Allocation vs withdrawal rates

[youbet]

You all sure do take things literally... From where I'm from, if someone says they "figure" or "reckon" they can do something it doesn't mean 100% guarantee that it will happen... It means that they will *try* to make it happen.

Anyway your calculations are not going to be correct. Vanguard is including 10% in a market neutral fund, and soon another 10% in a "hedge fund" of sorts. They also have 20% in low volatility and 5% in commodities.

Furthermore the AA and the constituents of the fund have shifted many times. Right now they are 5% over weight in emerging market stocks. In the past they have been over weight in reits. I've also seen the overweight in corporate bonds... You are not going to be able to use FireCalc to predict what will happen with this fund.

Sounds like you're on top of the fund goals and strategies now.

 

[rafapark]

Thank you

Thank you everybody for the responses. Yes, sorry for the typo, I meant 35%/65%

The reason I ask is that I have run firecalc and other tools including OTAR using 20%/80%, 30%/70% and anything in between. Based on my expected budget I get 100%. I even get 100% with 10%/90%.

So even if I get 100% with 10%/90%, should I go to a riskier allocation since all these tools are based on historical returns which is fine for planning purposes I guess. I just wanted to know how people are calculating allocations based on future expected returns ( and yes, I know nobody has a crystal ball, but I was just curious how people are planning and what assumptions people are making when firecal gives them 100% with a low risk allocation).

 

[pb4uski]

You are in the "won the game" zone and there are two schools of thought.

One is that because your WR is low you can prudently take on more risk and volatility and have a higher stock allocation (high volatility and high potential reward). The opposite end of the spectrum is that since you have plenty that there is no need to take any risk to have what you need to meet your goals (so you would have little in equities and low volatility but low reward).

I lean towards the former just based on my many years of investing (dance with the girl who brung you) and to make it more likely to leave a nice legacy for our kids and favorite charities.

At the end of the day... a personal judgement.

 

[REWahoo]

At the end of the day... a personal judgement.

+1

Two other factors: what is your risk tolerance and do you hope to leave something for your heirs. Both those considerations should influence your judgement.

 

[Midpack]

You are in the "won the game" zone and there are two schools of thought.

One is that because your WR is low you can prudently take on more risk and volatility and have a higher stock allocation (high volatility and high potential reward). The opposite end of the spectrum is that since you have plenty that there is no need to take any risk to have what you need to meet your goals (so you would have little in equities and low volatility but low reward).

I lean towards the former just based on my many years of investing (dance with the girl who brung you) and to make it more likely to leave a nice legacy for our kids and favorite charities.

At the end of the day... a personal judgement.

Good description of the choices.

Though I was completely comfortable with plenty of risk during accumulation (100/0 until almost age 50), now that we're in distribution I don't see any reason to take more risk than necessary now that we've 'won the game' somewhat. I'm close to 60/40 now and expect to adjust down to 40/60 or less in the decade(s) ahead.

Unlike pb4uski, we don't have kids, so legacy/residual estate isn't high on our priorities. If we did, I suspect we'd agree with pb4uski. Odds are we'll still leave a tidy sum for charities.

Though we've had/have some zero risk folks here, almost no one should go below 20/80 IMO (unless maybe if you're truly near the end like my 93 yo Dad). That requires a 40-60% larger nest egg than even 30/70, something few can afford. Zero risk is very expensive...

 

[Dawg52]

+1

Two other factors: what is your risk tolerance and do you hope to leave something for your heirs. Both those considerations should influence your judgement.

As you know, my risk tolerance is low and with no children there is really no need to take on the extra volatility that comes with a higher tilt towards equities. I wouldn't mind leaving some to nephews and charities, but I would like to keep the old liver as healthy as possible too.

 

[mathjak107]

after the wild 6 figure swings at day 1 of my retirement i am finding i am no longer comfortable watching almost 100k vanish in one session .

i think i may reduce from 50/50 to 35-40% and do the rising glide path thing back up over years .

this early on downside risk is very important since all the success rates do not figure large extended hits right at the gate .

this is my 3rd week in retirement and seen 130k or so evaporate in that time frame .

while i was 90% equity's my whole life after yesterdays wild day i am finding i am no longer as immune to seeing such large sums swing like that .

i think 40/60 may also be a lot more comfortable assuming less aggressive funds .

