The various withdrawal strategies, such as gummy's 'sensible withdrawals' (less plus a percentage of the extras) got me thinking a little more about the payout period reset (POPR) mentioned earlier on this site. Also the discussions of optimal asset allocations of 60% tips were a little worrysome to me. The high tip allocation gives up something in future growth for current income, but there is no quantification of the tradeoff. In particular, I am thinking about people such as me, who can live on the amount firecalc predicts, but would be happy with a few more luxury dollars.
For simple, straightforward runs, the optimal stock/tip ration has been shown to be 40/60 by other studies. I am looking at a POPR scheme where a different ratio would be used for the early years to allow for possible portfolio growth, then switching to the optimal after 5 years.
The case I ran is for the default $650k portfolio, with stock/tips@2% in various percentages, default expense ratio of .18, and CPI. First I ran a 30yr run for the above scenerio with stock/tips ratios from 0 to 100 in 10% increments, and asked for the 95% point. I noted the withdrawal amount and rate. Then I did a 5yr run with the withdrawal amount plugged in and noted the average portfolio balance after 5 years. Finally I did a 25 year run with a 50/50 portfolio using the average balance after 5 years, and looked for the 95% point. Here's a graph:
The first, red line shows the withdrawal percentage for the 30 yr run as the original SWR. This is pretty much as expected, except the peak allocation is 50/50 while earlier reports showed 60 to 70% tips as the peak. That is probably because I used tips at 2% instead of tips at 2.5%.
The blue line shows the 5yr new SWR as a percentage of the original portfolio. Since this line is in future (+5 yr) dollars, the the green line is the first line shifted up by inflation for 5 years at 3.5% for comparison.
Some key numbers: I would avoid the 100% stock portfolio based on risk, so lets look at the 80% point. The 50/50 portfolio has an initial SWR of 4.65% and the 80/20 portfolio has an initial SWR of 4.58% (and 90/10 is 4.49). This is a drop of .07% in the 95% SWR, which means that the annual withdrawal is 1.5% less. In exchange, one has a 50% likely increase from 5.44% (inflation adjusted initial SWR) to an 6.23% withdrawal in 5 years. This is an increase of .67% or 12.3% of the annual withdrawal.
A conclusion: Switching from the optimal 50% stock to an 80% stock portfolio for the first 5 years reduces the annual withdrawal by 1.5%, possibly forever (95% point). In exchange, the average withdrawal after POPR in 5 years is increased by 12.3%.
I attempted to compare inflation adjusted dollars to inflation adjusted dollars in the above analysis. However the adjustment is estimated at 3.5% a year in one case versus actual but unknown for the calculator. I think the spreadsheet would be better for this purpose, but I can not use Excel for another month. It seems that spreadsheets I load resets some defaults and messes up some critical stuff my wife is doing for the next month or so.
However, it does quantify the tradeoff of the future upside with an 80% stock portfolio versus the slight increase of initial SWR with a 50% portfolio. I do want to spend more of my money over the next 15 years, and less after that. But if I give up $600/yr out of $40k/yr for the next 5 years, I have a 50% chance of spending $4920/yr more in 5 years. It's enough for me to keep my 80% stock allocation, instead of switching to more TIPS.
There are lots of other combinations that could be analyzed, but the bottom line is that the higher stock percentage numbers that are the traditional 'best' still have their advantages, even when tips are added to the picture.
Wayne
For simple, straightforward runs, the optimal stock/tip ration has been shown to be 40/60 by other studies. I am looking at a POPR scheme where a different ratio would be used for the early years to allow for possible portfolio growth, then switching to the optimal after 5 years.
The case I ran is for the default $650k portfolio, with stock/tips@2% in various percentages, default expense ratio of .18, and CPI. First I ran a 30yr run for the above scenerio with stock/tips ratios from 0 to 100 in 10% increments, and asked for the 95% point. I noted the withdrawal amount and rate. Then I did a 5yr run with the withdrawal amount plugged in and noted the average portfolio balance after 5 years. Finally I did a 25 year run with a 50/50 portfolio using the average balance after 5 years, and looked for the 95% point. Here's a graph:
The first, red line shows the withdrawal percentage for the 30 yr run as the original SWR. This is pretty much as expected, except the peak allocation is 50/50 while earlier reports showed 60 to 70% tips as the peak. That is probably because I used tips at 2% instead of tips at 2.5%.
The blue line shows the 5yr new SWR as a percentage of the original portfolio. Since this line is in future (+5 yr) dollars, the the green line is the first line shifted up by inflation for 5 years at 3.5% for comparison.
Some key numbers: I would avoid the 100% stock portfolio based on risk, so lets look at the 80% point. The 50/50 portfolio has an initial SWR of 4.65% and the 80/20 portfolio has an initial SWR of 4.58% (and 90/10 is 4.49). This is a drop of .07% in the 95% SWR, which means that the annual withdrawal is 1.5% less. In exchange, one has a 50% likely increase from 5.44% (inflation adjusted initial SWR) to an 6.23% withdrawal in 5 years. This is an increase of .67% or 12.3% of the annual withdrawal.
A conclusion: Switching from the optimal 50% stock to an 80% stock portfolio for the first 5 years reduces the annual withdrawal by 1.5%, possibly forever (95% point). In exchange, the average withdrawal after POPR in 5 years is increased by 12.3%.
I attempted to compare inflation adjusted dollars to inflation adjusted dollars in the above analysis. However the adjustment is estimated at 3.5% a year in one case versus actual but unknown for the calculator. I think the spreadsheet would be better for this purpose, but I can not use Excel for another month. It seems that spreadsheets I load resets some defaults and messes up some critical stuff my wife is doing for the next month or so.
However, it does quantify the tradeoff of the future upside with an 80% stock portfolio versus the slight increase of initial SWR with a 50% portfolio. I do want to spend more of my money over the next 15 years, and less after that. But if I give up $600/yr out of $40k/yr for the next 5 years, I have a 50% chance of spending $4920/yr more in 5 years. It's enough for me to keep my 80% stock allocation, instead of switching to more TIPS.
There are lots of other combinations that could be analyzed, but the bottom line is that the higher stock percentage numbers that are the traditional 'best' still have their advantages, even when tips are added to the picture.
Wayne
