A reader left a question asking for particulars about his stocks/bonds/cash allocation. He gave some details about his situation, sounds like he has a good idea about when they will retire with the expectation of a little bit of income from outside the portfolio.
I don't know this person. Giving advice to or taking advice from a total stranger is a bad idea all the way around so I am going to punt on narrow advice and stick to some generalities.
The reader thinks he needs more fixed income, maybe you wonder the same thing about your portfolio.
There is a simple mathematical argument for 100% equities. The odds that equities will outperform bonds over the next 15 years is something like 92% (anyone inclined to find the exact number is welcomed to post it). Stocks generally go up in price and grow their dividends. If you buy a bond of any maturity today you will receive 100 cents on the dollar when it matures. $100,000 into a bond today gets you $100,000 ten years from now (or whatever maturity you buy). In 2017 $100,000 will buy a lot less than it does today as you know.
Chances are your emotional well being doesn't care at all about the above mathematical argument.
Part of the answer to how much in bonds, aside from any emotional aspect, is simple dollars and cents. The reader has $1.5 million now. If the income need from the portfolio is $35,000 then $1.5 million seems like a lot. If the income need from the portfolio is $110,000 then $1.5 million doesn't look so great.
I tend to think planning for retirement has to include a plan for spending. Maybe it breaks down to necessities, fun and the unexpected. Someone left a comment a while back saying this type of spending plan is similar to Ray Lucia's bucket idea. I haven't read his books but I make no claim of originality.
My view on taking income from a portfolio is that a person needs the portfolio to create a certain number. If that number is reasonable, 5% or less, then the mix (assuming something close to normal) can be more about tolerances than numbers. Even a 60/40 mix will give a good chance of providing enough growth.
Even then the equity portion can be constructed in such a way to reduce the likelihood of big blowups within.
A big issue that you really need to dig into if you are managing your own is how long your money needs to keep growing. Someone who is 60 or 65 who has just retired whose parents are alive needs to plan for many years of growth. Twenty years from now this person's expenses might be close to double (3% inflation means prices double in 24 years) what they are now. At that point this person in question here will likely still have plenty of more time yet.
To sum up, I doubt that less growth is going to be the best path too often.
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9 comments:
Roger,
Thanks for your comments. Considering you don't know me you provided good generic advice which I expect you to stick too. But since I will be in my mid 50's when I start cutting back on work, I am concerned about growth in my portfolio.
95% invested in equities seems out of whack to me, but 2003 seemed like such a buying opportunity I could not resist. While my crystal ball has gone cloudy inflation scares me more than bear markets. Markets bounce back inflation in my mind is more akin to a flesh eating bacteria that eventually kills you.
60/40 mix is a common recommendation, could you please discuss your view of 70/30 and 80/20 variations of the same idea?
Anon 6:55, you may find this article of interest http://tinyurl.com/2wt5sk
Based on the record of the the past 37 years or so at least it appears that an appropriate diversification strategy is superior to simply increasing equity exposure.
thanks,
I think a reduction in equity holdings is more realistic for me. I also think adding some wisdom tree ETFs might make a lower fixed income percentage more tolerable.
L2S
Roger.
I noted that you, like most investment advisers, go along with your thinking when you stated that:
"The reader has $1.5 million now. If the income need from the portfolio is $35,000 then $1.5 million seems like a lot. If the income need from the portfolio is $110,000 then $1.5 million doesn't look so great."
Is that assuming that this fellow will take his whole 1.5 mil and convert it to cash and stuff his mattress with it, and then use it up over the next 13.6 years?
By my math, if this same guy takes his 1.5 mil and invests it very conservatively with a reasonable 8% return, he will get and be able to spend $120,000 a year on average for as long as he wants without ever spending a cent of his 1.5 mil nest egg. That is assuming of course that in the first 2-3 years of this plan he doesn't stay invested during an extreme bear market downturn.
Am I wrong in my thinking; and if so, why? Thanks.
he may average 8% but i would bet that he hits exactly 8% less than 10% of the time. look at a Stock Traders Almanac for the history here.
If he is conservatively allocated maybe that means when the market is up 25% he is up 20% and when the market is down 20% he is down 15%.
He will get to 8% (in your example) with some combo of up a lot, up a little down a little and down a lot.
If in year one of his plan the market goes down 20%, he is down 15% and he takes 8% he is now down 23% and may not recover depending on what happens next.
an 8% income need builds in a high likelihood of running out of money.
This is just how numbers work. If this is new to you i urge you to get a book and bone up on this right away.
I had always heard 4 to 5 % was the most you could expect to take from your portfolio during retirement. Is this incorrect?
L2S
there is research out there that says something like a 5% income need give a 92% chance of success.
there is another number like 4.4% that kicks it up to 96% chance for success.
"there is another number like 4.4% that kicks it up to 96% chance for success." With a 4.4% withdrawl rate what is the assumed investment mix. 60%equities/40%Income or 70/30 or 50/50?
to the 8:18 comment, there is no one answer it depends on the person.
I say in the post that a reasonable draw down number, even a 60 40 can work. Can work is not a sure thing though.
This can't be answered generically, at least I don't feel i can answer it generically.
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