More FIRECALC Results vs % Equity Allocation

[Midpack]

Branching from the earlier thread http://www.early-retirement.org/for...rates-asset-allocation-to-equities-65054.html, more plug-n-chug using FIRECALC, this time starting with $1M and a 3% WR for 30 years.

The charts below** are as if you plotted only the best and worst outcomes for the 11 AA's from FIRECALC, without all the other results(that would be a little busy with 1,221 lines). 30 years uses 111 30 year periods.

**However, these numbers are not inflation adjusted, you'll have to apply the inflation factors to get results to match the basic FIRECALC output (but then they will match).
​

Looking at the worst case chart and the corresponding volatility (risk) with increasing % equity exposure might be instructive for determining what you can live with and still 'sleep at night.' To my eye the difference between 40-50% equity and 100% equity is not worth the considerably higher volatility, the difference in returns after 30 years is not that great. IOW, that's one big WHEE!!! YMMV

Note also the 0% and 10% equity allocations both fail before 30 years, and 20-30% both "deplete principal" in a sense. Even at lower WR's, some equity exposure is required to avoid depleting principal (shown on the earlier thread).

The table below ($'000s) is simply a summary of the results after 30 years for both charts.

% Equity| Initial Value|WR| Worst Case| Worst Start Year| Best Case| Best Start Year 0%| $1,000|3%| $ (464)| 1941| $ 3,452| 1980 10%| $1,000|3%| $ (49)| 1940| $ 4,260| 1980 20%| $1,000|3%| $ 406| 1937| $ 5,379| 1975 30%| $1,000|3%| $ 784| 1937| $ 6,785| 1975 40%| $1,000|3%| $ 1,102| 912|$ 8 ,386| 1975 50%| $1,000|3%| $ 1,267| 1912| $ 10,193| 1975 60%| $1,000|3%| $ 1,400| 1902| $ 12,211| 1975 70%| $1,000|3%| $ 1,495| 1902| $ 14,443| 1975 80%| $1,000|3%| $ 1,559| 1902| $ 16,890| 1975 90%| $1,000|3%| $ 1,563| 1903| $ 19,546| 1975 100%| $1,000|3%| $ 1,521| 1903| $ 24,892| 1942

 

[Lsbcal]

Nice graphs and presentation Midpack.

My issue is with "success". I would like to define a minimum level below which the portfolio never drops during the simulation period. One can do that in FIRECalc but one might not like the results. Generally I've set that minimum level (on the investigate tab, last line) at 50% of my starting portfolio.

Defining that minimum portfolio value will help me to sleep at night and ensure a decent standard of living during my lifetime. Plus I will hopefully be able to stay the course with my investment planning.

 

[Donzo]

Great info midpack! I feel even better about my new 50/50 allocation. I was 100% equities for many years (age 20s - mid 40s). Then went to 70/30 - got hammered in 08/09....So my new 50/50 feels pretty good. Thanks!

 

[karluk]

If I were to make my asset allocation based soley on this information (assuming, of course, that I expected to need only a 3% withdrawal rate), I would go with 60% equities. That's because of the almost flat worst case scenarios in this general range, combined with steadily increasing best case scenarios as the percentage of equities increases.

60% is a signficantly higher stock allocation than I currently have, so I'll have to ponder this a while, rather than making a hasty decision. The best reason I can think of to NOT go with a higher equity allocation is the possibility of having a repeat of the market meltdown of 2008. I doubt that I would be willing to rebalance to a 60/40 allocation after the kind of collapse we had back then, even though rebalancing turned out to be the correct decision.

Thank you, Midpack, for doing the research and posting your results. It's a real eye-opener that makes me question some of my fundamental investment decisions.

 

[Ed_The_Gypsy]

To my eye the difference between 40-50% equity and 100% equity is not worth the considerably higher volatility, the difference in returns after 30 years is not that great. IOW, that's one big WHEE!!! YMMV

I would cut it at 70%-100%, but that is just my brain talking. When I eventually pull the plug, I will be as paranoid as anyone.

