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Tricia C.

How to Adjust Investment Choices/Mix with Age

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45 minutes ago, MNGopher said:

What final asset value are you targeting?  What are you planning for a withdrawal rate?

I’m planning on using a 3% withdrawal rate. According to that chart, after a 60 year retirement my portfolio’s inflation adjusted value will be greater than or equal to the value it had on day one of retirement.

As far as the final asset value, I’m not quite sure. I’ve priced out several different lifestyles that require a net worth ranging from 1 million to 1.5 million. Right now I’m at 1.15, but at the moment my energy is focused elsewhere so I’m not rushing to retirement. Maybe I’ll wake up next week and pull the trigger, maybe I’ll wake up two years from now and hit the 1.5 maximum, or maybe I’ll decide I want a slightly more expensive lifestyle (unlikely). So who knows, but I’ll definitely choose a lifestyle that doesn’t require me to exceed 3%. 

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1 hour ago, sschullo said:

Tricia

You asked about an AA with age. What are your thoughts so far? 

Steve

 

Hi, Steve. 

Sorry, but I accidentally skipped over your earlier post and only read it now! Thank you for sharing your thoughts. Very sound advice for sure. Thank you! 

 I think I am leaning toward adjusting my AA to be more conservative with age. I don't think I could stomach the volatility as I get closer to retirement (planned at age 62).  I will be leaving my investments as they are right now, and plot out future adjustments based on resources you, Krow & Scott have mentioned (Boglehead and Vanguard). 

Although, I do find Ed's approach intriguing and way cool! I wish I had similar acuity with numbers and financial scenarios. Definitely will take some more study and reflection on my part 🙂 

On the side, I did purchase your Late Bloomer book some time last year, but have yet to make time to finish reading it (..a bad habit of mine with any book I pick up 😞 ).


 

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14 hours ago, Tricia C. said:

Hi, Steve. 

Sorry, but I accidentally skipped over your earlier post and only read it now! Thank you for sharing your thoughts. Very sound advice for sure. Thank you! 

 I think I am leaning toward adjusting my AA to be more conservative with age. I don't think I could stomach the volatility as I get closer to retirement (planned at age 62).  I will be leaving my investments as they are right now, and plot out future adjustments based on resources you, Krow & Scott have mentioned (Boglehead and Vanguard). 

Although, I do find Ed's approach intriguing and way cool! I wish I had similar acuity with numbers and financial scenarios. Definitely will take some more study and reflection on my part 🙂 

On the side, I did purchase your Late Bloomer book some time last year, but have yet to make time to finish reading it (..a bad habit of mine with any book I pick up 😞 ).


 

Thanks for reading my book! In the appendix, with Vanguard's permission, I published Vanguard's Model Portfolios. Since my late 50s, I used the 30/70 AA which I explained in detail the reasons on pages 80 and 81. Your current 75/25 is fine for your time horizon and you made it through (so far) this latest decline without losing sleep or worse yet panicking and getting out. You graduated! You have great risk tolerance. Congrats. I thought I had it back in the day with the tech bubble crash which lasted over two years and i was younger but what I had was not risk tolerance but overconfidence. That's just as deadly. Bill Bernstein wrote about if you won the game why continue playing. That was just one of the major mistakes I made. 

You asked about increasing your fixed account allocation as you age. That depends on how much you need the money when you retire. Some people can live comfortably with their pension and other sources of income (side gigs etc) and if that's the case, heck go 100% stocks and let your descendants benefit. But if you need the money, like I do, take the conservative approach. 

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12 hours ago, Tricia C. said:

I think I am leaning toward adjusting my AA to be more conservative with age. I don't think I could stomach the volatility as I get closer to retirement (planned at age 62).

Tricia has the right approach.

 These discussions can get too technical at times with no proof of outcomes. I do think people's attitudes about risk does change as you get older. While you are building your portfolio most younger people  optimistically want a lights out 100% stock portfolio. I did. But after experiencing some setbacks and with the realization that money is hard to  save and  to  grow and easy to lose ( if you don't know what you are doing)your perspective does change a bit. That's why target funds made up of index funds at low cost are an ideal choice for most people. No one approach is going to be right for everybody however. 

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13 hours ago, EdLaFave said:

I’m planning on using a 3% withdrawal rate. According to that chart, after a 60 year retirement my portfolio’s inflation adjusted value will be greater than or equal to the value it had on day one of retirement.

As far as the final asset value, I’m not quite sure. I’ve priced out several different lifestyles that require a net worth ranging from 1 million to 1.5 million. Right now I’m at 1.15, but at the moment my energy is focused elsewhere so I’m not rushing to retirement. Maybe I’ll wake up next week and pull the trigger, maybe I’ll wake up two years from now and hit the 1.5 maximum, or maybe I’ll decide I want a slightly more expensive lifestyle (unlikely). So who knows, but I’ll definitely choose a lifestyle that doesn’t require me to exceed 3%. 

