BW: "Retirement: What Price Risk?"

[Nords]

Business Week has a block of retirement articles on their website this week. (Again, my apologies if the site is restricting these articles to subscribers. My cookies can't tell the difference. But this is an interesting article that's worth retrieving from the library or their online magazine database.)

In this article they claim that there's not much of a risk premium to the 4% SWR. In their words, a paragraph above Table 4, "Increasing the expected returns and risks does little to alter this 4% rule of thumb."

I can't tell if they're claiming that (1) 4% or less has the best survival for all sizes of portfolios, or if they're trying to say that (2) it's better to have lower risk, even if it doesn't keep up with inflation. I think that they're only considering a 20-year period so inflation erosion won't be an issue, but then I'm very good at disagreeing with things that I don't want to hear.

It also bothers me that S&P's smart financial analysts are apparently substituting the term "average" for "median".

 

[sgeeeee]

Hi Nords,

Thanks for another great link.

I think what they are saying is that the probability of success (ie. not going broke in retirement) is not affected much by the stock/bond mix of the portfolio (risk) provided the withdrawal rate is less than 4%.

The article provides some important data that casts doubt on how much security personal accounts would provide the typical worker today. I think that's important and believe the conclusions, but I have some questions about the analysis. First, monte carlo simulations ignore correlations in the fundamental data. So the quantitative results will tend to be a little pessimistic. That's probably a minor issue for this study which still should give some good qualitative answers. Second, it is not clear to me how someone who is investing a fixed percentage of their income into a portfolio that is split 30/60/10 or 60/30/10 (stock/bond/cash) ever ends up with negative portfolio value after 40 years. While they do indicate that they assume a negative portfolio value is simply zero net worth, I don't understand how they got a negative value to begin with. They must be assuming that the investor is paying for stock losses with bond returns and cash interest? I didn't find any mention of rebalancing.

 

[Nords]

I think what they are saying is that the probability of success (ie. not going broke in retirement) is not affected much by the stock/bond mix of the portfolio (risk) provided the withdrawal rate is less than 4%.

Yeah, despite the article's sloppy vocabulary this statement grabbed me.

If it's true, then why the #$%!@ are spouse & I carrying a portfolio that's 95% equities? Or better still, if risk isn't an issue, why doesn't everyone carry an all-stock portfolio? Is Business Week implying that runaway inflation doesn't adversely affect a 4% inflation-adjusted SWR?!?

I hope I'm giving them too much credit for their analysis, but I'd like to see a better study.

 

[lazyday]

Re: BW:  "Retirement:  What Price Risk?"

Does table 2 say that at the end of accumulation, just before retiring, the minimum portfolio balance will be negative?

 

[sgeeeee]

Does table 2 say that at the end of accumulation, just before retiring, the minimum portfolio balance will be negative?

Strategy Mean Maximum Minimum + 1 Std Dev -1 Std Dev
60/30/10 $174,744 $1,348,578 ($18,509) $285,538 $61,950
100/0/0 $377,217 $6,136,651 ($291,132) $776,893 ($22,459)

What table 2 shows is the results of many monte carlo simulations each representing 40 years of investing. They don't tell us how many simulations they ran, but typically they would run several hundred or even thousands. Each simulation would result in a terminal portfolio value. The mean value listed in the table represents the average terminal value of all the simulations. The table also lists both the maximum and minimum result of the many monte carlo runs. And, yes, the minimum is actually a negative number. I don't understand how they end up with a negative value here either.

 

[Cut-Throat]

I don't understand how they end up with a negative value here either.

You just keep borrowing from the kids until the market recovers.

 

[Jarhead*]

Yeah, despite the article's sloppy vocabulary this statement grabbed me.  

If it's true, then why the #$%!@ are spouse & I carrying a portfolio that's 95% equities?  Or better still, if risk isn't an issue, why doesn't everyone carry an all-stock portfolio?  Is Business Week implying that runaway inflation doesn't adversely affect a 4% inflation-adjusted SWR?!?

I hope I'm giving them too much credit for their analysis, but I'd like to see a better study.

Nords: The fact that you and wife are both entitled to Cola'd military pensions, you are doing what I would probably be doing in your position. (Your daughter, or any other heirs are not going to get your pensions).
A heavy stock portfolio in your case makes perfectly good sense. (Somebody's going to be happy up the road).
By the way, re: the article, if you only have 20 years you have to cover , (My case probably), and you are willing to stick with a 4%percent draw, you can take a $1,000,000 and stick it in a safe deposit box, drawing no return, and it will last you 20 years.
Just helps to keep things in perspective. (Withdrawal is a whole lot different mind set than accumulation)
Of course all bets would be off if we got into hyper-inflation.

 

[Mr._johngalt]

Good points Jarhead! I figure I have LESS than "20 years to cover", soooooooooo every year it gets a bit easier, i.e. if the net worth stays flat it will have less
work to do next year, and the year after, and the year after that. Even though no one knows how long the
pile needs to last, if it NEVER gets any smaller, then it really doesn't matter does it? To put it another way,
I make more than 4% on all of my invested funds
except for what I need to keep liquid. Thus, if I take
4% (unadjusted for inflation), my "base" actually goes up. In reality I expect to earn about 6.5% at a minimum,
and cut my spending as inflation goes up. The end result is the same. If it works I have a good chance to die with the same net worth I have today.

