100% Equities in Retirement: The Ultimate Retirement Snowball

100% Equities in Retirement

Hello folks! Welcome back to The Green Swan. I’ve mentioned or hinted numerous times in the past how I am currently 100% invested in equities (via index mutual funds) and I plan on maintaining that balance of equities in retirement. The first part of that statement may raise some eyebrows and the second part certainly raises eyebrows. Equities are risky and volatile; not being diversified across other asset classes is an aggressive investment strategy; aren’t I putting my retirement in jeopardy?

Invest to Win

I’ve tackled the question before in my invest to win post which explained why I invest “aggressively” by maintaining a 100% equity portfolio today. But what I didn’t elaborate on in that post was my investment philosophy for when I enter retirement. To be honest, at the time of that writing I didn’t know. Retirement wasn’t necessarily on the horizon nor the fore-front of my mind.

Thanks to finally formulating my retirement investment philosophy further in the last couple years and a recent reader suggestion to elaborate on it (thanks Crusher!), I’m here today to do just that. Here is why I plan to remain invested in a 100% equities in retirement.

First, let me reiterate from my invest to win post that I think equities are the best asset class with truly passive income. The return profile historically can’t be matched by other asset classes. I’d encourage you to read that post for some background and more elaborate justification.

While stocks (I’ll use stocks and equities interchangeably) have volatile investment returns, they are generally smooth over the medium-term (i.e. 5 year returns) and long-term (10+ year returns). In my invest to win post, I use the S&P 500 as a proxy for this justification. Generally, similar results would be expected for any broadly diversified stock mutual index fund and as far as my personal investments go, about 65% of my investments are US equities with the remaining 35% foreign.

Sequence of return risk aside (I’ll get to that later), there is very low likelihood that over any given 5-year period you will end up with less money than you began (even during the great recession!). In terms of volatility, that isn’t too bad in my book. I can handle choppiness in the short-term knowing that over the medium-term things tend to average out.

Some may argue investing in real estate (RE) is up there in terms of return performance, but that is often reliant on the use of leverage, RE requires management of the properties, and it is less liquid. Why real estate isn’t for me could be a whole new post and maybe eventually I will write that, but for now I’ll simply leave it as my preference is to stick with equities in retirement.

I invest to win, stocks are winners historically and I see no reason why they won’t be going forward. That’s why I will not incorporate bonds or other “inferior” (in my mind) asset classes to my investment portfolio.

What do the Models Say?

Have you ever dabbled on firecalc.com? It is a nice resource that I’ve frequented many times. I’d encourage you to plug in your circumstances and assumptions and calculate the results. Then make a few slight tweaks. Enter your investment portfolio as 100% equities in retirement and compare the results to 75% equities and 25% bonds…

I plugged in a portfolio of $2 million, estimated expenses of $75,000 and leaving all other assumptions unchanged with exception to the allocation being 100% equities in retirement.
Equities in Retirement

Results:

While Firecalc found four instances where the portfolio “failed” in which it was depleted within a 30-year timeframe, this still represents an impressive 96.6% success rate. Further, over its 117 tested 30-year cycles, the average ending balance was $5.9 million. As the chart below shows, the lowest resulting balance was a negative $895K and the highest resulting balance was $17.9 million.

Equities in Retirement

Then I changed it to 75% equities and 25% fixed income (bonds).

Equities in Retirement

Results:

Firecalc reported two failed cycles which represents a 98.3% success rate. As you would expect, the portfolio was more balanced and less volatile. However, the average ending balance was notably less at just $4.1 million with an $11.8 million peak and a negative $284K trough.

Equities in Retirement

We are all welcome to draw our own conclusions after this quick and simple experiment. My conclusion is that for a slightly higher success rate (98.3% with the bond mix vs. 96.6% with equities alone) I’d be sacrificing 30% less of an average ending investment balance ($4.1 million vs. $5.8 million, respectively). No thanks!

Plus, the significantly higher average ending balance of 100% equities in retirement as well as the potential for outsized returns (indicated by the highest ending balance of $17.9 million in the all-stock portfolio vs. $11.8 million with 25% fixed income) means that you are much more shielded from longevity risk.

The Kicker

The kicker for my wife and I are our ages. Retiring young has some distinct advantages over the traditional retirement cohort. First, it forbids conservative investing because of longevity risk, and secondly, re-entering the labor force if necessary is more palatable and accessible.

Basically what I’m saying is that longevity risk is bigger than sequence of return risk in my view. They are related in that poor sequence of returns can lead to running out of money in the end (the longevity risk), but they are different in that we can recognize, tackle and mitigate sequence of return risk early on whereas longevity risk isn’t something you can address until it is too late and you are living in a Medicaid supported nursing home (YIKES!).

