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Old 04-08-2015, 03:53 PM   #21
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Here is an interesting article by Rick Ferri in which he claims that for those already retired a 30/70 asset allocation is the best overall, this week.
Fixed it for ya!
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Old 04-08-2015, 04:23 PM   #22
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Ok, but if I'm reading the chart correctly, there seems to be no improvement/advantage of going more than about 50% stocks. Why take on more risk?
It has to do with terminal value. A higher equity % will give you a higher terminal value, on average, without sacrificing survivability up to about 75 to 80% equity. So some folks consider 75% equity to be the sweet spot - if you can live with the volatility!

Us? I think we'll stick with around 50% for a while. I would be reluctant to drop below 40/45% until quite a bit older. Maybe 30% when we turn 80?

Remember, all, that Rick Ferri is probably targeting the 65 year old retiree with this advice, and it reminds me a bit of Bernsteins "won the game" argument. I think I did read that article a while back and it seemed like he was ignoring the long term effects of inflation, just like Bernstein.
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Old 04-08-2015, 04:26 PM   #23
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The suggestion is really not far off from the old age in bonds rule for most people already retired. While dropping to 30% equities is not in my plan, the article makes me feel a little better about my 42-45% equity allocation. I'm coming up on ER just before age 60 in less than a year. With no significant pension, I need to protect myself for the first few years.
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Old 04-08-2015, 04:37 PM   #24
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if interest rates jump 3 percentage points then a 5-yr treasury bond fund would lose 15%
I do not see the Fed raising rates any time soon!

Imagine what a 3% in crease will do the government debt.
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Old 04-08-2015, 04:40 PM   #25
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It has to do with terminal value. A higher equity % will give you a higher terminal value, on average, without sacrificing survivability up to about 75 to 80% equity.
By "terminal value" do you mean what's left of the portfolio at the end of one's life?

So you're saying that anything over the ~50% AA would only benefit the heirs while creating perhaps a stress induced early departure for the benefactor?

Now THERE'S a sweet spot to calculate: high volatility stress=early departure vs low stress longevity=outliving your money!
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Old 04-08-2015, 04:40 PM   #26
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I wasn't predicting a jump in rates, I was just stating the impact on that fund.


30/70 allocation can have a huge interest rate risk depending on the duration of the 70
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Old 04-08-2015, 04:46 PM   #27
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By "terminal value" do you mean what's left of the portfolio at the end of one's life?

So you're saying that anything over the ~50% AA would only benefit the heirs while creating perhaps a stress induced early departure for the benefactor?

Now THERE'S a sweet spot to calculate: high volatility stress=early departure vs low stress longevity=outliving your money!
Yes, exactly. I think the studies show that the heirs get more with higher equity allocation - this is for all equity% up to about 75/80.

That is the entire point about choosing an AA. Look at the annual volatility of each AA versus the survival or SAFEMAX for a given time period. Then decide what you can live with and your withdrawal %. That is your "sweet spot".
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Old 04-08-2015, 05:23 PM   #28
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Retirement duration matters a ton. For a 65 year old, 30/70 is fine. Living 30 years is a long shot, and unless living money to your estate is a priority, somewhere between 30 and 50% equities probably gives the highest chance of not running out of money at 4%

At 55 a 30 year horizon is more realistic. Woman have almost 50% shot of living to age 85, men average live expectancy is 25 year. I think 30% is too low as the FIRECalc runs illustrate.
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Old 04-08-2015, 05:47 PM   #29
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I don't see an age at retirement mentioned, but he is maybe using the classic age of 65 for retirement and not talking to early retirees. At the end of the article he says:

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Of course, I’m speaking about the average investor and everyone is different. Some people will decide 30/70 is too conservative and move up the risk scale. Others may decide to move a bit lower in stocks. These adjustments are fully understandable and acceptable after a thorough assessment of safety needs, income, longevity and estate planning considerations in retirement.
Our stock allocation is up to around 35 percent right now (and about 10 percent money market, and 55 percent bonds), and DH and I are 66 and 64.66 (we are probably the choir Ferri is preaching to). The equities portion will actually grow (we hope haha) as we purposely dip into only the money market segment of the holdings as necessary and take SS, which covers more than half our spending.
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Old 04-08-2015, 06:06 PM   #30
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Right, he is not talking to early retirees.
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Old 04-08-2015, 06:07 PM   #31
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I do not see the Fed raising rates any time soon!

