Join Early Retirement Today
Reply
 
Thread Tools Search this Thread Display Modes
How sound is this strategy (vs relying on FIRECALC)?
Old 12-23-2013, 01:22 PM   #1
Thinks s/he gets paid by the post
robnplunder's Avatar
 
Join Date: Nov 2013
Location: Bay Area
Posts: 2,124
How sound is this strategy (vs relying on FIRECALC)?

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. )
__________________

__________________
Pura Vida
robnplunder 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 12-23-2013, 01:47 PM   #2
Give me a museum and I'll fill it. (Picasso)
Give me a forum ...
haha's Avatar
 
Join Date: Apr 2003
Location: Hooverville
Posts: 22,387
Quote:
Originally Posted by robnplunder View Post
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. )
It is a very aggressive idea. If you try it, be sure to report back in a few years.

Ha
__________________

__________________
"As a general rule, the more dangerous or inappropriate a conversation, the more interesting it is."-Scott Adams
haha is offline   Reply With Quote
Old 12-23-2013, 02:08 PM   #3
Thinks s/he gets paid by the post
 
Join Date: Nov 2011
Posts: 2,370
A 6% withdrawal rate is considered high. About that 8% from funds, "Past performance does not guarantee future returns."
__________________
GrayHare is online now   Reply With Quote
Old 12-23-2013, 02:11 PM   #4
Moderator
Alan's Avatar
 
Join Date: Jul 2005
Location: Eee Bah Gum
Posts: 21,144
Sounds a bit like VG Lifestrategy Moderate Growth fund which has a 60/40 mix by investing in 4 index funds, and has been around since 1995 with an 8% /year return over that period.
__________________
Retired in Jan, 2010 at 55, moved to England in May 2016
Now it's adventure before dementia
Alan is online now   Reply With Quote
Old 12-23-2013, 02:18 PM   #5
Give me a museum and I'll fill it. (Picasso) Give me a forum ...
REWahoo's Avatar
 
Join Date: Jun 2002
Location: Texas Hill Country
Posts: 42,139
These two phrases should have your financial survival alarm bells ringing:
Quote:
if their past performance holds true
Quote:
I am assuming we won't see such recession for another 10 years
If it doesn't work, what's plan B?
__________________
Numbers is hard

When I hit 70, it hit back

Retired in 2005 at age 58, no pension
REWahoo is offline   Reply With Quote
Old 12-23-2013, 02:24 PM   #6
Recycles dryer sheets
KM's Avatar
 
Join Date: Jan 2007
Posts: 392
I think a plan that requires an 8% real return every year has a low chance of succeeding long term. Another way to look at it is you are going with a 6%+ withdrawal rate. Again - that is pretty aggressive. Doesn't mean it cant be done - but it's not one I would ever feel comfortable with.

I guess it also depends on how long you are planning for (10 years? 30 years?), as well as how much leeway you have in your budget. Inflation can be a killer.
__________________
KM is offline   Reply With Quote
Old 12-23-2013, 02:36 PM   #7
Give me a museum and I'll fill it. (Picasso)
Give me a forum ...
brewer12345's Avatar
 
Join Date: Mar 2003
Posts: 16,391
Quote:
Originally Posted by REWahoo View Post
If it doesn't work, what's plan B?
Step 1: underpants.

Step 3: profit!

__________________
"There are three kinds of men. The one that learns by reading. The few who learn by observation. The rest have to pee on the electric fence for themselves."



- Will Rogers
brewer12345 is offline   Reply With Quote
Old 12-23-2013, 02:50 PM   #8
Thinks s/he gets paid by the post
Major Tom's Avatar
 
Join Date: Nov 2009
Location: SF East Bay
Posts: 3,130
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.
__________________
ER, for all intents and purposes. Part-time income <5% of annual expenditure.
Major Tom is offline   Reply With Quote
Old 12-23-2013, 02:59 PM   #9
Thinks s/he gets paid by the post
robnplunder's Avatar
 
Join Date: Nov 2013
Location: Bay Area
Posts: 2,124
Quote:
Originally Posted by REWahoo View Post
If it doesn't work, what's plan B?
I'd assume most folks here will have SS or pension, and equity in house. Combine that with reduction in $80k expense to something more sustainable.
__________________
Pura Vida
robnplunder is offline   Reply With Quote
Old 12-23-2013, 03:00 PM   #10
Give me a museum and I'll fill it. (Picasso)
Give me a forum ...
NW-Bound's Avatar
 
Join Date: Jul 2008
Posts: 19,442
I forgot to say that as an active investor who picks stocks, I do try to beat the market, both for long-term returns as well as reduced volatility.

