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Old 11-30-2013, 09:14 PM   #61
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Here is another fellow that is discussing changes in AA: Bill Bernstein: Take Risk Off The Table

BTW, I'm not trying to convince people that equities are dangerous or banging the drums for reduced equities. Just trying to get a handle on levels of risk. Nobody here should think they are doing the wrong thing if they have convinced themselves their AA is right for them.
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Old 11-30-2013, 09:24 PM   #62
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Here is another fellow that is discussing changes in AA: Bill Bernstein: Take Risk Off The Table

BTW, I'm not trying to convince people that equities are dangerous or banging the drums for reduced equities. Just trying to get a handle on levels of risk. Nobody here should think they are doing the wrong thing if they have convinced themselves their AA is right for them.
You still haven't said that I do, or do not understand the math of what you are talking about. I have been as clear as I could; if you choose to say"no comment", I'll exit this discussion. I usually don't even read this type of thread, but both your statement that I have been trying to pin down, and NW's statement about SWRs and minimax made me want to understand this discussion.
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Old 11-30-2013, 10:03 PM   #63
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The challenges of figuring this stuff out is a big reason that when I feel like I have convincingly won the race for good I will be dumping money into CPI-indexed SPIAs and TIPS (assuming rates there are acceptable).
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Old 11-30-2013, 11:17 PM   #64
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Retirement calculators like FIRECalc do not go down to the details of how various segments of the US stock market would fare over the period of 1871-2013 (142 years), as historical data that finely defined was simply not available. Even with today's technology, when I wanted to look back at some stocks I owned that have been merged or bought out, I had a tough time.

Hence, for historical performance testing, usually only simplistic 2-component portfolios are available, using a stock index and a long bond index. That's all we have to look back at history.

Using a 50/50 portfolio with a 3% WR, I saw that a $1M portfolio starting in 1906 would be drawn down to $422K in 1920. Similarly, a $1M portfolio starting in 1966 would be down below $426K in 1981. The 3rd bad period was starting in 1937, and reached the lowest point of $528K in 1948.

When economic conditions were as bad as the above 3 periods, reducing WR from 3% to 2% helped, but not as much as one would think. With a 2%WR, the minimum point of the above 3 periods would be $532K, $587K, and $643K. Yes, one brought up the minimum portfolio value by about 20-25%, but at a reduction of standard living to 2/3.
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Old 12-01-2013, 07:49 AM   #65
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Lsbcal, NW-Bound,
Thanks for the OP and the continued refinement. My takeaway: If a retiree is carrying 60% equities (and that's as fine as we can cut it, there's insufficient data to model various types), takes a 2% WR (from starting value, adjusted for inflation), and does this for 30 years, then US historical returns have, in the past, had at least one case where a person like you has had his retirement portfolio reduced in (real) value by 50%. That's good to know, and is valuable information that can prompt us to recognize this possibly small but not insignificant risk and reduce it (e.g. by modifying the withdrawal method, holdings, etc) or building a backup plan.

Every week I drive to the store to buy groceries. I know there is a small but not zero chance that something bad will happen on the way: a flat tire, a minor accident, a major accident with horrible, debilitating injuries, etc. But I go anyway, like we all would. We do what we can to reduce risk (carry a spare tire, drive carefully, have insurance), but ultimately we go because we want to move on with our lives (and running out of food is bad, too).
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Old 12-01-2013, 09:02 AM   #66
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I'm not planning on a 2% WR except in extremely bad circumstances. The OP data showed one could maintain a 4%+ withdrawal if willing to take a 50% portfolio hit at some point in the future. I do not think I made that point clear in the OP. Sorry about that. Perhaps instead of dollars I should have just shown WR in percent. I reproduced the chart in the OP with WR's here:



This year we will spend around 3.4% of the 2013 starting portfolio. My whole motivation is to keep a very nice lifestyle going into the future. So like Sam, I'm planning on driving to the supermarket while taking the standard seat belt precautions -- no need for a Humvee. My FIRECalc numbers showed I could maintain a 3.9% WR at 65% equities and a 4.1% WR at 50% equities. Again, that is for a potential worst case 50% portfolio hit. The runs were for 20 years but 30 years gave the same results because the bad stuff happens early in the sequence e.g. you retire in 1929 and get hit badly in the early 1930's.

Maybe I should show the key FIRECalc settings just in case this helps to clear up any confusion. The portfolio size and SS numbers are not the ones I used to produce the above chart (or the OP chart). The WR % chart above does use our numbers.

I could have made errors and that is part of the reason for posting this -- groups are generally stronger then individuals.



Note: the 500,000 minimum allowed portfolio is (I think) implemented in FIRECalc as a fixed dollar number i.e. it may not be inflation adjusted. However, since portfolio events tend to happen in early years of the worst simulations, this may not be too much of an issue.