JG

 

[Jarhead*]

Good points Jarhead!  I figure I have LESS than "20 years to cover", soooooooooo every year it gets a bit easier, i.e. if the net worth stays flat it will have less
work to do next year, and the year after, and the year after that.  Even though no one knows how long the
pile needs to last, if it NEVER gets any smaller, then it really doesn't matter does it?  To put it another way,
I make more than 4% on all of my invested funds
except for what I need to keep liquid.  Thus, if I take
4% (unadjusted for inflation), my "base" actually goes up.  In reality I expect to earn about 6.5% at a minimum,
and cut my spending as inflation goes up.  The end result is the same.  If it works I have a good chance to die with the same net worth I have today.

JG

JG: And maybe we'll get real lucky, and only have to cover 10 years.
I mentioned this one time to Cut-Throat.
I usually play in a tournament on week-ends. But during the week, on Wed"s and Fridays, I play golf with a group of about 15 guys that are still pretty competitive, even though their ages are 60 to 75.(We have so many team bets, side bets, etc. that it takes a CPA type mind to figure out who owes what to who.
We have one unwritten rule. You are allowed to die on any day, but a funeral on Wed. or Fridays, is considered "bad form".
Black Humor is all we've got left, JG

 

[Mr._johngalt]

So true!

 

[amt]

I think what they are saying is that the probability of success (ie. not going broke in retirement) is not affected much by the stock/bond mix of the portfolio (risk) provided the withdrawal rate is less than 4%.

IMHO, what they are saying is that you cannot increase the SWR above 4% by shooting for higher returns (e.g., going 100% stock).

The corollary, they're likely suggesting, is that even if you go for high risks (e.g., 100% small caps stocks), the SWR for 20 years is still not much lower than 4%, which I believe is what you were saying.

Here's what they said:

In simple terms, if the annual withdrawal is about 4% or less of the initial fund, the money will probably last 20 years. Increasing the expected returns and risks does little to alter this 4% rule of thumb.

 

[preben]

Or put differently: you can get more UPSIDE by taking on more risk - but not much more downside.

(I have not checked the nos so am just trying to simplify the message).

The "downside" for me would however be the heart attack I get when I wake up to see my 100% equity FIRE portfolio reduced to half of yesterday...

Cheers!

 

[BUM]

Re: BW:  "Retirement:  What Price Risk?"

Or put differently: you can get more UPSIDE by taking on more risk - but not much more downside.

(I have not checked the nos so am just trying to simplify the message).

The "downside" for me would however be the heart attack I get when I wake up to see my 100% equity FIRE portfolio reduced to half of yesterday...

Cheers!

Yogi might say "Risk taking can be risky"...both ways! Imagine the heart attack waking up to a 100% upside in your FIRE port! I'd say "Lord, don't take me now!".

BUM

 

[unclemick]

Waking up to a half value portfolio - would have me muttering: 'it's the dividends stupid, watch the dividends!'

For slice and dice cats - the song would be: 'where oh where did my correlations go?'

 

[Mr._johngalt]

It's the same with bonds unclemick. My NAvs
(esp. on the "junk") have dropped like a stone.
But, I have to remind myself that I knew this going
in and those interest checks are still coming.

JG

 

[BUM]

Re: BW:  "Retirement:  What Price Risk?"

Same here. Balanced port is "leaking" daily. Not hemmoraging but I DW says shes going to staple my balls to the barn door if the trend continues.

th, bring back the bunny, man.

 

[ESRBob]

Re: BW:  "Retirement:  What Price Risk?"

Bum,
I'd invest in a good all-purpose staple remover.

You're definitely going to get them stapled one of these days. It may be worth educating the DW on short term ebbs and flows, etc etc. Or show her what happens if you buy "safe" investments, like bonds (when interest rates go up) or money market accounts (which safely destroy real after-tax value every year), and then ask her what she suggests.

If she's one to say, "you do it, but just don't ever lose money" then if firing the client isn't an option, you're back to staple removers.

 

[BUM]

Re: BW:  "Retirement:  What Price Risk?"

Sucks man, especially given my investment history over the last 25 years. LOO-ZAR! This time I'm really doing it by the book (Bernstein). All Vanguard well diversified with a big bunch still in cash, DCAing into conservative funds.

Shes a nervous nellie but so far willing to sit on the sidelines and glare.

 

[cute fuzzy bunny]

Re: BW:  "Retirement:  What Price Risk?"

th, bring back the bunny, man.

I couldnt find any photos of bunnies with balls, but I can offer you these...

Apparently he's a mexican bunny.

And while I was unable to find the bunny, unfortunately here is a squirrel. For extra bonus goodness, its also a pirate squirrel.

 

[playaman]

Thanks for the laugh.

 

[uncledrz]

hey, me too, we both laughed out loud!

 

[BUM]

Re: BW:  "Retirement:  What Price Risk?"

hey, me too, we both laughed out loud!

Disclaimer CHP: Yes, we all LOLed and what did the market do? ...went up. Rocky with rocks - nice touch, man.

BUM

 

[cute fuzzy bunny]

Re: BW:  "Retirement:  What Price Risk?"

For a small fee I can post a different squirrel and his nuts every day the market is open.

Any takers?

 

[laurence]

Re: BW:  "Retirement:  What Price Risk?"

Where is his wheelbarrow?

This guy has so many advantages to reaching ER:

He never has to buy a red sports car

He doesn't need an expensive gym membership

Tatoos: totally unnecessary!

 

[cute fuzzy bunny]

Re: BW:  "Retirement:  What Price Risk?"

Looks like we need that squirrel again today...

You folks better start breaking out the checkbooks or no squirrel magic goodness will be performed...