 

[nun]

What I take away from the numbers is - I wish I had retired in 1975, but I'd probably be dead by now

 

[Animorph]

Still works for 100% equities for me. Worst case is close to the best and best case is a big increase in final portfolio value.

 

[Midpack]

What I take away from the numbers is - I wish I had retired in 1975, but I'd probably be dead by now

My Dad retired in 74-75, with almost no knowledge of investing/retirement income, was he lucky or what?

However, M&D were/are LBYM thanks to growing up during the Depression so he had a reasonable [-]portfolio[/-] nest egg, [-]way too[/-] very conservatively invested (like the old physician stereotype), with a retired military COLAd pension and health care. Just in the last few years he volunteered that he 'might have retired at a most opportune time...'

 

[karluk]

Still works for 100% equities for me. Worst case is close to the best and best case is a big increase in final portfolio value.

That's a reasonable approach, but it's not one that I would take. Among other reasons, I am skeptical to the point of total disbelief that anyone retiring in 2013 (as I am) will achieve anything approaching the best case scenario. Now, with the benefit of hindsight, I am far less skeptical that those people who retired at the beginning of 2009 might achieve something close to best case results. 2009 retirees have already enjoyed four years of stellar returns for both stocks and bonds. No one can predict the future with 100% accuracy, but my bet would have to be that the 30 year period 2009-2038 will turn out to offer better investment returns than 2013-2042.

So I simply don't see the large upside potential in maintaining a 100% stock portfolio right now. In the absence of a big upside (in my judgment, at least), I am not tempted to go overboard in my stock allocation.

 

[Midpack]

Still works for 100% equities for me. Worst case is close to the best and best case is a big increase in final portfolio value.

Whatever works for you. But with 100% equities if I'm on the worst case path, at age 91 thru 95 the portfolio value drop would ensure that I didn't even make it to 95

 

[ERD50]

Branching from the earlier thread, ... more plug-n-chug using FIRECALC, this time starting with $1M and a 3% WR for 30 years.

... Looking at the worst case chart ... To my eye the difference between 40-50% equity and 100% equity is not worth the considerably higher volatility, the difference in returns after 30 years is not that great.

Thanks for these runs and presentation. I need to take a closer look at that other thread. While not a big difference from the results of the "INVESTIGATE" tab in FIRECALC for %AA versus success, your chart seemed to show a little advantage to ~ 40% AA, while the FIRECALC looks very flat from ~35%-95%? It might just be the granularity of the definition of success (1 part in 111), versus your use of $ figures ( which seems to provide more sensitivity).

Regarding your take on 40-50% AA versus higher AA's, maybe my eye isn't following the lines that well, but isn't most (all?) of that volatility on the positive side? The lines are very tight the first few years, but that seems like maybe the only place the 80-90% AA dips below the 40-50%?

Another thought I have (which may be totally bogus), is that the knee appears at around 40%, but is pretty flat from 40% - 100%. So maybe if history shifts things around a bit, we would be better off near the middle of that range - ~70%?

I sometimes wonder - maybe a low AA in the first 5 years is best? Would that help to avoid that early dip that seems hard to recover from, or is that just moving the problem to later?

More on that volatility below...

Nice graphs and presentation Midpack.

My issue is with "success". I would like to define a minimum level below which the portfolio never drops during the simulation period. One can do that in FIRECalc but one might not like the results. Generally I've set that minimum level (on the investigate tab, last line) at 50% of my starting portfolio. ...

I like that approach also, but I wan't exactly sure how FIRECALC was handling that, it seemed a touch confusing, but I did a few more runs, and I'm more confident now. The results surprised me....

