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Old 03-06-2015, 06:59 PM   #41
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Thank you for that link. It's kind of fun to data mine into the past. See for example December 1917 - dividend 11.77. It was below that level - substantially so - for 10 years. the drop for most of that period over 40%. Now I'm not saying that's what's in the cards now but there is nothing certain in any investment approach and living off of dividends is no exception and its certainly not guaranteed.
You are right. 1917 and next 10 years is worst then Great Depression when related to inflation tables.

Historical Inflation Rates: 1914-2015 | US Inflation Calculator

So I think you would not go hungry but in my example you would have to readjust your lifestyle to 40% less income. Though 1916 1917 look like 2 years with spike in yield.
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Old 03-06-2015, 07:00 PM   #42
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Why the focus on just living off dividend returns as a measure of the survivability of a retirement portfolio? Isn't that just another way of saying that a low SWR greatly increases your chance of success? What am I missing?
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Old 03-06-2015, 07:03 PM   #43
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I am with you.

All I am saying is if you need lets say 75k a year and you have Equity portfolio generating 80k a year in dividends you may be 100% in equities. In fact it makes sense to be 100% in equities.

Portfolio that generated 80k in 2007 probably generated 70k in 2008 and 2009. Dividends did not go down 50%. For example VTI index did not decline dividend at all. KO, PEP, PG, CL, MO , PM and lot of other companies increased dividends in 2008 and 2009.
If you have enough to generate income without needing to spend principal you can take a lot more risk. But for those that plan to spend principal a time like 2008 could be difficult. If you need 4% withdrawals you'll be in difficulty, if all you need is 2% then dividends will support that and you are home free.
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Old 03-06-2015, 07:03 PM   #44
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I keep thinking of the quote from mike tyson: "Everyone has a plan 'till they get punched in the mouth".

During the 2008-09 crash I didn't blink and just carried on as normal. It was a little depressing seeing my network plummet but at least I was working, making good $$$ and funneling that into equities. It actually turned out to be beneficial.

However, now that I'm fired, a re-occurence like 2008-9 would be a much more serious test.
I will reiterate here that an annual camping permit in New Mexico which still costs only $225 will allow you to camp in any of NM state parks. All you need is a used motorhome, then you do not have to live under a bridge.

For electricity hook up to run the A/C or heater as needed, it will cost a mere additional $4/day. The stay is limited to 14 days, so you will need to drive to another park every 2 weeks.

Think of a motorhome as a tiny house on wheels, and it is even self-propelled. Party on!
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Old 03-06-2015, 07:07 PM   #45
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Why the focus on just living off dividend returns as a measure of the survivability of a retirement portfolio? Isn't that just another way of saying that a low SWR greatly increases your chance of success? What am I missing?
Perhaps that 100% equity portfolio will over a long term grow much faster then conservative portfolio.
Maybe that 100% equity portfolio has natural build in Inflation protection. That is different then withdrawing 2% from 60-40 portfolio.

But surely historically we can find 10-15 year periods where this is not a case.
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Old 03-06-2015, 07:10 PM   #46
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You are right. 1917 and next 10 years is worst then Great Depression when related to inflation tables.

Historical Inflation Rates: 1914-2015 | US Inflation Calculator

So I think you would not go hungry but in my example you would have to readjust your lifestyle to 40% less income. Though 1916 1917 look like 2 years with spike in yield.
Looking at the table it looks like right now is the highest spike ever. But I don't really know how the table is constructed.
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Old 03-06-2015, 07:16 PM   #47
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Looking at the table it looks like right now is the highest spike ever. But I don't really know how the table is constructed.
The percentage of profit (Dividend payout ratio) that is distributed to stock holders is actually historical very very low for US companies. This is not the case for European and Japanese equites.

US companies can very easily grow dividend. I do not know historical tables... you can google that up.

IE http://seekingalpha.com/article/2351...he-s-and-p-500
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Old 03-06-2015, 07:19 PM   #48
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To tell you truth I thought we will have to retire at 60 instead of planned 55. Yes it was depressing and disappointing. But I did not panic with 100% in equities.

Today I could retire at 50 .

But I suppose one has to have Plan B and panicking can not be part of such plan.
BTW I would not feel comfortable retiring with 100% equities unless Dividend yield is equal to annual spending.
Going through 2008 was tough even while working and getting a paycheck. Facing a 50% stock market decline as a retiree would be gut wrenching and if capital gains or principal are required as well as dividends to generate income the hit to the portfolio could be even worse. So this is where some sort of cash/fixed income buffer is useful and why the "buckets" way of looking at things is popular. Most people need more than dividends, but if your savings-to-expenses ratio is 50 rather than 25 you can probably go with 100% equities.

