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Explorer ○○○

How do you determine your retirement allocation?

Those of you who are in retirement or close...and are or will be taking regular withdrawals...how did you determine your allocation and how much fiddling did you put into it?  Let's assume that you figured your budget, less what you get from SS/Pensions/Annuities, and decided you need to withdraw 4%+inflation annually to cover your budget.

Did you just go with 60/40 index allocation, following Bengen, and roll with that?  Or did you do Monte Carlos, tweaking %'s of your funds?  Did you try for the maximum safe withdrawal?  Or did you look to minimize the worse down year but still hit 4%?

Since past performance does not predict the future returns...it almost seems like tweaking the allocation to get to 4.5% or worst case less than -20% is just a waste of time and overthinking.  Maybe it's better to get your % with the lowest risk at the start, but realize you will have to adjust it as you go?

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Frequent Contributor

Re: How do you determine your retirement allocation?

The (100-age = equity%) rule of thumb is just that, a guideline.  it can vary from ((100 to 120) - age). 

I develop my retirement allocation mainly on my risk tolerance, also partially due to my time horizon.  

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Participant ○○○

Re: How do you determine your retirement allocation?

As we got closer to retirement, I calculated our current expenses and projected a retirement budget for comparison. The retirement budget had/has two versions = “Frugal Lite” and “Frugal Extreme.“ With those numbers, I then calculated the taxes to add to this total number.  From this number I calculated the percentage passive income we needed to offset this total expense need. I calculated a 2.5%, 3.0%, and 4.0% yearly return. I use 2.5% as my S.W.A.N. figure.   
 
I then projected the social security we would each receive and subtracted that amount from the total expense budget. The remaining balance was the amount our portfolio would need to generate each year.  When 2.5% would cover this cost, I believed that I would/had come to a place I considered - “financial independence.” 
 
All of this data is the “Rube Goldberg” that comes down to the final number. That is, the difference between what is needed for living expenses & aspirations, and how much our portfolio generates. My concern is that this number be on the “positive” side of the ledger even with withdrawals (RMDs, etc.).  If it should dip to the negative, then we would need to shift our expenses from the “frugal lite” to the “frugal extreme“ budget.
 
I am in my 3rd year and my DW her 6th year of retirement. So far so good.
Best to all,
Brian
 
Added: In determining the asset allocation, I looked to determine the lowest equity percentage that would get us to 2.5% total return after taxes.  This calculation projected 2% for bonds and 5% for equity.
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Explorer ○○

Re: How do you determine your retirement allocation?

Closer to 51hh than BrianG for me. Looked at monthly spending in the year prior to retiring; wanted to match that, figuring that would allow some extra travel, eating out, etc. Subtracted expected SS for both of us, plus W’s TIAA annuity (roughly $1000/mo). The gap was only about 2% annual withdrawal, so relaxed and didn’t tweak asset allocation much from its prior 60/40. Retired 5 years now, AA down to about 50/45/5 at this point; withdrawals mostly from equities so far, have helped each of the 2 kids with down payments, port larger, all is good except for the virus and anxiety about the election. 

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Participant ○○

Re: How do you determine your retirement allocation?

My calculation is specific to my situation. I am taking RMD's monthly from my 403b RA at TIAA. I have a moderate allocation (52% equities). The RMD provides 80% of my monthly family budget. The remainder comes from Social Security income.

I have additional investments in an IRA and a brokerage account at Fidelity. That additional amount came mainly via inheritance just about in the year I retired; it gives me a reserve, from which I've made one extraordinary purchase: a retirement home, which is an apartment in a 55+ community.

I've kept things simple by accepting the RMD rate in my RA and letting that percentage grow (as has the principal). The additional reserve from inheritance has supported some extraordinary purchases (e.g., new car, furniture for the new home). While we're still transitioning our residence (COVID has stalled things in recent months) we draw a monthly stipend from the Fidelity account to cover condo fees and property taxes.

