Retirement Planning: Reducing Return Target and Risk?

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Submitted by Coronita on August 26, 2021 - 12:57am

Hypothetical situation, asking for a set a peers.

*Individuals have 19-20 years left to 65 where he/she/they can start drawing on their IRA/401k/Roth etc and has $1million or more already accumulated in their retirement account(s) portion. No debt, mortage, etc.

When should these set of people start to reign in their retirement accounts and reallocate from higher risk higher risk funds to something lower risk, lower return, for stability?

For instance, if these people have $1million, even without future 401k/IRA contributions, at 4% annually, 19 years from now this would be about $2.1m. If that person continues to makes $20k annual contributions to their retirement account(s), at 4% return, 19 years from now that's $2.6m.

Should folks start thinking of taking the "safer" route now, or is 19 years way too far out to reign things in and things should be kept in higher risk allocations, trying to go after that 7-8%+ return? 7-8% consistently for the next 19 years doesn't seem realistic, or am I wrong? If so, then is 4% more realistic.

Submitted by svelte on August 26, 2021 - 7:18am.

The longest downturn in the 20th century was about 10 years - The Great Depression.

Therefore at 20 years out, I would keep the pedal to the floor...keep virtually all the money in the stock market and maximized 401K contributions.

At 10 years out, re-evaluate. How is their health? Do they plan to retire early? Does the job market look good in their chosen field(s)? Is the stock market way overvalued? If poor health, early retirement, employment problems are imminent, or an extreme stock crash looks likely then move to a more conservative position.

At 5 years out, I would start moving to a more conservative position. Most financial planners would recommend 60% stock 40% stable, Warren Buffett recommends 80-90% stock 10-20% stable. They should shoot for something in that range at 5 years out, depending on their risk tolerance.

The above is what I've been implementing in my own life.

Submitted by Coronita on August 26, 2021 - 9:09am.

svelte wrote:
The longest downturn in the 20th century was about 10 years - The Great Depression.

Therefore at 20 years out, I would keep the pedal to the floor...keep virtually all the money in the stock market and maximized 401K contributions.

At 10 years out, re-evaluate. How is their health? Do they plan to retire early? Does the job market look good in their chosen field(s)? Is the stock market way overvalued? If poor health, early retirement, employment problems are imminent, or an extreme stock crash looks likely then move to a more conservative position.

At 5 years out, I would start moving to a more conservative position. Most financial planners would recommend 60% stock 40% stable, Warren Buffett recommends 80-90% stock 10-20% stable. They should shoot for something in that range at 5 years out, depending on their risk tolerance.

The above is what I've been implementing in my own life.

The is considerations to retiring early. Like soon.

As far as medical/health, it appears that with the Covered California PPO Platinum plan, it's roughly $1600/month or $19200/year. In addition, there is a a 10% coinsurance up to $4500/year for in network or $20,000/year for out of network. So out of pocket medical cost would be $23.7k-39.2k in the worst case.

No mortgage or rent.

Passive income of $120k/year. Imho, it's going to be tight, but assuming early retirement, doable to live off of the passive income. But the question is, what about the the retirement accounts. Assuming early retirement, they can be touched after 59 1/2 years, which would be 13 years away, instead of 19. So maybe bank that at 4% with a 50/50% split between equity and some income/dividend/fixed income basket in case things go sour for the next 10 years, and there's maybe 9 more years after that to recover.

The other angle is if one does an early retirement, instead of at 65, I think the social security benefit is severely crippled.

One thing I was suggesting is maybe take on a job that provides health insurance to clamp down on that cost. For instance, if you work X number of hours at starbucks, you get medical coverage. Do something simple that is flexible.

Submitted by gzz on August 26, 2021 - 9:40am.

Neither 4% nor 8% yields are realistic assumption for long term portfolio returns.

Your specific question needs further assumptions to answer IMO like marginal utility of wealth.

As a general answer, I think the Vanguard people are smart and trustworthy and their age cohort funds are probably the best answer as to ideal risk.

Submitted by gzz on August 26, 2021 - 9:45am.

You can see your future SS benefit if you retire today or otherwise early on its website.

I think mine was like 20k a year from about 15 years of paying in but don’t remember exactly.

Svelte: bear markets can last much longer than recessions, and indeed last for multiple generations.

It is hard to time the market I suppose but now is not a good time to be heavy in stocks IMO.

Submitted by plm on August 26, 2021 - 10:46am.

