No. of Recommendations: 5
A bit circular, what is a recommended way of covering living expenses? Holding 100% stocks seems very risky, hence the original question.
Cash. Or near-cash like CDs, short term T-Bills, short-term bonds funds like SHY, SPSB, VCSH, etc. Along with income like pensions & Social Security. SS can start at age 62.
Keep enough cash/near-cash handy to cover the ebb & flow of immediate expenses. Just like you keep $50 cash in your wallet even though you carry 3 credit cards with enough credit limit to buy a small car.
People are inordinately scared of Sequence Of Returns Risk. It's just another thing that you need to be aware of. The price for completely avoiding the risk is very very high.
Keep in mind that every day is the first day of the rest of your life. Therefore every day is the beginning of a SOR Risk. The 5th year of retirement is no different that the 1st year. You just have 5 years less of remaining lifetime. Not a big deal when your initial lifetime was 30-40 years.
Some people (and a lot of authors of financial articles) freak out about the SORR in the first year but completely ignore the SORR of any subsequent year. They think that the 1st year is special. It is not.
Holding 100% stocks is risky only when you are completely dependent on that value.
100% stocks in a $2,000,000 portfolio is not risky the way 100% stocks in a $500,000 portfolio is.
Work with an assumption that stocks will take a 50% loss sometime. Then stocks recover a year or two or three later. Can you survive during that 50% drawdown?
We typically think of our portfolio being just the brokerage & 401K accounts.
That should be 100% stocks, because stocks are the asset class that is going to grow. Bonds do not grow, at best they maintain their value. A substantial bond allocation in your portfolio is a huge drag on overall performance.
The cash & near-cash? Don't think of that as part of your investment portfolio.
Don't retire on a shoestring.
My own personal opinion is that if you cannot handle having your portfolio lose 50% on the day after you retire, then you don't have enough to safely retire.
From a personal aspect, we retired in late 2006. Just ahead of the 2008-2009 crash where stocks lost 50%. So I've lived it.
