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Portfolio withdrawal strategies compared
Old 11-19-2008, 12:42 PM   #1
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Portfolio withdrawal strategies compared

This was just published in the Journal of Financial Planning. They argue based on the spread between the trailing E/P and bond yields retirees in 2008 should live off equities. Yes counter to conventional wisdom. Makes no sense to me so hopefully smarter people then I can figure it out.

When Does a Bonds-first Withdrawal Sequence Extend Portfolio Longevity?

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These findings have practical implications for retirees in 2008. The spread of stocks' long-term earnings yield over bond yields is +0.63 percent at the time of this writing, indicating that stocks' expected return and the equity risk premium are near historical lows. If the E10/P − Y indicator remains as reliable as it has been in the past, it is unlikely that investors retiring in 2008 who choose a bonds-first withdrawal strategy will significantly extend the longevity of their portfolios compared with investors who maintain a 50/50 stock/bond mix. Investors retiring now who choose to consume bond wealth first will most likely expose themselves to the volatility of an all-equity portfolio for little additional reward.
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Old 11-19-2008, 12:49 PM   #2
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Similar discussion going on at Bogleheads, too. There was an article (June 07, I think) which tested the general strategy (bonds first) with results strongly supporting that approach. It is also what Lucia does with his buckets plan.

One issue of interest to me is that it leaves you 70 years old or more, and 100% in stocks. Normally that would be OK because your long term equity earnings would overwhelm any small short term fluctuations at the time of withdrawal. Given the current state of the market, I wouldn't want to be in that position now.
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Old 11-19-2008, 01:03 PM   #3
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Quote:
Originally Posted by DblDoc View Post
This was just published in the Journal of Financial Planning. They argue based on the spread between the trailing E/P and bond yields retirees in 2008 should live off equities. Yes counter to conventional wisdom. Makes no sense to me so hopefully smarter people then I can figure it out.

When Does a Bonds-first Withdrawal Sequence Extend Portfolio Longevity?

DD
This kind of "academic" research is what lost most of us so much money.

Who do you want to align yourself with? WEB, or these hacks? Could treasuries go much higher over time? Could stocks?

Q.E.D.

Ha
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Old 11-19-2008, 01:28 PM   #4
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This article is a doozy.

One underlying premise is that withdrawal rate is constant as the initial rate and doesn't change (ie, 7.5% of original portfolio value withdrawn each year).

That the withdrawal strategy then becomes an either or proposition based on a market signal, which has been backtested, but takes an academian to determine if the signal is really a signal or just an 'urge.' That is, you do bonds first and never rebalance, or you do stocks first and never rebalance.

What happens with this proposal, then, is that modern portfolio theory gets thrown out as soon as a retiree starts to withdraw on a 50-50 portfolio mix. Life in a vacuum!

Way too many market and economy issues are left out of consideration! But an interesting science experiment if you need to publish to maintain your creds!

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