 

[rafapark]

That's my point. Why would I endure the stress of worrying about the stock market with a high equity allocation when I don't have to? I don't plan to get rich by investing in the stock market when I retire anyway. I am staying with 30%/70% and don't worry about what the market does too much. Even with this allocation, I'd have a significant amount of money left at 95 according to the calculators. No heirs, so I guess charities will be happy.

 

[mathjak107]

i agree , if you already won the game why keep playing .

boy if i could live on 2% withdrawals i would be in cd's , short term bonds , tips and maybe 15% equity's .

but i can't , but if i could ha ha ha .

the problem i have is it isn't percentages that get me it is dollars .

being down 10% when you are still accumulating money may barely be a blip in dollars compared to when you are at your peak in savings .

a 100k swing in one day is not even comprehensible to me at this stage after yesrdays ride .

i am realizing i want to reduce this ride .

 

[hnzw_rui]

this early on downside risk is very important since all the success rates do not figure large extended hits right at the gate.

Isn't this exactly the point of FIRECalc?

 

[mathjak107]

history does not have many scenarios where retirees got whacked day 1 and it was prolonged . the only real prime example is thwe y2k retiree and that cycle is not complete at 30 years yet .

getting whacked after up cycles first is far more common .

 

[hnzw_rui]

history does not have many scenarios where retirees got whacked day 1 and it was prolonged . the only real prime example is thwe y2k retiree and that cycle is not complete at 30 years yet .

getting whacked after up cycles first is far more common .

I'd say 1929 is a fairly good example of someone's portfolio getting whacked repeatedly.

 

[mathjak107]

kitces says close but the 2000 retire may still be a failure point while the 1929 retire was not . the length of the recovery in 2000 is the main difference .

in dollar terms the 1929 retiree recovered pretty quick since consumer prices fell 18% and dividends were double digits .

 

[hnzw_rui]

kitces says close but the 2000 retire may still be a failure point while the 1929 retire was not . the length of the recovery in 2000 is the main difference .

in dollar terms the 1929 retiree recovered pretty quick since consumer prices fell 18% and dividends were double digits .

As my crystal ball and time machine both aren't working, we'll just have to see what happens.

Right now, the 2000 retiree looks to still be ahead of the 1929 retiree based on the withdrawal rates (70/30 portfolio).

Revisiting the worst times to retire in history (2014 update) | Investing For A Living

A quick calculation of inflation adjusted balances at year 15 are as follows:

1929: 458,598
1966: 361,352
2000: 581,206

 

[mathjak107]

here is kitces workup on the subject


https://www.kitces.com/blog/how-has...bble-and-the-2008-financial-crisis/#more-7856

 

[Midpack]

kitces says close but the 2000 retire may still be a failure point while the 1929 retire was not . the length of the recovery in 2000 is the main difference .

in dollar terms the 1929 retiree recovered pretty quick since consumer prices fell 18% and dividends were double digits .

"Anything is possible" so 2000 could still be a failure point over 30 years, but exactly where did Kitces suggest that's more probable than historic real returns? Or that 2000 retirees have more reason to be concerned than their predecessors? He seemed to conclude that while no one can project 30 years, 2000 and 2008 still haven't broken the rule so far, real or inflation adjusted. From your link:

The bottom line, though, is simply to recognize that even market scenarios like the tech crash in 2000 or the financial crisis of 2008 are not ones that will likely breach the 4% safe withdrawal rate, but merely examples of bad market declines for which the 4% rule was created. In turn, this is an implicit acknowledgement of just how conservative the 4% rule actually is, and how horrible the historical market returns really were that created it. In the end, this doesn’t necessarily mean that the 4% rule is ‘sacred’ and that some future market disaster couldn’t be bad enough to undermine it (and of course, it can/should still be adopted for individual circumstances like a longer/shorter time horizon, the impact of taxes, the impact of fees and other investment costs, etc.). But when the Great Depression and the stagflationary 1970s couldn’t break it, and the crash of 1987 and even the global financial crisis of 2008 were just speed bumps, it will take a lot to set a new safe withdrawal rate below 4%!

 

[hnzw_rui]

here is kitces workup on the subject


https://www.kitces.com/blog/how-has...bble-and-the-2008-financial-crisis/#more-7856

From the article, it appears to me kitces doesn't think 2000 retirees will have it worse than 1966 retirees and for now, they're just on par with 1929 retirees.

