Review IPS AA glide path based on expenses vs age

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Topic Author
smee44
Posts: 17
Joined: Wed Oct 19, 2016 5:31 pm

Review IPS AA glide path based on expenses vs age

Post by smee44 »

Bogleheads,
I drafted the below revision to my IPS AA glide path as I never liked my age based one as it didn’t fit with my FIRE goal and the projected timing of that.

Questions:
  1. Any reason my proposed IPS glide path doesn’t make sense?
  2. Have other Bogleheads have adopted glide paths based on expense multiples vs age? If yes feel free to share your IPS glide path.
Goals of glide path:
  1. Glide based on multiple of expenses to match my “need” to take risk.
  2. No change in AA at target retirement portfolio multiple of 30x.
  3. No change in AA past age 67 to keep portfolio management simple and clear if I am unable to manage the accounts.
Assumptions I am not asking to be debated in this thread:
  • Current AA 90/10% fits my risk tolerance, AA has been 90/10% since 2018, currently portfolio is around 10x projected expenses.
  • Terminal AA is 55/45% at SS FRA, I feel this fits my risk tolerance from 67 to death.
  • Plan to FIRE with 30 times expenses (projecting this to happen between age of 45-50)
  • US/International stock ratio fixed at 60/40% through the complete glide path.
Proposed IPS Glide Path Statement:
Glide path of the total retirement portfolio was developed with respect to a multiple of retirement expenses and social security FRA (full retirement age). At FRA the AA is fixed for simplicity.
  • 0-15 times projected retirement expenses & <67 yrs. old: Stock/Fixed Income Ratio: 90/10%.
  • 15-25 times projected retirement expenses & <67 yrs. old: Stock/Fixed Income Ratio: 85/15%.
  • 25-35 times projected or current retirement expenses & <67 yrs. old: Stock/Fixed Income Ratio: 75/25%.
  • 35-50 times current retirement expenses & <67 yrs. old: Stock/Fixed Income Ratio: 65/35%.
  • 50+ times current retirement expenses or >67 yrs. old: Stock/Fixed Income Ratio: 55/45%.
Overall I feel this glide path matches my need and willingness to take risk across my investing life better than my previous glide path which was 120-age in stocks which I didn't put much thought into. Thank you for taking time to review and comment.
Doc7
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Joined: Fri Aug 24, 2007 12:55 pm

Re: Review IPS AA glide path based on expenses vs age

Post by Doc7 »

Mine is like this. I didn't do it in "X Expenses" but 100% = 33X Expenses.

11-30% of retirement $$ - 80% Stock (I was 70/30 for 12 years prior to changing to this Glide path.. I was 80% stock on this one for about 6 weeks before hitting my next milestone lol…. So in the end I will really have been 70/30 from age 25 through about 45 or so, I think)

Now : 31-60% : 70% Stock

61-90% : 60% Stock

91-1110% : 50% stock
sycamore
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Re: Review IPS AA glide path based on expenses vs age

Post by sycamore »

It's a reasonable glide path.

Let's do some boundary testing...

Say that your combined savings & portfolio growth is relatively low so your portfolio never gets as big as 25X.
Maybe we have one or two decades-long stock bear markets along the way.
Or your expenses grow faster than your portfolio.

At at age 67, your IPS says your portfolio should be 55/45, which means moving 30% in stocks to bonds.
Would you do a single exchange of 30% on your 67th birthday, or make the transition over, say, the course of a year?

Even if you get to 34.9 X, you'd still need to exchange 20% from stocks to bonds. That's a big chunk so decide
KlangFool
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Re: Review IPS AA glide path based on expenses vs age

Post by KlangFool »

OP,

1) Your current age?

2) Your annual saving rate in terms of the retirement expense? 100%? 50%?

3) Your glide path is not reasonable. The usual rule of thumb is at least 10 years of retirement expense during retirement. Your targeted FI number is 30X. At 30X, you should be 67/33. Your glide path does not meet that goal.

KlangFool
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Topic Author
smee44
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Joined: Wed Oct 19, 2016 5:31 pm

Re: Review IPS AA glide path based on expenses vs age

Post by smee44 »

KlangFool wrote: Fri May 06, 2022 4:03 pm OP,

1) Your current age?

2) Your annual saving rate in terms of the retirement expense? 100%? 50%?

3) Your glide path is not reasonable. The usual rule of thumb is at least 10 years of retirement expense during retirement. Your targeted FI number is 30X. At 30X, you should be 67/33. Your glide path does not meet that goal.

KlangFool
Answers to your questions first.
1) Current age is 36.
2) Annual savings rate in relation to expected retirement expenses both in 2022 dollars is 88%.
3) My glide path is 75/25 at 30x vs your rule of thumb 67/33. So my glide path is more aggressive, I will think more about my risk tolerance at this retirement number maybe more bonds is appropriate but I want to protect growth due to a longer retirement.

Thanks for your reply and guidance of 10 years retirement expenses in fixed income.
SnowBog
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Re: Review IPS AA glide path based on expenses vs age

Post by SnowBog »

As a general concept - I'm of a similar mind - I think it makes more sense to think about AA relative to FI vs. age. My guess is this is more relevant to people contemplating "retiring early" - as there is a noted difference between the two (whereas for someone who retires at "normal" age they are likely more interchangeable).

That said - I didn't really establish a "meaningful" glide path...

Tl;dr version - I've gone from 80/20 to 60/40 over the past 4+ years (ignoring my pre-BH years) as our portfolio grew unexpectedly fast - and we got closer to FI.

At the end of 2021, I expected we'd be FI within 1-2 years (with plans for RE after 5-8 years) - so our "need" for risk/growth was relatively small.

After the losses this year, I've debate if I need to adjust our AA - as we are now obviously further away from FI...

