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Old 11-21-2008, 01:31 PM   #21
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Originally Posted by FUEGO View Post
The hope would be that 12-14 years out the $1,000,000 equity/bond portion would grow sufficiently large to support the 4% SWR.

.

Since your plan is to harvest bond interest and stock dividends as you go along, you might not get the growth you're expecting. The bond portion wouldn't grow at all unless interest rates fall. The equities growth without divident reinvestment might likely be v-e-r-y slow, perhaps no more than inflation.

I'd think that plan through a bit......
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Old 11-21-2008, 01:47 PM   #22
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The bond portion wouldn't grow at all unless interest rates fall.
The Vanguard LT Investment Grade Corporate bond fund (VWESX) is yielding more than 7%. So, in a 3% inflation world, you could withdraw 4%, and reinvest 3%, and pretty much keep the inflation-adjusted value of your bonds constant over time, which would allow you to grow your withdrawal rate with inflation. Of course, if inflation exceeds 3%, all bets would be off.
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Old 11-21-2008, 02:51 PM   #23
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Since your plan is to harvest bond interest and stock dividends as you go along, you might not get the growth you're expecting. The bond portion wouldn't grow at all unless interest rates fall. The equities growth without divident reinvestment might likely be v-e-r-y slow, perhaps no more than inflation.

I'd think that plan through a bit......
I've thought it through a bit more than what I posted. What I posted was just done quick and dirty. We were having a huge thanksgiving feast here at w*rk and that is probably the only "bonus" I'll be getting this year so pardon the loose math! I was in a hurry to eat...

But the basic premise is to set aside a lump sum sufficient to compliment the dividends and interest that your portfolio produces and consume this "bucket" for the first decade or so. Then start living off your permanent portfolio once the set aside bucket is depleted. In practice, this would look similar to starting with something like a 60/40 portfolio and moving 1% a year to equities (by consuming the fixed income disproportionately on average). By year ten you would be at a 70/30 long term target.

I know someone here before has posted a research paper that studied different withdrawal methods (stocks first, fixed income first, stick with target allocation, etc). The author may have been Moshe Milevsky et al IIRC. I think it was something from the Journal of Financial Planning. Can't seem to find the thread on it though. The conclusion was that the "withdraw from bonds first" was the strategy that had the best success as defined in the research paper. "Withdraw from bonds first" really means shift your asset allocation to 100% equities over time. No surprise that this results in long term increases in wealth vs. the other withdrawal schemes.

I'm essentially advocating a "consume fixed income first" strategy coupled with consuming dividends. Just that you limit your consumption of fixed income once you reach your permanent target allocation and then begin the traditional consumption of equities and fixed income.
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Old 11-21-2008, 06:51 PM   #24
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OK, some of the more conservative bond funds may be up a bit - but that doesn't really change the situation that much. Even with a 50/50 AA, you are still going to be very, very close to a 25% drop in portfolio, esp with withdrawals that you would be making in retirement. And you said this would "scare you insane".
It changes the only point against me that you had as I saw it. That was all I was addressing. The "total bond market" fund is not the more conservative ones, it's the average bond market. The more conservative bonds are short term bonds which are up a good 3.5%, or heck US treasuries.

Regarding the "scaring insane" and the rest of your post, the point of my post was to say that 100% stock, or anything close to it in retirement, I think is an insane approach. Also, I feel like you read the comment literally, when I meant it figuratively. A 25% annual drop on a 50/50 portfolio like I envision would stress me quite a bit. But so far, that's still a hypothetical based on the way I would have invested. The optimist in me believes it will remain that way.

I am going to save at least a 25% extra cushion before I retire. I'd also think I'd be insane to retire with "just enough". Gotta leave some margin for error, right?

