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POPR analysis
Old 02-18-2004, 09:23 AM   #1
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POPR analysis

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
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Re: POPR analysis
Old 02-18-2004, 09:57 AM   #2
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Re: POPR analysis

Some suggestions for your excel problem...

My excel guts expertise is a little aged, so this may apply only to a version that you arent using, but most settings are in .XLT files, specifically BOOK.XLT and I think PERSONAL.XLT or personal.XLS. If you save those files and then restore them after doing your work, the settings should stay intact. I think the newer versions may put all of the settings into a folder called XLSTART, so if you dont see any likely XLT files, look there. If you check the create/modify dates on the files and they're recent, thats a likely sign that those are the files you want.

If you're using a modern windows (2000 and XP for sure, not as sure about 98 and very unsure about 95), you can create a separate "user" identity for each of you and this should sustain separate documents, email and web, and office settings that not only shouldnt get messed up, they cant be shared unless explicitly told to. Go to the windows Control Panel and look for a panel tool called "users", that should be fairly straightforward after that...make one for yourself, log out of the main identity, log in to the other one, and do your stuff. When you log out of that other identity and back into the main user, all should still be well with them.

You can download OpenOffice www.openoffice.org which contains an open source Office "substitute" that can be used at no cost. The spreadsheet is fine for doing typical calcs and will load most excel spreadsheets, but it doesnt seem very good at running the older spreadsheets that were converted over from lotus 1-2-3, like most of the early retirement/gummy stuff. But it beats the heck out of using a calculator and since its a completely separate set of programs, nothing you do there will disturb your excel settings.
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Re: POPR analysis
Old 02-18-2004, 10:21 AM   #3
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Re: POPR analysis

Thanks TH. I can't experiment now, since she is dealing with girl scout cookie sales on the order of $100k. We have dozens of people come by our garage to pick up or drop off cases of cookies, all of which she has to track and report on.

Excel is on the win98 computer. We also have a winXP computer, but it only has microsoft works (and open office). I just tried the intercst re2002i sheet and it seems to open ok with open office. It has 10 year inflation adjusted portfolio numbers, and I think I could probably add a 5 year column pretty easily, but I would also have to do some work to validate using open office for that spreadsheet. I'm feeling lazy at the moment....but I might run a 10year POPR just to see.

Wayne
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Re: POPR analysis
Old 02-18-2004, 07:59 PM   #4
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Re: POPR analysis

This makes sense to me. The safe withdrawal rate is only one of the important numbers that comes out of historical simulations. The terminal value is also of critical importance because additional funds buy a lot of safety too. There are a lot of different kinds of risk to your portfolio and one of them is longevity. The best insurance against outliving your portfolio if you live a long life is additional earnings.

Higher equity positions have a high probability of producing large earnings. There is a potential down side, but the odds are good that higher equity positions will pay off -- and no other investment type offers as much upside potential with as little risk.

I do question your 5 year horizon a little bit. If you look at the Shiller data, there has never been a time when the equity 30 year average return has ever been below 7%. But the 5 year average return has actually gone negative 6 times. That's still pretty good odds, but it might be better to keep the stock/bond ratio high for more than 5 years.

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Re: POPR analysis
Old 02-18-2004, 10:46 PM   #5
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Re: POPR analysis

Boy, I don't miss those cookie pickups one bit!

It'd be interesting to see a Monte Carlo or FIRECalc-style evaluation of the worst five-year starting periods-- 1929-1934 or 1973-1978? But your point is well made-- a higher stock allocation is more likely to throw off a higher stream of withdrawals. Bill Bernstein is a big fan of 10-20% bonds, right?
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Re: POPR analysis
Old 02-19-2004, 02:51 AM   #6
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Re: POPR analysis

Quote:
Boy, I don't miss those cookie pickups one bit!

It'd be interesting to see a Monte Carlo or FIRECalc-style evaluation of the worst five-year starting periods-- 1929-1934 or 1973-1978? *But your point is well made-- a higher stock allocation is more likely to throw off a higher stream of withdrawals. *Bill Bernstein is a big fan of 10-20% bonds, right?
Just run Firecalc with a 5 year window, and click on "Detailed Results". If you want, copy the results to Excel and play.