When calculate my savings-to-expense ratio I could probably go with 100% equities, but I've taken another option. I annuitized a bit under 20% of my savings to provide lifetime income and I now expect the draw from my remaining savings to be 0%. I'm now around 75/25 with what's left and on an upwards glide path. If I can get 1% better return from my smaller, but higher equites AA, portfolio than from my pre-annuity 50/50 portfolio, then I should have a higher networth in 10 year's time, at 65. Also I don't think I've increased the overall risk of my portfolio because the higher equity allocation is offset by the guaranteed income from the annuity.
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Old 03-06-2015, 07:23 PM   #49
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I think it is important not to look at AA in a vacuum.

When I retired/rebalance in early 2000, CA Muni bonds were 5-5.5% and 10 year TIPs were 3.75-3.95% and even IBonds were over 3.0% real yields. In the context of trying to sustain a SWR of 3.5% or so it was very easy to see how the bond portion of the portfolio would support this objective.

So my AA was around 60-65/35-40 during my early retirement years.
My AA gradually drifted to 75/25 around 2006/2007. I deliberately reduced my AA in 2009 to take advantage of the low stock prices. I have continued to reduce bonds until now I am done to 7%.

I think if I was 40, my bond AA would be approximately 0.

However, the one thing I did learn during the 2009, is that if I think stocks are bargain, I'll happily exhaust all my cash buying them. In my case because the market came back so quickly everything worked out well.
Life would have been different if the bear market or even a flat market last for a couple more years.

I took advantage of the Pen Fed CD deal of the last few years and have stuck a 3 (now down to 2) year of living expense in CDs. What happens in 2021 when the CD mature and rates are still awful I am not sure, but I'll figure it out if I need to. So I think a 100% equities is ok as long as you have very low risk reserves in some form.
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Old 03-06-2015, 07:33 PM   #50
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In spite of being huge fan of equities we are now building CD ladder

I am 5 years away from ER and I do not think money that I will need/want in 6 years belongs into equities.

We will not be able to touch 401k and IRAs plus being younger we will spend more hence that money goes to CDs.
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Old 03-06-2015, 07:42 PM   #51
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So consensus is that a 2 percent SWR is pretty much bullet proof?

I have been working scenarios on the spending and income side and to me it looks like a 2.8 - 3 percent rate is as low as I can go.

Given someone who is Mid 40s I think I am close ... but nervous as hell .
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Old 03-06-2015, 07:54 PM   #52
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In spite of being huge fan of equities we are now building CD ladder

I am 5 years away from ER and I do not think money that I will need/want in 6 years belongs into equities.

We will not be able to touch 401k and IRAs plus being younger we will spend more hence that money goes to CDs.
Good plan, I did the same, but used a stable value fund in my 457 plan and had enough to cover the worst bear market I could think of......about 3 years. I retired at 53 and in the first year of ER I've lived off money I had in the bank and a short period of part time work. When the bank account money ran out my plan was to use the stable value and dividends in bad times and take gains from taxable equities in good times. But now that I have the annuity most of the stable value is back in equities as I know I'll have income every month.
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Old 03-06-2015, 08:03 PM   #53
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I will reiterate here that an annual camping permit in New Mexico which still costs only $225 will allow you to camp in any of NM state parks. All you need is a used motorhome, then you do not have to live under a bridge.

For electricity hook up to run the A/C or heater as needed, it will cost a mere additional $4/day. The stay is limited to 14 days, so you will need to drive to another park every 2 weeks.

Think of a motorhome as a tiny house on wheels, and it is even self-propelled. Party on!
I don't think there is any doubt that most of us at this forum (particularly with our long education re LBYM skills) could adapt to most events and come out more of less OK. After all, most people made it thru the depression, the only ones jumping out of windows were the 1% ers of that time.

But it bothers me when a particular approach is presented as a fool proof answer when there is nothing certain in this world. Even a posters question is 2% WD absolutely safe? well no -there are examples - data mining again - some countries didn't do so well with rates at below 2% Japan, Germany and Italy come to mind if memory serves on a Wade Pfau article some time ago.

On the other hand, I think with a LBYM and debt free situation one's belt can be cinched to amazing degrees if need be so I agree with you.
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Old 03-06-2015, 08:04 PM   #54
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In spite of being huge fan of equities we are now building CD ladder

I am 5 years away from ER and I do not think money that I will need/want in 6 years belongs into equities.

