Experts seem to agree that for most investors, the path to long-term success is to buy and hold index mutual funds. The funds should have low maintenance fees. The portfolio should be diversified among stocks, bonds and cash. And the investor should re-balance the portfolio periodically, with two guidelines:
To adjust the blend away from stocks into less risky investments as one gets closer to retirement
To maintain the appropriate blend for one’s time until retirement, in response to recent changes in the markets. E.g., stocks often grow faster than other investments, so if the percentage of stocks has become higher than the target, re-balancing would involve selling stocks and buying other investments. Conversely, if stocks have done poorly, re-balancing might involve buying more stocks.
These guidelines make perfect sense to me, and I’ve followed them for over thirty years. But they’re just general rules. And my situation is such that I wonder whether the first guideline - to re-balance when the fraction of stocks gets too high - would apply less to me in retirement than it would to other folks.
I’m 57, and work for the federal government. I am eligible to retire now, and will probably do so in about three years. I will receive a pension which I will be able to live on (I live cheaply, have no dependents, and plan to retire to a lower cost-of-living area than Baltimore-Washington).
My portfolio contains an amount, in cash and U.S. treasury securities, equivalent to about ten years worth of the pension. So unless I suffer from certain major medical problems, or the economy experiences inflation rates higher than we’ve seen in decades, I may never have to touch my stocks (although the one area of discretionary spending for which I might want to tap into my savings would be travel).
It makes perfect sense to move to a less risky position as one gets closer to retirement. But once your needs are met, I think you can afford to take more risk.
Because I may not ever have to touch my stocks, I think it may not be necessary to re-balance my portfolio when I retire. I might be better advised to just let the stocks grow to maximize what I leave in my estate.
My question: Does anyone see any pitfalls with this strategy?
Seems reasonable. You could, for example, consider the cash value of your pension as an annuity in your portfolio. I bet if you did that, your fraction in stocks will be much lower than many conservative recommendations.
Having recently retired, I offer one observation that I learned. Before retirement there is one date in mind-your retirement age. A single number. Well, the day after you retire you realize that retirement isn’t a single number. You are managing your investments for today, tomorrow, and 20 years from now.
20 years from now is a long time. It is similar to the time frame you were looking at when you were 40. So some of your investment decisions should be the same after retirement as when you were 40. You clearly have to protect yourself from a downmarket next year, that requires very liquid assets. You also can’t afford to put all your money is safe assets. And the traditional percentages don’t make much sense IMHO. I need a relatively small part of my retirement in the next 2 years. I need far more of my retirement over a 10 year span starting 10 years from now.
In my experience, the job of saving for retirement got harder once I retired.
If your investments are essentially all going to your estate, what do your inheritors want? You might ask them about their investing philosophy, or how they feel about it. Are they likely to need your estate?
My mom consulted me a while ago about some different pension options she had. Basically, she had an option that would pay her more for the rest of her life, or would pay her and me less for the rest of whoever of us lived longer. I told her she should live her life and enjoy her money, and if there was something left over for me, great, but I didn’t need it.
In general, I agree with you that if you have a safe pension that meets your needs, you can keep more of your other investments in equity.
I don’t agree with the typical advice about keeping certain percentages in asset classes. While 60/40 stocks/bonds is easy advice, a moments thought will tell you that someone with $100,000 in assets needs to invest differently than someone with $1,000,000, and the same for someone with $10,000,000.
Someone with only $100,000 in assets who needs to withdraw $12,000 a year probably shouldn’t have any money in the market, they need to be risk averse. Someone with $10,000,000 in assets who needs the same can be 99% in stocks. To say they both should have a 60/40 split is unrealistic.
I allocate based on how much I need to remove from my retirement savings. I keep two years worth of withdrawals in cash or cash equivalents, seven years worth of withdrawals in bonds or bond equivalents, and all of the rest is invested in stocks.
It’s good advice to figure your pension as an annuity, I currently get a small pension of around $4,000 a year from a long ago employer, I figure that’s equivalent to $100,000 in my bond portfolio for allocation purposes.
Before I retired, I was a very aggressive investor and had trouble moving out of equities (even though I rode the market way down several times). After eight years of retirement, I find myself looking at only 60% equities which is bothersome. However, my accounts have grown to the point that I actually have more dollars in equities than when I retired. However, I still have cash equivalents for living expenses, future buying opportunities (or another Trump term )
Yes, that’s how I look at it. If the OP puts a reasonable value on their pension as if it were investments, that would be something like twenty times its annual value (based on typical annuity rates, or on the various rules-of-thumb for minimum safe withdrawal levels.) If, as they say, their actual portfolio is worth about ten times their annual pension, then it represents only about a third of their income-generating assets. So even if they’re 100% in equities it’s really only 33%, which is not reckless at all considering that they feel that they could live reasonably well on the pension alone.
Probably totally unnecessary advice, but if any of your portfolio will require you to take taxable distributions at age 70 1/2, you might want to consult a tax specialist relatively soon. There are things you can do now that will help minimize the tax bite when you get older.