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Risk vs WR & Bonus Q
Old 03-12-2010, 07:55 PM   #1
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Risk vs WR & Bonus Q

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...

Bonus Question: How much notice is customary for a management position? I know 2 weeks is not acceptable.
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Old 03-12-2010, 09:17 PM   #2
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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.
That's great! Don't forget that the 4% traditionally includes taxes. Sounds like you are about ready to pull the trigger.

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Originally Posted by Midpack
How does one determine a corresponding asset allocation? 50/50, 40/60, 20/80...
There are some papers and studies that may give you an idea. Check out the Bogleheads' Wiki on this: Safe Withdrawal Rates - Bogleheads

To me, it appears that if withdrawal is less than 3% it doesn't much matter if the AA is 50:50 or 40:60, for example, for a 30 year time period. I went with 45:55.

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Bonus Question: How much notice is customary for a management position? I know 2 weeks is not acceptable.
My guess would be 30 days. You could call HR or ask others in management at your firm if there are any that you trust.
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Old 03-12-2010, 09:23 PM   #3
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Wow Midpack! Are you getting ready to jump ship?!?!? Sounds like you are ready to leap.

Is that 2.5% of assets before taxes? I am assuming so.

Somewhere I think I remember a 3% safe withdrawal rate could be supported through 100% FI investments, but I don't have a link. I'm sure someone else knows where that is. At today's low rates that seems perhaps a little more challenging. What are TIPs paying now for total return?

Anyway - You can probably get away with a very small allocation to equities if you still want some - 20%, 25%. Again, hopefully someone will link that too. Sorry I don't have the specific information, but maybe it will help some other folks recall where it is.

VWINX currently has a SEC Yield of 3.27%. It's around 40% stocks. That's considered pretty low volatility "conservative allocation". You could mix more FI with that if you wanted even less volatility.

How much notice? IMO - 1 month is generous if you are really ready to be out of there. Kind of depends on how long term your relationship has been with the company IMO.

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Old 03-12-2010, 09:26 PM   #4
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Somewhere I think I remember a 3% safe withdrawal rate could be supported through 100% FI investments, but I don't have a link. I'm sure someone else knows where that is.
Yes, the table with that information (from the Trinity Study) and the link to it, along with much other information and links to other studies are all available at the link I provided in the post before yours.... we probably posted simultaneously.
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Old 03-12-2010, 09:44 PM   #5
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Thanks W2R - I should have known you'd have your fingers right on the specific references!

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Old 03-12-2010, 10:07 PM   #6
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Don't forget there are (at least) 2 risk factors here:

1. The risk of losing money on your investments. A lower equity position reduces this risk.

2. The risk that you actually need a higher WR, due to a combination of factors such as higher than anticipated inflation, unexpected major expenses, and under estimating regular expenses. The longer you expect to live, the higher this risk may be. To help overcome this risk, you want to get a better return out of your portfolio, which means you may need to keep that equity position higher.

I'm just giving caution that a lower risk portfolio may not give you a lower risk overall financial situation.
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Old 03-12-2010, 10:19 PM   #7
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As to your second question... it depends...


At my mega corp... upper management was supposed to give 30 days notice... (that was SVP and above)... the others 2 weeks...

My take is it depends on what you plan to do.... if you are taking another job, I would only give two weeks and move on... I would agree to help out if they needed my knowledge that only I had....

If I was going to retire.... I would give a lot more notice... I would want them to be able to get a replacement and have me train them... If they did not want me there... fine, I give them the two weeks and would be outta there...
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Old 03-12-2010, 10:28 PM   #8
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If a company has a deep bench - i.e. plenty of experienced folks on staff - 30 days may be more than sufficient to train a replacement assuming you are not bringing in someone from the outside.

If your replacement is hired from outside the company - well, training can take a long time, but how much of that training you are obliged to handle personally, that depends, I suppose.

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Old 03-12-2010, 11:48 PM   #9
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Bonus Question: How much notice is customary for a management position? I know 2 weeks is not acceptable.
When I left my mega-corp, I had a management position (ie. Pres -> VP -> me). I 'sorta gave' slightly < 30 days notice. See Sudden Epiphany

Everything's negotiable, I ended up staying 90 days when asked.

If they really care, they'll ask you to fit their schedule. Your choice, of course.
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Old 03-13-2010, 12:08 AM   #10
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Firecalc says that you get a 100% success rate for a 2.5% WR if you have at least:

2% equity for a 30 year retirement
17% equity for a 40 year retirement
29% equity for a 50 year retirement

I used 5-year treasuries as the bond portion. I assumed no pension and no SS. I used the constant spending power model (CPI-adjusted).
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Old 03-13-2010, 12:20 AM   #11
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Bonus Question: How much notice is customary for a management position? I know 2 weeks is not acceptable.
The legal answer will depend on your employment contract/staff handbook and, if not specified, there may be a default position imposed by law (e.g. under HK law the default notice period for a full time employee is 1 month but my contract overrides this by requiring 3 months).

Whether you wish to give a longer notice period depends on personal circumstances. My own take would be that I would rather give more notice than less and leave on the best possible terms with the least possible inconvenience to the company. Not only would I get the benefit of a relatively rare feeling of being virtuous, I would maximise the chances of getting a good reference etc should I ever need it.
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Old 03-13-2010, 05:28 AM   #12
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Two weeks is a minimum customary time period.

