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Old 06-10-2014, 10:18 PM   #61
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Why not just go a bit more cash for awhile until you get comfortable. Next time PenFed has 5 year 3% CDs, grab a few years of those to cover living expenses.

The USA can't survive another major downturn so it will not happen. A 50% drop in the market would wipe out the fragile gains of most of the public pension funds and collapse the government. There are not a lot of ways to bail out this time. Conclusion: The people that are able to keep the market running along will do so.

There may be a 10% or 20% correction, but nothing much more than that.
Wow, your confidence is reassuring. However not quite as reassuring as when economist Irving Fisher said "Stock prices have reached what looks like a permanently high plateau"
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Old 06-10-2014, 10:28 PM   #62
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Wow, your confidence is reassuring. However not quite as reassuring as when economist Irving Fisher said "Stock prices have reached what looks like a permanently high plateau"
Curious, when did he say that? At the 2012 highs, 2013 highs, or just now at the 2014 highs?

Edit. Oh, Irving Fisher. Isn't he quite dead?
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Old 06-10-2014, 10:34 PM   #63
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I'm hoping we're not at market top - I gave notice today and retirement starts in 2 weeks....


Someone is going to have a great summer! Congrats!
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Old 06-11-2014, 12:12 AM   #64
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Curious, when did he say that? At the 2012 highs, 2013 highs, or just now at the 2014 highs?

Edit. Oh, Irving Fisher. Isn't he quite dead?
Yes, he said it in 1929 just before the crash.
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Old 06-11-2014, 12:34 AM   #65
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"With 25% in cash and a 3% WR, I should be able to survive several years of famine. Even a bad stretch of Biblical proportion was only 7 years, right?...."

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Congratulations on post # 10,000.
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Old 06-11-2014, 04:29 AM   #66
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I am considering a glide path approach starting with a $3MM portfolio.
What do you think of filling up with 80% bonds AA and work on depleting that over the next 25 years. When hitting 75, out of bonds, the $600,000 would hopefully have compounded nicely oven 25 years even with a bear market to provide sufficient funds for another 25 years.
Is this a realistic approach? Still 14 years out for me, so just thinking about various options.
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Old 06-11-2014, 04:46 AM   #67
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What do you think of filling up with 80% bonds AA and work on depleting that over the next 25 years.
I think with a 25 year time horizon you'd be giving up substantial gains and risk taking a painful loss in purchasing power from inflation. History indicates an AA with less than ~40% in stocks fares poorly over a 30 year time frame. From FIRECalc:
Attached Images
File Type: jpg Equity % success rates.JPG (65.2 KB, 24 views)
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Old 06-11-2014, 04:59 AM   #68
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One more thought: If you followed your proposed 25 year plan you'd gradually increase your equity allocation from 20/80 to 100/0. How concerned will you be near the end of those 25 years - when you are 75 - about a big downturn in the stock market?
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Old 06-11-2014, 06:07 AM   #69
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Yes, he said it in 1929 just before the crash.
Well, in the long run, he was right.
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Old 06-11-2014, 07:12 AM   #70
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Congratulations on post # 10,000.
Thank you for the reminder! I did not notice at all this milestone. Time flies while you are having fun.
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Old 06-11-2014, 07:36 AM   #71
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I am considering a glide path approach starting with a $3MM portfolio.
What do you think of filling up with 80% bonds AA and work on depleting that over the next 25 years. When hitting 75, out of bonds, the $600,000 would hopefully have compounded nicely oven 25 years even with a bear market to provide sufficient funds for another 25 years.
Is this a realistic approach? Still 14 years out for me, so just thinking about various options.

I'd be very skeptical and cautious about using a rising glide path. The idea comes from a paper by Pfau and Kitces:

Reducing Retirement Risk with a Rising Equity Glide-Path by Wade D. Pfau, Michael E. Kitces :: SSRN

AFAIK they are the only folks advocating this approach. I certainly wouldn't take this approach without fully understanding their work including their assumptions, methodology, data, and outcomes (not just failure probability but the entire distribution of returns). This approach is especially concerning given the relatively low expected returns for bonds.

I have not read this paper in depth, but some things you may want to consider:

- Most papers on w.r. are written using higher withdrawal rates (4-5%) as failures are more common then. But many (at least on this board) are choosing to cut risk by going with lower w.r (say 3% or less). If you're using a lower withdrawal rate, the conclusions in the paper may not apply.

- I wouldn't trust the results until it's been replicated using both historical simulation (e.g. Firecalc) and with MC methods. Academic papers are often filled with errors which escapes the notice of the reviewers. There's also a good chance that they have bugs in their experiments (this is widely true for academic code) which may impact their results

- Pfau is very fond of MC methods and I think used it in the paper. I'd double check his assumptions as he has done things like somewhat arbitrarily reducing US equity returns by 2% in his simulations.
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Old 06-11-2014, 09:30 AM   #72
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I'd be very skeptical and cautious about using a rising glide path. The idea comes from a paper by Pfau and Kitces:
What a gliding path offers fundamentally in my opinion is, in some cases, a better balance throughout time between increasing risk (stock crash) vs. reducing uncertainty (longevity, spend levels). Especially when you want to leave an inheritance.