Still, I look at the market as the baseline. If the market, read the economy, can only go up 3-4% a year, it is going to be impossible to make 8% a year, year after year. Not unless you put it all in one or two hot stocks, and know to switch out when these stocks grow cold. We all know how putting your money in just a couple of stocks may work out in the other direction when things go wrong. Enron? Global Crossing? MCI-Worldcom? Nortel?
__________________
"Old age is the most unexpected of all things that can happen to a man" -- Leon Trotsky
NW-Bound is offline   Reply With Quote
Old 12-23-2013, 03:02 PM   #11
Thinks s/he gets paid by the post
Katsmeow's Avatar
 
Join Date: Jul 2009
Posts: 3,399
I don't see a basis for the assumptions you are making. It is possible that the assumptions will hold true. But I think that what you are doing is not all that different from a 6% withdrawal rate which doesn't have the kind of success rate that most people would be likely to want to see.
__________________
Katsmeow is offline   Reply With Quote
Old 12-23-2013, 03:03 PM   #12
Thinks s/he gets paid by the post
 
Join Date: Oct 2012
Location: Colorado Mountains
Posts: 2,145
I ran Vanguard's Nest Egg Calculator using 1,300,000 split 46/31/23 stocks, bonds, cash. 30 year period, and $80,000 per year spending. Probability of success was 42%. When I run this calculator with my own numbers, the success rate is 93% and that assumes withdrawals at twice the amount I actually plan to take. I would say you would be in a high risk area. Your results would be a big if, but I think the if has more to do with the first few years of stock market performance than the overall performance of the selected funds. How lucky do you feel?
__________________
Hermit is offline   Reply With Quote
Old 12-23-2013, 03:15 PM   #13
Recycles dryer sheets
KM's Avatar
 
Join Date: Jan 2007
Posts: 392
Quote:
Originally Posted by robnplunder View Post
I'd assume most folks here will have SS or pension, and equity in house. Combine that with reduction in $80k expense to something more sustainable.
If you are also assuming a pension, SS, and/or significant house equity - that is a totally different scenario.....

I guess I am now confused as to what you were asking in your opening post.
__________________
KM is offline   Reply With Quote
Old 12-23-2013, 03:33 PM   #14
Thinks s/he gets paid by the post
 
Join Date: Oct 2006
Posts: 3,820
Quote:
Originally Posted by robnplunder View Post
.... I get 8% total return from the portfolio if their past performance holds true in the long run.
....

What do you think about this strategy?

The strategy won't work well if we go through another 2007/8 recession.
Quote:
Originally Posted by robnplunder View Post
[I] have SS or pension, and equity in house. Combine that with reduction in $80k expense to something more sustainable.
This is a good time to talk about "target" vs. "basic" spending.

I wouldn't be comfortable with that strategy if I felt that I need SS + $80,000. I'd want to be able to weather another 1007/8. Remember, most people didn't see it coming.

OTOH, if I only need SS, and I'm perfectly happy living on just SS in the unlikely case that returns are really poor, then your strategy makes sense. Why deny myself the things that $80,000 can buy today, just to protect against the unlikely case that I'm just covering my needs in my later years? In other words, if the $1.3 million is "fun money" anyway, why not spend it sooner?

---

That said, I've got a couple practical issues. First, is the 8% real before or after fund expenses?

Second, you don't really have a "strategy" until you've written down (with numbers) how you will know that
1) your fund performance is too poor to take regular withdrawals, and you need to live on your cash,
2) your fund performance has recovered to the point where you can rebuild your cash
3) your fund performance is so poor that you have to reduce spending, and
4) how much you're going to reduce spending in (3)
__________________
Independent is offline   Reply With Quote
Old 12-23-2013, 03:35 PM   #15
Thinks s/he gets paid by the post
robnplunder's Avatar
 
Join Date: Nov 2013
Location: Bay Area
Posts: 2,124
Quote:
Originally Posted by KM View Post
If you are also assuming a pension, SS, and/or significant house equity - that is a totally different scenario.....

I guess I am now confused as to what you were asking in your opening post.
One thing (there are others) I was interested in is how others feel about stock/bond mutual fund performance over the last 10 years even with the recession. I took a stock of my mutual funds and they collectively performed at 8.2% for the last 10 years, even with big recession in the middle.