Recently, and coincidental to KlangFool's 10x in fixed recommendation, I've attempted to build a quasi-dynamic bond AA to set a "max" bond AA based on:
  • Maximum Fixed Income $ of 10 years expenses + my quasi-Liability Matching Portfolio (LMP)*
  • Progress towards bond projection at retirement [early]
Both resulted in keeping my target AA of 60/40 - so I haven't thought about this much further...

* I'm using EE & I Bonds to provide "bridge income" between retirement and delayed social security/pensions, which I reference as an "LMP" in my portfolio. So the above would maintain 10x expenses in fixed income before - during - and after my LMP is exhausted (by including the LMP - which is otherwise a "fixed income" holding - in the target).
Topic Author
smee44
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Joined: Wed Oct 19, 2016 5:31 pm

Re: Review IPS AA glide path based on expenses vs age

Post by smee44 »

Thanks for all the replies. Some additional notes and thoughts.
  1. I do not plan to FIRE until I reach 30x so biggest jump of would be 25 to 45% bonds, I am thinking about putting a max change of 10% bond reallocation per year. I will continue to think about a transition path of AA.
  2. I don't plan to move backwards through the glide path. This is why I didn't want a change of AA at my planned retirement multiple of 30x. I am going to write that note of that into my IPS.
  3. I plan to delay SS to 70 which would reduce my expenses by ~50%+/-, but this is pretty far out so I haven't really put too much time in forecasting this. SS would cause a jump in my fixed income multiple as my expense would drop at 70.
So far I feel like my glide path is reasonable with a few minor tweaks.
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Ben Mathew
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Re: Review IPS AA glide path based on expenses vs age

Post by Ben Mathew »

While it can make sense to base AA on wealth, not including age at all in the calculation can cause problems. Having 20x at age 40 is very different from having 20x at age 60. At age 40, if you haven't retired yet, your portfolio does not hold your future savings. So it should generally have a higher percentage of stocks than the portfolio at age 60.

The other aspect of your plan--holding AA constant after retirement--is consistent with the optimal asset allocation in a lifecycle model. That's because there is no future savings incoming after retirement. However, adding SS may merit an upward sloping between the start of retirement and the start of of SS, and a slight downward slope after, as shown in this post:

Asset allocation on the savings portfolio

You seem to want to take less risk when you have more wealth ("if you win the game, stop playing"). This can be achieved by funding a retirement spending floor ("essential expenses") by 100% bonds (preferably duration matched TIPS) and maintaining a fixed asset allocation on the remaining discretionary funds. Building a bond bridge to Social Security would be a way to do that.
Total Portfolio Allocation and Withdrawal (TPAW)
SnowBog
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Re: Review IPS AA glide path based on expenses vs age

Post by SnowBog »

Ben Mathew wrote: Sat May 07, 2022 9:48 am You seem to want to take less risk when you have more wealth ("if you win the game, stop playing"). This can be achieved by funding a retirement spending floor ("essential expenses") by 100% bonds (preferably duration matched TIPS) and maintaining a fixed asset allocation on the remaining discretionary funds. Building a bond bridge to Social Security would be a way to do that.
+1

While I didn't go full LMP, as I noted in my prior post, I am building a quasi-LMP using I and EE Bonds. The expectation is that it will cover all of our "essential" expenses - and coincidentally roughly matches what I'll get from social security and pensions when they start

Even if the stock market implodes right after we retire, we can still service all basic needs from savings bonds. We plan on using Variable Percentage Withdrawal (VPW) which will define a max withdrawal from our portfolio - which will set the upper threshold of our spending for discretionary expenses - which naturally will be scalled back if our portfolio is getting hammered.

But as noted, this is definitely one of those "quit playing" approachs. I recognize that with our low AA, including these quasi-LMP funds, we are leaving money on the table and will most likely have a smaller portfolio at the end than we could have. I'm OK with that, we'll have "enough".
Topic Author
smee44
Posts: 17
Joined: Wed Oct 19, 2016 5:31 pm

Re: Review IPS AA glide path based on expenses vs age

Post by smee44 »

I wanted to close the loop on this thread with my final IPS terms. I appreciate the input from this community and many of the comments factored into my final glide path statement as documented below.

Finalized IPS Glide Path Statement:
Glide path of the total retirement portfolio was developed with respect to a multiple of retirement expenses and social security FRA (full retirement age). At FRA the AA is fixed for simplicity. When a change in AA happens, transition the AA in max steps of a 5% AA change per year until the new AA is reached. Review FRA AA percentage at early retirement date with Social Security study factored in. Do not move backwards in the glide path after retirement.

0-15 times projected retirement expenses & <67 yrs. old: Stock/Fixed Income Ratio: 90/10%.
15-20 times projected retirement expenses & <67 yrs. old: Stock/Fixed Income Ratio: 85/15%.
20-25 times projected retirement expenses & <67 yrs. old: Stock/Fixed Income Ratio: 80/20%.
25-35 times projected or current retirement expenses & <67 yrs. old: Stock/Fixed Income Ratio: 70/30%.
35-50 times current retirement expenses & <67 yrs. old: Stock/Fixed Income Ratio: 60/40%.
50+ times current retirement expenses or >67 yrs. old: Stock/Fixed Income Ratio: 55/45%.

Again thank you for your time.
makeitcount
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Re: Review IPS AA glide path based on expenses vs age

Post by makeitcount »

What happens if you achieve a portfolio multiple of 27x and then the market tanks taking you back to 23x?
Do you maintain the 27x AA (70/30) or do you up your risk/volatility by increasing your stock % (80/20)?

FWIW, I follow a similar plan but decided to maintain a given AA once a threshold is crossed.
"Yeah, well, you know, that's just like, uh, your opinion, man." - J. Lebowski
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