The Money Mustache Community
Learning, Sharing, and Teaching => Investor Alley => Topic started by: Roothy on August 29, 2018, 02:05:59 PM
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I am within 10% of my FI number. I was 90/10 for many years, and the run up has been extraordinary. I have resolved for a long time that I would take risk off the table as I approach my number (which I have been doing over the last year), and then put it back on again as the sequence of return risk lessens over the years after I retire. (Effectively, doing a Kitces "bond tent.") The trouble is that I don't know--and no one seems to have a really good metric--for when to start taking risk off the table, at what pace, and then when/how to reverse it.
My goal has been to be 60/40 by the time I reached my FI number. Since I don't plan to retire for a year to a year and a half after that (long story, but not really changeable), my plan was to then just buy equities with any new purchases, maintaining bonds at 10 times yearly spend until retirement-which will slowly cause equity to drift up. Barring a pull back in the markets, this would likely make me 65/35 on the day of retirement. Then the plan would be to slowly spend down bonds disproportionately until I'm at 90/10 ten years into retirement. (A reverse equity glidepath, that is.)
What I need advice on:
1. I'm now at 70/30, and I'm within about half a year of my FI number. Should I go ahead now and convert to 60/40?
2. Is 60/40 too conservative, given that I will (in about 20 years) have social security? The present-value "bond value" of SS would put me *already* at 60/40. Moving to 60/40 in investable assets would put me at more like 50/50--which feels uncomfortably conservative to me.
3. I also wonder how I should be looking at my home equity (which I have not included in any numbers above), which is about the same size as the SS "bond." No, it doesn't generate income, but yes, when I'm old and gray I will very likely cash it out to pay for my dotage in an old age home. Should I be ignoring it as a matter of AA? It already feels strange to me to ignore it as a matter of investable assets.
4. Finally, what do you think of the plan to hit 60/40 (however calculated) at FI, and then start drifting upward in equities up to and then past retirement?
Thanks for getting this far, if you are still with me. :) I know these are nice problems to have.
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First, congrats on getting so close to FIRE! Second, it sounds like based on #2 and #3, you're already at or past 60/40 in terms of how conservative your overall net worth allocation is. I think most here ignore home equity in calculating net worth and the risk associated with your asset allocation, but I always include it because I like to have a more precise understanding of risk/exposure and I plan to sell my place and use the equity to travel and live more cheaply elsewhere. Good on ya for also calculating the present value of SS - I think that's an often overlooked piece of your net worth and lifetime AA. Again, others here will likely have a different opinion.
As for #4, it seems like a solid plan especially if you're particularly concerned about sequence of return risk (i.e., you think you'll be unable or unwilling to return to work if during the first couple years of FIRE the shit hits the fan and the market spits out returns in the bottom 5th percentile of historical returns). I would do the same were I also in that boat. You probably already know this, but logistically, move tax-sheltered assets to adjust AA as desired.
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1. I'm now at 70/30, and I'm within about half a year of my FI number. Should I go ahead now and convert to 60/40?
2. Is 60/40 too conservative, given that I will (in about 20 years) have social security? The present-value "bond value" of SS would put me *already* at 60/40. Moving to 60/40 in investable assets would put me at more like 50/50--which feels uncomfortably conservative to me.
4. Finally, what do you think of the plan to hit 60/40 (however calculated) at FI, and then start drifting upward in equities up to and then past retirement?
I think, based on historical behavior, you are "in the right ballpark." I further think that if I knew the right answer, I could be much, much richer than I am now. :)
See Playing with Callan's periodic tables of investment returns - Bogleheads.org (https://www.bogleheads.org/forum/viewtopic.php?f=10&t=257653) for some interesting charts, particularly the ones showing different stock/bond holdings.
3. I also wonder how I should be looking at my home equity (which I have not included in any numbers above), which is about the same size as the SS "bond." No, it doesn't generate income, but yes, when I'm old and gray I will very likely cash it out to pay for my dotage in an old age home. Should I be ignoring it as a matter of AA? It already feels strange to me to ignore it as a matter of investable assets.
Good for you on ignoring it as a matter of investable assets. Until/unless you make active plans to sell it, ignoring it for all other investing calculations is not unreasonable.
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Your situation doesn't sound too far off from mine. I'm about 9 months from FIRE and 15 years (after FIRE) from SS, so it looks like I'm a little older and a little closer to FIRE. I hit my FI number years ago and hit my FIRE target number more recently. My FIRE number is more than double my FI number because my expected barebones FIRE budget is about $1600/mo, but my planned spending is over $4000/mo.
