In early retirement discussion forums, you’ll often see the term OMY, which refers to people who have reached their calculated retirement savings target, but decide to keep working “One More Year”. Sometimes that one more year becomes two more years, three more years, and so on. This leads to OMY being seen as an irrational behavioral quirk like hedonic adaptation. However, are the potential benefits of working one more year being under-appreciated?

In the Medium article How important is asset allocation versus withdrawal rates in retirement?, EREVN (he lives in Vietnam) compares the power of picking the optimal asset allocation vs. saving more money. Investors often worry about whether they own the right mix of stocks and bonds. Do you own enough stocks, as to get a high enough return? Do you own enough bonds, so you don’t freak out during a market drop?

EREVN points out that historically, the optimal asset allocation in terms of having your portfolio last the longest is almost always 100% stocks. (98% of the time.) Even including the other 2%, how much of a benefit is it to hold the optimal asset allocation?

Read the entire article for full understanding of the assumptions taken, but here is the summary of his experiments. We usually optimize asset allocation based on highest return, but that’s not exactly the same as withdrawal rate. Note: Whenever you see “4% withdrawal rate”, that’s the same as having 25 times your annual expenses. 3% withdrawal rate = 33.3x expenses, 2% withdrawal rate = 50x expenses, etc. I added the stuff in the brackets [].

Even with perfect hindsight, choosing the best possible asset allocation is only equivalent to going from a 4% withdrawal rate to a 3.7% or 3.8% withdrawal rate. [25x expenses to 26x or 27x expenses.] In other words, saving 1 or 2 extra years of expenses dominates getting the asset allocation decision perfectly correct. In reality, we don’t have perfect hindsight and our asset allocation will be sub-optimal.

The powerful conclusion:

Instead of stressing about trying to pick “the right” asset allocation, you’re better off picking anything reasonable and ignoring every other asset allocation internet discussion for the rest of your life… and then working an extra six or twelve months to pad out your retirement fund before retiring.

I like the paring of working one more year and being able to drop the worry about asset allocation now and forever! You don’t want to work forever, but this does make OMY have multiple benefits (existing portfolio can grow another year, might even save more, stop worrying about asset allocation).

Here are a few related posts on “Saving More vs. XXX” from the archives:

• Saving More vs. Working Longer
• Saving More vs. Saving Earlier vs. Higher Investment Returns
• Saving more vs. Taking More Stock Market Risk

Image via GIPHY.

The default option inside many employer-sponsored retirement plans are Target Date Funds (TDFs), which adjust their portfolio holdings automatically over time based on a specific target retirement date. Morningstar just released their 2020 Target-Date fund report. You’ll need to provide your name and e-mail to download the free full report. There is a lot of in-depth analysis for industry insiders, although many individual investors are basically stuck with the one fund series that is available in their 401k/403b plan. Besides looking up your fund, here are a few broader takeaways.

Here is the average glide path across 53 different TDF series (taken from 2019 report). On average, most TDFs have an asset allocation close to 90% equity and 10% bonds in the early years, with the equity percentage dropping (and bond percentage rising) as time goes on. At the year of retirement, the average asset allocation is roughly 45% equity and 55% bonds.

Glide paths stick closer to the average across funds during the early accumulation years, but differ much more as you near retirement. Near-retirees take notice! The chart below shows the historical percentage difference in quarterly return between funds with the same target dates. (All the 2020 funds were compared, all the 2030 funds were compared, etc.) You can see that during the “COVID crash” in Q1 2020, the biggest difference in performance actually came from the funds meant for those in retirement.

Some TDFs maintain a higher equity allocation and keep lowering it gradually “through” the retirement date, while others decrease more sharply right up “to” the retirement date and then hold things steady. For a 2020 fund, this could mean a 15% difference in the amount of stocks being held in 2020 (ex. 45% stocks vs. 30% stocks). The situation actually flips a decade after retirement and the “through” funds end up holding less stocks on average.

