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Mid-Fifties and Over Crowd: Equity Exposure as You Near Retirement?

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  • Mid-Fifties and Over Crowd: Equity Exposure as You Near Retirement?

    With the recent volatility in the stock market, those of us over 50 may be wondering whether this is a good time to step off the rollercoaster ride a bit and rebalance. FYI: grab a cup of coffee or your beverage of choice – this is a bit of a lengthy post   My husband went to bed after his eyes glazed over as I was going on and on about asset allocation so decided to air my thoughts to the WCI crowd. Several discussions recently in my family and even on this board (Dr. Mom’s recent post referencing the JAMA article on Net Worth Shock and Mortality) have brought this topic to the forefront.

    My husband and I are 54/52 and have let our asset allocation drift a bit over the last few years to 60/40 from 53/47. This felt comfortable until recently. A combination of the market volatility along with Drbaseballdad’s desire to think about going part-time within 3-5 years has sparked this discussion in our household. At the same time, I’ve been having a long-distance email debate with my brother, age 51 - a megacorp vp, and my Dad, age 82 – a lifelong investor who still manages his own investments. My brother (Finance major with an MBA) has recently turned his portfolio over to a financial advisor who thinks stock valuations are extremely overinflated and pulled my brother back to 20% stocks. This was surprising to me – apparently the other 80% is in bonds. Whether this FA put my brother in expensive loaded funds, I have no idea but I can’t figure out why someone his age would only be in 20% stocks. Even my 82 year old Dad (who lives well completely off social security and pension – doesn’t touch investments) has at least a 40-50% stock allocation. My brother’s FA has convinced him that the stock market is extremely overvalued and that now is not the time to be heavily invested in stocks. Normally, I would ignore this type of “noise” but this year's market dips has made me think that maybe we are too heavily invested at 60%. We were planning to let this 60/40 AA ride until the end of 2018 and then rebalance but the recent volatility has not exactly scared us but has prompted us to think this is a wake up call to rebalance now.

    Here is a Wall Street Journal article on the overvaluation of the market:

    Anyway, apparently my brother commented to his FA about my Dad and I being skeptical about this strategy of a 20% stock allocation and must have also told him that his sister (that would be me – Baseballmom) uses a buy and hold strategy of index funds (not exactly since rebalancing is essentially selling high and buying low). Following is the FA’s emailed response. Really interested in what you all think of this:

    Yeah, it really comes down to a mindset sort of thing. You can let the emotional fear of missing out get you to make really low probability bets that will eventually burn you, or you can step back and let the probabilities work for you over time. Human emotion is not a friend of rational investing – I learned that for myself at (former investment firm) too many times. There is just something about the stock market that seems to lead people to make irrational decisions – the same people would never view real estate, clothes shopping, or anything else the same way. I don’t pretend to know that January was the top of the market, but the odds of success from holding stocks are very, very poor over the next several years. Kudos to you for being able to recognize that and make the high probability bet. It doesn’t mean there won’t be plenty of moments where we wonder (worry) if we are right. That much I have also learned. It is never that easy. But we have a good compass over the long-term. The short-term is a crapshoot as the past few weeks remind us. I’m happy to sit down with your Dad or sister at some point if they want. I enjoy talking about this stuff. There is so much disinformation out there about “buy and hold,” especially at this point in the cycle. It is tough to find the truth.

    Is this just a typical FA scare tactic or is there some truth to what this guy is saying?  Reading between the lines, what is the motivation behind what he is saying to my brother?  If he is investing for at least a 30-40 year period, what is the reasoning behind a 20% stock allocation?  I just can't figure this out without suspecting some expensive bond funds are involved but have not been able to find out for certain.

    So that’s a little background on various factors which prompted this post. Back to the original topic, though, and primarily I’m interested in the exploring perspectives of our over-50 peers on this board. Not trying to age-discriminate and the younger folks can feel free to weigh in - but the truth is that it’s easier to be nonchalant about market volatility when you have many capital earning years left, however, risk tolerance definitely seems to decrease and a fervent desire to preserve your nest egg kicks in as you reach this transitional period of life.

