Lower your returns Now!

[unclemick]

Once in retirement - your need to lower your portfolio return so it will last as long as you do.

FundAdvice.com - 'Retirees: Lower returns = More money' - by Paul Merriman. The gist being methods to damp standard deviation.

Thought I'd start a new thread since long posts honk up my old webtv and I can't post to the Yahoo one.

This falls into general area of how to get the money out after ER - Norwegian widows, dividends, SWR, etc. heh, heh.

 

[Cut-Throat]

Exactly Unclemick !

While I have not examined all of the corners of this example, it basically describes why someone should be diversified. The numbers are a bit strange as they start out with a 6% withdrawal amount. And only increased that anount by 3.5%. May have been more realistic to start out with a 4% withdrawal and increased 5 or 6% which was inflation at that time.

At any rate, not being 100% in stocks does lower your return in the very long run! But also lowers your risk.

But when you start withdrawing money, it's different. Stocks get more risky with time, because your lifespan is finite! This is precisely why no one should be 100% in Stocks or Bonds for that matter!

And the older you get the less you should be in stocks! If I ever get to the point where 100% TIPS will support my withdrawal amount, I'll be 100% in TIPS. However with a possible 45 years to live, stocks will make up at least 50% of my portfoilo at the present time. And yes I have lowered my return in favor of less volaltility.

 

[cute fuzzy bunny]

I've mentioned a few times about big down years coupled with a high withdrawal number being a potential portfolio crippler. This article bears that out.

By reducing debt and the larger withdrawal amounts required, and also reducing my portfolio risk/deviation, I think I'm lined up with this philosophy. By historical measurements, I'm unlikely to have a large down year (more than 10%) and very unlikely to have two in a row. My dividend rates almost cover my ideal withdrawal rate.

So while I wont shoot the moon with a high stock port, gambling that the extra allocation to stocks will make me a multi millionaire (again), I also likely wont ever run out of money and will leave behind at least a little something to someone.

Currently at 55% bonds, half of which are short term and the other half are intermediate, and 45% stocks, most of which are large and small cap value.

On the 100% tips ports, what are the concerns that the CPI is understating inflation?

 

[John Galt]

Two (2) years from SS, if you boil it down to its
absolute core, rounded to the closest 10K, I am at
50% bonds (mostly corporate - some junk) and 50% real estate.
This ignores a bunch of stuff, but really is pretty much the picture here. Very comfortable with this.

John Galt

 

[Cut-Throat]

On the 100% tips ports, what are the concerns that the CPI is understating inflation?

TH,

I'm not concerned with this at all.

I am also not concerned with Social Security. If we can find a half a trillion dollars for the war in Iraq, that half the population was basically against, we sure will find the funds for SS.

The older I get the real worries are not financial, but real life issues like health issues (not how to pay for it but cancer etc.), losing your spouse etc. etc.

 

[Jarhead*]

TH:
Re: being a multi-millionaire again.

As long as you have most of your front teeth, less than 5 years to pay off your single wide, that comes with less than 5 dogs under the front porch, you"ll be considered a man of means in the North State

 

[John Galt]

I agree with Cut-Throat. For me, the financial worries
fade as I age, to be replaced by other issues. I have
not decided which worries I prefer.............

John Galt

 

[sgeeeee]

I agree with Cut-Throat.  For me, the financial worries
fade as I age, to be replaced by other issues.  I have
not decided which worries I prefer.............

I can't find anything else to worry about, so I worry about dryer sheets whenever I get the chance. Also, several recent posts have caused me to worry that I'm feeding my dog sub-optimal dog food.

 

[cute fuzzy bunny]

TH:
Re: being a multi-millionaire again.

As long as you have most of your front teeth, less than 5 years to pay off your single wide, that comes with less than 5 dogs under the front porch, you"ll be considered a man of means in the North State

Thats the thing...i'm practically living high on the hog here.

 

[BigMoneyJim]

Before Retirement? Re: Lower your returns Now!

As I've mentioned before, the past few months I've been pondering why I would want more stocks pre-retirement than during retirement. I think the old idea was to be more heavy in stocks to maximize growth before retirement (during accumulation/active saving) and then preserve the wealth after retiring (during withrdrawals).

On one hand this makes sense, but on the other hand it introduces a market timing issue: When do I go more conservative? What if I had planned to retire in early 2002 and stayed more heavily in stocks until then? Ouch.

I diversified into bonds a bit, but I'm still fairly stock-heavy at 80/20. I'm resisting jumping to 60/40 now because it's too drastic a change from nearly 100/0 and I think it would be an emotional decision for fear of the current market.

I hope I'm not steering the thread astray, but I keep thinking what's good for the goose (retiree) is probably good for the gander (young dreamer) if I assume I can't know when to make the switch from a aggressive portfolio to a retiree portfolio.

 

[sgeeeee]

Re: Before Retirement? Lower your returns Now!

As I've mentioned before, the past few months I've been pondering why I would want more stocks pre-retirement than during retirement. I think the old idea was to be more heavy in stocks to maximize growth before retirement (during accumulation/active saving) and then preserve the wealth after retiring (during withrdrawals).

On one hand this makes sense, but on the other hand it introduces a market timing issue: When do I go more conservative? What if I had planned to retire in early 2002 and stayed more heavily in stocks until then? Ouch.