If you are officially retiring, most companies have rules regarding notification of retirement. My company requires 30 days.

IMO - Assuming you are just quitting, to ER (no retirement package involved) and do not want to burn a bridge (just in case) or feel obligated... I would offer a month and do a good turnover. If they plead for more time, I would offer 1 month full-time and perhaps another month part-time. Or offer to come back part-time as a consultant as needed for a while (for your normal pay rate)... hand hold till they are ready.
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Old 03-13-2010, 06:25 AM   #13
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Two weeks is a minimum customary time period.

If you are officially retiring, most companies have rules regarding notification of retirement. My company requires 30 days.

IMO - Assuming you are just quitting, to ER (no retirement package involved) and do not want to burn a bridge (just in case) or feel obligated... I would offer a month and do a good turnover. If they plead for more time, I would offer 1 month full-time and perhaps another month part-time. Or offer to come back part-time as a consultant as needed for a while (for your normal pay rate)... hand hold till they are ready.
That sounds about right to me. I don't think formal "obligations" are the key factor. What is more important is how you feel about your employer, your peers and your employees. If the company has treated you well try to do well by them.
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Old 03-13-2010, 06:53 AM   #14
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How does one determine a corresponding asset allocation? 50/50, 40/60, 20/80...
Here are a couple of recent articles that may be useful to you:

Asset Allocation for Granthams Seven Lean Years

Quote:
Grantham’s current prediction, which he discusses at length in his most recent letter, is for “seven lean years” – a period of depressed returns across nearly all asset classes. He projects large-cap U.S. equities to return just 1.3% per year. Worse still are small-cap U.S. equities, from which he expects only 0.5% annual returns. International developed market equities fare better (4.7%) in this scenario, but emerging markets equities look relatively anemic (3.9%).

Fixed income looks equally daunting. US government bonds are projected to return about 1.1%, and TIPS are projected to return only 0.8% per year.

The only equity asset class that looks attractive to Grantham is US high-quality stocks, for which he projects a return of 6.8%.
Fine Tuning Your Asset Allocation - 2010 Update - Merriman - February 24, 2010

Quote:
Perhaps the biggest job that any investor has is managing risk. If you take too much, you could be flirting with disaster; if you take too little, you could cheat yourself out of the returns you need to take care of yourself, your family and your heirs. In this article, updated to include results from 2009, Paul Merriman shows how to get this important equation right.
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Old 03-13-2010, 07:54 AM   #15
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Originally Posted by Midpack View Post
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...
.
Just curious - why not split the difference spend more and enjoy the fruits of your labor and reduce the stock allocation a little?
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Old 03-13-2010, 08:09 AM   #16
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Firecalc says that you get a 100% success rate for a 2.5% WR if you have at least:

2% equity for a 30 year retirement
17% equity for a 40 year retirement
29% equity for a 50 year retirement

I used 5-year treasuries as the bond portion. I assumed no pension and no SS. I used the constant spending power model (CPI-adjusted).
My trial scenarios also showed that a surprisingly low equity allocation goes a long way - similar to the above. With SS figured in, I would be able to go < 20% equities. But we are using a higher SWR and also would like to leave a specific inheritance for our kids, so it will be closer to a 40-45% equity allocation.
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Old 03-13-2010, 08:27 AM   #17
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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.

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Old 03-13-2010, 09:33 AM   #18
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My trial scenarios also showed that a surprisingly low equity allocation goes a long way - similar to the above. With SS figured in, I would be able to go < 20% equities. But we are using a higher SWR and also would like to leave a specific inheritance for our kids, so it will be closer to a 40-45% equity allocation.
Thanks to you and FIREdreamer. A few hours after I posted, it dawned on me that playing with asset allocations on FIREcalc would be a great start to answer my own question. I will do that this morning.

I am middle-upper management in a medium sized privately held LLC. I was planning on giving 4-6 weeks notice with my proposed last day worked, BUT offering to stay on as long as my boss would like (within reason). There are at least 3 viable replacements for me (2 would require relo though) and I am pleased to say the leadership (Dept Mgrs) I have in place today could without a doubt keep the place humming along without missing a beat indefinitely. Thanks everyone.

FWIW. By all indications I will never have to work again. But I am sure I'll get bored eventually, and go back to work after a few months, but doing something with less responsibility/stress. It will be nice to not worry about income after 33 years in the trenches...
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Target WR: Approx 2.5% Approx 20% SI (secure income, SS only)
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Old 03-13-2010, 09:44 AM   #19
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LOL, thanks for sharing the link...
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Target WR: Approx 2.5% Approx 20% SI (secure income, SS only)
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Old 03-13-2010, 09:49 AM   #20
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FWIW. By all indications I will never have to work again. But I am sure I'll get bored eventually, and go back to work after a few months, but doing something with less responsibility/stress. It will be nice to not worry about income after 33 years in the trenches...
That was my guess for you based on your prior posts. However, nothing wrong with taking a sabbatical, heh? And getting your bearings. Then you can discover that new, unrelated, career you have occasionally fantasized about.

Best of luck to you. Sounds like you are ready to make a major life change! This is exciting.

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