How sound is this strategy (vs relying on FIRECALC)?

[brewer12345]

Hey Brewer, Still retiring 12/31?

Currently on vacation until the end of the year. When I go back on 1/2 I will be giving 2 weeks' notice.

 

[daylatedollarshort]

Yes, what everyone else has said.

If I had a $1.3M portfolio, I'd be trying to figure out ways I could live on $30-40K/year in order to keep the withdrawals down so I could sleep comfortably, knowing I had a strategy that stood a great chance of surviving for the long term.

+1.

 

[galeno]

If the OP follows his plan of a 6% AWR he will go broke in less than 18 years assuming that his portfolio expenses and taxes equal 1% of port.

 

[Independent]

8% is real based on my mutual funds. Of course, one needs to pay long term capital gain tax when withdrawing.

The hypothetical situation had 3.5 years of cash to spend. So, one has 3.5 years of mutual fund returns (if any) to account for.

I think you're saying that the 8% is net after expenses, but not after taxes.

Note that I used "real" to mean "after inflation". You may be thinking "actual history".

I'm not sure how the second paragraph relates to the other issues.

 

[NW-Bound]

I looked a bit more at this VSMGX, and it appears to be reasonable for an indexing investor who wants a balanced MF with some foreign stock/bond exposure. It is a fund of funds, and invests in 4 index funds with roughly the following mixture at the present time.

Total US stock: 42%
Total Foreign stock: 18%
Total US bond: 32%
Total Foreign bond: 8%.

As a passive balanced fund, how does it compare to active balanced funds like Wellington with the same 60% stock AA, albeit with only 10% of that being foreign stocks?

I looked up Morningstar data, and computed the return from Dec 1994 to Dec 1999 of Wellington as 23.1%/yr, and from Dec 1999 to Dec 2013 as 5.78%. These numbers were better than VSMGX at 17.8% and 4.78% respectively. All returns are nominal, meaning not inflation adjusted.

So, while I hold only very little Wellington, I have to ask if the performance numbers above prove the skills of its MF manager, or do people still call it luck?

 

[Alan]

So, while I hold only very little Wellington, I have to ask if the performance numbers above prove the skills of its MF manager, or do people still call it luck?

I believe Wellington is managed by a team, and has a track record going back to 1929 (8.25% over the last 84 years), so no hot shot manager who might leave.

Founded in 1929, Wellington™ Fund is Vanguard’s oldest mutual fund and the nation’s oldest balanced fund. It offers exposure to stocks (about two-thirds of the portfolio) and bonds (one-third). Another key attribute is broad diversification—the fund invests in about 100 stocks and 500 bonds across all economic sectors. This is important because one or two holdings should not have a sizeable impact on the fund. Investors with a long-term time horizon who want growth and are willing to accept stock market volatility may wish to consider this as a core holding in their portfolio.

 

[REWahoo]

I believe Wellington is managed by a team, and has a track record going back to 1929 (8.25% over the last 84 years), so no hot shot manager who might leave.

+1

 

[brewer12345]

I looked a bit more at this VSMGX, and it appears to be reasonable for an indexing investor who wants a balanced MF with some foreign stock/bond exposure. It is a fund of funds, and invests in 4 index funds with roughly the following mixture at the present time.

Total US stock: 42%
Total Foreign stock: 18%
Total US bond: 32%
Total Foreign bond: 8%.

As a passive balanced fund, how does it compare to active balanced funds like Wellington with the same 60% stock AA, albeit with only 10% of that being foreign stocks?

I looked up Morningstar data, and computed the return from Dec 1994 to Dec 1999 of Wellington as 23.1%/yr, and from Dec 1999 to Dec 2013 as 5.78%. These numbers were better than VSMGX at 17.8% and 4.78% respectively. All returns are nominal, meaning not inflation adjusted.

So, while I hold only very little Wellington, I have to ask if the performance numbers above prove the skills of its MF manager, or do people still call it luck?

I have met a few of the Wellington people professionally an I would say that they uniformly struck me as (conservatively) among the sharpest 25% of their profession. Could it be luck? Perhaps. I am inclined to think they have a good process that results in modestly above market returns over time.

 

[NW-Bound]

The above question of mine was a rhetorical one, as market efficiency theorists would insist that any outperformance is due to luck. They would argue that if any fund beat the market, then people would flock to the fund and it would end up being the entire market and could no longer outperform it.