We will not be able to touch 401k and IRAs plus being younger we will spend more hence that money goes to CDs.
I think that's entirely reasonable.
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Old 03-06-2015, 09:27 PM   #55
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I never understood the whole % allocation for bonds. In my mind, the fixed income portion of my portfolio is to provide safe harbor in case of protracted down swings in equities. My comfort level for the amount of time I'll need for such safe harbor is about 5 years, so I maintain the equivalent of about 5 years of expenses in bonds.

The fact that that happens to be about 10% of my portfolio is just incidental - I didn't get there by planning for 10%, I got there by planning for 5 years of expenses.

In theory, if my portfolio continues to grow, that allocation will get smaller and smaller. Conversely, if my portfolio shrinks overall, the allocation will get higher and higher.
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Old 03-06-2015, 09:32 PM   #56
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I never understood the whole % allocation for bonds. In my mind, the fixed income portion of my portfolio is to provide safe harbor in case of protracted down swings in equities. My comfort level for the amount of time I'll need for such safe harbor is about 5 years, so I maintain the equivalent of about 5 years of expenses in bonds.

The fact that that happens to be about 10% of my portfolio is just incidental - I didn't get there by planning for 10%, I got there by planning for 5 years of expenses.

In theory, if my portfolio continues to grow, that allocation will get smaller and smaller. Conversely, if my portfolio shrinks overall, the allocation will get higher and higher.
What about buying more stocks when they are knocked way down? That's a big part of what my fixed income is there for.
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Old 03-06-2015, 09:34 PM   #57
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I never understood the whole % allocation for bonds. In my mind, the fixed income portion of my portfolio is to provide safe harbor in case of protracted down swings in equities. My comfort level for the amount of time I'll need for such safe harbor is about 5 years, so I maintain the equivalent of about 5 years of expenses in bonds.

The fact that that happens to be about 10% of my portfolio is just incidental - I didn't get there by planning for 10%, I got there by planning for 5 years of expenses.

In theory, if my portfolio continues to grow, that allocation will get smaller and smaller. Conversely, if my portfolio shrinks overall, the allocation will get higher and higher.
What is not to understand? Your way of looking at it is perfectly legitimate of course, but so is the "whole %" approach, which works well for those investors who would find it hard to stomach a steep drop in the value of their entire portfolio, regardless of how many years of guaranteed living expenses they had on hand.

Your approach - one that provides for 5 years of living expenses, is the one that gives you the feeling of safety you need. I'm not quite sure what you don't understand about the idea of allocating a certain percentage of the whole portfolio to a bond component. It's just a different way of looking at things.
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Old 03-06-2015, 10:02 PM   #58
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So consensus is that a 2 percent SWR is pretty much bullet proof?

I have been working scenarios on the spending and income side and to me it looks like a 2.8 - 3 percent rate is as low as I can go.

Given someone who is Mid 40s I think I am close ... but nervous as hell .
Even at a 0% real return, a 2% WR will last for 50 years. With a positive yield TIPS ladder that WR can be pushed higher with no NW ups and downs along the way as long as all the bonds are held to maturity.
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Old 03-06-2015, 10:15 PM   #59
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Even at a 0% real return, a 2% WR will last for 50 years.
If you assume 2% annual income inflation it will only last for 35 years.

Just a thought. If you are 100% in equites because you only need 2% withdrawals what happens when RMDs start and there's a bear market. Maybe you want to
be less than 100% in equities (at least in tax deferred accounts) after 70.5 so you don't have to sell stocks low.....
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Old 03-06-2015, 10:34 PM   #60
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People, myself included, assume that having some bonds will reduce the portfolio volatility, but at a cost of lower long-term performance. But how to quantify that?

I did a quick look with 4 portfolios: 100% stock, 100% bond, 50/50 stock/bond, 100% 1-month Treasury (cash) portfolio. And I set the WR to 0, so that we can see the vagaries of market performance without our hapless retiree helping to drain it.

What is the lowest value of the portfolio relative to its start, in inflation adjusted terms, with no withdrawal? Results are shown below using FIRECalc.

100% stock: 52%
100% bond: 64%
50 stock/50 bond: 66%
100% 1-month Treasury: 53%

The differences are not as high as I would think. Is that reasonable? You can try the "other" calculator and see similar (but not identical) results.

Note that the above is inflation-adjusted. In nominal dollars, our retiree has the consolation that he may still be able to claim that he's a millionaire.

PS. Note that FIRECalc only shows the portfolio values at year ends. The intrayear lows can be a lot worse, as we have seen with the market in the last Great Recession which dipped in March 2009 but rebounded some by the end of 2009. The numbers can be a lot scarier than shown above.

PPS. Seeing DLDS's post, I was reminded that I forgot to add 100% TIPs to the list above. Its minimum value should be 100%.
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