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My Plan for Asset Allocation/Spending in Retirement

A reader writes in, asking:

“Do you plan to switch to a different all in one fund when you get older? I have been doing the 3 fund portfolio over the last couple decades and was thinking of switching to all in one fund, but I would think that an 80/20 split for someone in their 50s is a bit aggressive. So do you plan to switch to a more conservative split later in life or do you plan to stay with this all in one fund until you retire?”

I’ve written before that I don’t necessarily plan to stick with this fund indefinitely. But that has more to do with costs (i.e., lower fixed-income yields and higher expense ratios) than it does with the fact that risk tolerance tends to decline with age. (Note: this dollar cost increases over time as the size of the portfolio increases. So what makes sense at one stage may not make sense at another stage, even if you appreciate the simplicity just as much as you always have.)

In other words, at some point I may switch to a three-fund portfolio — or a two-fund portfolio using Vanguard Total World Stock ETF for the stock allocation.

Ultimately though, the plan is essentially to segment the portfolio into two sub-portfolios as discussed in prior articles:

Let’s walk through a simplified example to show the idea works. Imagine that the following figures are applicable:

  • We anticipate total spending of $85,000 per year.
  • We anticipate the lower earner filing for Social Security at age 62, with a benefit of $20,000 per year.
  • We anticipate the higher earner filing for Social Security at age 70, with a benefit of $35,000 per year.
  • We are comfortable spending from a stock-heavy portfolio at a rate of 3% per year, and assuming that such would last more or less indefinitely.

Given the above figures:

  • From age 70 onward, we would need $30,000 per year from the portfolio (i.e., $85,000 total spending, minus $55,000 of Social Security). With a 3% spending rate, that would require $1,000,000. So we would need $1,000,000 allocated to the mostly-stock (or maybe all-stock) portfolio.
  • To retire at age 62, we would still need that $1,000,000 stock-focused portfolio, and we would need an additional $35,000 per year from savings for the years 62-69, because the larger Social Security benefit hasn’t begun yet. 8 x $35,000 = $280,000. So we would need an additional $280,000 allocated to something very safe (e.g., an 8-year CD ladder and/or TIPS ladder, perhaps with some I-Bonds in that mix).
  • And then for every additional year prior to age 62, we would need an additional $55,000 allocated to the safe investment mix (because neither Social Security benefit is being received at that point). For example if we wanted to retire at age 58, we’d have 4 years of $55,000 of spending from the safe-asset portfolio, followed by 8 years of $35,000 of spending from that portfolio. And the whole time, the remaining ~$30,000 would be coming from the stock-focused portfolio.

In other words, $500,000 in the safe-asset portfolio, plus $1,000,000 in the stock-heavy portfolio would let us retire at age 58, with a spending level of $85,000 per year. At the beginning, that’s a 5.67% spending rate from the portfolio. A lot of people would balk at that, especially beginning at age 58. But in terms of risk level, it’s mostly just the 3% spending from the $1,000,000 portfolio that generates much risk. The rest of the spending is coming from sources with very little risk (i.e., a combination of CD/TIPS/I-Bonds earlier, and Social Security later).

With regard to the 3% spending rate, I would likely be comfortable using a higher rate if stock valuations were lower or if we were talking about retirement at a later age. Also, I anticipate using something along the lines of a hybrid method in which the spending each year is an average of “last year’s spending plus inflation” and “x% of the portfolio balance” — as opposed to one or the other.

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