Minor edit: the SS numbers should use 2013 or later. My actual simulations used 2013.
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Old 12-01-2013, 09:45 AM   #67
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I wonder about the name of this thread. If an early retiree looks at this data and actually feels it in his body, he has not won any game at all. He has actually played the wrong game.The only sensible game, given reality, would be to find another way. If you are young, immediately get a government job, preferably federal or even better, congressman. If too late for that, don't retire early, or plan to live in a 4th floor walkup on a portfolio of $5mm. Or go straight to a life of welfare and petty crime. If one is already retired, do something like Brewer mentioned, buy an index linked spia and/or join AARP and get some aggressive leadership.

How many marriages are going to survive a 50% overall portfolio loss? Especially if as people say they have no expectation of a pension, and minimum expectation of SS?

How sure can one be that the big hits always come early? Given that Firecalc is just a series of historical numbers, and not an oracle, it seems likely to me that the "early out or you are ok" is very likely an artifact of the basically benign investing and business environment in 20th century America, with maybe a meaningful boost from a very handy WW2.

No wonder that during 2008 the ER.org mantra was "keep the faith", or that some of the faithful felt injured by Lord Bogle when he said, absolutely accurately, "If you cannot stand to lose anymore, sell." He didn't mean if you are losing sleep sell, he meant if your survival was still likely, but could be severely crippled by further meaningful losses, sell. Don't forget that 2008-2009 across the board equity losses were ~50%, and what is being talked about here is an across the board equity loss of 80%+. (similar to 1929-1932)

Que cosa!
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Old 12-01-2013, 09:59 AM   #68
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Now, 17% cash, 20% bonds with duration< 4 years. and 63% equities. I would sell more equity, but I am already at the limit of taxable income that I wish to have for this year.

Most of the equities are biased toward growing income and hopefully reasonably stable overall income for the entire portfolio.

If I lost 1/2 of my dividend income I would survive but be hurting. However, I think that is very unlikely to happen. Which is why I am income rather than total return oriented.

Ha
I was reading on setting up a liability matching portfolio. It seems that although Bernstein recommends such, he acknowledges that in the current environment it's not possible. However, in one post I was reading of his, he seemed to indicate that one could count 1/2 their dividend income toward as liability matching.

Is that what you're doing?
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Old 12-01-2013, 10:03 AM   #69
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One error I see is using a past year (2012) in your SS start date. FIRECalc only accepts current or future years - it's a known bug.
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Old 12-01-2013, 10:15 AM   #70
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One error I see is using a past year (2012) in your SS start date. FIRECalc only accepts current or future years - it's a known bug.
Good catch. I actually did use 2013 but recorded the incorrect number here. I made a note on my post, thanks.
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Old 12-01-2013, 10:22 AM   #71
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I was reading on setting up a liability matching portfolio. It seems that although Bernstein recommends such, he acknowledges that in the current environment it's not possible. However, in one post I was reading of his, he seemed to indicate that one could count 1/2 their dividend income toward as liability matching.

Is that what you're doing?
I may not know the lingo well enough to interpret correctly or to be sure I understand the question. I see liability matching as a function of a pension fund or insurance company where the cash calls on the portfolio are well known, or stochastically forecastable as in the case of P&C insurance companies. An individual gets no such help from the law of large numbers

I just try to invest in solid, dividend paying and growing basic businesses at what seem to be good prices. Then I only replace them if they get way overvalued, or if I think I see a negative change. I live cheaply; so my "taxable portfolio" income is enough to pay income taxes and my living expenses. My IRA and Roth are smaller, but I leave the Roth alone and just take my RMDs in stock and add it to my taxable portfolio. I also hedge in the taxable portfolio when my judgment is that the overall market is in "possibility of abrupt fall" territory.

I do not recommend this; but it is entertaining and very familiar to me so I feel fairly solid with it. To me, it does seem better than relying on timely stock sales to meet current expenses, but the vast majority of members here and commentators elsewhere see this issue differently, and they may well have the better plan. Is amounts to a small part time business, and likely a reasonably good part time business would pay quite a bit better.

As others have pointed out, even in this thread, this method cannot get a blessing from Firecalc, due to its idiosyncratic nature and lack of systematic data sets.

Ha
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Old 12-01-2013, 11:52 AM   #72
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To avoid confusion, I feel that I should stress here that the low WR that I quoted to guarantee that the portfolio would not drop below 50% is a lot lower than Lsbcal cited. It is because my number assumes no other income sources. For people who want to retire very early in their 30s or 40s, this makes a big difference.

If one has a 60/40 portfolio, if the market drops as much as 80% in one year, meaning stocks are down to 20c on the dollar while the bond portion stays constant, his portfolio would become 60*0.20 + 40 = 52. This is very unusual, and I am afraid there would other major disruptions that make life very difficult, let alone what the stock market does.