    If you’re in your mid-fifties or older and nearing retirement:

    What is your age, how many years until retirement/semi-retirement?

    Do you have a pension?

    Are you factoring social security into your future retirement income plans?

    What is your current asset allocation?

    Do you plan to adjust this in 2018 due to a predetermined glide path or because of recent market volatility?

    How do you plan to adjust your AA at certain ages throughout your lifespan from 50 on?

    Related question:  What will your AA be at full retirement and do you plan to maintain that same AA throughout your lifespan?

  • #2
    I’m 58 years old. My wife is 52. Our net worth is 51% stocks and the rest is real estate and fixed income. 80% of our net worth is in our taxable account. There is no way that we could rebalance to 80% bonds without paying a bunch of money in capital gains tax. I’m planning to retire at 60. My wife loves to work. She will work till she is 60, I’m thinking. We have no plans  to change our asset allocation. We can live off the dividends and real estate rents. Our biggest problem will arise when i hit age 70.5 and have to take RMDs. The taxman is going to take a lot of that money. But that’s why having munis in taxable accounts helps. I need to retire at 65 so I can start taking money from my 401k and convert to Roth. My wife continuing to work might screw up that plan.


    • #3
      I'm 56 and DW is 62.  I retired 4 years ago and DW does a day a week in clinic to satisfy her desire to give back.  We both do some teaching for fun.  I definitely think the market is overvalued but I have felt that before and been very wrong (fortunately learned relatively early in my investing career that my instincts were on par with the best pundits and chose never to act on them - thank yous to Malkiel, Bogle, Bernstein, Stanley & Danko, Tobias, Ellis, Zweig, Solin, Schultheis, DeMuth and others I have forgotten).  We are probably about 60% equities and quite happy with that.  Most of our money is now invested for our children/grandchildren and as we age our plan is to increase our equity exposure.  Certainly, I plan to be close to 100% equities when I am your father's age (assuming I'm still around).  Have never had a financial advisor.  Total market index ETF with a small, value tilt.


      • #4
        The idea that you can predict stock market performance kind of needs to be divided into two parts.  The shorter term year to year performance is nearly impossible to predict in my opinion.  Stocks may be overvalued, but they still may have an extra 15% upside before the reality sets in.  If you are out of the market and miss that last hurrah, you really lose out.

        But over perhaps a decade or so, perhaps you can have some rough idea of whether stocks will do well or not so well, at least in general.  Right now things are not looking so great for the next decade.  I kind of like the Warren Buffet rule about how stocks are priced.  Total market cap to GDP ratio.  By that single, of course to some degree faulty measure, right now, stocks are overvalued by around 40%.  Back in 2009, stocks were undervalued by around 40%.

        So, with interest rates perhaps likely to rise in the coming years, putting some extra downward pressure on stocks, combined with stocks being perhaps 40% overvalued, the next decade isn't looking so great for stocks.  Here is a link to that indicator:

        How to strategize given a potentially soft decade ahead depends on your time horizon.  I am older, but not only am I FI, I am still working.  So at the moment I can afford more risk because of excess income that will likely continue for who knows how many more years.  Maybe 5, or 10, or 15, or 1?  My spouse is retiring in June, so maybe there will be more pressure on me to do the same?

        My assets are broadly diversified into stocks, bonds, cash, investment real estate, a business, and my personal home.  The investment portfolio portion of my allocation is 80/20 tilted to stocks, but I have a significant amount invested in passive income producing real estate.  That portion of my investments feels like a bond because it yields monthly dividends in the form of rental income, and it will tend to appreciate with the inflation rate, and it will be tax protected.  So maybe I am diversified 1/3 stocks, 1/3 bonds and investment real estate, and 1/3 in my business. And then throw 10% cash into the mix as well.

        If you are going to live a long time and you want to retire early, you have to have a method to keep up with inflation.  That could be stocks, real estate, or a more conservative investment mix with lots of bonds.  However, it depends on your withdrawal ratio.  If you need to pull 5% a year from a bond portfolio, that isn't going to last a very long time, so you might have to take the risk of stock exposure to maintain your wealth over a longer time horizon.  If things don't go well in the market, could you cut your living expenses, forgoing that expensive international trip and stick closer to home?  If you need income for necessities, you have less flexibility.  If you have the necessities covered and the investment performance only matters for the extras of life, then it isn't so critical.  So much of this decision process depends upon your personal circumstances.  There is no way that one size fits all.

