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Old 03-17-2014, 11:33 AM   #21
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My inlaws never EVER invested in the stock market. My MIL has a small fed pension, gets WEP reduced SS. and a TSP (in G fund), some IRAs that are all in CDs. FIL had smaller IRAs (in CDs) and a microscopic annuity (about $4000/year). He died last year at 90, she's still alive.

They were blue collar folks who lived very frugally. They raised 6 kids, paid off their row house, and managed to save a few hundred thousand. He worked a union job in a garment factory, she went to work for the IRS as a file clerk when the youngest started grade school. Their key to their retirement was managing their spending, not investing.

MIL still has a paid for house and a few hundred thousand (closer to 200k than 300k). Her income (pension & ss) plus small RMDS, cover her bills and she's still banking a few bucks each month. At 86, she's unlikely to run out of money. She never pulls more than the RMD from the IRAs/TSP. By her choice she lives on about $24k/year.

It's possible to do it... but unlikely for most people,
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Old 03-17-2014, 01:34 PM   #22
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Not sure how this will come out in the post, but here's an Excel file showing success rates versus withdrawal rates for various portfolio equity percentages. All FIRECalc defaults except for withdrawal amount and equities percentage.

Basically, 0% equities looks pretty risky, with the worst success rate at any withdrawal rate above 2%. My 100% equities doesn't look bad at all. Depending on your WR, 80% to 100% equities looks good. Not that I'm recommending that for most people.


Attachment 18421
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Old 03-17-2014, 01:51 PM   #23
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I don't think I did the file upload correctly. Here's a pdf:

Success Rates by WR and Equity Percentage.pdf
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Old 03-17-2014, 02:20 PM   #24
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I don't think I did the file upload correctly. Here's a pdf:

Attachment 18422
Thanks. Was that for 30 years? I think it will skew toward equities as the timeframe increases.

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Old 03-17-2014, 02:25 PM   #25
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I don't think I did the file upload correctly. Here's a pdf:

Attachment 18422
Nice graph, but something it doesn't show is the much greater volatility of equities vs fixed income investments. I share your like for and (I presume) comfort with equities but not everyone has that comfort level.

I know very little about Treasury Bonds, but am guessing that most people whose portfolios rely mainly on these types of investments really like the fact that when they buy a CD or bond issue, they know exactly what return their investment will be earning. Contrast this to buying an equity or equity fund with which not only do you have little idea what your return will be over the next few years, you don't even know for sure whether you will have a net gain at all. Even for those equity investors who are relying on dividend payouts alone, those dividends can vary. This is scary stuff for some people.

P.S. - my professed comfort level with equities is, at least partially, imaginary. I only began portfolio withdrawals 2 or 3 years ago and am hoping to stick around on this planet for another 3 or 4 decades. At some point, I imagine I will get to live through at least one severe downturn while in the withdrawal phase, and we'll see how comfortable I am with equities then
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Old 03-17-2014, 03:24 PM   #26
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Thanks. Was that for 30 years? I think it will skew toward equities as the timeframe increases.

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Yes, 30 year period.
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Old 03-17-2014, 03:49 PM   #27
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Nice graph, but something it doesn't show is the much greater volatility of equities vs fixed income investments. I share your like for and (I presume) comfort with equities but not everyone has that comfort level.

I know very little about Treasury Bonds, but am guessing that most people whose portfolios rely mainly on these types of investments really like the fact that when they buy a CD or bond issue, they know exactly what return their investment will be earning. Contrast this to buying an equity or equity fund with which not only do you have little idea what your return will be over the next few years, you don't even know for sure whether you will have a net gain at all. Even for those equity investors who are relying on dividend payouts alone, those dividends can vary. This is scary stuff for some people.

P.S. - my professed comfort level with equities is, at least partially, imaginary. I only began portfolio withdrawals 2 or 3 years ago and am hoping to stick around on this planet for another 3 or 4 decades. At some point, I imagine I will get to live through at least one severe downturn while in the withdrawal phase, and we'll see how comfortable I am with equities then
I think overall and on average, equities will give larger average returns than 100% bonds, or bond heavy portfolios.
I think there are times (like 1981) when someone who is willing to discriminate will know that there is high likelihood that US long term treasuries will give an extremely good risk adjusted return. However, most people hated them, and I preferred equities myself.