Well, that has not happened with Wellington or Wellesley. Why? It's because they do not stomp the market every year, and I am sure that they do not try to. For example, this year both Wellington and Wellesley did not do well relative to the market or their peers because of their bond holdings. People who bought into these funds within the last year or two expecting outperformance will be disappointed, and may leave.

Could it be luck? Perhaps. I am inclined to think they have a good process that results in modestly above market returns over time.

Yes, the keys are "modest", and "over time". Swinging for the fence like many MF managers back in 2000 backfired badly.

 

[Bikerdude]

Currently on vacation until the end of the year. When I go back on 1/2 I will be giving 2 weeks' notice.

 

[robnplunder]

I think OP was planning on withdrawing an initial $80k and not adjusting for inflation going forward. In that case, it'll probably work, at least in terms of portfolio survivability. After 20 - 25 years of inflation, there may be some lifestyle adjustments to make however.......

True. Assumption there was that as we get older, we spend less. So, I didn't bother to make the adjustment. For most us, pension and/or SS kicks in at some point.

 

[robnplunder]

I think you're saying that the 8% is net after expenses, but not after taxes.

Note that I used "real" to mean "after inflation". You may be thinking "actual history".

I'm not sure how the second paragraph relates to the other issues.

Yes, 8% net after expense but not after taxes.

$300k is set aside for the 1st 3.5 years of expense at $80k/year. This gives the $1M portfolio a 3.5 year head start. Anyway, it is an aggressive strategy but there are many mutual funds which outperformed 8%/year for many years.

 

[audreyh1]

Currently on vacation until the end of the year. When I go back on 1/2 I will be giving 2 weeks' notice.

How exciting for you. Finally!

 

[Dawg52]

Currently on vacation until the end of the year. When I go back on 1/2 I will be giving 2 weeks' notice.

Congrats. 2014 s/b a fun year.

 

[brewer12345]

Congrats. 2014 s/b a fun year.

Thanks. For now I am just pretending to be on vacation. Still have to get through the messy business of quitting and making my exit.

 

[NW-Bound]

Eh, what are you going to do all day, Brewer? Other than brewing and harvesting chicken off the limb?

To other posters who look for nice, nice MFs with high returns, I just remember now that one needs to be leery of touted 10-yr performance by mutual funds. For 2003 was a trough year in the market, so counting from there would show a really nice performance to the present time.

I just looked back at my own performance for Dec 2003 - Dec 2013 period. I clocked a 9.48% annualized return. Is that not great or what?

How much did I draw or add to my stash, I am not sure as I did not keep really good records. However, my wife left work in 2006. I stopped work 20 months ago, and only worked part-time since 2003, albeit with a good paying consulting job. However, our expenses were also high. We paid off our home mortgage, bought a 2nd home, bought a few vehicles (new and used), paid for the kids' college education, took 2 or 3 international and domestic travels a year. So, I do not think we were able to save much during that period.

So, how did I do it? I cannot reveal all of my secrets, but one of them was that from 2000 to 2003, my portfolio dropped 40% due to tech stocks. So, if I counted from 2000 high, my performance would be less impressive.

 

[ERD50]

True. Assumption there was that as we get older, we spend less. So, I didn't bother to make the adjustment. For most us, pension and/or SS kicks in at some point.

If you are not accounting for inflation, and you assume SS/pension later, then your OP is totally misleading and the answers given are not relevant.

You need to look at the entire picture, and even then it's fuzzy w/o a certified Crystal Ball.

But for reference, 8% with no inflation adjustment only had a 43% success rate for 30 years (20% with infl).

-ERD50

 

[karluk]

If you are not accounting for inflation, and you assume SS/pension later, then your OP is totally misleading and the answers given are not relevant.

You need to look at the entire picture, and even then it's fuzzy w/o a certified Crystal Ball.

But for reference, 8% with no inflation adjustment only had a 43% success rate for 30 years (20% with infl).

-ERD50

As several other posters have pointed out, the 8% withdrawal rate is really only a little over 6% if one includes the $300k cash cushion as part of the portfolio. I'm too lazy to run FireCalc to find out for sure, but I suspect that 6% without inflation adjustments has a similar success rate to 4% with inflation adjustments. With that in mind, OP's proposal looks less like a hyper-aggressive withdrawal strategy and more like a method to front load withdrawals in the early stages of retirement, when good health may allow one to enjoy the money more.

