (Withdrawal rate) x (Years of living expenses needed in bonds/cash).

Buffett said he recommends a 90/10 allocation for his wife, though 10% for her is likely many millions.

For our typical 4% SWR retiree, 10% is 2.5 years of living expenses (ignoring inflation). I don’t think that’s enough. A retiree in 2000 would have blown through her cash (or cut back spending) and maybe had to sell stocks in 2002. Not good.

4% SWR => 5 years expenses is 4x5 = 20%  80/20

3% SWR => 5 years expenses is 3x5 = 15%  85/15

Theses are still aggressive allocations. Vanguard Lifestrategy Growth is 80/20.

[Eric]

Here's how I've been thinking about stock/bond allocation: if you’re FIRE’d and living off the portfolio only, wouldn’t it be better to have a set number of years of living expenses in bonds/cash? The idea being to have enough cash to ride out a stock market downturn, and not have to sell stocks at low prices.

Then, the bond or cash allocation is: (Withdrawal rate) x (Years of living expenses needed in bonds/cash).

Buffett said he recommends a 90/10 allocation for his wife, though 10% for her is likely many millions.

For our typical 4% SWR retiree, 10% is 2.5 years of living expenses (ignoring inflation). I don’t think that’s enough. A retiree in 2000 would have blown through her cash (or cut back spending) and maybe had to sell stocks in 2002. Not good.

4% SWR => 5 years expenses is 4x5 = 20%  80/20

3% SWR => 5 years expenses is 3x5 = 15%  85/15

Theses are still aggressive allocations. Vanguard Lifestrategy Growth is 80/20.

Would you simply move towards 100% stocks then?  Because otherwise, I'm not sure what the point of counting your years in bonds/cash, since you'd simply continue to rebalance back into your 80/20.  What am I missing?

[AdrianC]

Here's how I've been thinking about stock/bond allocation: if you’re FIRE’d and living off the portfolio only, wouldn’t it be better to have a set number of years of living expenses in bonds/cash? The idea being to have enough cash to ride out a stock market downturn, and not have to sell stocks at low prices.

Then, the bond or cash allocation is: (Withdrawal rate) x (Years of living expenses needed in bonds/cash).

Buffett said he recommends a 90/10 allocation for his wife, though 10% for her is likely many millions.

For our typical 4% SWR retiree, 10% is 2.5 years of living expenses (ignoring inflation). I don’t think that’s enough. A retiree in 2000 would have blown through her cash (or cut back spending) and maybe had to sell stocks in 2002. Not good.

4% SWR => 5 years expenses is 4x5 = 20%  80/20

3% SWR => 5 years expenses is 3x5 = 15%  85/15

Theses are still aggressive allocations. Vanguard Lifestrategy Growth is 80/20.

Would you simply move towards 100% stocks then?  Because otherwise, I'm not sure what the point of counting your years in bonds/cash, since you'd simply continue to rebalance back into your 80/20.  What am I missing?

How do we decide on an allocation? I don't know my risk tolerance once I'm living off the portfolio alone. Up to now I've been between 100/0 and 90/10 or so and happy with that. I think that's going to change when the fire hose of cash from my work turns off.

So this is my way of coming up with an allocation I think we can live with in FIRE. I'm not just guessing at risk tolerance.

That make sense?

[Eric]

If you're just using it as a thought exercise to determine your risk tolerance for your AA, then sure, I think that's a good way to look at it.

I was thinking about your statements in practice though.  So no matter what % of bonds you hold, if you're only living off of the bonds during a downturn (without rebalancing), then your AA is going to shift towards higher stock %.  If you instead regularly rebalance, then you maintain that AA, but you're not avoiding the selling of stocks at low prices. 

Or I guess there's a third option, which would be to live off of the bonds, and then add them back in at some undertermined point in the future.  But that feels a little market time-y to me and I personally like to avoid transactions based on "feel".

[AnEDO]

We just reached FI (but we don't plan to retire until 2020) and up until this point I have always been at a minimum 90% equities.  We rode the sub prime market meltdown all the way down and all the way back up again so I know that I can stay the course during market volatility.  You might be surprised to know that I just rebalanced to 50:50 stocks:bonds.  The reason for us is that we have enough.  I am totally happy giving up some market gains in order to significantly increase the odds that we can still retire in a few years.  If equities ever get as cheap as they did in 2008, I would feel compelled to shift more to equities but for now, the potential upside vs the potential downside isn't compelling enough for me to risk my upcoming freedom.

[AdrianC]

If you're just using it as a thought exercise to determine your risk tolerance for your AA, then sure, I think that's a good way to look at it.

That's a good part of it. We all have to find an allocation we know we can stick with.

I was thinking about your statements in practice though.  So no matter what % of bonds you hold, if you're only living off of the bonds during a downturn (without rebalancing), then your AA is going to shift towards higher stock %.  If you instead regularly rebalance, then you maintain that AA, but you're not avoiding the selling of stocks at low prices. 

Or I guess there's a third option, which would be to live off of the bonds, and then add them back in at some undertermined point in the future.  But that feels a little market time-y to me and I personally like to avoid transactions based on "feel".

Third option, but a rule-based system. I agree that it can't be based on feel.

I have it on my to do list to look into variable withdrawal rate strategies. Not got there yet.

[AdrianC]

We just reached FI (but we don't plan to retire until 2020) and up until this point I have always been at a minimum 90% equities.  We rode the sub prime market meltdown all the way down and all the way back up again so I know that I can stay the course during market volatility.  You might be surprised to know that I just rebalanced to 50:50 stocks:bonds.  The reason for us is that we have enough.  I am totally happy giving up some market gains in order to significantly increase the odds that we can still retire in a few years.  If equities ever get as cheap as they did in 2008, I would feel compelled to shift more to equities but for now, the potential upside vs the potential downside isn't compelling enough for me to risk my upcoming freedom.

If you've won the game, why play? Understandable.

Something to think about, for sure. A 50% market drawdown with my 90/10 allocation would significantly mess up my FIRE plan.

[ChpBstrd]

Remember that the overall rationale of diversification is to survive as many "what if" scenarios as possible. The bonds in a 80/20 portfolio are there to prevent you selling too many shares during a recession. The international allocation is there to mitigate the risk of a US-specific problem (similar to the Japan problem mentioned above). Think through the sorts of scenarios you might have to survive and pack accordingly: inflation, deep recessions, Japan scenarios, rising or falling interest rates, commodity or housing bubbles, sovereign defaults, liquidity crises, etc.

Also consider the many diversification options that are not binary stocks/bonds, like preferreds, REITs, MLPs, options funds, commodities funds, convertables, etc. These all zig zag differently than the stock market, but can be just as painful to watch at times.