Is my Portfolio Diversification/Spilt reasonable between investment types?

[waltworks]

I am 57 years old and plan to retire somewhere between 62 and 65. I am married. All accounts shown below are combined (me and wife). Both of us will wait until 65 to collect a pension and social security. I expect the pensions and social security to be about 70% of our annual spending needs at 65. This covers most of our basic needs. The portfolio will cover the balance of our spending needs. I do not need the portfolio to have high or even average equity returns. I only need it to help keep up with inflation. I believe a 60% equity and 40% bond split is conservative enough.
 
Do the below splits and ratios seem reasonable based on my needs? adequate diversification? Any other investment types I should consider?
 
FYI - I am hoping the Roth helps me avoid higher tax brackets (as much as possible). I Max-out on 401k and 403b. In addition, I do "non-deductible" IRA's contributions and then  "back door" into Roth contributions each year.

   

[TomTX]

If you and your wife are comfortable with the structure, that covers the three most important considerations.
 
My own personal opinion, for someone still 5-8 years ahead of planned retirement, 40%  bonds and cash is too high. Maybe if you were already 10 years into retirement.  My considerations are quite similar to yours, except I have been retired for 10 years (70something) and I'm still about 75-25, not 60-40.
 
What I think you're not looking at is the security of the SS/P component.
 
Maybe another way to think about it is at the cash flow level.  Fast forward 8 years.  70% from SS and pensions.  For a rough approximation, the income from SS and pension is kinda/sorta analogous to income from pretty secure bonds ---  call it 50 parts Treasuries and 20 parts investment grade corporates.  So at cash flow level you're about 50% Treasuries, 20% corporates,  (0.3*0.6 =) 18% equities, and (0.3*0.4=) 12% corporates, cash, and minus.
 
So are you really 60-40, or are you 18-82?
 
I'm not trying to push specific numbers, but I am trying to get you to think of the SS/P as part of the allocation.
 
I'm not sure what "help keep up with inflation" means to you, but here's a story-line. Part of the security of SS/P is because they are not (fully) adjusted to inflation.  If you are 35% SS,  35% Pension, and 30% portfolio, and the portfolio has to cover inflation, then 4% inflation requires 13.33% portfolio growth. You need a lot more growth from the portfolio if it has to inflation-cover all income than if it only has to cover itself

[waltworks]

If you and your wife are comfortable with the structure, that covers the three most important considerations.
 
My own personal opinion, for someone still 5-8 years ahead of planned retirement, 40%  bonds and cash is too high. Maybe if you were already 10 years into retirement.  My considerations are quite similar to yours, except I have been retired for 10 years (70something) and I'm still about 75-25, not 60-40.
 
What I think you're not looking at is the security of the SS/P component.
 
Maybe another way to think about it is at the cash flow level.  Fast forward 8 years.  70% from SS and pensions.  For a rough approximation, the income from SS and pension is kinda/sorta analogous to income from pretty secure bonds ---  call it 50 parts Treasuries and 20 parts investment grade corporates.  So at cash flow level you're about 50% Treasuries, 20% corporates,  (0.3*0.6 =) 18% equities, and (0.3*0.4=) 12% corporates, cash, and minus.
 
So are you really 60-40, or are you 18-82?
 
I'm not trying to push specific numbers, but I am trying to get you to think of the SS/P as part of the allocation.
 
I'm not sure what "help keep up with inflation" means to you, but here's a story-line. Part of the security of SS/P is because they are not (fully) adjusted to inflation.  If you are 35% SS,  35% Pension, and 30% portfolio, and the portfolio has to cover inflation, then 4% inflation requires 13.33% portfolio growth. You need a lot more growth from the portfolio if it has to inflation-cover all income than if it only has to cover itself

Thanks. I know it is difficult without specific numbers, but trust me I am overly conservative in estimating numbers. If I work until 65, I would be able to live off a 2 percent withdrawal rate maybe less. I guess I feel comfortable pretending I am laid off tomorrow and can never work again. So 40 percent bonds is really a bridge to 65 as my back up plan. I guess I naively expected comments like - more value stocks. I did not anticipate the bonds being too much.

That is my exact thinking. Getting laid off is a possibility. So having a bridge and bonds allows me to sleep at night. I am trying to survive the perfect storm. Laid off and 60 percent decline in the market.

[FireHiker]

Sounds like a good problem to have. You could be laid off tomorrow and never have to work again. In the mean time, run up the score.

[Turnbull]

I took the liberty of normalizing your parameters to a $100,000 annual income, for the purpose of tabulating numbers and running some what-if scenarios.  If interested, simply scale all dollar values in the table by whatever factor turns cell E3 into your actual planned income
   

This first table merely shows a no-investment, no inflation base.  The starting principle (G3, $1.5M) is simply the normalized income divided by the 2% drawdown you softly approximated.  Not real interesting;  with no inflation the problems are trivial.
 
But adding inflation (cell F1) of 4% - 6% annually  gives a tougher nut.  The portfolio is drained by age 85 or 81 respectively.  So take 5% and see:
   

The main point I'm making is the growth in column D --- Your drawdown increases (a lot) more than you might think because columns B and C are not increasing enough.  So this demonstrates the problem.  The portfolio is drained by age 85.  How much growth is needed to prevent this problem?  ---   Table-wise, we assume portfolio growth by putting a number in cell H1.  5% delays exhaustion to 91.  7% to 98.  What age do you want to cover?  These are rough numbers but the idea is there.  I show 6% just for the example:
   

You are more than welcome to recreate the table for yourself ---  the last line in each screen capture shows the cell format for the column -  and modify for your own circumstances.  The colored cells in rows 1 and 3 are "your values;"  everything else is calculated.  Note that the table contains a row for each year;  I hid many rows for the screen capture size.

 
Back to your original question --  Playing with your numbers, I guess you need about 7-8% growth across the portfolio for the life of the portfolio to provide reasonable inflation protection and some margin of safety.  Can you get ~7% long term with 40% bonds?  Your call, I'm just trying to help clarify the issues.

[EricL]

Long term inflation rate since 1913 is 3.22%

So --- do you want to use 3.22%, assuming the next 30 years will match the long term average?

 

Or do you want to say the last 10 years have been a lot lower than long term average and that undershoot will continue?

 

Or do you want to assume that the next 10-15 years will be somewhat higher, to bring the recent average up to the long term?

 

Or do you want to look at the 100 years  in 20 -30 year chunks and see the and most  to find a range of choices?

 

I say you --  or rather Shelburne  --  should pick what you think appropriate

[Trudie]

The reality of inflation, having lived through the high inflation of the 70’s - early 80’s is that fixed income rises too. I bought CD’s in 13%-14% range. As inflation dropped, my CD’s continued to pay at those elevated rates, juicing my returns.

There is no real set it and forget it AA. We all need to keep our eyes open and see opportunities AND threats.