It can make a lot of sense on an emotional and rational level.

Case in point: my mother is retired since 3 years or so. She will start receiving a small pension in three years, and is married. Her mother is still alive. We have the following uncertainties:
  • Pension. It will be certain in three years time. We have a rough idea now but the government keeps changing the rules.
  • Grandma may or may not start running up healthcare costs. As she gets older we get more certainty around that. For example, just last year her husband (my grandfather) died suddenly. He might also have ended up in the ER or nurse care for several years.
  • My sister may or may not get into money issues
  • Mother may or may not continue her current spending levels which are quite high. We'll know better in a few years as she ages how that evolves.
  • Her husband has a rather high pension, with survivor benefits. Since this is her (and his) second marriage they have separate finances right now.
  • Tolerance for risk. She never saw stocks drop 30% or more in her life since she was fully invested in her own business. We don't know how she will react when it does. Having a few positive years first OR a small amount in stocks eases the ability to "stay the course".
  • In all likelihood, not all grandchildren have been born yet. If there is a child born with special needs, she'll want to provide extra.

Which each passing year all these uncertainties become more certain, and therefore we can increase risk exposure if things go a certain way.

In these first retirement years for her, having a reduced downside risk is worth more than later on.
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Old 06-11-2014, 09:46 AM   #73
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It would be interesting to model a portfolio success rate based on a variable SWR factoring one's lifestyle.

How would you calculate success rates based on:

3% SWR for the first 10 years, 4% SWR for the following 10 years, then 3% SWR after that.

This might come about for someone retiring at age 47 and living a low budget lifestyle for 10 years, maybe working some part time job they find fun for a little extra cash, then at age 57 doing a bit more lavish lifestyle with a higher SWR, then having SS kick in at 67 and drop back to 3% SWR.
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Old 06-11-2014, 09:49 AM   #74
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I get many more failures with cFIREsim because of the treatment of bonds
I've noticed that too. cFIRE results give me less fun money than FireCalc...
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Old 06-11-2014, 09:55 AM   #75
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I am considering a glide path approach starting with a $3MM portfolio.
What do you think of filling up with 80% bonds AA and work on depleting that over the next 25 years. When hitting 75, out of bonds, the $600,000 would hopefully have compounded nicely oven 25 years even with a bear market to provide sufficient funds for another 25 years.
Is this a realistic approach? Still 14 years out for me, so just thinking about various options.
It depends on your expenses and other income, like Social Security, pensions or part time work. Many here have retirement lifestyles and annual expenses that require higher withdrawal rates than a very conservative portfolio could support and/or they are okay with a riskier portfolio in order to increase their net worth.

If your nest egg is large enough in relation to your spending and other retirement income, you may be able to have zero or a low allocation in stocks throughout retirement and still show a 100% success rate, plus leave an estate, in the retirement planners to a very old age.

In the Fidelity RIP, it shows what the worst year loss could have been for various types of AAs. You might play around with the various AAs, check out the worst year and think about your personal tolerance if that worst year happened in year one of your retirement.
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Old 06-11-2014, 11:16 AM   #76
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Originally Posted by molof View Post
I am considering a glide path approach starting with a $3MM portfolio.
What do you think of filling up with 80% bonds AA and work on depleting that over the next 25 years. When hitting 75, out of bonds, the $600,000 would hopefully have compounded nicely oven 25 years even with a bear market to provide sufficient funds for another 25 years.
Is this a realistic approach? Still 14 years out for me, so just thinking about various options.
Look at the link I posted above. Better to start with 35% equities. Lower than that may not give you the gains long term you need to beat inflation. Look at the survival statistics shown in the article.
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Old 06-11-2014, 11:19 AM   #77
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One more thought: If you followed your proposed 25 year plan you'd gradually increase your equity allocation from 20/80 to 100/0. How concerned will you be near the end of those 25 years - when you are 75 - about a big downturn in the stock market?
Glide path usually stops at 70% equities.
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Old 06-11-2014, 11:22 AM   #78
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Photoguy - IMO the rising glide path model is very complete and draws legit conclusions. I credit Kitces for that - he's very good about testing assumptions which is how this approach was modeled in the first place. I think it's the most innovative paper in years and I think it will stand up over time.

It's one more option.
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Old 06-11-2014, 12:36 PM   #79
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Glide path usually stops at 70% equities.
+1

However, that wasn't the plan the OP put forth.
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Old 06-11-2014, 12:47 PM   #80
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Look at the link I posted above. Better to start with 35% equities. Lower than that may not give you the gains long term you need to beat inflation. Look at the survival statistics shown in the article.
+1.


I have to rely on my equity performance to sustain RE. So, it will be more than 35% I will allocate to equity funds. Hence, what market does for the next 17 years (I will be 70 and start taking money out of SS) will define how I will live my life at RE (continue LBYM or Splurge/Travel to see the world/donate to good causes/etc.).

BTW, IMHO, the market acts like it's at or near the top and people are waiting for reason to take a breather. No volatility - a calm before a minor storm (i.e, a meaningful correction)?
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