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Asset Allocation 10 years from retirement

Posted by bainesfigure on 10/9/2007 at 3:07 PM | 12 answers | 1650 views
I'm interested in what others think about asset allocation between stocks, bonds and cash (and stocks broken down between Large company, small company and international)

I have heard about the rule of thumb where you subtract your age from 100 and that is the amount you should have in stocks (if you are conservative)

I have additional cash for short term expenses and educational expenses for a child

My current pre retirement money is at about 50% stocks.
I consider myself a conservative investor. Age 53. In addition to retirement money, I expect a pension after I stop working.


Do you know why Social Security originally was set to pay the full amount at a retirement age of 65?

Answer, because well before World War I, the German Kaiser decided to set the original pension plan for German Government and Railroad workers at 65. When the U.S. devised Social Security our government set the retirement age to match Germany kind of as a "what the heck" Calculation. It didn't really matter that the average life expectancy of an American male was 62 at the time.

Now, let's move up today, where if a married couple retires at 62 or 65, one spouse has a high probability to live at least in to their early 90's. You may well be that person. With one pension and your investments, I'd go so far to say that the old start at 100 and subtract your age is as old a metric as the one used by the Kaiser and far more dangerous.

Having said all that, you state that you are a conservative investor so a higher percentage of investments in stocks just might not be acceptable to you. Thisquestion is and remains very personal. At a 35 to 50% equity weighting I'd be prepared to be able to only withdraw about 3.5% of your nest egg for retirement per year. If you withdraw more, you will most likely run through all of your principal in far less than 30 or so years of retirement.

Risk is very personal but that old suggestions of 100 - age is old, tired, and no longer very helpful for a 30 plus year retirement.

Lastly, beware advice "such as even mine" on this site. You will need to solve it for yourself.
Good answer stealthbucks. I was using 4% as a figure for a post retirement withdrawal rate, but perhaps I should revise it downward to 3.5%.
I use the "Financial Engines" website which I get free through my Vanguard account to test various allocations. The only thing that throws me off there is that they expect people to annuitize part of their retirement savings. I'm not sure if annuities will have different rates as people start living longer in the future.
Here are my thoughts.

If you are willing to settle for a 3.5 - 4.0% withdrawal rate in retirement, as you say, you might as well consider taking the whole kit and caboodle and buying 30 year treasuries when you retire. They (30 year treasuries) are currently yielding ~4.8%. So if you retired at age 60, the resulting stream of income would last until age 90, guaranteed. In addition, you could sell a bond here or there if need be and you would leave one heck of a pot of money to your airs.

That said, now you only need to get your seed money to the level necessary to buy enough treasuries to spin off your desired yearly income. Let's say that you wish to have a retirement income of $x/year, you will need to save to a level of $x/0.048.

Looking at where you are and comparing where you want to be should help you with your asset allocation.

I could not disagree more with Frog_N_Toad. Putting all of your money in long term T-Bills does not account for two factors. 1st is the tax hit on the income, second is the affects on inflation and growing that 3.5% at a rate that allows for an increasing distribution rate to cover inflation. This plan would wipe you out fast and ugly or leave you living on a third the income in 30 years. 3.5% adjusted up to inflation is not the same as 3.5% of a fixed taxable distribution. (Sorry no disrespect to F&T but your Finance Engine program is right). I am also assuming your pension will be fixed and therefore you will need to overcome the affects of inflation that this drag will apply to your income.

I think Vanguard is on to something, although it is shocking that they would recommend an annuity. Here is an idea that will get that 3.5% rate I suggested up significantly. If you use a Variable Annuity with a living death benefit of say 5 to 6% you could withdraw more like 4 to 4.5% adjusted with inflation for your retirment years. You could go with a more aggressive allocation in the Annuity and place the market risks on the Annuity provider. This is a good plan to ramp up your equity allocation while protecting the principal to a degree. It is not cheap but solves your question nicely.

A couple of caveats. These annuities are expensive compared to low cost index funds, the insurers credit rating matters (a lot). They are complex. They are a SOLD product not a purchased one. Over twenty years the cost of being in an annuity is not cheap but if the program gets you to stay invested in equities and allows you to sleep at night, it may just be right for you. It is not a cost equation as much as an ability to handle risk equation.

Do your homework and please don't take this as anything more than blog chatter. I do not own an annuity but then again, I am more aggressive than you and fairly comfortable with equity risk. Annuities also can create problems for estate planning. This whole solution is complex and often very confusing. I think Fidelity has some interesting articles regarding annuities. Of course they are selling them as well.

Whatever you do, don't avoid the power of inflation to erode your life style. Putting everything you own in treasuries is not a good plan.
Thanks, I still have a long time to educate myself about all the post retirement options. A good chunk of my retirement money will be in a deferred compensation account (a 457 plan which is like a 401k), and that 457 plan has a complex variety of distribution options including an annuity. As a municipal employee I do get a pension (indexed for inflation) but no Social Security.
I think that I would still keep at least 30% of my nest egg in stocks during my post retirement years.
I am not planning to touch my retirement funds for a long time, so I don't have any insights to offer. However, I did just run across a CNN Money that talks about making your money last in retirement, and thought I'd share it in case you hadn't read it:

I must admit that I am somewhat confused by your disapproval of my post. The reason I am confused is that when I wrote it, I did not think I wrote it in a fashion that could result in agreement or disagreement. It was, I thought, written tongue and cheek, simply to get the questioner to realize that his request was ill-defined. I guess I failed.