I diversified into bonds a bit, but I'm still fairly stock-heavy at 80/20. I'm resisting jumping to 60/40 now because it's too drastic a change from nearly 100/0 and I think it would be an emotional decision for fear of the current market.

I hope I'm not steering the thread astray, but I keep thinking what's good for the goose (retiree) is probably good for the gander (young dreamer) if I assume I can't know when to make the switch from a aggressive portfolio to a retiree portfolio.

Hi BMJ,

If I remember correctly, when you look at 30 year periods throughout history, stocks have outperformed bonds 100% of the time. So if your time horizon is greater than 30 years, you can keep most of your money in stocks with a high probability of being better off. The same isn't true for 10 year periods. There are 10 year periods when bonds did better. So as you get into your late 60s or older (say within 10 or 20 years of your life expectancy), it makes sense to reduce your stock exposure so you reduce the risk of a long bear market.

For people who are retiring at age 65, it makes sense to begin to reduce stock exposure when they retire. But if you are retiring much earlier, you might want to keep with your pre-retirement allocation till you get a little older.

 

[charlie]

BMJ,

You might want to check out Vanguard's Target
Retirement series. These funds change the
stock/bond mix gradually over the years. I am
70 and use Target Retirement 2025 which has
a 60/40 mix. It will be about 40-45% in stock
by 2025. I probably won't be around then but
who knows?

Cheers,

Charlie

 

[Buzz Schranz]

Chuck-Lyn - Wow! You certainly like equities. Looking at the VG Target Retirement 2005 (which I assume would be for a 64 year old), the holdings are 65% bonds and only 35% stocks. Maybe VG is being a bit conservative, but, then again, they have access to a lot more information than we do....

Buzz

 

[charlie]

Hey Buzz,

Yes, I am a littlle more agressive with equities than
most at age 70. However, I am comfortable with
a 60/40 split. I am hoping for a compound annual
return of 8+% and need about 7% to support a
4% SWR with 3% inflation. That takes about a 60/40
split to last 30 years according to FIREcalc. Ironicallly,
if my stash were bigger, I would probably be more
conservative.

Cheers,

Charlie

 

[unclemick]

Charlie

What are your defense options if your 60/40 portfolio in the course of thirty years takes a Merriman article type dip. I calculate a -22% 73-74 type dip - My defense will be dividends plus 1% which puts me in the 'variable' SWR camp.

 

[hankjoy]

Uncle Mick: what if your dividends were 8%? Then your dividend plus 1% variable SWR would look pretty comfortable. In fact if you retired in say "73 with an SBI portfolio you could just live on the dividends alone and not deplete your portfolio even though the market dropped tremendously. What are your thoughts?
HankJoy

 

[Cut-Throat]

Hankjoy,

My thoughts -

If it was easy to get 8%, the Banks and Mortage companies would not be lining up to lend money at 4%. Would they?

Lots of things come to mind, to good to be true is one of them.

Another one - is more money has been lost chasing yield than at the end of a gun barrel.

 

[unclemick]

Hankjoy

I think(? with what I 'know'? now) should we repeat a 73-74 meltdown capping dividends at 4% and reinvesting the rest would be my first thought. Interestingly, I believe the 70's were one of the three best decades for earnings growth - even though stocks were highly 'unpopular'(as reflected by P/E multiples).

 

[charlie]

unclemick,

My first line of defense would be to pray a lot!

The bond portion of my IRA is in short term corporate.
It holds enough cash to support 6 years of expenses.
If we hit a bump like 2000-2002 I will just keep rebalancing and turn up the prayer volume.

My home equity loan Will be paid off in 4.5 years
and I will sell my small business by then or sooner.
This will allow me to reduce the withdrawal from
my IRA substantially. I may receive a modest
inheritance someday, but my Mom is a spry 88
years and will likely outlast me.

Lyn and I live comfortably now and could reduce
expenses considerably if necessary. Finally, we
could do a reverse mortgage on the home if
all else fails.

I suppose we could take in borders and start
eating dog food (TH, what brand do you suggest?)

Cheers,

Charlie

 

[unclemick]

I.E. - in a major meltdown - provided dividends held up - I would violate my own rule based on Bernstein et al - once in a while the market goes bonkers and then you wait till the madness passes.

 

[db]

I am a littlle more agressive with equities than
most at age 70.  However, I am comfortable with
a 60/40 split.  Ironicallly,
if my stash were bigger, I would probably be more
conservative.  

Charlie,

I too follow a 60/40 split for our portfolio as well as that of my 91 year old mother, but my rationale is different. It seems to me that you determine how many years of future income you need in fixed income securites to be comfortable, and let that guide your asset allocation. In my mother's case, the 40% in fixed income securities is more than 15 years of her annual draw, so I feel justified in allocating the other 60% to equities.

db

 

[John Galt]

Hello db! Now there is an explanation for having
a 60/40 equities/fixed income allocation that even I would not dispute. Pretty safe planning, unless you are
counting on your mother's estate funding your ER, a
questionable approach IMHO.

John Galt

 

[db]

 Pretty safe planning, unless you are counting on your mother's estate funding your ER, a
questionable approach IMHO.

John,

My wife and I have been retired for more than 10 years, and, except for the RMD from an IRA I inherited from my dad, we have not drawn from our IRAs. I am the sole heir of my mother's estate. She draws a bit under 3% annually for her living expenses.

db