IMO, the real risk in equities for people without some meaningful, regular source of cash that is not dependent on securities is outliers. Things that are not in that database on which this site was founded. Remember, there are only a few discrete 30 year periods in that database, and likely these few cannot be expected to be typical of whatever is to come in out future.

For me it is also true that I can have more felt confidence in a collection of businesses that I can understand and that easily support me with their easily covered, increasing dividends. I know this is a minority position today, and I am glad for this. I try to live cheaply so that I will never have to come up with off the wall choices for high payout securities, stocks or bonds.

Ha
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Old 03-17-2014, 03:54 PM   #28
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I don't think I did the file upload correctly. Here's a pdf:

Attachment 18422
Interesting chart, thanks. I knew the lines would cross just knowing statistics and asset allocation/market history, but didn't know exactly what it looked like - until now.

And it also shows how radically different a 0% equity AA is from even small equity allocations. Most people simply can't practically afford such an approach without radically altering their working years lifestyle and/or delaying retirement significantly.
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Old 03-17-2014, 09:44 PM   #29
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Originally Posted by Animorph View Post
Not sure how this will come out in the post, but here's an Excel file showing success rates versus withdrawal rates for various portfolio equity percentages. All FIRECalc defaults except for withdrawal amount and equities percentage.

Basically, 0% equities looks pretty risky, with the worst success rate at any withdrawal rate above 2%. My 100% equities doesn't look bad at all. Depending on your WR, 80% to 100% equities looks good. Not that I'm recommending that for most people.....
To be clear, what was the non-equity portion of the portfolio in these graphs invested in?
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Old 03-17-2014, 10:12 PM   #30
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To be clear, what was the non-equity portion of the portfolio in these graphs invested in?
The FIRECalc default, "long interest rate", whatever that is.
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Old 03-18-2014, 07:55 AM   #31
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The FIRECalc default, "long interest rate", whatever that is.
If that is the case then I suspect the results in your pdf are optimistic compared to a 100% treasuries scenario because if I am interpreting "long interest rate" correctly it probably includes a lot of non-treasuries which yield more and therefore result in higher portfolio survivorship since the withdrawals are adjusted for inflation than 100% treasuries.
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Old 03-18-2014, 08:45 AM   #32
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Going 100% either in Long Treasury Bonds or in equities exposes one to single event type risks that blends protect much better against.

I also believe what actually occurs in most cases with people invested in 100% fixed income is over dramatically being portrayed as dire. Most people I have known that lived on 100% fixed income have adjusted spending to equal or actually be below what they earn.
As an example, what would a 30 year retirement be like for someone who retires at 65 with Social Security of 24K per year and 500K to invest.

Today that person would get 18K per year for 30 years on a 30 Year US Treasury Bond. After 10 years with 3% inflation spending would have to be cut by 10 percent. By age 95 with 3% annual inflation the income would be 75% inflation adjusted to income from age 65, as Social Security is adjusted to inflation and partially rescues the portfolio. At 4% inflation it is 71% of the original income, at 5% inflation the amount is 68 percent of the starting amount. At 10 percent annual inflation for 30 years, a very unpleasant thought, it would end up at 60 percent of spending. In these cases selling of houses and moving to apartments usually occurs.

While these are all unpleasant outcomes in retirement, it is hardly the end of the world. This is retiring on 42K per year and over time adjusting your income to 30K per year. This is probably one of the reasons surveys show older people spend less as they age, they drop their spending as they age to equal their income, as many older people are very conservative with their investments. Also reverse mortgages tend to step in and offset the needed income replacement.

But the comfort these people gain from certainty of income, for them cannot be replaced by faith in statistical probability of success, the price is a sure reduction of inflation adjusted income as you age.
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Old 03-18-2014, 11:43 AM   #33
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It's not that you can't retire on all fixed income. Even my chart shows that it has worked fine with a low enough withdrawal rate. But I would consider it a higher risk approach than using a portfolio with lots of equities. Sure, your principal won't jump up and down, but what if you suddenly need a higher withdrawal rate? The probability of your portfolio surviving that is much better with lots of equities. That's more important to me than avoiding market ups and downs. This might cover things like a parent requiring support, a child becoming permanently disabled, a chronic medical condition, a divorce, a marriage, or the cost of some future technology. Add to that that I might be able to spend more in the future, or at least leave more to my kids, and I end up with my 100% equities.
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