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ASSET ALLOCATION is usually a set-it-and-forget-it exercise. At least, that’s how I’ve handled it until now. I decided on my appetite for risk, then set my stock-bond ratio accordingly.
I tallied everything once or twice a year, and then rebalanced. I’d apply a portion of my winning positions to my less successful asset classes. Rebalancing this way forced me to buy low and sell high. Combined with dollar-cost averaging, it’s an investing approach that’s served me well for more than 20 years.
Each year, I’d also consider how much I wanted to keep in cash investments. Now that I’m semi-retired, I’d been looking to reduce my stock exposure and add to cash. At least that was the plan, until now.
The current “transitory” spike in inflation has forced me to me to rethink my entire approach. Here’s why: If the current inflationary bout should persist, my cash assets could lose nearly a quarter of their value over the next five years. This has me looking to trim my cash investments substantially, not add to them.
Next, I’m concerned about what life will be like 20 years from now. The remaining baby boomers will swell the ranks of the over-80 crowd. They’ll be selling investments to pay for health care and many other senior-oriented necessities.
The cost of these services has risen faster than consumer inflation for years. I don’t imagine that trend reversing now. The general investment selloff required to meet these expenses may depress returns for all of us.
This creates a dilemma as I weigh my asset allocation. Higher inflation means low—or negative—real returns on cash and bonds. I may be required to own more stocks just to have a fighting chance against that loss of purchasing power. Of course, that would increase my investment risk during retirement—not the usual approach.
Asset allocation, alas, is no longer a set-it-and-forget-it exercise for me.
I would consider cash as part of fixed income. Because bonds yield so little and could be hurt by rising interest rates I have slim fixed income holdings but heftier cash holdings. Both cash and fixed income lose to inflation but I would contend the safety of cash offsets the puny extra yield of interest sensitive bonds.
The questions (IMO) in retirement are:
Bonus: What should you NOT do in retirement?
10 Things Not to Do When You Retire:
Thanks for this list. It’s longer than mine.
Since my spouse of 30 years died, I have had to take a different path. And I still have a teen at home and two in college.
Many income based government rules (EFC for college, IRMAA for Medicare, IRS tax tables for example) are unfavorable for widows/widowers, as the expenses of running a household do not drop 50% with the loss of a spouse.
Inflation, any additional unfavorable changes to tax laws, and rank stupidity, are the more obvious risks I face financially. These are common to many early retirees.
You are 100% correct about the unfairness of tax laws for single versus married couples. I never could understand that either.
You also touched on an interesting point here. Risks common to many early retires, the key word being early. Are people who dream of or plan to retire early prepared to do so and can they afford to? Retiring at 60 or even 55 may be highly desirable to manage people, is it realistic?
Several of those items depend on one’s income. Frivolous spending for one person may be routine for another. Take SS when you NEED that income. Living comfortably is very relative.
Thanks Dick, everything is relative, really. Enjoy your weekend!
I certainly agree with adjusting investments to better meet inflation concerns, but I’m not so sure about seniors selling investments to pay for health care needs. In reality seniors are the best protected group when it comes to health care bills.
Between Medicare, Medigap or Medicare Advantage we are protected from nearly all out of pocket costs with limits on Rx costs. We are also the group mostly likely – not necessarily fairly – to get more government help. While premiums will rise, I don’t see that causing asset selling especially given most seniors have minimal investments and those that do are higher income thus lessening the selling need in any case.
The six-digit number I see tossed around of late is $200,000 for retiree out of pocket health-related expenses. Many don’t have thousands a year available for what isn’t covered.
Agree at the relief that Medicare is relatively affordable. However for moderate income retirees, their Medicare premiums eat deeply into their social security.
True that most seniors don’t have as much invested as many had hoped. It’s somewhat concerning to see the first generation on defined contribution plans retiring.
That $200,000, sometimes stated as $300,000 is spending over a lifetime retired. It’s like saying in my case I should plan on paying $450,000 in property taxes during retirement.
The reality is relatively easy to understand.
Assuming no IRMAA premiums, $170.10 for Medicare Part B, about $200 or perhaps less for Medigap and about $40.00 a month for Part D. That virtually eliminates OOP medical costs. Part D is variable. That leaves the potential for dental and vision care which is highly variable as well. I just cancelled my dental for 2022 because the coverage versus the premium was not a good deal so I will use the saved premiums to cover OOP costs – the plan never covered major procedures in any case.
Retiring from a education system I’m guessing you will receive some support for retiree medical costs when you retire.
Then there is the risk of LTC, a big risk for some, but still only 3% of seniors are in nursing homes and most LTC is rendered in the home.
As you know, the decision on when to retire needs to consider all of this and for some that unfortunately may lead to a later retirement date. It also points out the value of having a reserve of cash for such contingencies like an HSA.
LTC costs are also rising rapidly and it seems likely that fewer will have insurance to cover LTC in the future.
Very likely. My premiums went up 46% last year and 26% this year. But the risk is not as great as the fear.
You’ve captured a most important point here: “the risk is not as great as the fear”.
I have LTC insurance and my premiums are rising. So I’ll pay the higher premium, because I can.
Fears are different. They tend toward irrationality. Those who sell [you name it, whatever might make one feel more secure] often play up fears and uncertainties to make their products more attractive. Fear-based spending is the worst!
a single premium LTCI might be an option for a new LTCI (as a safeguard against increasing premiums) but obviously if you have paid a lot of premium thus far (over the years), then sigh, yeah not many good options. I did look into the the SP LTCI pre-COVID but elected not to get one. Something I will need to revisit.
Fear-based anything is the worst. Goodbye rational thoughts.