With a 3% withdrawal rate it seems like any portfolio will have pretty close to a 100% chance of success with anything more than half stocks, even for a 60 year retirement.  It's interesting that you have a very aggressive asset allocation, yet you have a very conservative withdrawal rate.  There is nothing wrong with that, since you know yourself and your risk tolerance.  Your fears/concerns aren't volatility, because you know you aren't going to succumb to behavioral errors like panic selling.  Your concerns, I would assume, are more longevity and maybe inflation.  I think that this ties back to many people's responses to Tricia's original question; that your risk tolerance is a very personal decision based on a compromise of your own need, ability, and willingness to take risk. 

My biggest concern with your plan, Ed, would be sequence of return risk.  I'm sure you have researched this and taken it in to consideration.  If someone achieves FIRE status at a young age and pulls the trigger, the first 5-10 years of retirement becomes very important.  A long bear market or a sharp drop with a stagnant recovery can put a FIRE plan at risk because you would be forced to sell depreciated stock for (possibly) many years, thus reducing the odds of success.  On the other hand if the decade after you retire has above average returns, you will likely do very well, and could even increase your withdrawal rate and still not outlive your portfolio.

Personally I'm at about 70/30 (65/35 if you count emergency and new vehicle fund as part of portfolio), with 2-3 years until retirement.  I plan to stay somewhere between 60/40 and 50/50 in retirement.  Full disclosure:  my pension will keep me housed, fed, and the utilities on, so I am investing for the "wants" more than the needs.  I plan to use some type of "variable withdrawal rate", starting at 4% but will adjust based on the economy.

 

 

 

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1 hour ago, MNGopher said:

It's interesting that you have a very aggressive asset allocation, yet you have a very conservative withdrawal rate...Your fears/concerns aren't volatility...Your concerns, I would assume, are more longevity and maybe inflation.

Exactly right and an aggressive asset allocation and a conservative withdrawal rate are great defenses against this "risk". In my view, that's the number one risk we should all be concerned with. We should only be afraid of volatility in so far as we believe our emotions will trigger us to sell low and buy high and thus maximize the risk of running out of money!

1 hour ago, MNGopher said:

My biggest concern with your plan, Ed, would be sequence of return risk.

Yup. The graph posted earlier was based on historical data and therefore sequence of risk is averaged in. Being that Feb 19th 2020 represented a long bull market peak, your actual odds of success were lower than the graph states. Similarly if you were to retire at the bottom of a bear market, your odds would be higher than the graph states.

Not that long ago I was thinking about retiring way more seriously/sooner than I currently am. One of the biggest reasons I didn't do it was for this very reason. In fact, when I do eventually "retire" there is a good chance it'll take me some time to really flesh out my retirement lifestyle and during that transition I may pick up part time work until my personal pursuits no longer leave room for work. This'll help guard against sequence of return risk.

My other safeguard against sequence of returns risk is to modify my lifestyle (at least temporarily). Unlike "lean-fire" people, I plan to leave room for that and I hope to never need it.

2 hours ago, MNGopher said:

my pension will keep me housed, fed, and the utilities on

That is a very valuable pension!

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https://www.portfoliovisualizer.com/backtest-asset-class-allocation
^ that's a fun tool. You can use it for contributions or withdrawals, but keep in mind that it's lookin' in the rearview mirror, so don't depend on it too much for making projections into the future.

Allocation is kind of like spending in a way. Where it's going isn't really as important as how much is going there. Increasing regular contributions will have a greater impact on your final balance than choosing between 100/0, 80/20, 70/30, 60/40, 50/50, etc... index funds aren't going to make you look like an investment whiz overnight or even over a decade, but saving as much money as you can into those low cost investments will make things look better.

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Ed and MNgopher,

I don't know about you MNGopher, but I wish I were young enough to see how all of this plays out with the FI and FIRE movement. It will be interesting of the unintended consequences of retiring with a million or 1.5 million without a pension or full SS, yet living for up to 60 more years without an income! Its the longevity that is uncharted. Wall Street has data going back 100 years but the future is unknown. So its the only part of the equation that has to be trusted. Do we trust that the stock market and the world economies will continue to grow? If we cannot trust that, what is the use of investing? Illness is another factor. Capitalism is great for a healthy, literate, and sound mind but a chronic illness of any type takes it all away in a minute. 

