30/70 asset allocation is the best overall?

[Big_Hitter]

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

 

[audreyh1]

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".

 

[clifp]

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.

 

[Bestwifeever]

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:

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.

 

[audreyh1]

Right, he is not talking to early retirees.

 

[mathjak107]

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.

 

[Chuckanut]

As usual, this illustrious group has contributed a lot of good ideas and facts to chew on.

 

[papadad111]

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.

 

[FIREd]

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.

 

[papadad111]

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 ...

 

[samclem]

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:

__________________

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.

 

[Onward]

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.

 

[brewer12345]

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.

 

[gcgang]

This isn't too dissimilar to Ray Dalio's All Weather Portfolio, 30% Stock, 55% Bond, and 15% gold/commodities.


Sent from my iPhone using Early Retirement Forum

 

[NW-Bound]

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.

 

[Fermion]

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

Well death is not certain either. It is certainly not out of the realm of possibility that a system is developed that causes cells to regenerate or stop decay. Alternatively the brain could be mapped onto the next generation of quantum computer and you could *live* forever (or as long as you can afford to pay for your iBrain storage space in the cloud).

 

[REWahoo]

The retirement killing scenarios in the future might not involve ugly inflationary periods.

Very true...

 

[MichaelB]

Well death is not certain either.

Very true...

My money says REWahoo's scenario happens before Fermion's does ...

 

[Fermion]

My money says REWahoo's scenario happens before Fermion's does ...

In the past 100 years we have been hit by exactly how many mile-diameter asteroids?

In the past 100 years life expectancy has increased by decades and processing power has gone from slide rule to trillions of calculations per second.

Smart money would be on me based on recent history.


Maybe we will need to amend Ben's quote. For sure he will always be correct about taxes.

 

[MichaelB]

In the past 100 years we have been hit by exactly how many mile-diameter asteroids?

In the past 100 years life expectancy has increased by decades and processing power has gone from slide rule to trillions of calculations per second.

Smart money would be on me based on recent history.

Past performance is no guarantee of future results

 

[mrfeh]

Gonna be retiring in 12 months, with a 40+ year time horizon.

I think firecalc will say I'm 100% good for anything between 30/70 and 70/30. I've chosen 60/40, and it may stay there for the rest of my life...

 

[Lsbcal]

I ran 2 scenarios in VPW shown below. The first is a 30/70 and the second is a 50/50 AA. Both are for a 65 year old with depletion of the portfolio at age 110. The backtesting table is for a start year 1968 which was the worst in modern times and encompassed the 1969 and 1973 recessions plus the 1970's inflation.

In general the 50/50 allows somewhat higher spending but not for every year of a start year sequence. I haven't shown all the results but the chart of withdrawal statistics for every start year in general move up with 50/50 versus 30/70. It could be that different start ages and some international stock would modify results somewhat.

 

[NW-Bound]

Well death is not certain either. It is certainly not out of the realm of possibility that a system is developed that causes cells to regenerate or stop decay. Alternatively the brain could be mapped onto the next generation of quantum computer and you could *live* forever (or as long as you can afford to pay for your iBrain storage space in the cloud).

If your thoughts could be stored on a computer, could that still be you without your body and senses (what good are thoughts or ideas without a physical body and its senses)? Or will your senses get virtualized also, à la Matrix the movie? And what prevents a software virus from polluting your stored thoughts, causing it to crash the computer or enter an endless loop?

And will computing power be so cheap that the thought storage can be provided free to everybody? So that their thoughts continue to post threads on the virtualized ER forum, so they can argue about every little thing till eternity?

And as you mention the cost for iBrain storage, will the cost become so low with advanced technology that our WR will become infinitesimal, allowing our portfolio to grow indefinitely, rendering all this AA and WR moot?

But the most important issue is what will keep ReWahoo's asteroid from wiping out all this wonderful computer storage where our thoughts reside?

I don't think anything can ever be certain or guaranteed. Something bad is going to happen one way or another. It's nature.

 

[eytonxav]

For those that continue for years to feel that interest rates are too low to hold bonds, (this article advocated 5 year treasuries), if interest rates were to climb 3 percent in the next year which do you think would perform worse 5 year treasuries or the US stock market?

So do you think the stock market would take such a rapid increase in stride

 

[In-control]

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:

__________________

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.

This is a great baseline. What is not included is other income, like most ER's I do not include SS in my budget calculations. Since that is variable a table really could not include it. We do 40/60 and are 54 and 53 yrs old planning on ER next yr. I may change the AA when we start collecting SS. So many variables go into your budget. We want to enjoy the $ while we are young and I can see us spending more now then say when we are in our 70's. My point with this is to show how different everyone is and why it is worth the effort to create a realistic budget and live with it. A 40/60 AA meets our budget needs with a 4% rate.