Ultimately, the key point here is simply to recognize that the 2000 retiree is merely ‘in line’ with the 1929 retiree, and doing better than the rest. And the 2008 retiree – even having started with the global financial crisis out of the gate – is already doing far better than any of these historical scenarios! In other words, while the tech crash and especially the global financial crisis were scary, they still haven’t been the kind of scenarios that spell outright doom for the 4% rule.

Which means even the 2000 retiree isn’t yet below the ‘critical threshold’ that couldn’t simply be guaranteed for life, if depletion was a concern. In addition, a growing base of research suggests that retiree spending in real dollars tends to decline in later years – i.e., spending increases for retirees in their 70s and 80s don’t even keep pace with inflation – which means in practice a 2000 retiree today is probably even better off and spending even less as a current withdrawal rate than these calculations would suggest.

 

[Mulligan]

i agree , if you already won the game why keep playing .

boy if i could live on 2% withdrawals i would be in cd's , short term bonds , tips and maybe 15% equity's .

but i can't , but if i could ha ha ha .

the problem i have is it isn't percentages that get me it is dollars .

being down 10% when you are still accumulating money may barely be a blip in dollars compared to when you are at your peak in savings .

a 100k swing in one day is not even comprehensible to me at this stage after yesrdays ride .

i am realizing i want to reduce this ride .

I feel for any very recent retirees. I was VERY acutely aware of my finances the first year in. And I had no reason as I live off a pension. But even then it was worrying about my stash and whether I would actually GET that monthly check for not working. On the good side though Math you do have SS around the corner as a ballast.
I decided I was going to bail quite a bit out of my Total Stock and then realized I forgot I would lose a 2k income tax credit if I did, so I just sold 10k worth to keep me under the number. And I thought I was going to sell and gain back some today then the turd market went negative at the end of the day so I lost more.


Sent from my iPad using Tapatalk

 

[pb4uski]

Interesting, for me, suboptimization of a very conservative AA (say 30/70) would bother me a lot more than the volatility of a more aggressive AA (like 70/30).

 

[audreyh1]

Sorry, Mathjak107, gallows humor here, but this correction does seem auspiciously timed with your retirement. I'd start feeling a little paranoid myself!

Chances seem good to me that this will remain just a correction, and be a fleeting event, but then, what do I know?

Of course, I retired in August of 1999.

 

[Sycamore]

mathjak107 referenced an article by Michael Kitces, a detailed review of the 4% rule compared to four other bad market sequences.

Today I listened to a Podcast interview of Dr. Wade Pfau. He mentioned his work with Michael Kitces on a rising glide path investment strategy where you start at 30/70 (stocks/bonds) and raise your equity exposure gradually up to 60/40.

This strategy mitigates the impact of poor early market returns.

Check out their work on this topic.

 

[audreyh1]

mathjak107 referenced an article by Michael Kitces, a detailed review of the 4% rule compared to four other bad market sequences.

Today I listened to a Podcast interview of Dr. Wade Pfau. He mentioned his work with Michael Kitces on a rising glide path investment strategy where you start at 30/70 (stocks/bonds) and raise your equity exposure gradually up to 60/40.

This strategy mitigates the impact of poor early market returns.

Check out their work on this topic.

We have had several discussions on that very investment strategy - when it was first published, and several since.

 

[NW-Bound]

here is kitces workup on the subject

https://www.kitces.com/blog/how-has...bble-and-the-2008-financial-crisis/#more-7856

Thanks for a very good article!

Regarding the Year 2000 retiree, it is shown that a $1M portfolio of 60/40 AA and a WR of 4% would result in about $900K nominal at this point 15 years later. However, the cumulative inflation is 41% (according to another source), and the author acknowledges that when he says that the inflation adjusted WR has grown to 6.2% of current portfolio value.

Now, if the retiree can just keep up with inflation, he will deplete his stash in 100%/6.2% = 16 years. So, he might just make his 30-year retirement, having spent 15 years of it already.

If our retiree is an early retiree one, and wants to live more than 16 years, he will hope to beat inflation, or cut back his spending. Or can he buy an annuity?

I did a quick look, and for his $900K at this point, he can get a joint annuity that pays $48.9K/yr if the couple is 60 year old, or $55.6K/yr if they are both 70. The 2nd number is still lower, but closer to the inflated 4% initial WR ( 1.41 x $40K = $56.4K ).

PS. I forgot to mention that the annuity is not COLA'd, so does not look too good.