The tread, as I read it, started with a simple question as to what is the appropriate asset allocation for a savings account (for retirement) in which the owner was intending to retire in 10 years. The questioner stated that he was a "conservative" investor, but there was no mention of an explicit dollar value goal (at retirement) or a desired (long-term) growth rate. Should not these parameters be considered when establishing an asset allocation over long periods of time (> 10 years)? I think so.

Your first reply said that because the questioner was a conservative investor, a higher percentage of investments in stocks might not be acceptable to him. Now that may or may not be the case. But, I would guess that if the questioner were asked to consider lowering his dollar value goal (at retirement) and (long-term) growth rate simply to reduce the variability of his account over the next ten years, he would want to consider both aspects. I certainly would, and I do.

So as I said, if the questioner is willing to settle for a 3.5 - 4.0% withdrawal rate in retirement, with absolutely no consideration for the growth of his account over long periods of time, he might as well consider taking the whole kit and caboodle and buy 30 year treasuries at retirement. The only thing left, as I said, is accumulating enough wealth to spin off the desired income at the particular interest rate. This should warrant consideration as to his asset allocation to meet that goal, which is always the case.I was in no way, however, recommending this action.


P.S., I am currently 46. I wish to retire as early as 50, but no later than 55. This would be 4 to 9 years from now. My retirement savings are currently held in about 87.9% stocks, about 4.5% bonds (convertible bonds and convertible preferred stocks only), and about 7.6% cash.

The convertibles are getting to be a little expensive (their yield is quite a bit lower than that of strait corporate bonds), so I will probably lighten up on them at the beginning of the year and the only reason that I see to hold such a large percentage in cash is simply that I cannot find many stock bargains at the present.

This is what works for me. I must be a non-conservative investor (<= tounge and cheek)
Toad, I have read your other responses and have never disagreed before. Having said that, 3.5% fixed is radically different than 3.5% adjusted and thus increased for inflation (meaning increases in distribution for 30 years). Your advice, even tongue in cheek is bad. If bainesfigure said "All I want is 3.5% for 30 plus years on a fixed dollar figure" then your plan is solid. Otherwise, I got to stick with phhhhiiiiiittttthhhhhh!

I do agree that this venue is fun for me but it's like Shrek said without a lot of info. "Everyone's an onion with lots and lots of layers". That is why words on this site can be plentiful, cheap, (and even in my case), very misdirected. We simply don't know enough. In fact I incorrectly assumed baines pension was fixed. Having an increasing pension payout is huge and makes your suggestion more feasible. The interesting point is I think bainesfigure looks set up pretty damn well and is probably just soliciting thought for the sake of response alone.

Note not a lot of comments from the younger crowd....

I am just slightly younger than you, have no interest in retiring but am able to do so now; albeit with some lifestyle reduction required. I'm a bit of a freak in that I like what I do and am paid well to do it. 55 is a great goal and I don't own any preffereds. Too scary and I got burned once by Conseco preffereds. Convertibles are beyond my feable brains ability to grasp. That, I guess is what fund managers are for. Good luck and I did not intend to offend.

Time value of money and the true cost of inflation are biggies to me; thus I get testy.
The reason I posted initially is that I am interested in exploring the relationship to risk tolerance and asset allocation. Being fortunate enough to be "set up really well" allows me to have the option of having some flexibilty in how I allocate my retirement money. I think there are two ways of looking at it. You could say that I have enough to fall back on that would allow me to take an aggresive stance; but since I am bothered by too much volatility, I take a more moderate approach...I think I'm about 50% into equities in my retirement accounts with a fair amount of stock in taxable account with a total of about 40% in stocks if you total up both retirement and non retirement accounts.
That being said, I see that I'm even more conservative than most of the target retirement funds. Vanguard Target Retirement 2015 is about 65% in stocks. Other mutual fund companies have different allocations in their lifecycle or target date funds.
So, obviously, asset allocation boils down to a personal decision. The reason I posted originally was just because I wanted to hear different viewpoints about the issue. I think it is a crucial issue in personal finance because studies have shown that asset allocation is the most important factor that determines how fast and with what degree of volatility our savings will grow.

Not offended at all. I am just surprised that I have to re-learn, over and over again evidently, that I am not able to communicate in writ, e.g., sarcasm, "tongue-in-cheek," "tongue-and-cheek," (lol), etc., as if I were talking with someone in person.


I feel that I am in the same boat as you. Because I have 2 pensions to fall back on, I have a rather high equity stake. That said, I do feel that I am a conservative investor. I define that term differently than most. To me, a conservative investor never pays more for an asset than it is worth.

But as I said above, I am finding very few equity bargains at this time. I would not make a radical change in your allocation at this time. If you wish to move towards a higher percentage in equities, consider making minor changes each year and ease your way into your final percentage. At this point in the cycle, I think "evolution" trumps "revolution."

Good luck.

Toad, thanks for your comments. If you don't mind my asking: what portion of your retirement and non retirement assets are in stocks?

I sent you the details via mail.

Good luck.


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