So what happens as the RMD takeout increases each year in the percentage or the dollar value of the 403b? I take it, and I don't worry about it. So far I'm spending it or keeping a cash reserve, not reinvesting it. Maybe next year, or the year after that. I'm in my mid-70's. I'm not going to live forever, nor am I going to run out of money.

ADDED:  We have also invested in long-term care insurance policies.

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Contributor ○○○

Re: How do you determine your retirement allocation?

According to Bengen and verified by the Trinity studies and Wade Pfau the asset allocation for a 30-year retirement and a 4% initial withdrawal adjusted for inflation is between 50-75% stock. 

  1.                                                              Success rates for…
  2.         Allocation          Period-- 25 yr.  30 yr.    35 yr.   40 yr.
  3.       100% stock                       99%    94%     91%     89%       
  4.         75% stock                      100%   98%     93%     92%
  5.         50% stock                      100%  100%    97%     87% <survived every 30-yr period
  6.         25% stock                      100%    87%     71%    45%           

I'm currently around 65% stock primarily in two moderate-allocation funds.  I was planning to go to 50% stock by adding a conservative-allocation fund but the low interest environment changed my mind.  If you need more than 4% then perhaps you do not need a 30-year retirement period.  At 65-70 how many retirees will actually live to 95-100? 

Here are the initial withdrawal rates for other retirement period lengths.  A 100% success rate means the portfolio was successful in ever retirement period from starting in each year from 1926 to 2017.  The top success rate is for a portfolio that is 75% stock.  The bottom is for one that is 50% stock.  According to this study, a 4% initial withdrawal works for a 25 and 30-year retirement, 5% for a 20-year retirement, and 6% for a 15-year retirement.

  1.                                                 Success rates for…
  2.                              3%                      4%                   5%                   6%                7% 
  3.         15 years     100/100%        100/100%        100/100%          97/100%        82/85%
  4.         20 years     100/100%        100/100%         100/99%             81/79%              
  5.         25 years     100/100%        100/100%           84/85%              
  6.         30 years     100/100%          98/97%             76/70%
  7.         35 years     100/100%          93/97%
  8.         40 years     100/100%          92/87%

Some experts say if you want to adapt this to our present low interest rate environment, subtract a half percent from the initial withdraw,  Take 3 1/2% instead of 4%. 

I did a test using Vanguard Wellington during one of our worst retirement periods.  One starting in 1968.  Taking a 4% withdrawal adjusting it for inflation the fund failed after 24 years.  The period had a big sequence of return problem and it was a period of very high inflation. 

One simple tweak allowed it to last more than 30 years.  Don't take a full inflation adjustment.  Take inflation minus one percentage point.   For example, if inflation was 3% multiply the previous year's dollar withdrawal by 1.02 not 1.03.  I included that little tweak in my withdrawal plans for our taxable accounts.  Where did I come up with that?  Other studies have shown that in general retirees spend on an average 1% less each year as they age.  That little tweak shouldn't hurt the retiree's standard of living at all.

I also included review periods.  Periodic reviews are stressed by all retirement advisors.  If the portfolio does well then re-calculate the initial withdrawal using the percentages for a shorter retirement period.  For example, use 4% for the initial withdrawal expecting a 25-year retirement and adjust that for inflation minus one percentage point.  After five years use 5% for a 20-year retirement and adjust that for inflation minus one percentage point.  After five more years use 6% for a 15-year retirement and adjust that for inflation minus 1 percentage point.  That might give the retiree a big bonus.

For our traditional IRA we use the government's withdrawal method and just taking RMDs

P.S.  Monte Carlo is a computer testing technique. Some of the scenarios can get rather far out.  Those that use it usually accept a success rate somewhere around 85%.  Bengen and other use historical data to test their theories.

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Frequent Contributor

Re: How do you determine your retirement allocation?


@51hh wrote:

The (100-age = equity%) rule of thumb is just that, a guideline.


That’s the first time I’ve heard “age in bonds” expressed that way.