Lucy and I have set our target retirement date for March 2023 which would put us at the ripe old age of 37. My view for folks retiring in their 30s and 40s is that it is almost a requirement to invest aggressively to pursue greater returns in order to avoid longevity risk. After all, retiring that young may mean retirement is 50+ years!

The second unique aspect of retiring that young is that getting back into the labor force is more accessible than older cohorts. When you are young, you shouldn’t be too worried about sequence of return risk. If your investments are getting bit in the butt shortly after retiring, it is a lot easier and more feasible to re-enter the workforce to alleviate the drain on your investment accounts and allow them to bolster back up. Even if it is a part time gig to supplement your cost of living a bit, that may be all that is needed to improve your retirement success.

Starting out with Cushion

The key is starting with cushion to avoid sequence of return risk. I’ve always harped on retiring with cushion. It is evident in my post on our retirement lifestyle as well as my post on entering retirement while carrying a 4×4.

The trade-off is working an extra year now to build this cushion which allows me to pursue this aggressive investment strategy or perhaps retiring sooner with a more conservative investment selection which will have heightened longevity risk. Which do you choose?

I know what I’d choose. I don’t find it too unpalatable to work an extra year. Retiring at 37 vs. 36 doesn’t make a world of difference for me. But that same might not be said for someone who is retiring at 56 rather than 55. Everyone’s circumstances are different though.

Plus, working one more year and building that cushion has huge upside potential! After all, the peak firecalc output above for 100% equities in retirement was $17.9 million!

The upside is if I don’t run into sequence of return risk in the first 5-10 years of retirement, the extra “cushion” I built in on the front end won’t ever be utilized or relied upon as my cost of living was never adjusted upward to account for it. It was just there in case I needed it. And if I don’t need it…well it will just be “reinvested” and keep compounding, thereby building more and more cushion.

We all talk about getting the snowball started (aka start saving and investing) in our working years to prepare for retirement. Well in retirement, the cushion will be my retirement snowball.

Say my cushion is $100K; as in I’m hypothetically comfortable retiring and living on $2 million but I choose to retire with $2.1 million just in case. This theoretically represents the extra savings from working one more year. That $100K cushion, if never relied upon to bolster a couple bad investing years early in retirement (sequence of return risk), then it will sit there and keep working for me. Granted, it won’t be idle in the least bit. That little snowball on the front end of retirement would grow to over $1 million after 30 years (assuming flat 8% returns).

Equities in Retirement

How Much Cushion?

First, I think it is important to know what exactly your cushion is being utilized for. In context of this post where we are looking at cushion to offset sequence of return risk, as little as $100K (or 5% cushion compared to the hypothetical target retirement investment account balance of $2 million).

This ties and corresponds with the outputs from Firecalc that we detailed above. If you are looking to bolster that success rate of a portfolio with 100% equities in retirement to what the comparable 75% / 25% stock and bond portfolio mix, an extra $100K is sufficient. The results from a $2.1 million all stock portfolio is a 98.3% success rate (same as 75% / 25% mix portfolio) and an average ending account balance after 30 years of $6.5 million (much higher than the 75% / 25% mix…).

However, recognizing that stock portfolio returns tend to move toward the median after a 5 year time horizon, then maybe you would feel more comfortable with 5 years of expenses as a cushion. In the same hypothetical example above, this would be an extra $375K (~19% cushion to the original $2 million target). The might mean an extra 2 years in the workforce before pulling the trigger on early retirement.

Or, if you are like me and want retirement cushion built in four ways to Sunday, including most notably for anticipated lifestyle inflation and risk of healthcare insurance outpacing sanity, then you may shoot for a ~40% cushion or more.

I’ve often hinted in my writing that I’m not against the working “one more year” (the OMY syndrome). This is why. I plan to write more on the OMY syndrome, so stay tuned! Working OMY and building that cushion one step further heading into retirement can cure longevity risk with upside to live lavishly in retirement.

Conclusion

Not everyone’s circumstances are the same. I think especially for really early retirees (i.e. retiring in your 30s or 40s), heavy consideration should be given to maintain significant, if not all, of your investments in equities in retirement. There is too much risk not to considering your retirement span may be 50+ years. Plus you have a significant benefit of still being quite young in that you can more easily re-enter the workforce if sequence of return risk bites you in the butt. And having to re-enter the workforce isn’t a big sacrifice given the super early retirement in the first place. As a 30-40 year old retiree, you have a lot more benefits in your corner than the typical retiree in their 60s.

Granted, what works for me may not work best for you. Read my disclaimer page and do your own analysis based on your unique situation and circumstances.

Thanks for taking a look!

The Green Swan

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18 Comments

  1. In the last year, I’ve moved down to 95% equities and holding 5% cash and bonds. Call it market timing with the Shiller P/E getting so high.

