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Old 03-13-2010, 09:51 AM   #21
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Congratulations Midpack! The numbers add up (at your proposed SWR I don't think your precise AA matters much) and you can leave on good terms. Sweet!
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Old 03-13-2010, 10:52 AM   #22
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Just curious - why not split the difference spend more and enjoy the fruits of your labor and reduce the stock allocation a little?
That's in essence what I am asking. I am at 70/30 now and intend to reduce my equity exposure in the years ahead. Trying to figure out how much risk I really need to take, could be pretty low. Thanks...
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Target AA: 60% equity funds / 35% bond funds / 5% cash
Target WR: Approx 2.5% Approx 20% SI (secure income, SS only)
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Old 03-13-2010, 11:25 AM   #23
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That's in essence what I am asking. I am at 70/30 now and intend to reduce my equity exposure in the years ahead. Trying to figure out how much risk I really need to take, could be pretty low. Thanks...
Jim Otar points out that asset allocation is a much less powerful driver of future value for an individual than it is for a large pension fund. During the accumulation stage, he estimates that AA contributes perhaps 30% to portfolio longevity. AA works mostly by reducing volatility. During the decumulation stage, AA does not help with the "sequence of returns" risk, which poses the most important threat to portfolio longevity.

So if I were you I would plan very carefully to ensure that I had safe and liquid assets set up to cover the first five years of RE, and I would set up the remainder of my AA with the amount of risk that I was comfortable with. Then I would relax and enjoy life!
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Old 03-13-2010, 11:34 AM   #24
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Midpack, like W2R and RIT I chose to go with a 40-45% equity allocation after retiring.

I was at 55% until the market whittled it down significantly and I decided last year I would go ahead and keep it there. Looking at both FIRECalc results and myself in the mirror when the market tanked, that seems to be my "sweet spot" when it comes to risk/equity exposure/SWR needs.
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Old 03-13-2010, 11:47 AM   #25
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Assuming a 4% SWR is based on a 60/40 Eq/Bond asset allocation, if my anticipated expenses are 2.5% of total assets I should be able to safely reduce my risk with more a conservative asset allocation. How does one determine a corresponding asset allocation? 50/50, 40/60, 20/80...
Here is one way of thinking about the math.

If 4% at 60/40 is good for 30 years, than any portfolio value above (WR/.04) can theoretically be safely invested in 30yr TIPS. So if you were planning a $40K withdrawal, 4% requires a $1MM portfolio split $600K for equities and $400K in bonds. But with a 2.5% WR, you have a $1.6MM portfolio ($40K / .025). There is no reason you can't take that extra $600K and invest it in bonds. Rebalance the remaining $1MM portfolio at a 60/40 split annually and leave the $600K bonds to simply accumulate over the next 30 years (hopefully in an IRA).

Using that approach gets you a 37.5% equity allocation. You have the same upside as anyone using a standard 4% WR and 60 / 40 split, but you have tremendous downside protection. At today's 30yr TIPS rate, that $600K in bonds will grow in real terms to $1.119MM leaving you in a very good position if the standard 4% SWR flames out.
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Old 03-13-2010, 11:59 AM   #26
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Bonus Question: How much notice is customary for a management position? I know 2 weeks is not acceptable.
As others said . . . it depends.

In my line of work, when you quit you're typically shown the door the very same day. And then they continue to pay you for a couple of months and prohibit you from starting your next job until after the "garden leave" period is up. But I wasn't going to a competing shop so there was no reason I couldn't give them lots of notice. I told my boss about 30 days beforehand. They didn't know what to do. Virtually nobody ever gave them notice before. I was surprised when they asked me to keep my departure quite. Most folks didn't know I was leaving until my last day. Very strange place.
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Old 03-13-2010, 12:52 PM   #27
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That's in essence what I am asking. I am at 70/30 now and intend to reduce my equity exposure in the years ahead. Trying to figure out how much risk I really need to take, could be pretty low. Thanks...

It is a difficult question to answer. I am going through a similar exercise myself. Our allocation is 60/40 right now. I am still a little over a year off from ER at 55.
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Old 03-13-2010, 12:56 PM   #28
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Originally Posted by Meadbh View Post
Jim Otar points out that asset allocation is a much less powerful driver of future value for an individual than it is for a large pension fund. During the accumulation stage, he estimates that AA contributes perhaps 30% to portfolio longevity. AA works mostly by reducing volatility. During the decumulation stage, AA does not help with the "sequence of returns" risk, which poses the most important threat to portfolio longevity.
As he does, for example, in this Comment on this "Rebalancing Can Be Hazardous to Your Portfolio" piece.

