What do you think of this investment advice when nearing retirement

[ka6767]

I read somewhere many years ago and it stuck with me because I thought it was reasonable advice.

When you are young put most of your investments in aggressive index mutual funds because you have time to make your money back when the market drops. When you're 10 years from retirement put 10% of your portfolio in lower/low risk investments each year until you retire. Year 10 (90/10), Year 9 (80/20) Year 8 (70/30) etc.

Max exposure in the market during retirement should be about 20 - 30% of your portfolio.

Their reasoning was that in retirement you don't have the income or time to make your money back if there is a severe drop in the market.

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[thesauce]

It's a reasonable approach, but it all depends on your time horizon and where the rest of your money is. It isn't a one-size fits all.

I would probably put everything into a broad-market index fund or something that tracks the S&P under the assumption that the market will do what it has always done and give you your 7-12% average (depending on how you measure it). Sticking it all in low-risk investments could leave your returns less than inflation.

 

[Neopolymath]

The truth is that this depends on how much money you need to live in retirement (but not thrive) versus your portfolio size. Someone who has a smaller portfolio and thereforr smaller margins to maintain their basic family lifestyle after living as a working physician needs to be more conservative with their retirement money on the glidepath and during retirement. Someone with a lot of money and not a lot of expenses (typical WCI enthusiast, for example) has a lot more room to be aggressive.

It's really a classic case of the rich get richer because they can afford to be in on opportunity when others cannot risk it during retirement. That's how you see estates grow so massive during retirement when someone starts off with more than enough.

 

[Monocles]

I read somewhere many years ago and it stuck with me because I thought it was reasonable advice.

When you are young put most of your investments in aggressive index mutual funds because you have time to make your money back when the market drops. When you're 10 years from retirement put 10% of your portfolio in lower/low risk investments each year until you retire. Year 10 (90/10), Year 9 (80/20) Year 8 (70/30) etc.

Max exposure in the market during retirement should be about 20 - 30% of your portfolio.

Their reasoning was that in retirement you don't have the income or time to make your money back if there is a severe drop in the market.

This is pretty reasonable, and is the basis behind most target date retirements if you look at the details. Of course this is assuming a normal career trajectory of working into the mid 60s. If you are aiming to FIRE you could be "10 years away from retirement" even before you graduate training, and it wouldn't make sense to go hard into low-yield safe investments like bonds.

 

[Splenda88]

IMO, I think you can't go wrong with S&P 500 index regardless of age.

All my money will be in real estate and S&P 500. I will keep some cash (50-75k) on the side to buy more S&P 500 when there is a big market downturn.

 

[Chemist0157]

It depends on what you have by the time you reach retirement age. If you have more than enough money to keep living as you want during a market collapse where stocks falls 50% and do not recover to their value at time of initial decline for several years, then you could keep everything stocks. I think Warren Buffett was going to just put money in an index fund for his wife when he dies.

If you are FIRE and scrimped and saved for years and live cheaply and have just enough to do the 4% rule (which is not perfect), then you are going to be more conservative.

I’m not planning to do much bonds at all until probably my 50s, but it will depend on market cycle and how much I have accumulated at that time. I’m planning on getting more involved with real estate so that will play a role depending on how that has gone over the next 20 years too.

 

[Mman]

I read somewhere many years ago and it stuck with me because I thought it was reasonable advice.

When you are young put most of your investments in aggressive index mutual funds because you have time to make your money back when the market drops. When you're 10 years from retirement put 10% of your portfolio in lower/low risk investments each year until you retire. Year 10 (90/10), Year 9 (80/20) Year 8 (70/30) etc.

Max exposure in the market during retirement should be about 20 - 30% of your portfolio.

Their reasoning was that in retirement you don't have the income or time to make your money back if there is a severe drop in the market.

while that sort of sounds like safe and prudent advice, math does not bear it out. You need to maintain allocation to stocks if you want your retirement funds to last for a long time. Your line about the reasoning for it refers to something called "sequence of returns risk" where you get unlucky and catch a bad year or two right away that drops your savings massively when they are at their largest early in retirement and never recover.

Fortunately, those massive drops are usually recovered rather quickly. Tend not to see massively down year following massively down year following massively down year.

I'm too lazy to dig up the research, but basically you probably do not want to ever drop your stock allocation below 50-60% of your portfolio even in retirement. You need the stocks to help offset inflation over time. You can't be 20% stocks and expect your savings to last for 30-40 years unless you are simply withdrawing such a tiny amount each year.

 

[Chemist0157]

I think anything less than 60/40 stocks/bonds stands more and more chance of not sustaining itself over time. Something like that.

 

[Financial Advisor Justin]

I read somewhere many years ago and it stuck with me because I thought it was reasonable advice.

When you are young put most of your investments in aggressive index mutual funds because you have time to make your money back when the market drops. When you're 10 years from retirement put 10% of your portfolio in lower/low risk investments each year until you retire. Year 10 (90/10), Year 9 (80/20) Year 8 (70/30) etc.

Max exposure in the market during retirement should be about 20 - 30% of your portfolio.

Their reasoning was that in retirement you don't have the income or time to make your money back if there is a severe drop in the market.

Best advice find and advisor you like and trust that specializes in working with Healthcare Professionals!........II know a guy!

 

[pastafan]

Run the numbers yourself: FIRECalc: A different kind of retirement calculator