Author Topic: Retirement Asset Allocation?  (Read 1533 times)

KG28282

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Retirement Asset Allocation?
« on: August 07, 2019, 03:08:26 PM »
I'm nearly 100% invested in index funds/ETFs. I'm planning on retiring in the next 3-5 years. My biggest concern is a major market slump right before or right after I quit my job.

I have been considering strategies for the near-term funds I will need for annual living expenses, so I am not selling everything at a loss if there's a crash. Something like a 5 year CD or bond ladder? What else?

h82goslw

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Re: Retirement Asset Allocation?
« Reply #1 on: August 07, 2019, 04:03:32 PM »
Bogleheads.org for the best investment strategies. 


My suggestion, based on what Iíve learned there, is slowly go to a 60/40 AA, with a few years of expenses in cash/CDs to mitigate sequence of returns risk.

KG28282

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Re: Retirement Asset Allocation?
« Reply #2 on: August 07, 2019, 04:47:44 PM »
Heard of Bogleheads but never actually checked it out. Looks great, thanks so much for the recommendation.

ScreamingHeadGuy

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Re: Retirement Asset Allocation?
« Reply #3 on: August 07, 2019, 06:07:38 PM »
Read about equity glide paths at Earlyretirementnow a d bond tents by Michael Kitches.  (Itís the same thing- they just gave it different names.)

The premise is to reduce risk leading into retirement and then add stocks as you move further into retirement to minimize sequence of returns risk. 

KG28282

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Re: Retirement Asset Allocation?
« Reply #4 on: August 07, 2019, 06:18:39 PM »
Bookmarked this one too. Thanks!!

JSMustachian

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Re: Retirement Asset Allocation?
« Reply #5 on: August 08, 2019, 03:09:18 PM »
I'm planning on having 3-5 years worth of expenses in bonds and enough discretionary spending that can be cut down to where I am doing a 2-3% withdraw rate. 

MustacheAndaHalf

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Re: Retirement Asset Allocation?
« Reply #6 on: August 08, 2019, 03:16:40 PM »
The conventional retirement allocation is 60% stocks, 40% bonds.  If you have 0% bonds right now, then that should be the priority.
Vanguard Target Retirement 2025 Fund already has 38% bonds, even though it's 6 years from it's target retirement date.
https://investor.vanguard.com/mutual-funds/profile/portfolio/vttvx

Do you have retirement accounts?  Selling inside a retirement account doesn't trigger taxes, so that's a good place to shift into bonds.

If you sell assets in a taxable account, you'll owe tax on the gains.

Andy R

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Re: Retirement Asset Allocation?
« Reply #7 on: August 08, 2019, 07:07:15 PM »
+1 for both bogleheads and earlyretirementmow.

My suggestion, based on what Iíve learned there, is slowly go to a 60/40 AA, with a few years of expenses in cash/CDs to mitigate sequence of returns risk.

Agree with this, but 3-5 years is already too near and I'd switch to 60/40 now.
Check it out in a spreadsheet and you'll see that the difference in expected return over 3-5 years of 60/40 vs gliding to 60/40 over the same short time is hardly noticeable, yet the risks are disproportionately enormously higher.

KG28282

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Re: Retirement Asset Allocation?
« Reply #8 on: August 10, 2019, 07:38:48 PM »
Hmm. I'm nervous to pull the trigger and reallocate my existing funds. The vast majority are tax-deferred, but still. I'm young, and exchanging into such a conservative allocation unsettles me.

What is the downside to instead start investing 100% of new money to bonds the next couple years, and then that last year keep new money in cash?

I expect to be able to save at least 15x annual spending in the next 4 years. If things really did get crazy, my worst case scenario is to keep on working until market recovery.

Andy R

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Re: Retirement Asset Allocation?
« Reply #9 on: August 10, 2019, 10:01:45 PM »
Hmm. I'm nervous to pull the trigger and reallocate my existing funds. The vast majority are tax-deferred, but still. I'm young, and exchanging into such a conservative allocation unsettles me.

So you are nervous about the market taking a dive, but you are nervous about not getting the highest expected return.
Sorry but you can't have your cake and eat it too.

What is the downside to instead start investing 100% of new money to bonds the next couple years, and then that last year keep new money in cash?

I expect to be able to save at least 15x annual spending in the next 4 years. If things really did get crazy, my worst case scenario is to keep on working until market recovery.

If you're job is recession proof and you're sure you can make up enough by contributing entirely from savings, then yea just contributing to bonds makes a lot of sense. Just make sure you are realistic with your assumptions.

MustacheAndaHalf

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Re: Retirement Asset Allocation?
« Reply #10 on: August 12, 2019, 01:27:52 AM »
You need to transition your thinking.  Before you retire, you want to accumulate assets in order to retire.  The goal is retirement.  It sounds like your goal is being greedy (which is very normal in the stock market).  If you're greedy, you will eventually hit a stock market correction.  If your goal is retirement, and you're very close, you need to protect your assets - not try to maximize them.