In just the last couple months, I moved from 80% stocks to 60% stocks with this short timeline to FIRE.
If you wanted to move toward a more conservative AA as you approach fire as part of a "rising equity glide path", you wouldn't normally start increasing your equity until after you FIRE, which is what I plan to do, although you would normally start moving toward the conservative AA years in advance rather than how I did it. Fortunately, it worked out for me, and I made the shift in AA when my index funds in my 457B/401a were at a high, even though the S&P500 was still down some from the high. I've seen rising equity glide paths calculated out over 10 years and also much longer. I'll go with a 10 year path.
I'm 60/40 now, and with 15 years of FIRE to SS, I would not consider that too conservative to start FIRE. SS is not a bond. The best way to think of SS is that you just have less expenses to cover with the stash when SS kicks in. So, that means you need less stash, not a different AA. Just subtract what's covered by SS, and you still have expenses that need covered by your stash just as if the SS and covered expenses didn't exist.
Your home is part of your net worth, but for the 4% rule, you should only count your stash for the reason you mention about your home not producing income to pay your expenses. An exception would be if you are planning to sell it to downsize to a smaller home (or to rent), then you could factor in the extra stash as a result of the transaction. I'm already in a LCOL area as far as home prices, so I completely exclude it from my calculations.
You should plug your numbers into cFireSim, and it will give you your percentage chance of success. It allows you to add things like SS income or changes in expenses. You can try some different things to see how it affects the result. It gives me 100% when factoring SS at my $4K+/mo spending, plus I can always cut back on discretionary spending if needed.
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I'm approaching 6 years of FIRE at 60/40. Rather than a rising equity glidepath, I want to decrease equity. We are probably approaching bubble territory as consumer, auto, and student debt per capita is now larger than the housing debt that precipitated the 2008 crisis. Long term, I'd like to be 30/70. My situation may be different as I increasingly hold closed end funds invested in debt and debt like securities and individual bonds bought at a discount to par. I expect near equity or even equity beating returns over a three decade period. Especially, with gurus like Bogle estimating a decade or more of equity returns under 5%.
But to answer your question, I think anything within 10% of your target allocation is fine since the plan is to have it be a moving target after reaching a "number" that is probably a moving target itself. Spend your mental efforts optimizing things that move the needle. For example, frugality and maxing your savings rate. Refinancing any "high" debt. Making the most of tax advantaged vehicles. And getting your post retirement health care squared away. (I'm on ACA in Texas which is quite reasonable after subsidy. YMMV.)
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Thank you for these perspectives; it just to hear them as I decide got to approach this stage.
Re: ignoring my house for purposes of both AA and investable assets. It's a lump of money that roughly keeps up with inflation, but there's seems to be so much disdain for considering it a relevant asset that I've essentially just given in to the weight of authority on the point, figuring that if every smart mind but mine thinks it should be ignored, then I'm the one who must be wrong.
But there's less consensus on how to treat social security. Bogle, for instance, says it should be treated as a bond and accounted for as such in your AA. I think Kitces says so, too. It makes sense, at least outside the extremes (like with lower met with fill for whom SHOULD I might be well over half their "assets,"). Especially if you discount i the value by about 25% for the political risks of lowered potatoes in one form or another, it's not like it's going away. It's essentially an annuity. Sure, I could look at it as simply lowering future expenses (which is how I use it on cfiresim) but that doesn't explain why I shouldn't be adjusting my AA based on "owning" that fixed income "annuity.". If someone had an inflation adjusted annuity instead, wouldn't we advise that invester that she could--even should-- be more aggressive with the rest of her AA?
Thanks for any thoughts you have on thethis point. (Or any other point!). I really struggle with this.
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Re: ignoring my house for purposes of both AA and investable assets. It's a lump of money that roughly keeps up with inflation, but there's seems to be so much disdain for considering it a relevant asset that I've essentially just given in to the weight of authority on the point, figuring that if every smart mind but mine thinks it should be ignored, then I'm the one who must be wrong.
So you're calling me stupid? ;) I realize it's easier and safer for people to say ignore it. But doing so doesn't allow you to account for the various ways in which you can use the equity in your house and the various ways in which your life might change going forward. Many people plan to stay in the same house until they die. For them, it doesn't matter either way, and accounting for your house probably unnecessarily complicates things. But for others who plan to sell, move around, or rent at some point, the most precise way to understand your financial picture is to include the equity as an asset for NW and AA calculations and to include a housing expense when you calculate your current and planned expenditures. FWIW, I studied econ and work in finance.