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Frequent Contributor

Re: How do you determine your retirement allocation?


@Lefty

            Since I’am not an engineer, IT guy or a career hobbiest I did it the simple way after modifying a method we had success with for 35 years with our Depression era parents.

             I’m sorry to disappoint most posters because any method or allocation might work or not. There is no answer specific to your situation that’s a lock. You can project the future but you absolutely can not predict the future. No matter what you do you just should chose a plan that fits your needs and quit tinkering knowing some years other methods will do better then yours and you’ll never know when.

              Recognizing that we built a custom “allocation” in parts. One part for income, one part for growth and one part for cash like holdings or a slush fund. Our parents used utility stocks to the limits of their needs above their personal inflation rate for supplemental income with very little excess. This worked out to about 1/3 of their investable assets. We use CEF’s to provide excess income to needs also realizing over time substantial excess income not as dependent on markets was a big flaw. This is 40%+ of our investable assets.

               Part two consisted of core Aristocrat stocks which was a wishy washy way to get growth. We convinced them to make small investments in WINTEL and AAPL in the late 80’s when we did. That was about 1/3 of their assets. For this part we chose a growth index fund and some individual holdings currently mostly tech. This is about 50% of our assets.

                Part three for both of us is/was a balance of cash and a long standing muni fund. This cash and fund had multiple uses including taking advantage of stock sales and a depository of capital gains. 

                As with our our portfolio theirs increased each year except ones like these for over 35 years until LTC exhausted all funds. Very few changes were necessary because excess income to needs of some sort was available in all markets. The time period was 1982-2017.

                  I would suggest anyone create a portfolio that fits their personal situation with excess assured income which was the key. Nothing bad has happened using the above method since 1982. Little tinkering, stress, market timing, rules, studies, financial gypsies etc. Three parts with investments of your choosing consisting of consistent income and two backup parts to use as you please.

             

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Contributor ○○○

Re: How do you determine your retirement allocation?

I figured income using the 4% guideline plus SS. Can I live on that? Of course expenses and income may need to be adjusted along the way. But I like starting with a cash position for a couple of years ahead.


@Lefty wrote:

Those of you who are in retirement or close...and are or will be taking regular withdrawals...how did you determine your allocation and how much fiddling did you put into it?  Let's assume that you figured your budget, less what you get from SS/Pensions/Annuities, and decided you need to withdraw 4%+inflation annually to cover your budget.

Did you just go with 60/40 index allocation, following Bengen, and roll with that?  Or did you do Monte Carlos, tweaking %'s of your funds?  Did you try for the maximum safe withdrawal?  Or did you look to minimize the worse down year but still hit 4%?

Since past performance does not predict the future returns...it almost seems like tweaking the allocation to get to 4.5% or worst case less than -20% is just a waste of time and overthinking.  Maybe it's better to get your % with the lowest risk at the start, but realize you will have to adjust it as you go?


 

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Participant ○○○

Re: How do you determine your retirement allocation?

We are 63 and retired.

We should use the 60/40 split recommended by VTRF 2025.

We use the more conservative 50/50 recommended by VTRF 2020.

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Frequent Contributor

Re: How do you determine your retirement allocation?

I didn’t follow any particular allocation formula to create a 4% withdrawal rate . My investment portfolio which is 90% equities generates 40% of total income almost all in qualified dividends. 25% of the income comes from SS and 35% from retirement income. Total income is 150% of expenses and taxes. I found that reducing taxes by owning qualified dividends and converting 1/3 of retirement benefits to Roth accounts reduced my taxes to an effective rate of 5%. The Roth account reduces taxable RMD income by 30K which keeps me in a lower tax bracket and avoids higher Medicare premiums. I can take tax free distributions from the Roth if needed.

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Frequent Contributor

Re: How do you determine your retirement allocation?