Using the defaults except for the 5 year window, the 20 worst years to retire were: 1924, 1995, 1982, 1994, 1925, 1954, 1950, 1951, 1932, 1923, 1985, 1996, 1993, 1921, 1878, 1922, 1948, and 1952.

Of the 127 full five year periods available, 1929 was the second best time to retire. (I guess it only got better after 1929, for the survivors.) 1973 was about the 5th best time.

Dory36
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Re: Thanks, Dory.
Old 02-19-2004, 10:07 AM   #7
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Re: Thanks, Dory.

You've debunked a bunch of my heuristic misconceptions!

It's hard to believe that 2001 & 2002 didn't make the list (yet). And I'm going to have to go back to try to remember something "good" about 1973...
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Re: POPR analysis
Old 02-19-2004, 10:19 AM   #8
 
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Re: POPR analysis

Where do I input the desired number of years to calculate? I don't see a slot for that on the current version although I do remember a previous version had that option.
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Re: POPR analysis
Old 02-19-2004, 10:36 AM   #9
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Re: POPR analysis

One of the first few fields near the portfolio size and withdrawal amount is the period of retirement.

Wait until we get another couple of years data from 2002/2003/2004 in there. Retiring on 1/00 might prove to have been one of the top 5 worst times.
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Re: POPR analysis
Old 02-19-2004, 11:30 AM   #10
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Re: POPR analysis

Quote:
. . .
It'd be interesting to see a Monte Carlo or FIRECalc-style evaluation of the worst five-year starting periods-- 1929-1934 or 1973-1978? *But your point is well made-- a higher stock allocation is more likely to throw off a higher stream of withdrawals. *Bill Bernstein is a big fan of 10-20% bonds, right?
Nords,

This may be what you're looking for:

http://www.early-retirement.org/cgi-...048070;start=0

I tried to find the worst 10 years using two different stock allocations and came up with a list of 13 unique years that were bad. Then I ran Safe Withdrawal Calculator v6.1 to find optimum stock/TIPS@2.0% allocations and SWR.

Here's the results:

............Optimum ....................
............Stock ....................
............Allocation...................
YEAR....(stock/TIPS).......SWR
1893......100..................5.52%
1903........90..................4.87%
1907........60..................4.63%
1910........70..................4.52%
1929........40..................4.66%
1930........60..................4.66%
1962........70..................4.64%
1964........60..................4.46%
1965........30..................4.32%
1966........10..................4.34%
1967........50..................4.53%
1968........30..................4.46%
1969........30..................4.53%

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Re: POPR analysis
Old 02-19-2004, 08:57 PM   #11
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Re: POPR analysis

re: the worst 5 year periods questions. The worst periods are already accounted for in the 30 year runs for 95% SWR. This sets a lower bound or SWR. The AVERAGE (although I would prefer to have used median) after 5 years of all the 5 year periods is the number I am using. It may also make sense for very young retirees to look at 5/10/15 year points, but that gets into a lot of speculation.

I picked 5 years because I wanted a short time frame to allow evaluation of how things are going. I picked 95% because I think anything over 95% is beyond the accuracy of the ability of historical returns to predict the future (acutally 80% is probably better from that viewpoint!!). An abrupt switch in portfolio allocation after 5 years is probably not the thing to do, but I did it for ease of calculation. Keeping a higher equity position is likely to help more over longer periods than 5 years - but it does help, on the AVERAGE, for as short a time as 5 years.

One key point to takeaway from the mini-study is that using optimal SWR to determine portfolio allocation is not necessarily a good thing to do.

The other is that you can retire with what you think the minimum is, and you have a good chance of your income being higher in a few years. This may be important for those who are candidates for being very young retirees.

This supports my philosophy of retire early, and enjoy a few years off, and if your portfolio follows the low road, find a job or get out your "will work for luxuries" sign (that's actually what I told my wife we would have to do if our portfolio really tanks; she thinks anyone who actually stood on the median, roadside, etc. with such a sign would get hurt!).

Wayne
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Re: POPR analysis
Old 02-19-2004, 09:13 PM   #12
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Re: POPR analysis

Thanks wzd,

Very useful study and analysis.
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