Imagine what a 3% in crease will do the government debt.
the fed does not control bond rates. investor greed ,fear and perception does .
that has run contrary to the fed as many times as they followed the feds lead on short term rate hikes.
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Old 04-08-2015, 06:44 PM   #32
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As usual, this illustrious group has contributed a lot of good ideas and facts to chew on. 📊📈📉
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Old 04-08-2015, 06:56 PM   #33
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Would be interesting to model the various age based AA's My example below:

45-50 early early retiree. 75%
51-58 early retiree. 60%
59-65 Typical Retiree. ( target of this article in my opinion). 40%
66+. Later retiree. 50%


someone FIREd in the early early retiree bracket is likely to need to be @ 75-80 % equities until they are closer to the typical retiree bracket. From there it may make sense to throttle back the AA. And into the later retiree bracket when SS kicks in, access to pretax accounts kick in, a reduction again in EquitybAA may make good sense.
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Old 04-08-2015, 07:21 PM   #34
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Would be interesting to model the various age based AA's My example below:

45-50 early early retiree. 75%
51-58 early retiree. 60%
59-65 Typical Retiree. ( target of this article in my opinion). 40%
66+. Later retiree. 50%


someone FIREd in the early early retiree bracket is likely to need to be @ 75-80 % equities until they are closer to the typical retiree bracket. From there it may make sense to throttle back the AA. And into the later retiree bracket when SS kicks in, access to pretax accounts kick in, a reduction again in EquitybAA may make good sense.
It depends on your withdrawal rate, I would think. A 45-year old with a 2% WR does not need to chase returns too hard.
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Old 04-08-2015, 09:03 PM   #35
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It depends on your withdrawal rate, I would think. A 45-year old with a 2% WR does not need to chase returns too hard.

Yes. Indeed. A Very good point !!

Adding a range of equity asset allocations based on withdrawal rate.

Lower WR, lower equity AA.

Modeling it - 5-10% equity AA reduction for each 1% of WD rate that falls below 4%, for example

So the typical 45 year old may be at 75-80% equity but if WR is 2.5 percent then can drop that AA back to 60-65%. May be a bit biased toward aggressive stance but reasonable ...
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Old 04-08-2015, 09:38 PM   #36
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Chuckanut may have been taking a well-earned vacation when we discussed Mr Ferri's 30/70 proposal a few months ago.

Here's that thread. Lots of graphs and well-thought-out opinions there (as here).

Like then, I think Mr Ferri is conflating "risk" with "volatility"--they ain't the same thing. The main "risk" is not the rising and falling of equity prices, it is inflation. Having a healthy dollop of equities has, historically, been important in order to address that risk. And as Audrey1 pointed out, if a long-term retiree goes below about 45% stocks, then the withdrawal rate needs to go down.

Chart below is from an article by Wade Pfau:

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Takeaway from the above: If your retirement horizon is 30 years or longer and you need to take a WR of more than 3.5% (of starting balance, adjusted for inflation), then you probably need more than 30% stocks if history is any guide. 45% stocks would be a better WAG for this situation.

At today's interest rates, I'd be buying some very short duration bonds if I was thinking of going to a bond-heavy allocation.

With this recommendation, I'm concerned Mr Ferri may have joined Dr Bernstein in recommending a course of action that will reduce their chances of getting a batch of nasty phone calls from clients. I'd rather they provide analysis, with all appropriate cautions, that is appropriate for the informed investor.
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Old 04-08-2015, 11:02 PM   #37
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Per FIRECalc, success rates of a 4% annual withdrawal over 30 yrs:

60/40 portfolio ... 95.6%

30/70 portfolio ... 86.8%

That's a significant difference.
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Old 04-08-2015, 11:07 PM   #38
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Per FIRECalc, success rates of a 4% annual withdrawal over 30 yrs:

60/40 portfolio ... 95.6%

30/70 portfolio ... 86.8%

That's a significant difference.
Worth noting that a lot of the ER-busting scenarios are the stagflation ones, with the worst being retire in 1966. A bond-heavy portfolio would have gotten killed in those times. We should keep in mind that the future might be quite different than the past. The retirement killing scenarios in the future might not involve ugly inflationary periods.
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Old 04-09-2015, 12:02 AM   #39
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This isn't too dissimilar to Ray Dalio's All Weather Portfolio, 30% Stock, 55% Bond, and 15% gold/commodities.


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Old 04-09-2015, 12:56 AM   #40
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It depends on your withdrawal rate, I would think. A 45-year old with a 2% WR does not need to chase returns too hard.
Surely, if one manages to merely keep up with inflation, a 2% WR will last 50 years, and 50 years is a long time.

I am not that old, but remember the time 50 years ago. It feels so long ago, almost like another life. I am not that old, but enough to be 1/4 the age of the US as a nation. It's hard to believe.

So, who knows what will happen in the next 50 years. The only thing certain is that I will be dead.

The more I think about all this WR and AA business, the less certain things appear, and the less I care.
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