Sticking with the 3% on $1M, 30 years, and setting the minimum portfolio balance to $500,000 (a dip below that at ANY time in the 30 years is counted as FAILURE), I got the following success rates:

100% EQ - 78% success
 75% EQ - 80% success
 50% EQ - 81% success
 25% EQ - 63% success
  0% EQ - 35% success

The difference with 0% equities was there was no 'warning' that there was a dip which then recovered. Any dip continued on to fail anyway, so I'm not sure that's a meaningful distinction.

To test my understanding, at 75/25 and 25/75 I also adjusted the 'minimum' until the warnings changed. For 75% EQ, the warning was given when I specified a $350,000 minimum, and no warning at $325,000 minimum. And at 25% EQ, the warnings were triggered between $225,000 and $250,000 (this is trial/error, so I didn't bother to get closer). So that is consistent with the 'success' rates above. And for reference, the success rates w/o any 'minimum' restrictions are 100% for all but the 0% EQ, which was 87%.

So that tells us that if we have a goal of not seeing any more than a 50% dip in our portfolio, we still need a fairly aggressive allocation to stocks (and/or very low WR). IOW, a very low EQ AA does not protect against volatility either, a low EQ AA may actually provide more of those 'exciting' deep dips. At least with 50% as the definition, and at the 25% increments that I ran.

I covered some of this a few years ago in a thread with "Scary dips" in the title, if anyone cares to search that. Basically, it's pretty hard to avoid volatility, AA and WR adjustments may not buffer it as much as many people would think.

-ERD50

 

[Animorph]

Whatever works for you. But with 100% equities if I'm on the worst case path, at age 91 thru 95 the portfolio value drop would ensure that I didn't even make it to 95

Dips are OK. It's absolute values that are the problem. A dip from 2% WR to 4% WR is no problem. Sucks for the kids, but I don't care. A dip from 4% to 8% would probably require some spending cuts. That's something that makes me more comfortable with 100% equities. If the sequence of returns doesn't bite you, the average result is that you have more to spend or a very low WR. More options.

 

[ERD50]

... I am skeptical to the point of total disbelief that anyone retiring in 2013 (as I am) will achieve anything approaching the best case scenario. ...

I agree, I'm looking only at the worst case graph (other than for daydreaming purposes!).

Whatever works for you. But with 100% equities if I'm on the worst case path, at age 91 thru 95 the portfolio value drop would ensure that I didn't even make it to 95

Not that I'm recc 100% EQ, but that drop is from a point the lower AA never reached. So even after that drop, the high AA is ahead of the lower AA. I don't see how that paints a high AA as a problem. I'll take all the positive volatility I can get!

I think what it really tells us, is how dangerous it can be for someone to be really 'conservative' for many years, and then try to jump into a high AA all at once - when stocks might be at a peak.

But for the DCA or buy & hold, they accumulated at those lower prices.

To me it's a little like someone telling you to choose from two cars for a 100 mile trip, no gas stations anywhere. One car gets 10 mpg, the other 20 mpg. Then they mention the 10 mpg car has a full 30 gallon tank, the 20 mpg has only one gallon left. For this trip, the rate of drop in the fuel tank isn't as important as how much fuel you started with (apologies to conservationists everywhere).

-ERD50

 

[Texas Proud]

I do not see the same as you....

IOW, the difference between the worst case at 50% and 100% is $254K... not chump change... over 10% of the portfolio

And the difference between the best case is almost 300% better...

If you are worried about the downside, it looks like 70% is the sweet spot for worst case... not much more upside... but for the best case, there is still a lot of upside...

 

[Meadbh]

Very helpful analysis, thank you Midpack. It illustrates very well how any reasonable equity allocation, coupled with a 3% WR, has been sustainable with historical market performance. Before we get too smug, however, let's not forget that the model is predicated on average historical returns of ~11% for the S&P 500, and returns of ~8% for balanced asset allocation. Many economists think that average returns will be lower in the future.

