Security vs. Opportunity

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George the original one
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Post by George the original one »

If you've been paying attention, you know that I'm age 50 and trying to retire before my normal retirement age (58). At 58, I'll have a pension available that will be enough, possibly even more than enough (depends on how much the government changes the terms). For ensuring that the pension is there at age 58, it behooves me to stay employed until age 53. Consequently, I need to have 5 years of retirement expenses available.
That goal was achieved and I still have a couple years of employment ahead. So the general question becomes: do I secure that money in a safe form and forego any potential investment gain/loss?
My gut feeling is no. I'd really like some help quantifying that it is the right decision (or that it isn't).


chenda
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Post by chenda »

If your planning on retiring in 3 years I would keep the money in a low risk investment. Your not likely to make a lot of money in 3 years and there's little time for it to compound. And if you loose money your going to have to delay your retirement, but you can't bring it forward due to your pension commitments. The benefit is low and the potential cost high.


secretwealth
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Post by secretwealth »

It really depends on how much you have saved and how much your pension is worth. But as chenda suggests, 3 years isn't enough time for compounding to do its magic--and if you have enough saved to cover you for 5 years at a low SWR, there's little reason to stay aggressive.
The only reason to stay aggressive that I can think of is if you're substantially short of being at a low SWR in 3 years--and I suspect that is not the case.


George the original one
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Post by George the original one »

How would you feel if the money already saved is 20%-50% more than needed?


sshawnn
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Post by sshawnn »

I would leave the money in a low yielding, risk averse account . You are at a point where enough is enough and I think that would allow you to sleep soundly every night.
That being said, I think this is a horrible time to try and enter the market. You can certainly readdress this question six months, a year, or even two years from now and adjust accordingly


secretwealth
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Post by secretwealth »

I'm not risk averse--quite the contrary. If I had 35% over what I needed in retirement and I was 8 years away from the goal line, I'd retire today.


bigchrisb
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Post by bigchrisb »

Just to throw it out there, is your investment time frame 3 years, or 3 years plus your your draw down phase (3+5 years)? I agree with the comments about low risk for money you need in three years, but with 8 you have a little more time to play with. I'd take a mixed stance between lower risk of loss, and lower risk of erosion to inflation over the 8 years.
For those of us without defined benefit pensions, we don't quite have that luxury - even at 30, I'm planning on a 60 year investment horizon, which doesn't afford the same luxuries with respect to risk!


sshawnn
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Post by sshawnn »

DW and I sometimes say,"If it were just us...." Well, it's not and I know GTOO has more than he and his wife to look out for(his mother) in the time period mentioned. Such familial positions slow more radical or risky plans and cause one to be risk averse.


celliott
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Post by celliott »

The money you'll need to bridge the retirement/pension gap should stay safe and secured. You could ladder some CD's for the 5 year period.
Anything BEYOND that you can afford to risk. I say dividend growth stocks paying a higher dividend are a good place to stay ahead of inflation.


wizards
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Post by wizards »

I second celliott.
The money you need for the 5 years should be kept in CD's adjusted to the period where the money is needed.
As for the remaining part of the savings I'd take more risk.
What is the current allocation of your investments?


Chad
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Post by Chad »

This is a weird time. Bonds are risky because of their big run up over the last few years, as are stocks, and CDs have historically bad interest rates. I would probably look for dividend stocks and then work that money into bonds/CDs as the interest rate rises over the next 3-5 years.
The problem with dividend stocks is your entry point. Right now it doesn't seem great. Historically, we get three 5 % pullbacks a year. I would wait and look for one of those to get into the market. This is actually what I'm doing with the money I save every 2 weeks. Just building it up for a good buy in opportunity. Though, I may jump on Apple before the broad market pullback.


Dragline
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Post by Dragline »

You probably already could guess what I am about to say: "DO BOTH". First decide what your "security" strategy will be and then decide what your "opportunity" strategy will be. Then decide what portion of your assets to allocate to each. Perhaps that 20-50% extra is what goes in the "opportunity" side of the equation.
You'll end up with that "barbell" type strategy recommended by Taleb.
Due to uncertainty (especially the unknown unknowns), you cannot know which is truly better today, but will only know in hindsight. Just make sure your finances do not interfere with your other life goals.
Or you could invest everything you own in Bitcoins and just call it a day. ;-)


George the original one
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Post by George the original one »

90% stocks

23% I-bonds

---

113% total funds for 5 years of expenses
** Safety Margin **

40% raidable Roth IRA contributions (account can suffer 40% stock drop and still provide 40% of 5 years expenses)
@sshawnn - mom passed away in November, so we're without familial obligations. That's also why the funds are suddenly sufficient.
@bigchrisb - I've been looking at it as funds needed for years 3-8.


sshawnn
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Post by sshawnn »

Sorry for you loss George. You probably mentioned it and I missed it. That does allow more wiggle room with regards to opportunity. But I still can see leaning on the conservative side this late in the game.
My question is how much would you reduce your pension amount (%-wise) if you left today versus your target quit date?


George the original one
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Post by George the original one »

> My question is how much would you reduce your pension

> amount (%-wise) if you left today versus your target

> quit date?
The going rate is 5%-6% reduction per year not worked. However, the legislature is tinkering with the terms and there already are clauses that make me not want to exit before age 53.


JoeNCA
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Post by JoeNCA »

Well, in a way it's like playing poker.

If profit goal was met, then it's time to get up and walk away.
By securing those funds, the probability that you will retire at the age that you have selected is 100% - you've done your job.
The work income from the next two years then, can be subjected to market fluctuations without affecting your retirement - risk does not matter.
Why not take it for a ride then?
Or, you can save it for one time special spending money when you retire.
Bottom line, if you must, risk only what you can afford to lose.


Seneca
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Post by Seneca »

I've never been in your enviable position, but here are some unmentioned things that come to mind.
To me, opportunity IS security. That said...
Do you have a spouse/partner and what do they think?
It might help to say aloud your choice isn't permanent, you can always go back to work, or choose to quit if you stayed on.
What are your plans after quitting employment? Managing your investments as you have been and "fishing"? Something new that might generate money/returns you don't get today?


JohnnyH
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Post by JohnnyH »

I'm thinking I'd just shoot for capital preservation in a PP like diversification. Historically it has had less severe drawdowns than most asset classes... I don't think I'd sit in USD with rates near zero.


tylerrr
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Post by tylerrr »

i agree to monthly buy into the PP where you are totally diversified in different markets or just keep stocking up on cash waiting for the stock market to crash in the next 1-2 years.
I think people are crazy entering large cap stocks right now even if for dividend investing. The market is at a high...I'm waiting for it to crash. It will....It always does in cycles....


J_
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Post by J_ »

Jacob said once to me when I wrote about my way of using money only in CD's : you pay "opportunitiy costs".

He was right I think, but I realise that the other side is: no sleepless night's.

Not using every opportunity can also be a profit in a non financial way.


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