        Right now I am putting 2/3 of new money into equities and 1/3 of new money into bonds.  But that is just the portfolio portion of my new investments.  I am also rapidly deleveraging with extra cash towards paying off remaining mortgage debt.  With the mortgage payoff I am getting 3.25% guaranteed.  That is better than what I can currently get with bonds, FDIC insured savings, or CDs.


        • #5
          my experience with my first FA that managed the group retirement accounts was that he knew how not to get fired.

          basically long survey that assessed risk tolerance.  i wrote 9.  when i looked at what he picked, i figured he converted that to a 6 to minimize complaints and risk of getting fired.  few people will know what they missed out on.  lots of calls when the actual value diminishes.  i agree with OP and think brother is potentially in a investment portfolio that very few people his age would desire.  i would think only the incredibly risk averse or people with a very defined timeline for work or health that couldn't withstand swings in valuations would benefit.  i'm sure there are more but it is head scratching.  i think we've discussed here many times, but the length of most corrections are like < 2years.  so even if the correction comes, he would likely still be young enough to see himself climb out.

          i'm planning on working for a while, wife also.  but currently we are probably 80% stock.  heavy cash with plan to start real estate investing.  very light on bonds.  we have a significant amount in a variable life policy which in theory gives us some income flexibility.  by most people's definition, we would be considered FI.  i want to provide you with the caveat that we have a pension, which you didn't ask about but probably does affect planning significantly.  however, i think it really matters where you are.  for example, when i look at POF spreadsheets, it is possible we would be FI with 2 million.  we could lose a lot more than that and still be considered FI by his definition, so in many ways our time frame for investing is shifting from our own needs to what is optimal for whatever estate is to be passed to kids.



          • #6
            i'm just under 50 and husband just over. we are within less than 2 years of retiring (I am totally days as a SAHW are totally overdue.....husband at 0.5FTE now) and have about 90% stocks (individual). we won't change anything. A lot has to do with how much you have in the pot. Example....a saved 2 mill retirement pot with a 30-40% loss in value is probably going to have an impact.  a 7-8 million dollar portfolio not so much. we also have  pension(s) coming in to help weather any storms.


            • #7
              Hi Baseballmom!!!  Glad to see you are still around!  First, forget the finance dude who wants money from you for his business.  His crystal ball is no better than yours or ours.  You will get far more from crowd sourcing your answer here.  I'm 52 and Dr. Dad is 53.  We are at about 60-70 Stock/ 30-40 bond or cash.  I use ranges for asset allocation instead of a set in stone number.  I'll update more for you on my opinions/wanderings when I have time later.  Have a great day!  Keep posting.  Great to hear from you again!


              • #8
                Being a physician for thirty years and now a financial advisor (fee only), my perspective is that any attempt to gauge market valuations outside of crazy extremes (tech stocks 1999) will produce lower long term returns.  We can only look back, not forward.  But looking back for seventy years tells us that if your time horizon is at least ten years (and I am 61 and assume my money needs to keep up with inflation and taxes at the least for another three decades minimum), that having at least 50% global stocks in your investment portfolio is a must.

                In a time of rising interest rates domestically, global fixed income makes more sense, but having more than 50% equities also makes sense if the portfolio is really globally diversified.  I have (and always have) at least 80% of my investments in global stocks.  Although I have been exposed to two great bear markets in the last twenty years, my investments are doing quite well.



                • #9
                  Unemployment among physicians is very low. The ability to continue working or return to work is a powerful financial tool. Anything to avoid drawing down assets after a big downturn. The ability and willingness to cut spending is also valuable. A physician with a good income is like a tenured professor and can go out on the risk curve. Stocks will always be your riskiest investment. A 60/40 SP500/Intermed Bond portfolio has 90% of risk concentrated in Stocks.

                  Google the "Larry portfolio"

                  The Stock market doesn't exist to fund your retirement. Your biggest expense is always going to be taxes. Next is going to be Health care.