I spent alot of time calculating retirement numbers this year in preparation of retiring in case the company forces people into the office (I'm way too safe about Covid)

Initially I had 10 percent in my spreadsheet for 401k performance, but changed to 9 percent recently. But this is for a very risky 401k, everything in equities, mostly sp500 index. And for that performance has been significantly better than 9 percent so I think that is a good number to use. I've been max out saver into 401K so the amount of money I have in there is probably too much so I can afford more risk. The RMD at age 72 is too high, thinking about t72 get money out faster later.

Until retirement age, plan is to start cashing out my brokerage accounts. Long time holder so percentage of gains that are long term are now 96 percent so its almost all tax free. So can start cashing out up to 80K at 3 percent CA tax and 0 percent fed. So the insanely low tax base will mitigate the significant reduction in income.

Submitted by gzz on August 26, 2021 - 3:55pm.

In the 20 year period from 1989 to 2009, Japan's stock market fell a total of about 75%. It still hasn't recovered 32 years after its 1989 peak.

There's been no great disasters or wars or anything either. Just weak corporate profits and low economic growth.

Submitted by scaredyclassic on August 26, 2021 - 4:27pm.

in spite of the fact that every prospectus warns you that past performance does not predict future results, we all kinda believe that past performance predicts future results and the prospectus is just saying that cause the dumb old stodgy SEC makes them.

Submitted by plm on August 26, 2021 - 5:03pm.

I suppose that is a good argument to have bonds in your portfolio. I just looked at the four bonds I can choose from in my 401k and the yields are really bad, 1.61%, 0.3, 0.38 and -.73 for the last year. Hopefully closer to retirement the yields will be better but they seem to be uninvestable for now.

I did do some work anaylyzing the last numbers from the 2007 to 2013 US crash to figure out if it made sense to time the market and the change in performance by timing and missing by x years and for long term holders, it didn't make sense. Better to ride out the crash in most cases. I suppose in a 401k or IRA where you can go in and out without penalty it might make more sense to switch between stocks and bonds.

I should really not be lazy and quote the text, this was in response to the Japan market perfromance one entry above

Submitted by plm on August 26, 2021 - 5:06pm.

scaredyclassic wrote:
in spite of the fact that every prospectus warns you that past performance does not predict future results, we all kinda believe that past performance predicts future results and the prospectus is just saying that cause the dumb old stodgy SEC makes them.

You sort of have to go by past performance. It might not match but that is the best guess. If not, my planning on getting 9 percent returns and being able to retire early is a bad decision.

Submitted by scaredyclassic on August 26, 2021 - 10:45pm.

plm wrote:
scaredyclassic wrote:
in spite of the fact that every prospectus warns you that past performance does not predict future results, we all kinda believe that past performance predicts future results and the prospectus is just saying that cause the dumb old stodgy SEC makes them.

You sort of have to go by past performance. It might not match but that is the best guess. If not, my planning on getting 9 percent returns and being able to retire early is a bad decision.

Why is past performance the best guess?

Submitted by teaboy on August 27, 2021 - 8:23am.

Submitted by Coronita on August 27, 2021 - 8:35am.

lol

Submitted by Coronita on August 27, 2021 - 8:54am.

The older I get the lazier I get, I experimented in 2 retirement accounts with those time/age based target retirement funds of funds, and I didn't think they were that bad...In a lot of way, they were good in that they were buy and forget.

For one account, it was Vanguard Target 2035 https://investor.vanguard.com/mutual-fun...

For another account, it was Vanguard Target Income

https://investor.vanguard.com/mutual-fun...

Submitted by Coronita on August 27, 2021 - 11:27am.

.

Submitted by teaboy on August 27, 2021 - 10:25am.

Coronita wrote:
The older I get the lazier I get

It's not lazy to focus on only the value-add tasks.
In hindsight, the periods I've spent the most time and effort on analyzing my stock/fund/etf picks are the periods my overall asset performance has been worst.

tb

Submitted by plm on August 27, 2021 - 10:51am.

scaredyclassic wrote:
plm wrote:
scaredyclassic wrote:
in spite of the fact that every prospectus warns you that past performance does not predict future results, we all kinda believe that past performance predicts future results and the prospectus is just saying that cause the dumb old stodgy SEC makes them.

You sort of have to go by past performance. It might not match but that is the best guess. If not, my planning on getting 9 percent returns and being able to retire early is a bad decision.

Why is past performance the best guess?

Because you can't know future performance without a time machine?

Took years for me to know something about stocks to not make so many mistakes investing although I don't know options yet. Don't know anything about bonds really. But from researching what a Bond fund does, it does seem like a really bad time to buy bonds if you think Interest rates are going to go up. If it goes up then the existing bonds lose value and I would guess that rates are probably going to go up. So staying 100 percent in stocks is probably the best thing to do. Stock market just seems to go higher and higher.