Also after watching the documentary Playing with FIRE, the bigger transitions from Scott and Taylor in the were not the transition from employment to living without an income, it was the withdrawal systems of transitioning to frugal living. Initially, Taylor did not want to give up her Mercedes Benz, but that's just a small part. It was tough for them, but they did it. I wonder how many people will give up on living in frugality and retire in their 50s instead.

But you folks are extremely smart and talented and you have got all of these known risks covered.  

I am most proud of the anti-materialism and anti-consumerism throughout the materials and books that I have read from your gurus. 

 

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13 minutes ago, ScottO said:

Increasing regular contributions will have a greater impact on your final balance than choosing between 100/0, 80/20, 70/30, 60/40, 50/50,

I prefer to avoid qualitative terms and I don't want to diminish the impact asset allocation will have on your final balance.

So to be clear, if you began in 1987 and made regular annual contributions then a 100/0 portfolio will be 62% larger than a 50/50 portfolio.

I don't say that to diminish the importance of maximizing contributions, but asset allocation is critical.

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Can I just say that I am thoroughly enjoying the discussion and picking up a lot of things I'd want to read about later on...like FIRE (yup..I had to google that one up!). 
Summer's here and for me that usually means more time to flex my "financial literacy" muscles, of which this discussion has given me much fodder.  I will definitely be referencing the different points raised here as I steer ahead in my own investment journey. 
I feel quite blessed and fortunate to be part of the 403bwise family. Thank you all for your valuable advice! 

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Please, ask as many questions as you can. I think everybody here is happy to share their knowledge/experience.

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17 hours ago, Tricia C. said:

Can I just say that I am thoroughly enjoying the discussion and picking up a lot of things I'd want to read about later on...like FIRE (yup..I had to google that one up!). 
Summer's here and for me that usually means more time to flex my "financial literacy" muscles, of which this discussion has given me much fodder.  I will definitely be referencing the different points raised here as I steer ahead in my own investment journey. 
I feel quite blessed and fortunate to be part of the 403bwise family. Thank you all for your valuable advice! 

FIRE is pretty wild in parts and can be practiced to the extreme, but it's really a throwback to America's old fashioned values of thrift and frugality. A time before we were all labeled as "consumers."

"Your Money or Your Life" by Vicki Robin is a great light introduction to FIRE, conscious spending and feelings surrounding money.

I just posted a video in another thread with a good comment about there being a finite amount you really need to learn about "financial literacy." It's not a never ending insurmountable topic. You could pick up the bulk of the information in a couple weeks/months, then go about the business of living your life with that added knowledge that will keep you from being taken advantage of.

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27 minutes ago, ScottO said:

a finite amount you really need to learn about "financial literacy."

If all you knew was the following then you'd get 95% or more of the benefits that somebody who knew everything might get:

  1. Pick a stock/bond split such that you won't change your plan when stocks drop by 50%.
  2. Put as much money as possible in tax advantaged accounts (HSA, IRA, 401k, 403b, 457b, etc.).
  3. If you have money left over, put it in a taxable account.
  4. Once the money is in the account, purchase total market index funds with the lowest possible fee (expense ratio) and no sales charges (loads).
  5. Direct new purchases towards the asset class (stocks or bonds) that is below the percentage you picked earlier.
  6. Every time you have money left over after bills, use it to buy more shares of your preferred total market index funds (notice I didn't say anything about what the market is doing at the time you have money left over).
  7. Reject the notion that you or anybody else can predict the what the stock market will do over a period of days, weeks, months, or even a few years.

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3 hours ago, ScottO said:

FIRE is pretty wild in parts and can be practiced to the extreme, but it's really a throwback to America's old fashioned values of thrift and frugality. A time before we were all labeled as "consumers."

"Your Money or Your Life" by Vicki Robin is a great light introduction to FIRE, conscious spending and feelings surrounding money.

I just posted a video in another thread with a good comment about there being a finite amount you really need to learn about "financial literacy." It's not a never ending insurmountable topic. You could pick up the bulk of the information in a couple weeks/months, then go about the business of living your life with that added knowledge that will keep you from being taken advantage of.

Also, the legendary author of the FI and FIRE movement is CL Collins Simple Path to Wealth. He credits Bogle from the first to his last sentence. It's an easy ready Tricia. 

Here is my Amazon review of Simple Path to Wealth: https://www.amazon.com/gp/customer-reviews/R24LBG260PCZHL/ref=cm_cr_dp_d_rvw_btm?ie=UTF8&ASIN=1533667926#wasThisHelpful 

And my Amazon review of Your Money or Your Life by Vicki Robin: https://www.amazon.com/gp/customer-reviews/R34XCX7436D7ZK/ref=cm_cr_arp_d_rvw_ttl?ie=UTF8&ASIN=0143115766

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