By What Age Do You Hope to be 100% Out of the Stock Market?

[gamecock43]

Being 28 I don't have a concrete plan...but I like the idea of dollar/cost averaging out around 55yrs. Regularly withdrawing to the point where I have 80% out by age 63-ish. The rest I might leave in as that would be last-ditch money that I wouldn't plan on needing and passing it down.

[jIM_Ohio]

Ah ... but if you only spent 40k the first year (and who couldn't live very contentedly on 40K in today's dollars if you had a paid-for house, even with increased medical costs?), the remaining income would go to increasing the nest egg, causing future year's earnings also to increase.

As far as the preferential tax treatment for dividend income, I figured someone would bring that up. But there will be changes to the tax code (there always are), and I'd be surprised if that stays in effect. Since I'm talking about a date 20 years or so in the future, I won't try to guess what the tax laws will be then.

I'm a bit surprised that I'm the only person who would like to some day have enough saved that I can live comfortably with zero invested in the stock market.

The idea I'm currently kicking around is to start gradually reducing my stock holdings (in the form of mutual funds) over a period of about 10 years, until I'm at zero by the age 65, and was curious to see if others had similar thoughts.

I know that the "Money magazine type conventional wisdom" says that everyone should be in stocks ... But I like to question CW based on what I observe. For me, the idea of being able to somedday remove the volatility of the stock market from my financial equation is just too appealing.

2 things have gotten me thinking about this question:

- As we have seen, right now some older folks are panicking and pulling all of their money out of the stock market in one fell swoop. It seems like a very reckless, fear-based, and perhaps irrational move. For those of us who do not have the stomach to stay invested in stocks until the day we die (and I will admit I am one of them), wouldn't it be better to have a pre-determined plan to start gradually pulling out of stocks over a number of years, based on our age? That way, we could remove emotion (both panic and euphoria) from the equation.

- Thinking back on my late grandparents' lives, both sets lived very comfortable (not lavish, but secure) lives until the day they died. The secret to their success was living below their means and a life-long habit of saving...it certainly wasn't stellar returns on risky investments. On my mother's side, they did own stocks but were completely out of the stock market by around their mid-70's or 10-plus years before they died. On my father's side, they never once had a penny in stocks or stock mutual funds. They didn't have a pension either. They had a bit of land that they sold in their 60's, and they had their savings. Combined with Social Security, that got them through, and my grandmother lived until her late-90's. Both sets of grandparents were even able to leave a small inheritance to their children, and it wasn't the stock market that enabled them to do that.

The difference is the amount of work and earnings needed to achieve goal one way or another. If I had $4 M it would be because I needed 160k in income. If you state the problem as needing only 40k in income to begin with, I don't need $4 M to generate that income if I invest in equities.

First, if 40k was my need, then I would only need to save $1 M if I held equities in retirement.

As to the volatility, there are withdraw techniques to avoid selling. My plan would have 7 years cash in the bank, so I would just take that down to 6 years expenses and wait for market to go up. My withdraw plan is much more detailed than that, but bottom line is anyone pulling money out now while in retirement did not have such a plan.

The tax treatment of dividends is not the reason to use that plan (it is a side benefit). The reason to use dividends is because they keep pace with inflation. The tax treatment is just a great benefit. I don't think the 5% dividend/capital gains rates can go away. Because if they are raised, whichever president passed that into law would be taken to cleaners for raising taxes on the poor- that will cost the election the next time around. Don't believe me, read my lips- ask Bush sr.

Thinking back on my late grandparents' lives, both sets lived very comfortable (not lavish, but secure) lives until the day they died. The secret to their success was living below their means and a life-long habit of saving...it certainly wasn't stellar returns on risky investments. On my mother's side, they did own stocks but were completely out of the stock market by around their mid-70's or 10-plus years before they died. On my father's side, they never once had a penny in stocks or stock mutual funds. They didn't have a pension either. They had a bit of land that they sold in their 60's, and they had their savings. Combined with Social Security, that got them through, and my grandmother lived until her late-90's. Both sets of grandparents were even able to leave a small inheritance to their children, and it wasn't the stock market that enabled them to do that.