Submitted by scaredyclassic on August 27, 2021 - 12:32pm.

I'd agree with the first sentence, but just strike the last four words.

All decisions must be made entirely future looking. Past performance is absolutely irrelevant.

Submitted by plm on August 27, 2021 - 1:23pm.

scaredyclassic wrote:
I'd agree with the first sentence, but just strike the last four words.

All decisions must be made entirely future looking. Past performance is absolutely irrelevant.

All the chartists would disagree with your statement as that is what they do, chart the past to predict the future.

Submitted by scaredyclassic on August 27, 2021 - 7:13pm.

Charts are kinda like reading the entrails of animal sacrifices

Submitted by ucodegen on August 27, 2021 - 11:56pm.

Many points here:
I wouldn't rely on 4% yield annually. Long term average for inflation is around 3%. Recently it spiked to 5%. From the aspects of the FIRE group (Financial Independence and Retire Early), they use the 4% not as the desired rate of return. It is the rate of draw-down on assets (between 3% and 4% of total value). There are several things that are having to happen in Retirement. You still have taxes (except in the case of Roth withdraws). Withdraws from standard IRAs and 401Ks are taxed as income. Any stock sales you have on your personal account are taxed up to 20% Fed tax and up to 12.3% California state tax(Cap gain is considered income and California). A Retiree still has inflation making things more expensive as you go through the rest of your life (I estimate it as eating away 3% yearly on my purchasing power - note: Normally wage increases offset inflation cost increases.. but now you are Retired...).

Right now, Gov bonds suck on their return, as well as state Muni's. One of the un-talked about issues of bonds is that bonds can be more volatile than many other investments including stocks unless held until their end date. If market interest rate go up relative to the interest rate on the bond when purchased, the actual value of the bond has to be discounted relative to the yield vs prevailing interest rate raised to an exponent of the number of years left on the bond. This can severely cut into a bonds value if it has to be sold early with a long period left on the bond. This page has an example of the math: https://www.investopedia.com/terms/b/bon...

If you want some 'reasonable' interest bearing bond-like investments, you might look towards REITs as well as setting up corporate bond 'ladders'. A 'bond ladder' is breaking up the initial investment into segments and then staggering their duration and maturity. This can also reduce the risk caused by increasing interest rates. A simple example would be to build a bond ladder with a 90 day period and 30 day intervals using $90K. This will mean one of the bond groups will mature on each 30 day interval, providing you with access to cash every 30 days. We can consider it as breaking the $90K into three 'strings' (I have seen other terms used) of $30K each. Then invest each 'string' in the following sequence of durations:

String 1:90day, 90day, 90day, 90day, 90day...

String 2:30day, 90day, 90day, 90day, 90day...

String 3:60day, 90day, 90day, 90day, 90day...

The 'stutter step' at the beginning causes maturation of one of the 'strings' every 30 days, at which point funds would be available before the balance is reinvested. To 'rebalance' just hold over the imbalance from the other 'strings' and add it to the balance on the 'string' that has a deficit. It is also possible to do the same with 1 year corporate bonds and using 12 'strings'. You can go with something like 'Vanguard Short-Term Investment-Grade Fund(VFSTX)/VFSUX/VSCSX, or a short term bond ETF. NOTE: While Muni's are state tax free, their yields are currently below 1%. (https://www.municipalbonds.com/bonds/sta...) Current Yields on Corporate Bonds are more than 30% higher than that (NOTE:I use the rough percentage of 30 to be able to 'eyeball' a comparison between Muni's and Corp bonds) https://ycharts.com/indicators/moodys_se...

I did an Excel spreadsheet a while back to calculate (approximately) what an average monthly income someone would have when retiring at a certain age, with a certain amount of retirement investments yielding a certain return and factoring in inflation(some of this part may need work) to show the projected spending power at retirement relative to current spending power. I don't know if anyone would be interested. I don't think the Piggington website can have me attach Excel sheets. I would also have to 'sanitize' it because I built it to help someone. It uses a bunch of Amortization and 'Payment' calcs. As usual, GIGO would also apply. I didn't put many garbage input checkers.

Here is a retirement 'estimator' that uses previous market results going back to 1871 for some data, and 1927 for other under different scenarios. Warning, there are more data entry point than it looks at first. https://www.firecalc.com/index.php?FIREC...

Submitted by gzz on August 28, 2021 - 8:56am.

ucodegen, using long term US stock market returns has serious survivorship bias issues.

How did Russian stocks do from 1871? Farmland in Poland? Confederate and Third Reich bonds?

