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My plan required me to be debt-free and that required every dollar of returns from the last bull run. There was no equity glide path for me. Within a week of leaving the job I sold 90% of my portfolio of cap-weighted index funds. Turned the debt into cash flowing income and sat in money markets during the 2020 crash. Waited for the ARKK fund to roll over in Feb 2021. Began to DCA 5% a month finishing in March 2022. AA=60/40. Am now 3 years retired no pension, no SS, no inheritance and by sheer dumb luck have SWAN the entire time.
Retirement, am there done that! So first I would prefer comments from the last few weeks, say 3 months or less. For Retirement, it was 4% rule, have Million$, you will spend less, have split of 60% Equities/40% Bonds. Well the truth is you will spend about what your salary allowed at retirement, and maybe more if you really like to travel. Inflation and Medical Insurance seem to be on the rise. I retired at 65, wife took SS, I waited until 70 and took maximum SS. I have no pension, and rely totally on my IRA’s, and RMD. Here is what actually happened. Today I am at 84/16, 80% equites to keep up with inflation and about 20% cash in the bank for any emergency, and to withstand the DOWN markets that will occur. I also like Buffets ideas, no bonds eventually put all your Equity money in the S&P 500. So far since 2011 my retirement year, we have done well in the Market with only 2 Down years, 2018 and 2022. My Bank Cash can hold me up for more than 5 years if necessary. So my advice, plan on inflation as it will eat into your nest egg, and plan on medical increases as it will increase from year to year, 2023 is an exception, but those are rare. Plan for you, read as much as you can then determine your own PLAN. Best of Luck.
5 years seems reasonable for many people and situations. I planned to retire at end of 2008. I had a moderate risk portfolio but had not dialed back my risk. I wound up working 2 more years to allow me to somewhat recover from the “great recession”.
If pension and SS adequately cover expenses and then some, wouldn’t having a higher allocation of equities, say 80%, be OK? Provided, of course there are adequate reserves for unforeseen circumstances.
My sense is that many on this forum are more aggressive than conservative. I thought I was the same until I had the opportunity to retire at 50. After one year and many recruiter phone calls, I realized that cutting expenses back significantly wasn’t something I really wanted to do but also taking a high stress, high paying job wasn’t what I wanted either. Long story short, I started dialing back many years earlier as I’m winning the game and more assets in the future, wasn’t critical to my plan of what a successful retirement looks like. I would never have known without the year off. I’m comfortable at 70/30 for now and may dial back 5 points every five years until it’s 60/40 where I hope it will stay.
I agree that gradually dialing down risk about five years before retirement is reasonable. How to dial down risk is the bigger question, since most of us need our portfolios to continuing growing some to offset inflation during retirement.
I’ll have a pension worth about 40% of my annual earnings. I’m investing a bit less these last five years, because I want to save enough cash to cover 2-3 years living expenses. That cash cushion should allow me to delay social security without having to sell investments. I’m also gradually shifting from a 90% stock allocation to a 50% stock allocation, with the goal of being at 70% when I retire and at 50% when I start drawing social security, somewhere between age 67 and 70.
As long as my wife and I had jobs, we always felt we could extend working time in the event of a downturn. So my answer would be at retirement.
I feel that dialing down portfolio risk should be gradual and ongoing with age rather than making abrupt changes in the portfolio composition X years before retirement. I favor the approach taken by the target-date funds (based on retirement date or college enrollment date).
Depends on when you will start using the money and how much you will count on it for income. I’d say about five years in advance.
I agree, and also agree with Sanjib in terms of gradually dialing it down in the period rather than flipping a switch.
This assumes a dial down of risk in the portfolio is required at all. If there are income sources outside the portfolio, then maybe it isn’t.
Also, part of the question may not be accounting for losing one’s paycheck, but what else is going on. For example, is there going to be a relocation or some other life change that might require a significant one-time expense? If so, this part of the portfolio should be relatively safe, but overall risk in the portfolio could go back up once this event has passed.
Five years seems about right. However, as R Quinn points out, it depends on a lot of factors, such as how much guaranteed income you will have (Social Security, pensions, annuities). The question really boils down to how susceptible are you to sequence of return risk? If you can adjust your spending in retirement when your portfolio suffers or can draw from a stable source of income in early retirement (e.g. laddered bonds, CD’s, etc.), you could start to dial down your portfolio’s risk later.
The other point is that you might want to dial back risk before retirement (say 5 years before) and then begin to add some risk back a few years into retirement if you were fortunate enough not to be hit with an unlucky sequence of returns.
Retirement should not be the end-all, be-all. I dialed down my risk in the last year or so since I switched from a safe full-time job that was not associated with the stock market to a freelance business that is very much tied to how the stock market does.
So, I’m about 80/20 now. I’ll likely keep it at that so long as I don’t have much higher everyday expenses. Another thing to consider is that Social Security can be seen as a bond-like asset (perhaps annuity is the better descriptor) that can take the place of the bond piece of your portfolio as you near taking it. On that note, the younger you are, the more human capital you have (which is equity-like).