Please share your thoughts for an asset allocation for a retiree with 20 years life expectancy, including a role for TIPS and I-Bonds if any.  Capital preservation in light of inflation is a goal, but growth of principal beyond what is necessary to keep up with inflation is not a goal.  Thanks!

What percentage of withdrawal is required?  The purpose of AA is to reduce risk and volatility and the withdrawal amounts and how you're going to handle that i.e.  buckets set apart for 5 years, annual amounts through sales, dividend and income approach, and of course, the total amount of assets and it's ability to produce and meet withdrawal needs.  And most of all, how does this individual handle volatility?  That psychic need frequently trumps mathematical factors.

Roberta 

[quote user="meyerr"]

What percentage of withdrawal is required?  The purpose of AA is to reduce risk and volatility and the withdrawal amounts and how you're going to handle that i.e.  buckets set apart for 5 years, annual amounts through sales, dividend and income approach, and of course, the total amount of assets and it's ability to produce and meet withdrawal needs.  And most of all, how does this individual handle volatility?  That psychic need frequently trumps mathematical factors.

Roberta 

[/quote]

Thanks, Roberta.  There is enough principal to fund 20 years of expenses as long as the principal is not eroded by inflation so that is why the goal is capital preservation in light of inflation not growth of principal (except to the extent to protect against inflation).

I am just looking for general opinions on this.  It is helpful to me to hear others'  thoughts on how they would structure such a portfolio and why.

Retirement or withdrawal investing is different from investing during the accumulation phase.  It involves a heavy degree of cash flow management.  How you are going to manage the cash flow determines, to a great extent, the kind of AA.

Roberta 

KCallie,  When it is to my advantage I make use of the fact that I am old.  (Otherwise I ignore it.)  Twenty years is a reasonable life expectancy for me, so I will simply describe what I have been doing.

I had a nitty-gritty conversation with my two children in which I let them know that, while I do not want to ever be dependent,  they should not expect to inherit much, if anything, from me.

I am required to take a minimum distribution from my IRA's, 401k's, etc. each year, so I make rolling five-year estimates of that amount and keep enough in cash equivalents to cover it.  When I make the RMD withdrawals I simply transfer the money into a taxable account.  This gives me a source from which to write checks as necessary.

When I first retired (a little more than 6 years ago) I aimed for a 50/50 equities/bonds-cash portfolio.  Right now it is more like 45/55.  I'll probably leave it that way until at least the end of the year.

About one-third of my equity allocation is in international holdings (mainly AEPGX).  My bonds are almost evenly split between RPSIX and I-bonds.  My largest holding by far is a Target Retirement Fund that does not match my age.  I chose it for its specific lineup.

I use a simple form of Quicken to track my spending, which has fluctuated quite a bit during my retirement.  One year I did a lot of traveling and one year I stayed home.  Then there was the year that one bathroom was gutted down to the studs and put back together.  (For the rest of this year I might stick to buying a few shrubs.)  Just like real life before retirement! 

Lorna 

 

 

 

 

 

Hi Lorna - thanks for your input.  You sound like you think like me - you adjust things as they make sense for your life and based on the information you have available to you at the time (current expenses, anticipated future expeneses and market conditions). 

I am always thinking about these things and tweaking here and there.  I know that isn't conventional, but I am not a "set it and forget it" kind of person.

[quote user="lornadoone"]

I am required to take a minimum distribution from my IRA's, 401k's, etc. each year, so I make rolling five-year estimates of that amount and keep enough in cash equivalents to cover it.  When I make the RMD withdrawals I simply transfer the money into a taxable account.  This gives me a source from which to write checks as necessary.

[/quote]

Does this mean you keep 5 years of RMDs in cash equivalents or that you keep 1 year in cash equivalents but use a 5 year time frame to make estimates?

[quote user="lornadoone"] 

When I first retired (a little more than 6 years ago) I aimed for a 50/50 equities/bonds-cash portfolio.  Right now it is more like 45/55.  I'll probably leave it that way until at least the end of the year.

[/quote]

I am heavy on bonds/cash now, too but starting to DCA back into the market right now (slowly).  I am a bit nervous that I am doing this too early.

[quote user="lornadoone"]

About one-third of my equity allocation is in international holdings (mainly AEPGX). 

[/quote]

How did you decide what percentage of international equities holdings you should have?  I will be at about 15% of my portfolio in international equities when I finish DCA'ing back in.  I am not sure what is typical.

[quote user="meyerr"]

Retirement or withdrawal investing is different from investing during the accumulation phase.  It involves a heavy degree of cash flow management.  How you are going to manage the cash flow determines, to a great extent, the kind of AA.

Roberta 

[/quote]

Could you explain this a bit more?  I can get by on social security plus 2% of my total portfolio a year given my current necessary expenses.  I prefer to live on SS + 3% and if I needed a nursing home, then SS + 4% probably would be necessary.

KCallie,

There are lots and lots of ways of doing this and many of them work.  Think about the accumulation phase - your AA determined your returns but there would have been no AA to determine if you had saved and put the money in investment accounts to grow over the years.  There was lots of talk about AA, but no discussion about whether you should cut your grocery bill or your vacations to save to have the money to invest.  Factors within you and your desires determined where you made your cuts.  I wore KMart slacks and good shoes.  I cooked chuck, chicken, rice and beans and we took the kids to every National park in the country with PB&J sandwiches at roadside picnic benches.

The SS and 3% gives you a lot of room for various methods.  The trinity study uses 4% + annual inflation of 3% and is considered the gold standard.  Various things float around which suggest ways to achieve a 5-6% (6 is pushing IMO) retirement withdrawal.

The buckets approach is very popular.  Lorna essentially uses it in keeping 5 years of RMD's in cash equivalents b/c she is taking RMD's.  I'm curious whether Lorna counts that cash as part of her AA or as a separate pot; some do, some don't.  I don't need to take RMD's yet so I keep about 5 years of living expenses without SS as the base amount of my bond allocation.  It also works out that the interest on that amount will provide for all of our living expenses, mostly extra's, beyond SS.  I do count that money as part of my bond allocation.

In both cases, we have plans to cover our cash withdrawals during a down market.  As retirees, we can't just wait out a bear market and not sell equities.  Some of us are no longer putting new money into the market and taking advantage of DCA.  We are essentially DCAing out of the market.

I am working on turning enough of our portfolio to the dividend model so that will provide enough income to cover some, if not all, of our RMD's   I prefer this way of handling the necessary outflow b/c it increases my total return with more of more of our portfolio in equities and b/c my cash flow needs are covered, I can wait out volatility and be more aggressive.  This correlates with my risk level and needs and I end up with an 80/20 which is quite risky but o.k. for us.

So the basic question is how are you going to handle and plan for 2% annual withdrawals from your portfolio?  Do you intend to sell 2% each year?  Is it part of the rebalancing process.  Are you going to go for a portfolio that yields the 2%?  Is that going to come from stocks or bonds or equity income funds or some combination?  Remember, you also need to "grow" 3%/yr to  compensate for inflation, so we're talking about a minimum total return of 5%/yr.  A 50/50 will average 8%/yr but where and how will you handle withdrawals and how will you compensate for the fact that now your portfolio is your paycheck and an average 8% does not mean 8% each and every year!

The greatest danger is going into preservation mode when the market dips and going totally to cash or bonds.  You've been in the market long enough that you know what I'm talking about and it's not some theory to you that you can blithely quote academic studies.  The question that you have to account for is how you will react when you see the source of your paycheck going down the tubes.  Your AA has to take that into account plus how you're going to manage the money to pay the bills.

Roberta 

Well? suggestions?

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