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100% Equities Portfolio for very early retirees
Old 03-06-2015, 07:43 AM   #1
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100% Equities Portfolio for very early retirees

I know the standard advice is to have some significant proportion of bonds in your portfolio no matter how old or young you are. But this article does a good job explaining why it might be better to go with a high equities allocation (given certain caveats): The Path to 100% Equities

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[The] data suggests any asset allocation from 60-100% equities has about the same chance of success (90%+.) I more or less assume anything above 80% success rate is false confidence. The future will likely have many Black Swans. You never know if Tyler Durden is going to erase the debt record, Simian flu will wipe out 90% of the human race, or a terrorist will detonate a dirty bomb in downtown Manhattan.
I'm at around 95-97% equities in my 30's, and the article makes a lot of sense to me. I'm not really concerned about risk in the sense of suffering from a higher standard deviation than a 60/40 portfolio would have.

We're only spending about 2.7% of our portfolio which is just above the dividend yield and well below the earnings yield (even at today's valuations). And we are comfortable adjusting spending downward if we enter a prolonged market downturn.

Thoughts?
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Old 03-06-2015, 07:54 AM   #2
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We were 100% equities until about a year before I retired. I retired at 39 so that had a lot to do with it. At that age I wasn't concerned about the volatility of my portfolio as long as I was working, and I was "shooting for the stars".

My big project the year as I was getting ready to retire was to diversify. I was also almost 100% in company stock.

Our allocation is completely different now, of course. I wasn't willing to hold 100% stocks as an early retiree, and given that I retired in 1999, I'm glad I didn't! The 2000 thru 2010 decade was very very hard on an all equity investor.
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Old 03-06-2015, 08:00 AM   #3
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DOD is 97 and 100% equities (worth millions), so it worked for him and he has seen a lot of s**t.
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Old 03-06-2015, 08:03 AM   #4
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I had been 100% equities all my life and do not regret it at age 50.

It provides you with inflation protection, in fact most of the time dividend yield grows much faster then inflation.

If you already spend below dividend yield it is extremely unlikely that you will adjust spending downwards even if market goes down 30%.
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Old 03-06-2015, 08:42 AM   #5
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The lower your withdrawal rate, the less difference your allocation makes to success rates (defined as portfolio value = 0) for a fixed retirement length. So it's not surprising that at a low 2.7% wr you don't see much difference.

However, consider the 14 year period starting at year 2000 (assume $1M starting value). In cfiresim a 100% equity portfolio would only have $550k compared with $864k for a 60/40%. This is at 3% withdrawal rate. (I'm unsure if cfiresim has the same bond pricing issue as firecalc).

I would not be happy in this scenario at the prospect of spending an additional 40+ years with half my initial portfolio and high valuations today making a recovery less likely.

I think it's dangerous to only look at success rates (portfolio != 0) especially for an early retiree. Have you looked at the different quantiles of the results and considered your specific rule for cutting back in a downturn?

Another thing to look at may be time until your portfolio reaches the "home-free" zone. I.e. with higher equities you'll experience faster growth (most of the time). At some point this will reduce your withdrawals to a bulletproof level (maybe less than 2%).
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Old 03-06-2015, 08:45 AM   #6
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Been 90%+ for nearly 10 years since stopping working. The tax treatment for bonds, bond funds, CDs, etc, is not worth it. I keep enough cash to pay 2 months of bills plus 5% in cash to wait for pullbacks in stocks that are on my target list.
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Old 03-06-2015, 08:55 AM   #7
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His success graph is quite different from the others I have seen. Most of them roll off above 75% stocks and have higher safe withdrawal rates for the 45% to 75% range. I'm not sure what is different. You might want to compare carefully to Bengen's SAFEMAX work to understand what the difference is.
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Old 03-06-2015, 08:57 AM   #8
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As soon as your annual dividend yield is higher then annual spending you are FI.

You spend dividends and never sell any equity. What is to sell if you own broad index funds like VTI?

So yield basically dictates your withdrawal rate.
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Old 03-06-2015, 09:34 AM   #9
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We're only spending about 2.7% of our portfolio which is just below the dividend yield and well below the earnings yield (even at today's valuations). And we are comfortable adjusting spending downward if we enter a prolonged market downturn.
The two bold statements are important.