                  • #10
                    The FA will be right, eventually, but we do not know when (and neither does he). Unfortunately, he has to be right twice (the decision to get out and the decision to get back in). I will make a side bet that your brother will not be with this FA 5 years from now.

                    I agree re: nonchalance of early career physicians with respect to stock market volatility. In one day, my Fidelity account can easily swing by the value of an entire year of my fellowship salary, and that account is only 50% of our investable net worth.

                    Anyways, I am 52 (Wife 53). We both plan to work our current jobs for a couple more years and then hopefully move onto a slower pace job or career but are prepared to live off our savings and investments.

                    We are about 60:30:10 with the 10% being cash in our taxable accounts. I have no intention of changing the overall asset allocation, but we have become underweighted in international/EM, so new investment money is being funneled to a greater extent in that direction.

                    I think a 60:30:10 AA is a reasonable allocation strategy for the foreseeable future and throughout my lifetime. Perhaps, if we still have a large nest egg into our 80’s, I might get more aggressive to invest for my children and grandchildren.

                    BTW, my dad (86) has been 100% stocks throughout, in addition to once having some office buildings. I tried to get him to lighten up on stocks about 20 years ago when I started getting interested in this stuff, and he was not interested. Like your dad, he lives comfortably on pension and social security and is mostly annoyed with all of the taxes on the RMDs for money he really does not even need/spend.


                    • #11
                      Basically your brother's FA is trying to time the market.  Maybe he is that rare person that can do that successfully but the odds are high that he isn't.

                      I'm 59 and have traditionally used the old Bogle guideline of age = percentage of bonds, though right now I'm about 50:50.


                      • #12
                        I'm not 50, so I'll keep my opinion out. I'm interested in hearing why your brother thinks it is useful to have a financial advisor.


                        • #13
                          Well I am 60 and plan to retire in 2.75 months.  The last time I looked I am about 63% equities.  Like Dr Mom I let the asset allocation drift somewhat. I am working on expanding my cash cushion since all earned income will be stopping soon. I plan to stay at least 60% stocks until at least 70.  I doubt this year will be as good as last year but I admit that I do not know.  80% bonds in his 50s seems stupid.  You might be interested in my new blog.  I am trying to write about topics of interest to those of us retiring with no pension or health benefits.  I am getting some pretty interesting comments especially on RMD management and health sharing.  I have an overly complex portfolio of 30 years of acquisitions but I find it easy enough to manage with some tools on Vanguards website.  I have no plans to radically change anything at this point.


                          • #14

                            Well I am 60 and plan to retire in 2.75 months.  The last time I looked I am about 63% equities.  Like Dr Mom I let the asset allocation drift somewhat. I am working on expanding my cash cushion since all earned income will be stopping soon. I plan to stay at least 60% stocks until at least 70.  I doubt this year will be as good as last year but I admit that I do not know.  80% bonds in his 50s seems stupid.  You might be interested in my new blog.  I am trying to write about topics of interest to those of us retiring with no pension or health benefits.  I am getting some pretty interesting comments especially on RMD management and health sharing.  I have an overly complex portfolio of 30 years of acquisitions but I find it easy enough to manage with some tools on Vanguards website.  I have no plans to radically change anything at this point.
                            Click to expand...

                            Yes, those RMDs are going to be a killer.



                            • #15
                              I'm 55, and right now my retirement accounts are 60% stocks and 40% bonds (a mix of Treasuries and a total bond fund) and my taxable account (which is a little smaller than my retirement accounts) is about 80% stocks and 20% muni bonds + cash.  I'm not planning an early retirement, so I'm OK with this asset allocation for now, but in five years or so I'll switch the retirement accounts to be bond and cash heavy so the overall ration of my assets will be closer to 50/50.  Since rebalancing the taxable account will incur capital gains taxes, and there are no RMDs on that account, it makes sense to just tilt the retirement accounts heavily in favor of bonds.

                              I'd consider switching now except that I'm not convinced that bonds are much safer long-term than stocks are, given that interest rates are beginning to rise.  I'm a bit worried this could be 1966 all over again, the start of a period when no investment option did very well.