To put it another way, any asset class we have long term historical data on is cherry-picked and better than average, simply because so many asset classes had drastically negative, -100% returns.

What number to use then?

In my view, it is mistaken and often hubris to assume one's investments will do better than treasuries. So about 2%.

Submitted by scaredyclassic on August 28, 2021 - 9:53am.

Diversify. Like, really diversify.

I think the best returns can be had on stocking up on things on sales at Costco.

I make 20 perc a year on dental floss.

Submitted by scaredyclassic on August 28, 2021 - 4:07pm.

gzz wrote:
ucodegen, using long term US stock market returns has serious survivorship bias issues.

How did Russian stocks do from 1871? Farmland in Poland? Confederate and Third Reich bonds?

To put it another way, any asset class we have long term historical data on is cherry-picked and better than average, simply because so many asset classes had drastically negative, -100% returns.

What number to use then?

In my view, it is mistaken and often hubris to assume one's investments will do better than treasuries. So about 2%.

Inflation adjusted?

Submitted by plm on August 29, 2021 - 11:35am.

If you believe in past performance:

Data from Vanguard:

Years Average 401(k) return
1 year (2020) 15.1%
3 years (2017-2020) 9.7%
5 years (2015-2020) 11.0%

And another:
The average rate of return on 401(k)s from 2015 to 2020 was 9.5%, according to data from retirement and financial service provider, Mid Atlantic Capital Group.

Not inflation adjusted but inflation was very low during that time frame. You could argue that it was quite the bull market but this is for average 401k which would also include bonds so I think an all stock investment return of 9 percent is conservative.

Submitted by plm on August 29, 2021 - 11:35am.

If you believe in past performance:

Data from Vanguard:

Years Average 401(k) return
1 year (2020) 15.1%
3 years (2017-2020) 9.7%
5 years (2015-2020) 11.0%

And another:
The average rate of return on 401(k)s from 2015 to 2020 was 9.5%, according to data from retirement and financial service provider, Mid Atlantic Capital Group.

Not inflation adjusted but inflation was very low during that time frame. You could argue that it was quite the bull market but this is for average 401k which would also include bonds so I think an all stock investment return of 9 percent is conservative.

Submitted by Coronita on August 29, 2021 - 1:28pm.

I am looking at one of my Vanguard accounts I had since 2002. I think it's the oldest one out of the 26 accounts and it is consistently invested on index funds. Average return has been 7.1%...But there were years that it looked awful, like a deep downturn. Personally, that's what I'm trying to avoid. Those deep downturns don't matter if you have another 10-15 years to wait it out. But it would suck if you are drawing from it right after a downturn. I've been talking a lot more with people who are seriously considering early retirement. just thinking....

I guess it's part of the ongoing The Great Resignation....lol...

Submitted by sdrealtor on August 29, 2021 - 3:25pm.

106 in the retirement mecca known as St George at the moment

Submitted by plm on August 30, 2021 - 1:07pm.

Coronita wrote:
I am looking at one of my Vanguard accounts I had since 2002. I think it's the oldest one out of the 26 accounts and it is consistently invested on index funds. Average return has been 7.1%...But there were years that it looked awful, like a deep downturn. Personally, that's what I'm trying to avoid. Those deep downturns don't matter if you have another 10-15 years to wait it out. But it would suck if you are drawing from it right after a downturn. I've been talking a lot more with people who are seriously considering early retirement. just thinking....

I guess it's part of the ongoing The Great Resignation....lol...

Problem with Covid is that it changes your thinking about life. Why keep working, risk dying or long term covid to make more money. If you have enough, why take risks? That 7.1% return worried me for a little but then I found this calculator https://dqydj.com/sp-500-return-calculator/ and those numbers were much better. Most likely it's going to be 9% or much higher going forward.

Submitted by gzz on August 30, 2021 - 5:41pm.

scaredyclassic wrote:
Inflation adjusted?

No. But expected inflation is very low too.

Submitted by gzz on August 30, 2021 - 5:50pm.

Returns have been high in the past few decades because of rapid technological progress and growth in the skilled working-age population.

Tech progress is slowing however. Not in every field, but in most of them. And one by one, the working age population in developed countries has stopped growing and is now in reverse. The main exception are those with high levels of immigration, however those nations are either importing people with lower skill levels than the shrinking native population and cannibalizing the skilled population from other low-growth nations (eg., China to USA, Slovakia to Germany).

Another factor that led to strong returns in the recent past was the "great moderation" where returns became more predictable and with lower and lower inflation and market interest rates. This made long-lived assets like real estate more valuable. That trend isn't done yet, put it's in its fourth quarter.

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