@Lefty wrote:

Those of you who are in retirement or close...and are or will be taking regular withdrawals...how did you determine your allocation and how much fiddling did you put into it?  Let's assume that you figured your budget, less what you get from SS/Pensions/Annuities, and decided you need to withdraw 4%+inflation annually to cover your budget.

Did you just go with 60/40 index allocation, following Bengen, and roll with that?  Or did you do Monte Carlos, tweaking %'s of your funds?  Did you try for the maximum safe withdrawal?  Or did you look to minimize the worse down year but still hit 4%?

Since past performance does not predict the future returns...it almost seems like tweaking the allocation to get to 4.5% or worst case less than -20% is just a waste of time and overthinking.  Maybe it's better to get your % with the lowest risk at the start, but realize you will have to adjust it as you go?


Just like you I started to look how much we need for withdrawal but I made sure we need less than 3% as our max and it's probably be under 2% when will take our SS.  I still want to make 6% annually which works for retirees who have enough.

Basically it's 3.5-4% withdrawal + 2-2.5% inflation.

Then, I want to achieve the 6% with the lowest volatility because I don't care to maximize our return any more.

From the above I created my specific criteria 1) make at least 6% annually  2) have a positive return every year  3) never lose more than 3% from any last top  4) SD (volatility) under 3.

Since retirement in 2018 I surpass the above with performance much better, never lost more than 1% from any last top and SD around 2.

You can't do in a conventional way of just buy and hold several funds.

How did I do it? I used mostly bonds funds, use momentum, trade stocks/ETF/CETs/GLD short term from hours to days-weeks. 

In this article  Kitces concluded: "Declining equity glide paths do not necessarily help support retirement success. Static allocations generally fare worse than more conservative starting allocations that rise in equity exposure throughout retirement. Depending on the underlying assumptions, the optimal starting equity exposures are generally around 20 percent to 40 percent and finish at around 40 percent to 80 percent."

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Participant ○○○

Re: How do you determine your retirement allocation?

In Jan 2017 we were 40/60. We are now 50/50. The recommended AA of VTRF 2020.

By Jan 2023 we will have the AA of VTRF 2025. Right now it's 60/40. We will hold that AA until Jan 20025.

On Jan 2025 we will start climbing toward 60/40.

"the optimal starting equity exposures are generally around 20 percent to 40 percent and finish at around 40 percent to 80 percent."

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Participant ○○

Re: How do you determine your retirement allocation?

@Lefty .... In answer to your question(s), note a post from Gatorbyter in 2017 which I have copied below, particularly point 5).

Some educational replies to this are seen at 

https://community.morningstar.com/t5/Investing-During-Retirement/retirement-distribution-portfolios/...

--- Frank

 

 
Re: Ideas For an "All Bond Funds" Portfolio
06-30-2017, 8:24 AM | Post #3851247
 

For a great understanding of Sequence of Return Risk, I HIGHLY suggest reading "Unveiling the Retirement Myth - Advanced Retirement Planning based on Market History" by Jim C. Otar. It's 525 pages of highly detailed presentation and currently available online (PDF) for $6 from his website http://www.retirementoptimizer.com/.

Note. I have no association with Mr. Otar and provide this link only as a courtesy. I bought the PDF book a while ago and certainly got a lot out of it. The following was gently “lifted” from another review:

Otar is an engineer turned financial advisor. His book is filled with a great amount of data analysis and detail based on his research using historical market returns. If you are near or in retirement, you owe it to yourself to check it out.

Otar points out that retirement distribution portfolios have critical differences from accumulation portfolios; e.g., they have a finite lifespan of 30 years or less and they are a "wasting asset" instead of a "growth asset" as money is being withdrawn. These differences result in many of the tools and concepts used in financial planning for accumulation portfolios being essentially useless for retirement distribution portfolios.

For example, here are some of his conclusions:

1) Asset allocation and diversification, particularly within asset classes (e.g. stocks) make little difference for portfolio longevity.

2) Portfolio rebalancing, no matter how it is implemented, has little effect on portfolio longevity.