"Portfolio Survival" rates assume no downward flex in spending. It seems that someone who can simply spend the dividends, whether they are high or low, can comfortably be in stocks.

The only cloud I see is the possibility of some major spending spike that would force me to sell at a bad time. But, I have trouble imagining such a crisis that would be more than 2x my annual spending, so even a 5% bond allocation would cover that.
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Old 03-06-2015, 09:34 AM   #10
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VYM Vanguard's high yield dividend ETF currently yields 2.92%. So if you are willing to live within that yield, trust that you don't go through periods of shrinking dividends, and ignore any volatility, sure.

I don't intend to use such a low withdrawal, nor am I trying to create a "perpetual" portfolio. I intend to spend a chunk of the portfolio down over my lifetime.

We're in our mid and late 50s now. We were much more conservative about our withdrawals in the first 10 years of retirment, wanting to let investments continue to build. Now I'm much more interested in spending it while I can!
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Old 03-06-2015, 09:57 AM   #11
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...(I'm unsure if cfiresim has the same bond pricing issue as firecalc)...
They made an attempt to address that in cfiresim last January, making it slightly more conservative than Firecalc.

Version 1.25 - 1/14/2014
- Changed how bond returns were calculated, due to discussions in this thread: viewtopic.php?f=2&t=119
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Old 03-06-2015, 11:44 AM   #12
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The two bold statements are important.

"Portfolio Survival" rates assume no downward flex in spending. It seems that someone who can simply spend the dividends, whether they are high or low, can comfortably be in stocks.

The only cloud I see is the possibility of some major spending spike that would force me to sell at a bad time. But, I have trouble imagining such a crisis that would be more than 2x my annual spending, so even a 5% bond allocation would cover that.
I made a mistake in my OP (fixed now), as our 2.7% withdrawal rate is slightly more than our dividend yield today.

You're right - if you can be flexible, you can stomach more volatile drops in the market with a high equities %.
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Old 03-06-2015, 11:46 AM   #13
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If you have enough money to seriously think about early retirement then you probably have enough money to take on the added risk of a high equity allocation as well. As long as you keep a couple of years in cash or short term bonds so you aren't forced to sell at a really bad time then you should do well...now comes the "previous results don't mean squat" message. Is it really a good idea to put all your eggs in one basket just because that basket worked well in the past. What happens if the basket develops a really big hole and you lose 50% of your eggs and you quickly eat the 2 or 3 eggs you put aside for a rainy day. Just like in life we should value diversity.

If you have a rental property I'd include the cost and the rental return in whatever basket you have REIT type funds. Pensions and SPIAs are more difficult because they have no value after you (and/or your spouse) die. They are more like insurance, but you might think of the money as "bond like" for AA purposes with a return that get's better with time.
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Old 03-06-2015, 11:46 AM   #14
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Quote:
Originally Posted by photoguy View Post
The lower your withdrawal rate, the less difference your allocation makes to success rates (defined as portfolio value = 0) for a fixed retirement length. So it's not surprising that at a low 2.7% wr you don't see much difference.

However, consider the 14 year period starting at year 2000 (assume $1M starting value). In cfiresim a 100% equity portfolio would only have $550k compared with $864k for a 60/40%. This is at 3% withdrawal rate. (I'm unsure if cfiresim has the same bond pricing issue as firecalc).

I would not be happy in this scenario at the prospect of spending an additional 40+ years with half my initial portfolio and high valuations today making a recovery less likely.

I think it's dangerous to only look at success rates (portfolio != 0) especially for an early retiree. Have you looked at the different quantiles of the results and considered your specific rule for cutting back in a downturn?
I took a quick look at 75/25 vs 100/0 allocations for 15 years, 20 years, 30, 40, 50 (to allow for truncated periods like the one starting in 2000) and found that the all stock portfolio has slightly fewer cycles that dip below 40% of the initial value. For a 40 year retirement period, 6% of all stock cycles dip below 40% of initial value, whereas 8% of the 75/25 portfolios dip below 40% of initial value.

In other words, you're safer with all stock than holding 25% bonds if avoiding a 60% dip is important. My guess is that the bonds were a drag due to inflation and didn't allow for long term growth to cushion you through the rough spots 20-30 years after starting the withdrawals.