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PS - I do not own any TIPS
I only asked because you were (originally) under the impression bonds were down this year. I was wondering why you thought that? I know TIPS are down. So are junk bonds. But the ones probably most investors use are up. Given the drop in interest rates since Jan 08, that's not really that surprising.
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Old 11-21-2008, 08:03 PM   #25
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I'm essentially advocating a "consume fixed income first" strategy coupled with consuming dividends. Just that you limit your consumption of fixed income once you reach your permanent target allocation and then begin the traditional consumption of equities and fixed income.
You may want to consider more of a "wait and see" approach. If you get lucky and during your first few yrs of ER equities take off fabulously and the equity percentage of your portfolio is skyrocketing through the roof while your fixed portion is shrinking because of higher interest rates, I'd hate to see you selling fixed and holding equities.

It's good to hypoethesize withdrawal strategies, dream about fictional "bucket" scenarios and all that. But when push comes to shove, you may want to enter ER with a sensible AA and make decisions based on what is actually happening at the time.......
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Old 11-21-2008, 08:06 PM   #26
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The Vanguard LT Investment Grade Corporate bond fund (VWESX) is yielding more than 7%. So, in a 3% inflation world, you could withdraw 4%, and reinvest 3%, and pretty much keep the inflation-adjusted value of your bonds constant over time, which would allow you to grow your withdrawal rate with inflation. Of course, if inflation exceeds 3%, all bets would be off.
I'm surprised you would advocate the the fixed portion of a portfilio would be 100% long term corporate........ :confused:

And even if you did take that undiversified approach, and I'd hardly recommend it, your scenario has no real growth.
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Old 11-21-2008, 08:15 PM   #27
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A 25% annual drop on a 50/50 portfolio like I envision would stress me quite a bit.
We've had a few interesting threads on this subject. You should look them over. Even portfolios destined to survive may take scary dips and dives along the way. A portfolio with a sensible allocation of equities aimed at surviving for 30 - 40 yrs or so historically has had enough risk exposure to take a dive such as you fear. Yet, it's likely to survive anyway. It's just one of things to come to grips with.
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I am going to save at least a 25% extra cushion before I retire. I'd also think I'd be insane to retire with "just enough". Gotta leave some margin for error, right?
If you're risk adverse, I sure recommend that. This means working longer, saving more and retiring later. But, you must feel comfortable and if that's what it takes, I'd sure recommend it. Smaller withdrawals rates, more "cushion," or padded budgets all boil down to the same thing: retiring with more money. I said in another thread that the one thing I've found true in all aspects of retirement planning, other things being equal, is that MORE MONEY IS BETTER!

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Old 11-21-2008, 08:29 PM   #28
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I'm surprised you would advocate the the fixed portion of a portfilio would be 100% long term corporate........ :confused:

And even if you did take that undiversified approach, and I'd hardly recommend it, your scenario has no real growth.
VWESX is a diversified fund of investment grade corporates. The real growth over the long term comes from equities.

As you know, I have other lower grade stuff mixed in (ISM/OSM and VWEHX), as well as some cash. I was just pointing out that with the S&P yielding 3.4% and VWESX yielding 7.2%, it is possible to have very close to a 4% SWR entirely from dividends and interest with a 60/40 mix of the S&P 500 and VWESX in a 3% inflation world.
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Old 11-21-2008, 08:40 PM   #29
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VWESX is a diversified fund of investment grade corporates. The real growth over the long term comes from equities.

As you know, I have other lower grade stuff mixed in (ISM/OSM and VWEHX), as well as some cash. I was just pointing out that with the S&P yielding 3.4% and VWESX yielding 7.2%, it is possible to have very close to a 4% SWR entirely from dividends and interest with a 60/40 mix of the S&P 500 and VWESX in a 3% inflation world.
My comments were directed at how your inputs related to Fuego's post. Don't know how this is related to Fuego's scenario.... but whatever....