The past performance of TDFs often hinges on recent stock market performance and which funds are holding the most stocks (or most domestic stocks). Both the “through” and “to” methods have their pros and cons, but one might fit your own preferences better. I personally think that people do respond differently to market drops after they stop working completely and have fully exhausted their “human capital”. (Once you can’t make any more money, you start to stare at your balance more often…) Perhaps the gradual “through” funds would work better for those that also stop working gradually, while the “to” funds would be better for those that stop work completely.

You can adjust your volatility level by picking a different date. You probably only have one TDF series as opposed to a wide menu. If it’s too stock-heavy for you, then just pick a retirement date that is earlier. If it holds too many bonds, then just pick a retirement date that is earlier. There is no rule that you have to pick your actual retirement year, or even any single one.

Gold or Silver-rated Target Date Funds. Morningstar changed up their ratings methodology in November 2019. A very detailed explanation and full rankings are in the report. Here are the gold/silver-rated funds and whether they are “through/to”:

• Blackrock LifePath Index (To)
• JPMorgan SmartRetirement Blend (To)
• Fidelity Freedom Index (Through)
• Fidelity Freedom (Through)
• JPMorgan SmartRetirement (To)
• State Street Target Retirement (Through)
• Vanguard Target Retirement (Through)
• American Funds Target Date Retirement (Through)
• T. Rowe Price Retirement (Through)

All other things equal, I’d still prefer a passive index approach with rock-bottom costs, but I’m glad to see even the actively-managed TDFs have lower expense ratios now than before.

Some of these TDF series are not available to retail investors outside of a employer-sponsored retirement plan. The Vanguard Target Retirement fund series remains the most popular with a 37% market share as of March 2020, and is also available to retail investors with a $1,000 minimum investment.

Bottom line. Although we often don’t have much choice in the matter, the good news is that every year the average target date fund gets cheaper and more competitive. Any of the gold/silver fund series above are able to provide a simple all-in-one solution. Added together, these “top-rated” options make up 78% of all TDF assets. However, it is still important to understand how your fund’s asset allocation changes as it nears the target retirement year, and know that you can pick a different year to adjust your risk level. If your fund is one of the bottom-dwellers, you may want to use this report to bug the HR department.

The 2020 Berkshire Hathaway Annual Shareholder Meeting was on May 2nd, 2020 and is now available as a recorded video on Yahoo Finance and a handy Rev.com transcription. As usual, I recommend listening or reading on your own, as my notes always differ slightly from what the business media chooses to highlight.

What makes Berkshire Hathaway (BRK) interesting to me is that it all started out as Buffett investing his own money alongside a few close family and friends. He’s always had nearly all of his own money in it. Even today, Berkshire is the main investment vehicle for many family members. People you run into at the store. People with whom you’ve shared a meal. This changes the types and amounts of risk you take.

And, now, I would never take real chances with money, of other people’s money under any circumstances. Both Charlie and I come from a background where we ran partnerships. I started mine in 1956 for really seven either actual family members or the equivalent. And Charlie did the same thing six years later. And we never, neither one of us, I think, I know I didn’t, and I’m virtually certain the same is true of Charlie, neither one of us ever had a single institution investment with us.

Buffett has stated that when he writes his annual letters, he imagines his sister reading them. That’s how I try to write as well, as an enthusiast making careful shares and recommendations to family. This overall sentiment helps you understand how BRK is run.

He started out with a familiar story of “betting on America”. This country has been though a lot, and it will recover again.

One of the scariest of scenarios, when you had a war with one group of States fighting another group of States, and it may have been tested again in the great depression, and it may be tested now to some degree, but in the end the answer is never bet against America, and that in my view is as true today as it was in 1789, and even was true during the civil war, and the depths of the depression.

In terms of investing, this means holding onto stocks for 20 or 30 years. But to survive the shocks during those times, you should never borrow money to invest in stocks, you need to have adequate reserves in 100% safe cash, and you need the proper psychological temperament.