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Another thing to look at may be time until your portfolio reaches the "home-free" zone. I.e. with higher equities you'll experience faster growth (most of the time). At some point this will reduce your withdrawals to a bulletproof level (maybe less than 2%).
Good point. After 10-15 years, under most scenarios your returns above your annual spending will be enough to get you to a very low withdrawal rate that would then be considered much safer (like 3% lowered to 2%).

And within that 10-15 years is when I feel most comfortable trying to go back to some form of gainful employment to top off the portfolio. Not necessarily FT work, but something to staunch the blood loss from my portfolio, even if it's just a bandaid.
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Old 03-06-2015, 11:52 AM   #15
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Old 03-06-2015, 12:06 PM   #16
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VYM Vanguard's high yield dividend ETF currently yields 2.92%. So if you are willing to live within that yield, trust that you don't go through periods of shrinking dividends, and ignore any volatility, sure.

I don't intend to use such a low withdrawal, nor am I trying to create a "perpetual" portfolio. I intend to spend a chunk of the portfolio down over my lifetime.

We're in our mid and late 50s now. We were much more conservative about our withdrawals in the first 10 years of retirment, wanting to let investments continue to build. Now I'm much more interested in spending it while I can!
It's good to hear you're more comfortable "spending it down" in your 50's. That's kind of what I see happening with our own spending, too. At this point I'm mostly concerned about maintaining real purchasing power long term in most years.

In 20 years when I'm in my mid-50's, I'll know a lot more about how much we'll actually need for the rest of our lives and what SS might look like and the kids will all be out of the house, etc. Less unknowns in income and expenses mean I can feel more comfortable eating into the nest egg at a faster rate.
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Old 03-06-2015, 12:12 PM   #17
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Good point. After 10-15 years, under most scenarios your returns above your annual spending will be enough to get you to a very low withdrawal rate that would then be considered much safer (like 3% lowered to 2%).
Now we are back to the "what of your required withdrawals are low or zero" scenario. People with pensions, SPIAs, SS, rental income or a combo of those might well get back into the accumulation mode. I know my mother never spent all her pension and kept saving all her life. She died quite well off and some of her estate is helping me retire early. I plan to do the same for my grand nieces.
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Old 03-06-2015, 12:20 PM   #18
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My WR is 2% of the current portfolio balance, so I suppose I could go all equities if I wanted. The reason I keep a ~35-40% bond fund component is not to increase the survivability of my portfolio (the 2% WR does that for me) but to reduce the chances of getting an upset stomach and a nasty case of the runs when a severe downturn occurs.
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Old 03-06-2015, 12:32 PM   #19
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It's good to hear you're more comfortable "spending it down" in your 50's. That's kind of what I see happening with our own spending, too. At this point I'm mostly concerned about maintaining real purchasing power long term in most years.

In 20 years when I'm in my mid-50's, I'll know a lot more about how much we'll actually need for the rest of our lives and what SS might look like and the kids will all be out of the house, etc. Less unknowns in income and expenses mean I can feel more comfortable eating into the nest egg at a faster rate.
I retired at 39, DH was 44. No children. It's been over 15 years now, FWIW.

We set up a diversified retirement portfolio with 40% income that would meet our needs, but we didn't draw on it for a long time. We actually drew down some other equity investments over the first decade. We were rolling the dice with that approach, knowing that we had the growing retirement portfolio to fall back on. It worked out for us. Lucky too considering the horrible equity decade of the 2000s.
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Old 03-06-2015, 12:44 PM   #20
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I took a quick look at 75/25 vs 100/0 allocations for 15 years, 20 years, 30, 40, 50 (to allow for truncated periods like the one starting in 2000) and found that the all stock portfolio has slightly fewer cycles that dip below 40% of the initial value. For a 40 year retirement period, 6% of all stock cycles dip below 40% of initial value, whereas 8% of the 75/25 portfolios dip below 40% of initial value.

In other words, you're safer with all stock than holding 25% bonds if avoiding a 60% dip is important. My guess is that the bonds were a drag due to inflation and didn't allow for long term growth to cushion you through the rough spots 20-30 years after starting the withdrawals.




Yup, which is why i even keep my emergency fund in stocks. Once it doubles, who cares if it ever cuts in half. The opportunity cost of cash is too expensive for me.


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