"Retired? Flex Your Investment Muscle"

Such was the title of this article on Yahoo Finance about trying to assess a proper asset allocation for someone in retirement. The author gives a reasonable "it depends," which it does, then goes on to talk about risk tolerance and concludes that a 25-40% range for equities would probably give a 70 year old a decent chance at keeping up with inflation.

I would come at this differently.

As difficult as this can be a big contributing factor must be how long you are likely to need the money to last. Someone that is 70 and whose parents are alive and who themselves are in good shape probably needs to plan on at least 30 years. At the low rate of price inflation from the last couple of decades it would take prices 15 years to go up 50%.


Think about that for a moment. A 65 year old couple with $6000 in monthly expenses might be getting $3000 in combined social security benefits and the other $3000 from their portfolio. If they have $700,000 in their portfolio they might appear to be in good shape today at a 5% withdrawal rate. Ten years from now assuming 3% price inflation the portfolio will need to generate $3914 per month. This means the portfolio would need to be at $913,000 in ten years, after ten years of monthly payments totaling $412,668 (figured using very simple math). So to have made the payments plus get to $913,000 the investor would have needed total growth of 89% over the ten years. Keep in mind this example doesn't take into account expensive one off events like a major house repair or family event that must be paid for.

Sticking with simplistic math the 89% means the portfolio needs to average 8.9% per year. This raises all sorts of issues. First if you need to average 8.9% per year, and you are very healthy and your parents are alive then how confident are you about only 40% in equities? The example assumes 3% price inflation for the next ten years, could you take someone to the hole on that one? As touched on above and in past blog posts there are always all sorts of one offs. In addition to the big ones above, there are smaller things like vet bills, car repairs, computers need to be upgraded (look at your Quicken for the last year, what sort of one offs do you see?). I haven't even touched on any sort of unforeseen doomsday for social security.

From a more predictable viewpoint the stock market, including prudent foreign exposure, will not go up 8.9% per year for then next ten years. It might average that but the path to whatever number will be much lumpier than the exact same number 10 years in a row. A year with a 10% decline in the market and normal 4-5% withdrawal plus paying for a plumbing catastrophe all occurring in year two and all of a sudden maybe 8.9% needs to bump up a little.



The building block here is longevity combined with things being a little bumpier in the next few years, in terms of things like inflation. Yes everyone needs to sleep at night but as I have said before if you are 80 years old and out of money, does it matter if it was because you were too aggressive versus too conservative? Either extreme has its downside.

We are headed up to Oregon today for a wedding over the weekend. We've never been so we are taking a couple of extra days to see some of the state. I'll blog and post pictures as we go. The pictures on this post are from the Bannie Fire which was the one from Sunday. The one is of yours truly and hopefully the other captures how laughably (well we can laugh now, anyway) steep the hill was. One interesting note, we used no water to put the fire out.