 

[mathjak107]

Branching from the earlier thread http://www.early-retirement.org/for...rates-asset-allocation-to-equities-65054.html, more plug-n-chug using FIRECALC, this time starting with $1M and a 3% WR for 30 years.

The charts below** are as if you plotted only the best and worst outcomes for the 11 AA's from FIRECALC, without all the other results(that would be a little busy with 1,221 lines). 30 years uses 111 30 year periods.

**However, these numbers are not inflation adjusted, you'll have to apply the inflation factors to get results to match the basic FIRECALC output (but then they will match).
​

Looking at the worst case chart and the corresponding volatility (risk) with increasing % equity exposure might be instructive for determining what you can live with and still 'sleep at night.' To my eye the difference between 40-50% equity and 100% equity is not worth the considerably higher volatility, the difference in returns after 30 years is not that great. IOW, that's one big WHEE!!! YMMV

Note also the 0% and 10% equity allocations both fail before 30 years, and 20-30% both "deplete principal" in a sense. Even at lower WR's, some equity exposure is required to avoid depleting principal (shown on the earlier thread).

The table below ($'000s) is simply a summary of the results after 30 years for both charts.

% Equity| Initial Value|WR| Worst Case| Worst Start Year| Best Case| Best Start Year 0%| $1,000|3%| $ (464)| 1941| $ 3,452| 1980 10%| $1,000|3%| $ (49)| 1940| $ 4,260| 1980 20%| $1,000|3%| $ 406| 1937| $ 5,379| 1975 30%| $1,000|3%| $ 784| 1937| $ 6,785| 1975 40%| $1,000|3%| $ 1,102| 912|$ 8 ,386| 1975 50%| $1,000|3%| $ 1,267| 1912| $ 10,193| 1975 60%| $1,000|3%| $ 1,400| 1902| $ 12,211| 1975 70%| $1,000|3%| $ 1,495| 1902| $ 14,443| 1975 80%| $1,000|3%| $ 1,559| 1902| $ 16,890| 1975 90%| $1,000|3%| $ 1,563| 1903| $ 19,546| 1975 100%| $1,000|3%| $ 1,521| 1903| $ 24,892| 1942

i can't wait to retire, i want to play with lil charts all day too.

nice work midpack.

 

[samclem]

Before we get too smug, however, let's not forget that the model is predicated on average historical returns of ~11% for the S&P 500, and returns of ~8% for balanced asset allocation. Many economists think that average returns will be lower in the future.

True. And that 3% WR is less than many of us are counting on. On the flip side, it's the "Take X% adjusted for inflation" method for blindly taking withdrawals--one that many of us reject in favor of the more flexible/adaptive "take x% of my year end value" method. The annual recomputation of WR helps quite a bit in avoiding portfolio crashes.

 

[Lsbcal]

Thanks for these runs and presentation. I need to take a closer look at that other thread. While not a big difference from the results of the "INVESTIGATE" tab in FIRECALC for %AA versus success, your chart seemed to show a little advantage to ~ 40% AA, while the FIRECALC looks very flat from ~35%-95%? It might just be the granularity of the definition of success (1 part in 111), versus your use of $ figures ( which seems to provide more sensitivity).

Regarding your take on 40-50% AA versus higher AA's, maybe my eye isn't following the lines that well, but isn't most (all?) of that volatility on the positive side? The lines are very tight the first few years, but that seems like maybe the only place the 80-90% AA dips below the 40-50%?

Another thought I have (which may be totally bogus), is that the knee appears at around 40%, but is pretty flat from 40% - 100%. So maybe if history shifts things around a bit, we would be better off near the middle of that range - ~70%?

I sometimes wonder - maybe a low AA in the first 5 years is best? Would that help to avoid that early dip that seems hard to recover from, or is that just moving the problem to later?

More on that volatility below...

Originally Posted by Lsbcal
Nice graphs and presentation Midpack.