What FIRECalc shows, however, is that the 50% draw down does not happen overnight but after a few years or a decade of slow grinding economy which did not give much opportunity to the investor in either the bond or stock market. One can check this out by running 100% stock and 100% bond portfolios, then see how both succumbed in intervals that overlapped.

There was little point in balancing between two lousy investment vehicles when that happened.

PS. We should be thankful for big market swings. It gives one a chance to get ahead by trading between stocks and bonds!
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Old 12-01-2013, 12:06 PM   #73
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Thanks for the clarification NW-Bound. Yes, my numbers were for 2 adults both taking SS at retirement and no other income sources.

In any case, there is no substitute for running your own FIRECalc simulations. Hopefully this thread just shows some considerations in how to run FIRECalc and analysis of simulation results.

Looking at really bad markets is probably easier to do in good equity markets like now then when stocks turn down.
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Old 12-01-2013, 12:24 PM   #74
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By the way, the bad two periods when neither stock nor bond did well were roughly 1906-1920, and 1960-1980.

And a period where both stock and bond did well was 1980-2000. One should not be surprised that most of us ERs benefited from this prosperous era.
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Old 12-01-2013, 12:35 PM   #75
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To avoid confusion, I feel that I should stress here that the low WR that I quoted to guarantee that the portfolio would not drop below 50% is a lot lower than Lsbcal cited. It is because my number assumes no other income sources. For people who want to retire very early in their 30s or 40s, this makes a big difference. ...

Now I'm confused.

The WR from the portfolio is independent of other income sources. But of course, those other income sources will set a floor for your income. Right?

So it might be less confusing to say that spending is less affected with other income, but that the portfolio WRs are what they are?

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Old 12-01-2013, 01:12 PM   #76
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Lsbcal will have to confirm this, but I thought that his high WR was temporary until the SS kicks in. In other words, his number is case specific.
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Old 12-01-2013, 03:23 PM   #77
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Lsbcal will have to confirm this, but I thought that his high WR was temporary until the SS kicks in. In other words, his number is case specific.
Yes, I set our SS to 2013 since we are now taking it, and thus the SS is in the full simulation. The WR %'s are what was taken from the portfolio and includes SS. It says on the simulation results: "Your spending is assumed to come from any Social Security and pensions you entered, as well as from the portfolio".

So I suppose I should have set the SS at zero to make the results more general. But my thinking with this thread was more about the fact that cutting back on the equity led to safer (minimum) withdrawal rates during the really bad stretches of years.

However, I have to now confess that I didn't read that (red) sentence above. Yikes, this means the spending numbers that I thought were really high are not nearly so high in our case. The basic info here is good I think. It's just the interpretation in our case that is a problem for me.

So now I'm wondering, have I really "won the game"? By staying at a higher equity allocation, the average spending numbers increase even though the minimum worst case years show a dip. I've probably lost some (most) readers at this point.

Anyway, I also have done a fairly careful spreadsheet analysis of these sorts of results. Maybe I'll present the data once I go back and rework my thinking.

Thanks to ERD50 and NW-Bound for bringing this up! This thread has had an unexpected outcome for me, but getting things correct in the end is the important point for me.

I now think that NW-Bound's table from Nov 29 (first page here) is the best way to summarize things.
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Old 12-03-2013, 11:11 PM   #78
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Two comments about the OP. The optimum portfolio is a classic example of data mining also known as curve fitting.

The CAGR and GSD are identical: 40% Xstocks + 60% FI = 60% Ystocks + 40% FI.

X = SC, EM and some say REITS. Y = LC. The real expected return of Xstocks = 5%. For LC = 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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Old 12-04-2013, 01:42 AM   #79
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Old 12-04-2013, 09:08 AM   #80
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... Yikes, this means the spending numbers that I thought were really high are not nearly so high in our case. The basic info here is good I think. It's just the interpretation in our case that is a problem for me. ...
I've been thinking about the fact that for many (most?) of us, our WR changes over time - one spouse still working for a while, retired for a few years before taking pensions/SS. It makes it tough to compare.

So I've come up with a pretty simple process to equalize all this, and will tyr it post it later today.

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Two comments about the OP. The optimum portfolio is a classic example of data mining also known as curve fitting.

...
I was thinking about this while reading his 'optimum portfolio' thread.

Optimal FIRECalc Portfolio - Early Retirement & Financial Independence Community

Of course, one could say any run of FIRECalc is 'data mining'. But getting to shorter time frames and more specific investments takes you deeper into that territory, it seems to me.

I feel better seeing that a wide range of AA ( ~ 45/55 to ~95/5) provides similar success rates. That shows a strong general trend. Not sure I feel that way about more specific profiles - but who knows? It is interesting to ponder.

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