Also, not to be picky (well not real picky!), it would be possible to have very close to a 4% WR, but not necessarily an inflation adjusted 4% SWR over 30 - 40 yrs. But I know what ya mean!
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Old 11-21-2008, 10:26 PM   #30
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You may want to consider more of a "wait and see" approach. If you get lucky and during your first few yrs of ER equities take off fabulously and the equity percentage of your portfolio is skyrocketing through the roof while your fixed portion is shrinking because of higher interest rates, I'd hate to see you selling fixed and holding equities.

It's good to hypoethesize withdrawal strategies, dream about fictional "bucket" scenarios and all that. But when push comes to shove, you may want to enter ER with a sensible AA and make decisions based on what is actually happening at the time.......
I agree 100% that we will all have to make the best decisions we can as the facts come along. And in the example you gave, I would probably rebalance the skyrocketing equities into fixed income to maintain whatever target percentages I have. So whether I am implicitly selling equities (and call it "rebalancing") or whether I am explicitly selling equities (and call it "market timing" or equity harvesting or whatever), the end result is the same. Consume some portion of fixed income except when the equities get out of proportion, sell to get back to balance.
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Old 11-21-2008, 11:38 PM   #31
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So whether I am implicitly selling equities (and call it "rebalancing") or whether I am explicitly selling equities (and call it "market timing" or equity harvesting or whatever), the end result is the same. .
There ya go.....

Now.... 29 months into RE, my portfolio down roughly 30% , I wish I could rebalance, sell, buy or hold my way back into the nice, cozy financial position I was on the day I walked out of MegaCorp for the last time!
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Old 11-22-2008, 11:31 AM   #32
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There ya go.....

Now.... 29 months into RE, my portfolio down roughly 30% , I wish I could rebalance, sell, buy or hold my way back into the nice, cozy financial position I was on the day I walked out of MegaCorp for the last time!
Yep. That's one reason I plan on having some sort of "sleep at nite" protection in the form of a cash cushion that I can spend down and not worry about (for a while at least). No guarantee that things will get better, but at least comfort to know you are provided for at least for a while.
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Old 11-22-2008, 11:47 AM   #33
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Yep. That's one reason I plan on having some sort of "sleep at nite" protection in the form of a cash cushion that I can spend down and not worry about (for a while at least). No guarantee that things will get better, but at least comfort to know you are provided for at least for a while.
Having a few years of cash/near-cash is somewhat comforting, but not much. Thanks to interest, dividends and some cash on hand, I haven't actually needed to sell anything that's fallen in value during this time. Still, looking at the bottom line and seeing that my overall net worth is down by close to a third opens the acid valve into my stomach big time......

In a 60/40 or 50/50 diversified portfolio, holding cash as part of your fixed allocation is very handy. But it's vastly overrated as comfort food at times like these!

Even if I hadn't had cash on hand, after applying divs + interest to my WR, the amount of slightly depressed bond funds I would have had to sell to supplement would not have materially worsened my losses. If this goes on for a number of years, of course that could exaccerbate things.
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Old 11-23-2008, 09:47 AM   #34
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In a 60/40 or 50/50 diversified portfolio, holding cash as part of your fixed allocation is very handy. But it's vastly overrated as comfort food at times like these!
What you need is a working spouse or a big COLA pension.
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Old 11-24-2008, 08:40 AM   #35
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Great idea! Now, where can I get one of those? (just kidding)

At any rate, here's what I have learned about myself from the last 6 months... whatever allocation and SWR I end up with a FIRE time, I will also have 2-4 yrs worth of expenses in cash which will not be a part of the overall portfolio. I guess, this is the same as having a bigger stash/lower SWR/different allocation, but for some psychological reason I find this approach more comforting.
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Old 11-24-2008, 11:57 AM   #36
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If we use Mark To Market accounting, the number we need to use for NW is the current one.
I use a 2% WR, but first I multiply my net invested assets by 2.

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What you need is a working spouse or a big COLA pension.
Like JG used to say, right before his wife had to quit work, "A working wife is like a pumping oil well."

'Ol John was good with a phrase.

Ha
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