My issue is with "success". I would like to define a minimum level below which the portfolio never drops during the simulation period. One can do that in FIRECalc but one might not like the results. Generally I've set that minimum level (on the investigate tab, last line) at 50% of my starting portfolio. ...

I like that approach also, but I wan't exactly sure how FIRECALC was handling that, it seemed a touch confusing, but I did a few more runs, and I'm more confident now. The results surprised me....

Sticking with the 3% on $1M, 30 years, and setting the minimum portfolio balance to $500,000 (a dip below that at ANY time in the 30 years is counted as FAILURE), I got the following success rates:

100% EQ - 78% success
 75% EQ - 80% success
 50% EQ - 81% success
 25% EQ - 63% success
  0% EQ - 35% success

The difference with 0% equities was there was no 'warning' that there was a dip which then recovered. Any dip continued on to fail anyway, so I'm not sure that's a meaningful distinction.

To test my understanding, at 75/25 and 25/75 I also adjusted the 'minimum' until the warnings changed. For 75% EQ, the warning was given when I specified a $350,000 minimum, and no warning at $325,000 minimum. And at 25% EQ, the warnings were triggered between $225,000 and $250,000 (this is trial/error, so I didn't bother to get closer). So that is consistent with the 'success' rates above. And for reference, the success rates w/o any 'minimum' restrictions are 100% for all but the 0% EQ, which was 87%.

So that tells us that if we have a goal of not seeing any more than a 50% dip in our portfolio, we still need a fairly aggressive allocation to stocks (and/or very low WR). IOW, a very low EQ AA does not protect against volatility either, a low EQ AA may actually provide more of those 'exciting' deep dips. At least with 50% as the definition, and at the 25% increments that I ran.

I covered some of this a few years ago in a thread with "Scary dips" in the title, if anyone cares to search that. Basically, it's pretty hard to avoid volatility, AA and WR adjustments may not buffer it as much as many people would think.

-ERD50

Interesting thoughts you've put down here ERD50. I'd sure like to think that some WR adjustments in the extreme cases (like 2008) would help a bit.

I'm personally prepared to go from our current 65/35 to maybe 40/60 should equities experience a longish period of well above historical average gains -- like was seen in the 1985-1987 before that crash. This would be a timing strategy based on a personal assessment of age and net worth so it's not a general case that can be easily stated. Over recent years equities have gone up at around a 7% rate (after inflation) but should that accelerate then I'd be concerned.

Unfortunately history is pretty unique so it's not possible to come up with a general timing strategy in advance. The fall back is to never change AA and is a very popular option and perhaps even a good one.

P.S. Sorry if I've deviated too much from the OP.

 

[Midpack]

i can't wait to retire, i want to play with lil charts all day too.

nice work midpack.

You must be Excel challenged if this would take you all day...





jk sorta

 

[Midpack]

I do not see the same as you....

IOW, the difference between the worst case at 50% and 100% is $254K... not chump change... over 10% of the portfolio

I see your $254K, but I'm not seeing where you're getting "10% of portfolio" - I get 20% [($1521/$1267)-1]

But even 20% works out to a difference in annual return of 0.62%, IMO that's pretty thin for the difference in highs and lows for a retiree - coincidentally at 90 years old BTW in this example case. YMMV

Equity|Init Port|End Port|Ann % return
50%|$1M|$1.267M|0.79%
100%|$1M|$1.521M|1.41%
||$254K|-0.62%

Most everything I've read (and it's been demonstrated here a hundred times) seems to suggest that anything from 40-80% equity is the sweet spot, 40% for the conservative/already won-the-game/older crowd and 80% for the risk tolerant/slightly higher WR/younger crowd broadly speaking. Or anywhere in between.

No argument on the upside, but that's probably as unlikely as I hope the worst case for any of us. And most people seem to [-]understandably worry[/-] plan much more with worst case in mind than best case (marginal utility etc.).