The American tailwind is marvelous. American business represents, and it’s going to have interruptions, and you’re not going to foresee the interruption, and you don’t want to get yourself in a position where those interruptions can affect you either because you’re leveraged or because you’re psychologically unable to handle looking at a bunch of numbers.

You just don’t know what’s going to happen. You know, at least in my view, you know that America’s tailwind is not exhausted. You’re going to get a fine result if you own equities over a long period of time. And the idea that equities will not produce better results than the 30-year Treasury bond, which yields one and a quarter percent now, it’s taxable income. It’s the aim of the Federal Reserve to have 2% a year inflation. Equities are going to outperform that bond. They’re going to outperform Treasury bills. They’re going to outperform that money you’ve stuck under your mattress.

Simple, low-cost S&P 500 index fund for growth. Avoid the salespeople.

So find businesses. Get a cross section. And in my view, for most people, the best thing to do is to own the S&P 500 index fund. People will try and sell you other things because there’s more money in it for them if they do. And I’m not saying that that’s a conscious act on their part. Most good salespeople believe their own baloney. I mean, that’s part of being a good salesperson. And I’m sure I’ve done plenty of that in my life too, but it’s very human if you keep repeating something often enough.

100% backed-by-the-government cash for safety. For them, it means Treasury-backed bills. For individual investors, this extends to FDIC-insured savings accounts and certificates of deposit.

And that means we own nothing but treasury bills. I mean, we’ve never owned, we never buy commercial paper. We don’t count on bank lines and a few of our subsidiaries have them, but we basically want to be in a position to get through anything. And we hope that doesn’t happen but you can’t rule out the possibility anymore than in 1929 you could rule out the possibility that you know you would be waiting until 1955, or the end of 1954, to get even.

Ignore the two things above if you have credit card debt.

My general advice to people, I mean, we have an interest in credit cards. But I think people should avoid using credit cards as a piggy bank to be rated. I had a woman come to see me here not long ago, and she’d come on some money. Not very much, but it was a lot to her. She’s a friend of mine, and she said, “What should I do with it?” I said, “Well, what do you owe on your credit card?” She says, “Well, I owe X.” I said, “Well, what you should do…” I don’t know what interest rate she was paying, but I think I asked her and she knew. It was something like 18% or something. I said, “I don’t know how to make 18%.” I mean, if I, owed any money at 18% the first thing I do with any money I had would be to pay it off. It’s going to be way better than any investment idea I’ve got. That wasn’t what she wanted to hear.

Be safe with your finances at this time. You don’t sell your airline stocks at a multi-billion dollar loss if you think a V-shaped recovery is likely. Just because we are still recovering from one horrible event, doesn’t mean another might not happen.

I would say that there are things that I think are quite improbable. And I hope they don’t happen, but that doesn’t mean they won’t happen. I mean, for example, in our insurance business, we could have the world’s, or the country’s, number one hurricane that it’s ever had, but that doesn’t preclude the fact that could have the biggest earthquake a month later. So we don’t prepare ourselves for a single problem. We prepare ourselves for problems that sometimes create their own momentum. I mean 2008 and 9, you didn’t see all the problems the first day, when what really kicked it off was when the Freddie and Fannie, the GSEs went into conservatorship in early September. And then when money market funds broke the buck… There are things to trip other things, and we take a very much a worst case scenario into mind that probably is a considerably worse case than most people do.

After listening to this entire Buffett talk and reading this Munger interview, the overall takeaway is definitely that of safety. They have been safe and will stay safe, no matter who complains about their cash levels. The world has changed, and just because something has a lower price today than in January, doesn’t automatically mean it is a better deal than in January.

Here is a NYT Dealbook article by Andrew Ross Sorkin, who has attended many shareholder meetings in person and also sensed a different tone this year.

You can find links to previous years’ Berkshire Hathaway Shareholder Meeting Full Videos, Transcripts, and Podcasts here.