Who am I to know the details of the above. Yes it's possible to save and live off interest. However I think today's retirees have 3 factors moving against what you put here.

1) SS for us is taxed if above basic income levels (poverty levels) where as in past SS was not taxed (even if people had other retirement income), add to that SS replaced a larger percentage of the working income than it does today (SS might replace 25% of my income now and that will be taxed at 50%, in the past SS replaced maybe 66% of working income and was not taxed).
2) 30 years ago retirement was maybe 10 years on average. I realize one of grandparents mentioned above lived to be 30, that means 4 other people did not even last 6 years- on average- in retirement- meaning savings needed to last shorter- on average.
3) Living below means is a solution which will transcend generations and enable many strategies to work.

The bottom line is this, many people think the market is go-go-go upward. They truly do not understand all their risks.

interest rate risks
inflation risks
market risks
currency risks
security risks
and the list goes on and on.

My parents took a retirement class, I am guessing the person running the class explained some of these things. He also sold them some investments too, but as long as my parents are happy and sleep well, that is what matters to them (I know they are invested really conservative).

Going back to the problem:
The choices are
a) Retire at age 65 with $4 M to generate $40k in income
b) Retire at age 65 with $1 M to generate $40k in income
c) Retire at age 58 with $2 M to generate $40k in income (I assume from age 58 to 65 the portfolio doubled based on a 10% annual return)
d) Retire at age 51 with $1 M to generate $40k in income. ( I assume the porfolio would double from age 51 to 58 based on a 10% annual return).

You appear to want A)- not sure of your age, but that is 14 extra years of work between you and me.

The difference is when I get to somewhere between c) and d), I will allocate to point where I can sleep at night (meaning have about 7-9 years expenses in CA$H), then pull the trigger. I don't want to work to point where I need $4 M to generate 40k income.

You're not wrong for *not* taking the risks you do *not* want to take, you are just willing to work 14 more years to *not* take the risk relative to me. I am willing to take the risk and gain 14 years of financial independance at a lower net worth than you. Does not make either of us right or wrong, just different.

**would insert picture of two kids (boy and girl) looking into their diapers with caption "there is a difference" if I knew where to find the pic**

[tripods68]

I would not want my money just setting on cash due to inflation. When I do retire (63 years old), my pension will replaced about 80% of my salary. That remaining 20% will come from 457, ROTH, and various taxable accounts. Having said that I would be invested in Mutual Fund sole focused generating income stream both in equity market seeking higher yield dividends payout and muni bonds.

[disneysteve]

The stock market contains all kinds of stocks, and even after retirement, I can see how certain ones can fit a conservative risk tolerance.

Absolutely. Lots of retirees depend on dividend checks to support their lifestyles. I don't know where the conservative money is today. It used to be banks and utility companies. Obviously, banks aren't the place to be today.

My mom is 78 and still has money in stocks (and collects the dividends each quarter). I don't see her ever getting entirely out of them.

[glock35ipsc]

I don't ever plan on being out of stocks 100%, my plan is to stay in at least 60%-70%.

[meaghanchan]

Looking at the efficient frontier on a historical basis, the lowest risk point you can be at isn't 100% bonds- it's about 80% bonds and 20% stocks. Having 20% in stocks is actually less risky in terms of standard deviation than being at 0% in stocks. For that reason, I will always have some amount in stocks, even if that amount is quite low.

I agree that at retirement, most people should not be heavily invested in stocks– but there are a lot of reasonable levels between 'heavily invested' (80%?) and 0%.

[MYOM]

That is a really GREAT question SCFR!

If you employ an Exit Strategy to sell at market tops, I can see a 50/50 allocation starting upon retirement. By age 80 that mix should be 100% bonds to 80% bonds and 20% conservative mutual funds only that have a standard deviation of 12 or less.

Dan Clemons