Join Early Retirement Today
Reply
 
Thread Tools Search this Thread Display Modes
Am I Looking at the Range in My Investment Portfolio Income the Right Way?
Old 07-21-2013, 05:47 PM   #1
Recycles dryer sheets
 
Join Date: Feb 2010
Posts: 396
Am I Looking at the Range in My Investment Portfolio Income the Right Way?

Am I looking at this the right way?

I am trying to figure out an estimated fluctuation range of return on my investment portfolio. Assume that I have a 80% stock and 20% bond allocation. I used the annual return from the US stock market from 1928 to 2011 and the annual return on US bonds from 1928 to 2011. So my equation would look like this: (Annual Stock Return for Year A)(80%) + (Annual Bond Return for Year A)(20%)= X%. I then reviewed the combined annual returns between 1928 and 2011. The worst year resulted in a -36% return and the best year resulted in a 43% return.

Assume I have $500,000 in my investment portfolio. Assume that I do not want to take more than 4% of my investment portfolio to use as living expenses. Assume that I plan to FIRE within one year. Does this mean that I would need to be prepared to live on any amount between $12,800 and $28,600 based on an 80 percent stock and 20 percent bond investment portfolio allocation? So if I retired on a day when the stock and bond market took a major turn for the better or for the worse, would my investment income vary by this amount, somewhere between $12,800 and 28,600?

Thank you for your insight.
__________________

__________________
nico08 is offline   Reply With Quote
Join the #1 Early Retirement and Financial Independence Forum Today - It's Totally Free!

Are you planning to be financially independent as early as possible so you can live life on your own terms? Discuss successful investing strategies, asset allocation models, tax strategies and other related topics in our online forum community. Our members range from young folks just starting their journey to financial independence, military retirees and even multimillionaires. No matter where you fit in you'll find that Early-Retirement.org is a great community to join. Best of all it's totally FREE!

You are currently viewing our boards as a guest so you have limited access to our community. Please take the time to register and you will gain a lot of great new features including; the ability to participate in discussions, network with our members, see fewer ads, upload photographs, create a retirement blog, send private messages and so much, much more!

Old 07-21-2013, 06:18 PM   #2
Give me a museum and I'll fill it. (Picasso)
Give me a forum ...
RunningBum's Avatar
 
Join Date: Jun 2007
Posts: 5,180
Quote:
Originally Posted by nico08 View Post
Am I looking at this the right way?

I am trying to figure out an estimated fluctuation range of return on my investment portfolio. Assume that I have a 80% stock and 20% bond allocation. I used the annual return from the US stock market from 1928 to 2011 and the annual return on US bonds from 1928 to 2011. So my equation would look like this: (Annual Stock Return for Year A)(80%) + (Annual Bond Return for Year A)(20%)= X%. I then reviewed the combined annual returns between 1928 and 2011. The worst year resulted in a -36% return and the best year resulted in a 43% return.

Assume I have $500,000 in my investment portfolio. Assume that I do not want to take more than 4% of my investment portfolio to use as living expenses. Assume that I plan to FIRE within one year. Does this mean that I would need to be prepared to live on any amount between $12,800 and $28,600 based on an 80 percent stock and 20 percent bond investment portfolio allocation? So if I retired on a day when the stock and bond market took a major turn for the better or for the worse, would my investment income vary by this amount, somewhere between $12,800 and 28,600?

Thank you for your insight.
If you're really looking at best and worse cases, I wouldn't limit it to what has happened in the last 83 years, because it could be even more extreme. Unlikely, but possible. Not that you should or even could plan for the absolute worst case, but don't limit your thinking to only what has happened before.

I'd be really, really surprised if such a swing happened on the day or week of your retirement, though again, it could. Much more likely is that you'll see a downturn coming over the year, in which case I would, and actually did, postpone retirement. For me when the dotcom bubble burst I was heavy in tech stocks and lost well over 36%.

In another case you might retire just as the market is starting to take a big hit. This is the toughest to recover from unless you either have a buffer or can return to employment, or have another way to make money.

One more thing about big swings, they have historically returned to normal levels. No guarantee this will happen in the future, but while I would get more tight with my spending if a big drop happened just before retirement, I probably wouldn't cut my spending all the way back. Likewise, if there was a big run-up just before ER, I wouldn't give myself a green light to spend a lot more, because stocks could easily fall back to the previous level.
__________________

__________________
RunningBum is offline   Reply With Quote
Old 07-21-2013, 06:25 PM   #3
Recycles dryer sheets
 
Join Date: Jul 2013
Posts: 108
Nico08, you might want to look at the discussion we're having on this thread.

Taking 4% as a strict function of the current value of your portfolio would indeed be too volatile, and probably not very sensible. You need more progressive adjustments.
__________________
siamond is offline   Reply With Quote
Old 07-21-2013, 06:57 PM   #4
Give me a museum and I'll fill it. (Picasso)
Give me a forum ...
Midpack's Avatar
 
Join Date: Jan 2008
Location: Chicagoland
Posts: 11,971
There are several ways to model your scenario, you might use FIRECALC with percent of remaining portfolio spending and output results to Excel (not inflation adjusted though IIRC) to see how variable they would have been from 1871 to present.

But to the broader question, while your withdrawals may vary dramatically from year to year or day to day, that does not mean your annual spending necessarily has to. In the interest of income/spending smoothing, I think most of us would want to start retirement with a cash buffer, a % of annual spending (half?) or an amount equal to the most variation you might expect in a single year. In years that withdrawals fall short of planned spending, draw down the cash buffer to make up the difference. In good years, don't spend the excess, use it to replenish/build up the buffer. And maybe reset every five years by adjusting the buffer, taking steps to permanent increase/decrease annual spending. Like many others, I keep 1-2 years annual spending in cash. And I plan to smooth spending over five year periods if at all possible. FWIW...
__________________
No one agrees with other people's opinions; they merely agree with their own opinions -- expressed by somebody else. Sydney Tremayne
Retired Jun 2011 at age 57

Target AA: 60% equity funds / 35% bond funds / 5% cash
Target WR: Approx 2.5% Approx 20% SI (secure income, SS only)
Midpack is offline   Reply With Quote
Old 07-21-2013, 08:56 PM   #5
Recycles dryer sheets
 
Join Date: Feb 2010
Posts: 396
thank you. i will take a look.
__________________
nico08 is offline   Reply With Quote
Old 07-21-2013, 08:56 PM   #6
Recycles dryer sheets
 
Join Date: Feb 2010
Posts: 396
Good advice and insight. Thank you.
__________________
nico08 is offline   Reply With Quote
Old 07-21-2013, 09:15 PM   #7
Thinks s/he gets paid by the post
 
Join Date: Jul 2005
Posts: 3,862
Your income could swing more than that. What if two years in a row result in losses of more than -38%? Also make sure your data includes dividends (reinvested in necessary) and rebalancing. FIRECalc does all that for you.
__________________

__________________
Animorph is offline   Reply With Quote
Reply


Currently Active Users Viewing This Thread: 1 (0 members and 1 guests)
 
Thread Tools Search this Thread
Search this Thread:

Advanced Search
Display Modes

Posting Rules
You may not post new threads
You may not post replies
You may not post attachments
You may not edit your posts

BB code is On
Smilies are On
[IMG] code is On
HTML code is Off
Trackbacks are Off
Pingbacks are Off
Refbacks are Off


 

 
All times are GMT -6. The time now is 04:10 AM.
 
Powered by vBulletin® Version 3.8.8 Beta 1
Copyright ©2000 - 2017, vBulletin Solutions, Inc.