If your retirement assets double, you still only retire once.  But if your assets get cut in half that could ruin your retirement.  So the goal is protecting your assets in retirement.  If you're nervous about not having enough... retire later.  If you're just being greedy, that won't change.  You can be greedy, or you can try to protect retirement assets.

insufFIcientfunds

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Re: Retirement Asset Allocation?
« Reply #11 on: August 12, 2019, 05:39:52 AM »
You need to transition your thinking.  Before you retire, you want to accumulate assets in order to retire.  The goal is retirement.  It sounds like your goal is being greedy (which is very normal in the stock market).  If you're greedy, you will eventually hit a stock market correction.  If your goal is retirement, and you're very close, you need to protect your assets - not try to maximize them.

If your retirement assets double, you still only retire once.  But if your assets get cut in half that could ruin your retirement.  So the goal is protecting your assets in retirement.  If you're nervous about not having enough... retire later.  If you're just being greedy, that won't change.  You can be greedy, or you can try to protect retirement assets.

+1; My brother in law told his mother the other day that she is invested to conservatively. I responded by mentioning she's retired and her investment philosophy is different than his (early 30s type) and should be more conservative.

There are a lot of good bond funds out there. Good luck on career change and move. Those are two very stressful events in one's life, especially if they happen at the same time. If you get the investment side in order now, it might be one less thing to worry about later. Sounds like you'll have enough on your plate.

FIRE 20/20

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Re: Retirement Asset Allocation?
« Reply #12 on: August 12, 2019, 12:07:37 PM »
Hmm. I'm nervous to pull the trigger and reallocate my existing funds. The vast majority are tax-deferred, but still. I'm young, and exchanging into such a conservative allocation unsettles me.

What is the downside to instead start investing 100% of new money to bonds the next couple years, and then that last year keep new money in cash?

I expect to be able to save at least 15x annual spending in the next 4 years. If things really did get crazy, my worst case scenario is to keep on working until market recovery.

I'll second the recommendation for EarlyRetirementNow's equities glidepath series of posts.  They're here, or you can find the full 4% rule series and read that:
https://earlyretirementnow.com/tag/glidepath/

The idea, as I understand it, is that you switch to a portfolio with a lower % of equities just before FIRE, then slowly ramp back up to a higher allocation of equities.  This addresses both the sequence of returns risk (SoRR) and provides long-term growth.  Because SoRR - the chance of low real returns early consuming your principle leading to too low a level of principle to grow when the good times return - is really only an issue for the first ~10 years; if you get through that phase you're golden.  After 10 years you either are in a recovery and made it through because of the non-equities portion of the portfolio or you're suffering your first retirement Bear market but the growth from the first 10 years was enough that the drop doesn't phase you.  Either way, if you get past the SoRR then you can have a higher portion of your portfolio allocated to equities to support the very long retirement timeframes most FIREes can look forward to. 

KG28282

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Re: Retirement Asset Allocation?
« Reply #13 on: August 13, 2019, 11:30:20 AM »
So you are nervous about the market taking a dive, but you are nervous about not getting the highest expected return.
Sorry but you can't have your cake and eat it too.

I actually said neither of those things. Recognizing a market slump as the #1 risk to my expected retirement date is not the same thing as being nervous.

You need to transition your thinking.  Before you retire, you want to accumulate assets in order to retire.  The goal is retirement.  It sounds like your goal is being greedy (which is very normal in the stock market).  If you're greedy, you will eventually hit a stock market correction.  If your goal is retirement, and you're very close, you need to protect your assets - not try to maximize them.

If your retirement assets double, you still only retire once.  But if your assets get cut in half that could ruin your retirement.  So the goal is protecting your assets in retirement.  If you're nervous about not having enough... retire later.  If you're just being greedy, that won't change.  You can be greedy, or you can try to protect retirement assets.

As for being greedy/not getting highest expected return... Perhaps that's a part of it. But isn't there a very real risk of outliving a portfolio that is invested too conservatively? And on the other hand, there is the sequence of returns risk.

But point well taken MustacheAndaHalf. I definitely need to change my investing mindset, which I appreciate all of you helping me to do.

It's too soon for me to be nervous about not having enough. The plan has always been to work a few more years, and there's nothing stopping me from working beyond that as conditions dictate. I am in a very stable place as far as career, housing, and cost of living vs. salary. If anything, my savings estimates are likely conservative, and I would not be surprised to have a savings rate of 20x annual spending over the next 5 years, ending with a 2.5% portfolio withdrawal rate.

Again, I thank everyone for participating and setting me on a better path. For now, I'm going to prioritize capital preservation and direct 100% of new investments to Treasuries. I may end up pulling the trigger on that reallocation eventually, but since I'm not pressed for anything at the moment, I may not need to. We'll see what the next few years bring.