His articles can be found at Otar Retirement Solutions.
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Old 03-13-2010, 01:23 PM   #29
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I'm planing on hanging up the spurs at y/e 2012 @ age 51 and expect to be going with about 50/50, but think I could be 40-45/55-60 and still be just fine...unless there was a relatively long string of very high inflation years without corresponding increases in equity prices. I've run the calculations every which way and back, and I'm anticipating around a 2.5-2.75% SWR before tax, and I always try to project out about 60++ years with relatively conservative return projections (spreadsheet or FIREcalc), and at least 40-45 if things get really bad.

R
Hi Rambler, just curious why you project 60 years. Do you come from a very long-lived family with significant possibility that you will live well past the century mark, or is the extra long timespan a way of adding a safety factor (i.e. "at this WR the portfolio will last 20 years longer than I will")?
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Old 03-13-2010, 02:58 PM   #30
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Originally Posted by Gone4Good View Post
Here is one way of thinking about the math.

If 4% at 60/40 is good for 30 years, than any portfolio value above (WR/.04) can theoretically be safely invested in 30yr TIPS. So if you were planning a $40K withdrawal, 4% requires a $1MM portfolio split $600K for equities and $400K in bonds. But with a 2.5% WR, you have a $1.6MM portfolio ($40K / .025). There is no reason you can't take that extra $600K and invest it in bonds. Rebalance the remaining $1MM portfolio at a 60/40 split annually and leave the $600K bonds to simply accumulate over the next 30 years (hopefully in an IRA).

Using that approach gets you a 37.5% equity allocation. You have the same upside as anyone using a standard 4% WR and 60 / 40 split, but you have tremendous downside protection. At today's 30yr TIPS rate, that $600K in bonds will grow in real terms to $1.119MM leaving you in a very good position if the standard 4% SWR flames out.
That strikes me as a most sensible way to look at it, and one that had not occured to me, thank you very much! I'll be playing with what you suggest in FIRECALC as well as my own Excel spreadsheets. Excellent!

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Old 03-13-2010, 07:39 PM   #31
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Hi Rambler, just curious why you project 60 years. Do you come from a very long-lived family with significant possibility that you will live well past the century mark, or is the extra long timespan a way of adding a safety factor (i.e. "at this WR the portfolio will last 20 years longer than I will")?
It is just the safety factor. I don't expect to live past 85 (that's if I even make it to 75), but my wife is of Japanese origin and will likely outlive me by a wide margin (we are the same age). So, the plan needs to go out to about 95 (or more). With a retirement age of 51, that is about 44 years of cash flow needs to plan for. So the conservative thinking plan takes us 60 years, but the "if all hell breaks loose" plan should still get us 40-45 years of mileage. The more moderate plan would take us 70-80 years (but I'll work on stimulating the economy a little more heavily if it looks like it is working out this way. No need to give it all to the gummint when I die). On top of that, it is really hard for us to guage expenses since we have been living overseas for so long that we just don't really know how the expense budget will work out (there is a lot of padding in my budget, based on living expense quotations tossed about on the forum).

On top of that, I would like to leave something to the kids, if possible, but won't be dissappointed if I can't. They will not be expecting it, as I have no intention to tell them about that desire. That said, I am watching carefully what the gummint will do about death taxes. How I help my kids will depend heavily on that and on gift tax legislation.

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Old 03-13-2010, 07:58 PM   #32
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Have you tried the "investigate" tab in FIRECALC? It will show success rate versus AA for any profile.

AT 2.5% WR, it probably won't be sensitive to changes, but you could increase the WR to see what happens as you increase the sensitivity.

-ERD50
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Old 03-13-2010, 08:01 PM   #33
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Have you tried the "investigate" tab in FIRECALC? It will show success rate versus AA for any profile.

AT 2.5% WR, it probably won't be sensitive to changes, but you could increase the WR to see what happens as you increase the sensitivity.

-ERD50
The other thing you can do in FIRECalc with low withdrawal rates is set a minimum portfolio balance. That way you see how frequently your portfolio drops below a certain threshold with various asset allocations.
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