 

[Animorph]

$80k withdrawals not adjusted for inflation for 30 years from a $1.3M portfolio gives a 92% success rate with the default FIRECalc settings (75% equities).

That's not a bad result.

 

[NW-Bound]

Perhaps not adjusting for inflation is a simple way to implement Bernanke's WR method. I have always thought that I will spend less as I get older.

Up my WR to 7% next year instead of 3.5%.

The problem is what do I spend that extra money on?

 

[Animorph]

Perhaps not adjusting for inflation is a simple way to implement Bernanke's WR method. I have always thought that I will spend less as I get older.

Up my WR to 7% next year instead of 3.5%.

The problem is what do I spend that extra money on?

You have to spend it on stuff you don't need since your real income will decrease in the future.

 

[NW-Bound]

Arghh... I meant to write Bernicke and put down Bernanke. All this QE and inflation talk got to me.

I have begun to see that I already accumulated a lot of things that I did not really need. I only need a roof over my head, and two meals a day, things that I already have.

Anyway, one should not downplay the pleasure of seeing one's Quicken bottom line inching up. Money can bring happiness even when one does not spend it. Some people do not understand, but I think plenty of people on this forum can identify with this.

 

[Huston55]

Hypothetically, let's start with $1M mutual fund portfolio, 40/60 - stock/bond split. I pick 5 well proven mutual funds with at least 10 year performance history. Based on their 10 year performance, I get 8% total return from the portfolio if their past performance holds true in the long run. I will re-balance the portfolio at the end of each year to keep 40/60 split, and 8% return.

I have $300k cash to withdraw $80k/year. I will replenish this fund with $$$ gained from the said $1M portfolio. $300k will get me going for at least 3.5 years even if the 40/60 portfolio does not do well for a few years.

The idea is to live on $80k/year with $1.3M in asset (your expense/asset amount will vary).

What do you think about this strategy? The strategy won't work well if we go through another 2007/8 recession. So, I am assuming we won't see such recession for another 10 years if history is on our side.

( Pardon me if this was all hashed out before. I could not easily find similar post. )

As several other posters have pointed out, the 8% withdrawal rate is really only a little over 6% if one includes the $300k cash cushion as part of the portfolio. I'm too lazy to run FireCalc to find out for sure, but I suspect that 6% without inflation adjustments has a similar success rate to 4% with inflation adjustments. With that in mind, OP's proposal looks less like a hyper-aggressive withdrawal strategy and more like a method to front load withdrawals in the early stages of retirement, when good health may allow one to enjoy the money more.

Rob-

If front-end loading withdrawals and having a cash cushion to enable it is your goal, try a 'guardrails' approach like Guyton-Klinger.

http://cornerstonewealthadvisors.com/files/08-06_WebsiteArticle.pdf

A 65/25/10 AA would allow you to start with a 5.8% WDR and have a 99% success rate, as long as you're willing to follow the rules, which your cash cushion would help you do. Your AA, as stated, is a little different but, the same mechanisms apply.

 

[robnplunder]

Rob-

If front-end loading withdrawals and having a cash cushion to enable it is your goal, try a 'guardrails' approach like Guyton-Klinger.

http://cornerstonewealthadvisors.com/files/08-06_WebsiteArticle.pdf

A 65/25/10 AA would allow you to start with a 5.8% WDR and have a 99% success rate, as long as you're willing to follow the rules, which your cash cushion would help you do. Your AA, as stated, is a little different but, the same mechanisms apply.

It's a quite a reading but I get the gist of it. At the end of the day, I would be very flexible with WR when I RE. I want to front load it to some extent but if the market does not cooperate, I will adjust.

I have been conservative with RE planning and want to explore other less conservative alternatives. I just don't want to be too conservative with WR and end up with more $$$$ later in my retirement when I can't get around well.

 

[daylatedollarshort]

Money can bring happiness even when one does not spend it. Some people do not understand, but I think plenty of people on this forum can identify with this.

I think of it as preferring to buy time freedom (from not having to work unless I want to) & financial security vs. depreciating consumer goods or status items.