    Overall, I’m with you on the 100% equities plan. Of course it’s a little easier for us with the wife’s military pension coming down the line and the rental properties. I can see why real estate wouldn’t be right for you, but it can be a decent way to keep cashflow going if the market tanks for a decade. (Japan went through an extensive bear market.) Real estate doesn’t have to require active management either.

    I think many people are surprised that I’m still aggressively investing at age 42. I’ve always wanted to have the 8% equity returns compounding for longer than 4% bond returns… (or whatever the numbers are nowadays.)

    1. “Aggressively” investing in stocks isn’t for everyone, that’s for sure. Glad you’ve been able to make it work as you get into your 40s. You have some nice safety nets built in which we all need to some degree for the short term stability. Thanks for sharing!

  2. I like the approach. I’m currently about 10% bonds, 10% “alternative” (REIT & high-yield corporate bonds) and the rest is domestic and international equities. I can see your argument for 100% equities and it seems reasonable, especially with enough “cushion.” For me, it freaks me out a little bit to be all in on equities, but with 80%, I’m feeling pretty good! I’ve got a few more years on you so I don’t have as much longevity “risk” to worry about! 🙂

    1. Glad you found your sweet spot. Still a pretty comfortable level of equities that should drive solid growth for your portfolio. Thanks for sharing, Jon!

  3. As long as you understand the risk/reward trade-off and have the back-up plans in place, seems like a reasonable plan. As I work in a somewhat cyclical field and one that would have limited employment opportunities in a downturn, my wife and I have chosen a more conservative 70%/20%/10% split between equity, bonds, and real estate (in addition to an overly conservative Cash fund). This included reducing some equity exposure of late by ~10%. While this will (likely) result in additional years of employment to reach FI, sleeping comfortably at night, and keeping the wife happy with a more conservative portfolio sits fine with me 🙂 We’ll likely continue to shift our allocation slightly depending on market conditions. I rationalize some market timing with a 70% savings rate. We’ll win, just how long will it take?

    1. I can understand the thought process there, good consideration given the heavy cyclicality your employment has. A little more of a safety net seems reasonable. As does a happy wife! Thanks for sharing, Jason!

  4. Until I find a better asset class uncorrelated with equities, I’m balancing with rental real estate and cushioning with enough cash to avoid selling in a down market. Since I’m only a few months into my retirement, I’m still anxious about balancing income and expenses.

    1. Yes, unfortunately all asset classes seem to be more correlated with each other than not. I know that hasn’t always been the case, but not sure if those days will return. Thanks for sharing your plan, Steve! And congrats on your retirement!

  5. It seems like just a couple months ago we were jumping on a call to catch up about this whole blogging thing. Where has the time gone???

    You mention 100% equities but don’t you also have a major piece of your net worth tied up in businesses you own with family?

    How do you factor that into the mix?

    Dom

    1. I know, time has flown! And that call was immensely helpful in getting me going!

      I do have a major piece in out small family business, about 20% or so of my net worth. At this point, I’m planning my retirement around that and not necessarily reliant on it in to sustain my retirement. However, I would view the approach somewhat similar as it is still considered an equity investment since I’m a part-owner. Albeit a concentrated investment which is admittedly even higher risk but higher reward too.

      Thanks for the question, Dom! All the best!

  6. I’ll definitely be utilizing a 100% stock portfolio in my early retirement, gradually changing over in my older years.

    Investments are just one source of income, and I believe that in early retirement my hobbies and passions will become opportunities to continue building that cushion; also, like you I will be padding it before retiring !

    1. Sounds like a good approach. I would consider that to a small degree if I was a ways into retirement and my equity investments were doing solid. Sort of like taking some house money off the table. Thanks for sharing, Chris!

  7. I certainly agree. I see no reason at this point or even when I retire to go to anything but equities. I mean I might buy a little bit of bonds, but I just hate the idea that they don’t profit me anything and I would like to leave the biggest legacy for my family that I can.

  8. Very nice analysis, JW. I love your idea of a cushion. Mrs. Groovy and I hit retirement with a five year cushion. Probably too much giving our advanced age. But it lets up sleep at night. Say hello to Lucy for me. Cheers.

  9. JW, thank you so much for following through with this very well written post. The concept is very interesting and we anticipate taking a similar path when we FIRE. Funny but we are targeting around your time frame also but we are way older (will be 57 at that time). I am very jealous that you will be doing so 20 years before me. 20 YEARS!!! 🙂

    We plan to remain high equity as well. However, we will likely reduce some volatility over time by selecting more conservative equity, dividend strong stocks and less small cap stocks, etc. It is a subtle change but I think a prudent one given our status as FIRE and our ages. We will also have initially a large cash cushion from the sale of our current home.

    Great post!!!

    1. You bet, I had fun writing the post! Congrats on getting your target retirement date set. Retiring in your 50s is still retiring early!

      That plan makes sense to me! I can see the allure leaning toward more conservative equities. Thanks for sharing!

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