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Rising stocks in retirement debate rages on!
Old 12-09-2013, 01:29 PM   #1
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Rising stocks in retirement debate rages on!

The latest volleys:

Rekenthaler Report on Morningstar - Dec. 4

Rekenthaler Report on Morningstar - Dec. 5

After reading all the posts and discussions (including the previous one on our forum), I'm left with one question.

Looking at Kitces' chart of 4% WR 30-year success rates, I see a 95.1% success rate for gliding from 30% to 70% stocks in retirement. Sticking to a constant 60/40 mix (my current plan), the success rate is 93.2%.

In our search for perfection and certainty (fruitless, it can be argued), it's tempting to embrace the precision that calculated numbers seem to give. But is a 1.9 percentage point difference in success rates really significant? If this were a FIRECalc result, I wouldn't think much of it. Am I missing something?
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Old 12-09-2013, 01:38 PM   #2
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Quote:
Originally Posted by wishin&hopin View Post
But is a 1.9 percentage point difference in success rates really significant? If this were a FIRECalc result, I wouldn't think much of it. Am I missing something?
In terms of "measure with a micrometer, mark with a grease pencil and cut with an axe", a <2% success rate differential qualifies as one of the latter.
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Old 12-09-2013, 02:05 PM   #3
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Originally Posted by wishin&hopin View Post
In our search for perfection and certainty (fruitless, it can be argued), it's tempting to embrace the precision that calculated numbers seem to give. But is a 1.9 percentage point difference in success rates really significant? If this were a FIRECalc result, I wouldn't think much of it. Am I missing something?
If it means anything, the higher stock allocation portfolios probably also produced much higher average terminal values than the ones with high bond allocations. This wouldn't show up as a change in "success percent", since a run is "successful" whether you've got $1 or $1 million at the end of the window. So, while the success rate difference is not highly significant, the improved chance of accumulating a big pile of money may be significant to some people.

We won't be taking a straight ""X% + inflation" withdrawal, but will withdraw a percent of our portfolio's ending value each year. So, higher average portfolio performance translates to more money to spend each year (on average) and an improved chance that the spending power of our withdrawals will keep up with inflation. And the flip side: Higher volatility in portfolio value (due to having more stocks) = more variability in annual withdrawal amounts.

"Honey, this is gonna be a red beans and rice year. Vacation will be a trip to see your Mom."
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Old 12-09-2013, 07:01 PM   #4
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A higher equity allocation will get you a higher terminal value but at the cost of a lower initial SWR due to the higher volatility of equities.

In fact, Bill Bernstein talks about a volatility factor of 2% for an all stock portfolio. A 60/40 port would have a volatility factor = 1.2%. 20/80 = 0.4%.
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AA = 60/35/5. Expected CAGR = 5.7%. GSD (5y) = 7.8%. USD inflation (10 y) = 1.8%. AWR = 3.0%. TER = 0.5%. Net Port Yield = 1.7%. Term = 36 yr. FI Duration = 4.9 yr. Portfolio survival probability = 86%.
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