3) Conventional Efficient Frontier analysis does NOT incorporate cash flow and is useless for distribution portfolios.

4) Conventional Monte Carlo analyzers do NOT incorporate negative fat tails of market returns and produce results for distribution portfolios that are far too optimistic.

5) You should NOT select the optimal asset mix (the one that produces the longest portfolio life); instead you should select the tolerable asset mix (the one that produces the maximum loss over a given timeframe that you can tolerate without panicking).

6) Portfolio longevity and appropriateness are overwhelmingly determined by (1) Luck and (2) Withdrawal Rate.

7) If your withdrawal rate is below the SWR (generally 4% real) there is not a meaningful impact on portfolio survivability from factors other than luck.

8) Luck is comprised primarily of two elements: (a) sequence of returns, and (b) inflation. These two factors overwhelmingly determine the likelihood of survivability of a distribution portfolio.

> Luck: If you are unlucky enough to experience significant losses in your portfolio, particularly in the first few years of retirement, nothing you can do will restore your portfolio to its previous level during your lifetime. Unless you permanently reduce the level of your distributions your portfolio is very likely to run out too soon.

> Inflation: Significant inflation during your retirement will destroy the purchasing power of your income withdrawals. Stocks and nominal bonds provide poor protection from inflation; therefore you should incorporate meaningful allocations to real assets and TIPS.

--- 30 ---

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Explorer ○○

Re: How do you determine your retirement allocation?

The information and analysis in Otar’s book is invaluable. It’s available at:

http://docshare04.docshare.tips/files/22966/229669551.pdf

fpajerski’s repost of Gatorbyter’s Post identifies the salient points, but I highly encourage you to read the book. Understanding why and how Otar arrived at those conclusions is very enlightening. 

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Explorer ○○

Re: How do you determine your retirement allocation?

As I approached retirement 15 years ago I realized that the "accumulation phase" was a lot easier than the "wind down phase" and that my "mental agility" would probably be winding down in the "wind down phase". So just prior to retirement I went with Wells Fargo Advisors for my IRA and even at 1% of assets per year we have done very well over these retirement years.  (I still manage my other investments and Deferred Comp account).

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Explorer ○○○

Re: How do you determine your retirement allocation?

Great comments.  That Otar study is interesting. Had not heard of it.   More or less says make sure you have saved enough, i.e. 25 years of expenses.  After that is depends on inflation and return risk.  Go with the allocation you are comfortable with, don’t overspend and don’t waste time on much else!

I have gravitated to most in balanced funds and let the managers handle it!   Other funds in stock and bond indexes for longer term or the kids.  Fiddling with various monte carlos doesn’t gain anything!

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Explorer ○○

Re: How do you determine your retirement allocation?


@Lefty wrote:

 Go with the allocation you are comfortable with, don’t overspend and don’t waste time on much else!

 


You’ve just summed up the best retirement investment strategy, bar none. 

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Participant ○○

Re: How do you determine your retirement allocation?

Just to add a small bit to the commentary here. Specifically, location decisions may be as important as allocation decisions. Once you are retired you may think you're pretty free to move about. But the costs of living matter, and the tax environments matter.

We had an incentive to remain in Michigan when I retired -- compared to other states that we considered (Wisconsin, New York, Maine, and Oregon). No state tax on Social Security income. No state tax on income from my main 403b retirement plan (it's interpreted as a "government pension"  because I worked at a state university). No state estate tax.

We may, however, have overemphasized the importance of cost-of-living and tax environments. There are non-monetary considerations which truly can be counted as potential costs. The major one for us is proximity to extended family, and almost as important is proximity to our favorite vacation spots. For us the latter is Maine. Traveling to Maine was out of bounds this summer.

So by staying where we are in retirement our income and savings go farther and last longer. But there are costs to doing this. We're having second thoughts. These are induced in part by the onset of the COVID-19 era. Our kids live in NY, and are largely home-bound or work-bound.

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