Then, other threads about "asset" suggest that many of us have increased their asset significantly after retirement, often with WR of 4% or less. It seems a mixed portfolio will return more than 4% over the long run even with inflation. I was wondering if 4% WR is on a too conservative side given this.
__________________
Pura Vida
robnplunder is offline   Reply With Quote
Old 12-23-2013, 03:42 PM   #16
Thinks s/he gets paid by the post
robnplunder's Avatar
 
Join Date: Nov 2013
Location: Bay Area
Posts: 2,124
Quote:
Originally Posted by Independent View Post
This is a good time to talk about "target" vs. "basic" spending.

I wouldn't be comfortable with that strategy if I felt that I need SS + $80,000. I'd want to be able to weather another 1007/8. Remember, most people didn't see it coming.

OTOH, if I only need SS, and I'm perfectly happy living on just SS in the unlikely case that returns are really poor, then your strategy makes sense. Why deny myself the things that $80,000 can buy today, just to protect against the unlikely case that I'm just covering my needs in my later years? In other words, if the $1.3 million is "fun money" anyway, why not spend it sooner?

---

That said, I've got a couple practical issues. First, is the 8% real before or after fund expenses?

Second, you don't really have a "strategy" until you've written down (with numbers) how you will know that
1) your fund performance is too poor to take regular withdrawals, and you need to live on your cash,
2) your fund performance has recovered to the point where you can rebuild your cash
3) your fund performance is so poor that you have to reduce spending, and
4) how much you're going to reduce spending in (3)

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.
__________________
Pura Vida
robnplunder is offline   Reply With Quote
Old 12-23-2013, 03:48 PM   #17
Give me a museum and I'll fill it. (Picasso)
Give me a forum ...
audreyh1's Avatar
 
Join Date: Jan 2006
Location: Rio Grande Valley
Posts: 16,528
Quote:
Originally Posted by robnplunder View Post
Then, other threads about "asset" suggest that many of us have increased their asset significantly after retirement, often with WR of 4% or less. It seems a mixed portfolio will return more than 4% over the long run even with inflation. I was wondering if 4% WR is on a too conservative side given this.
For a portfolio to support 4% withdrawal and still break even in real terms over a long period of time, your portfolio has to AVERAGE 7.29% a year if inflation is 3%! Not such a conservative assumption at all if you assume a 50/50 allocation.

Now the 4% withdrawal strategy assumes you can draw down the portfolio, so the required return is quite a bit lower to not fail.

STILL if the goal is to "keep up" - break even in inflation terms, you require some pretty good market performance.
__________________
Well, I thought I was retired. But it seems that now I'm working as a travel agent instead!
audreyh1 is online now   Reply With Quote
Old 12-23-2013, 03:58 PM   #18
Thinks s/he gets paid by the post
robnplunder's Avatar
 
Join Date: Nov 2013
Location: Bay Area
Posts: 2,124
Quote:
Originally Posted by Alan View Post
Sounds a bit like VG Lifestrategy Moderate Growth fund which has a 60/40 mix by investing in 4 index funds, and has been around since 1995 with an 8% /year return over that period.
18 years of 8% return ... so it can be done, especially, if the portfolio starts out with 3.5 years of good returns while depleting $300k set aside for spending buffer.
__________________
Pura Vida
robnplunder is offline   Reply With Quote
Old 12-23-2013, 04:18 PM   #19
Thinks s/he gets paid by the post
robnplunder's Avatar
 
Join Date: Nov 2013
Location: Bay Area
Posts: 2,124
Quote:
Originally Posted by haha View Post
It is a very aggressive idea. If you try it, be sure to report back in a few years.

Ha
Nah, I won't try it .

However, I am thinking it may make a good splurging source while living on SS, pension, and other savings. Perhaps, setting aside $500k for funding extra things in RE ($40k/year at 8% return) may not be bad. On a good year, there will be more to splurge. On a bad year, not so much. Any leftover can go to DS (or donation of your choice).
__________________
Pura Vida
robnplunder is offline   Reply With Quote
Old 12-23-2013, 04:58 PM   #20
Give me a museum and I'll fill it. (Picasso)
Give me a forum ...
youbet's Avatar
 
Join Date: Mar 2005
Location: Chicago
Posts: 9,965
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.......
__________________

__________________
"I wasn't born blue blood. I was born blue-collar." John Wort Hannam
youbet 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 02:09 PM.
 
Powered by vBulletin® Version 3.8.8 Beta 1
Copyright ©2000 - 2017, vBulletin Solutions, Inc.