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

[robnplunder]

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. )

 

[haha]

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

 

[GrayHare]

A 6% withdrawal rate is considered high. About that 8% from funds, "Past performance does not guarantee future returns."

 

[Alan]

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.

 

[REWahoo]

These two phrases should have your financial survival alarm bells ringing:

if their past performance holds true

I am assuming we won't see such recession for another 10 years

If it doesn't work, what's plan B?

 

[KM]

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.

 

[brewer12345]

If it doesn't work, what's plan B?

Step 1: underpants.

Step 3: profit!

South Park Underpants Gnomes Profit Plan - YouTube

 

[Major Tom]

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.

 

[robnplunder]

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.

 

[NW-Bound]

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?

 

[Katsmeow]

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.

 

[Hermit]

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?

 

[KM]

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.

 

[Independent]

.... 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.

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)

 

[robnplunder]

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.

 

[robnplunder]

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.

 

[audreyh1]

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.

 

[robnplunder]

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.

 

[robnplunder]

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).

 

[youbet]

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.......

 

[NW-Bound]

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.

This caught my attention, so of course I had to check this fund out as I never heard of it.

According to Morningstar, a $10K invested in this VSMGX fund on 12/22/1994 would become $43.748K on 12/22/2013. A factor of 4.37X in 19 years works out to an annualized gain of 8.08%. Very impressive.

But wait. The $10K would have become $22.743K on 12/22/1999. This factor of 2.27X in 5 years works out to 17.8% annualized gain.

And then, from 2000 until now, the fund appreciated only 1.9X in 14 years for an annualized gain of 4.78%, and this is before inflation adjustment.

So, what happened was that the 8% "long-term" performance included the go-go years of the 1990-2000 decade. The more recent performance is not so impressive, and then we need to correct for inflation.

Inflation from Jan 2000 till Nov 2013 is 38%. Apply that to our annualized gain of 4.78% above, and we end up with a whopping 2.4% per year.

I rest my case.

 

[Alan]

This caught my attention, so of course I had to check this fund out as I never heard of it.

According to Morningstar, a $10K invested in this VSMGX fund on 12/22/1994 would become $43.748K on 12/22/2013. A factor of 4.37X in 19 years works out to an annualized gain of 8.08%. Very impressive.

But wait. The $10K would have become $22.743K on 12/22/1999. This factor of 2.27X in 5 years works out to 17.8% annualized gain.

And then, from 2000 until now, the fund appreciated only 1.9X in 14 years for an annualized gain of 4.78%, and this is before inflation adjustment.

So, what happened was that the 8% "long-term" performance included the go-go years of the 1990-2000 decade. The more recent performance is not so impressive, and then we need to correct for inflation.

Inflation from Jan 2000 till Nov 2013 is 38%. Apply that to our annualized gain of 4.78% above, and we end up with a whopping 2.4% per year.

I rest my case.

Nice work, you have proven to the OP that timing is everything, and that past history does not indicate future success. Maybe he should do similar analysis on the past histories of the funds he is looking at to determine their likely success.

I chose the VG fund above because it is a similar style to what he was suggesting in that it is 60/40 and simply is comprised of a collection of a few other funds. It was pure chance that it had the exact return he was looking for since it is a very young fund compared to the likes of Wellington and Wellesley.

 

[brewer12345]

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.

Of course, this is exactly what we tie ourselves up in knots on here. The 4% SWR is incredibly conservative if you can avoid the bottom 10% or so of historical outcomes. Only problem is that we don't know where we will fall on the scale for a retiree starting out now and depending on the path of returns in the next 30 or 40 years.

 

[Dawg52]

Of course, this is exactly what we tie ourselves up in knots on here. The 4% SWR is incredibly conservative if you can avoid the bottom 10% or so of historical outcomes. Only problem is that we don't know where we will fall on the scale for a retiree starting out now and depending on the path of returns in the next 30 or 40 years.

Hey Brewer, Still retiring 12/31?

 

[rbmrtn]

So, what happened was that the 8% "long-term" performance included the go-go years of the 1990-2000 decade. The more recent performance is not so impressive, and then we need to correct for inflation.

Yes, I was looking at the same thing with the S&P 500. Up about 80% 2003 - 2013, but most of that performance has come in the last 3 years. About 15% return 12/03 to 12/07. So beware of averages they can hide a lot of details. Also this doesn't take into account the withdrawals during the flat period.

Here's a S&P calculator that shows return for a specified time period

S&P 500 Return Calculator