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Vanguard Retirement Analysis vs. 4% withdrawal analysis
Old 08-25-2005, 06:14 PM   #1
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Vanguard Retirement Analysis vs. 4% withdrawal analysis

After spending countless hours becoming comfortable with the 4% number - I turned my attention to securities/asset allocations that I would purchase for both my parents who are retired and for myself (especially excess cash).

Asset Allocation Conclusions: I came to the conclusion that Vanguard's Wellesley fund (60% fixed income and 40% equity) was the best diversified (and a no brainer regarding volitility versus return). My overall holdings are 60%/40% which allows me to "play" in the stock market. I also hold muni bonds in for tax purposes.

Since I was purchasing Vanguard's mutual funds - I took advantage of thier "free" retirement analysis. Surprisingly, they wanted me to sell the Wellesley fund and asset allocate into other index funds. They also recommended an equity/fixed income ration of 50%/50%.

What really surprised me was thier Time Path scenerio analysis. Despite a less than 4% starting number for current expense ratio - they managed to demonstrate that if I started investing in 1965 (thier worst scenerio) and stuck to thier inflation adjusted expense estimates - I would run out of money in 25 years.

In fact, to get to a 100% safety, (they projected 75% success at an initial core 3.3% spend rate) I would have to reduce my core expense numbers (expense numbers without new cars, kids education) to 2% of my total balance.

Anyone else have experience with thier analysis? I just got the results and I'm trying to understand what the difference between thier time path analysis and the 4% number analysis.

One major difference (I believe) is that they don't assume a fixed rate of inflation - they use actual inflation numbers starting from 1965 (6% growing to 13%) as well as actual return numbers (stocks falling by 50% in 1973-1974).

Comments from those who are more facile with the 4% number than I am
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Re: Vanguard Retirement Analysis vs. 4% withdrawal analysis
Old 08-25-2005, 07:52 PM   #2
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Re: Vanguard Retirement Analysis vs. 4% withdrawal analysis

Hmmmm - a couple of smart ass comments - before the serious folks weigh in:

1. 1965 to 'going broke' in 25 years(1990) covered my working/investing years - given that my salary was not in lock step with inflation - I made do with what I was Paid. Albeit - it went up during the period due to experience/inflation/ job responsibilities - etc., etc. etc. Not in lock step - plenty of wiggle room - without using the 'hedonics' word.

2. As much as I admire Vanguard - I don't use financial planners - calculators - are prisoners of their math. The Vanguard calculator - back when they first started their website - had me going broke in the worst case also. I did take away a predetermined -22% dip should 73-74 repeat for my 60/40 portfolio. Handgrenade wise - useful for planning - and looking at what if's.

To put it buntly - 60/40 and some dividend stuff - De Gaul and the Norwegian widow. Toss in a little Bear Bryant if adjustments need to be made in the stretch - ala 'agile, mobile, and hostile.'

BTY - 65,66 plus 30 yrs is one of my favorite worst cases to play with. Note that the 4th ed of Ben Graham's 'The Intelligent Investor' came out right before the 'fun' of 73,74.

In the worst case - portfolio current yield is my 'salary' - NOT adjusted for inflation. Those adjustments are ala the Bear above - I can change spending easier than I can change Mr Market.
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Re: Vanguard Retirement Analysis vs. 4% withdrawal analysis
Old 08-25-2005, 08:25 PM   #3
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Re: Vanguard Retirement Analysis vs. 4% withdrawal analysis

Quote:
Originally Posted by familyretired
After spending countless hours becoming comfortable with the 4% number - I turned my attention to securities/asset allocations that I would purchase for both my parents who are retired and for myself (especially excess cash).

What really surprised me was thier Time Path scenerio analysis.* Despite a less than 4% starting number for current expense ratio - they managed to demonstrate that if I started investing in 1965 (thier worst scenerio) and stuck to thier inflation adjusted expense estimates - I would run out of money in 25 years.

In fact, to get to a 100% safety, (they projected 75% success at an initial core 3.3% spend rate) I would have to reduce my core expense numbers (expense numbers without new cars, kids education) to 2% of my total balance.

Anyone else have experience with thier analysis?* I just got the results and I'm trying to understand what the difference between thier time path analysis and the 4% number analysis.*

One major difference (I believe) is that they don't assume a fixed rate of inflation - they use actual inflation numbers starting from 1965 (6% growing to 13%) as well as actual return numbers (stocks falling by 50% in 1973-1974).

Comments from those who are more facile with the 4% number than I am
The REHP calculator also uses actual inflation as measured by the CPI-U

What does Vanguard use as their fixed income security?

The REHP calculator uses 3-month commercial paper (equivalent to a money market fund) If Vanguard is using something with a longer maturity, it might explain the difference. The 25-year period from 1965-1990 was a bad time to be holding a long bond.

intercst
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Re: Vanguard Retirement Analysis vs. 4% withdrawal analysis
Old 08-26-2005, 03:33 AM   #4
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Re: Vanguard Retirement Analysis vs. 4% withdrawal analysis

The tools on their web site are portfolio dependent. A "conservative" allocation give a 3% SWR for 40 years, while an "aggressive" allocation gives a 4% SWR for 40 years.
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