Early Retirement & Financial Independence Community

Early Retirement & Financial Independence Community (http://www.early-retirement.org/forums/)
-   FIRE and Money (http://www.early-retirement.org/forums/f28/)
-   -   Portfolio Allocation and Withdrawals (http://www.early-retirement.org/forums/f28/portfolio-allocation-and-withdrawals-73966.html)

Gotadimple 10-10-2014 01:09 PM

Portfolio Allocation and Withdrawals
 
Wade Pfau recently wrote a blog post about how the size of one's portfolio makes a difference in success rates. He is also the editor of the Journal of Personal Finance. In his blog post of October 9, he announces that the latest issue of the Journal is now available Wade Pfau's Retirement Researcher Blog

He focuses on two articles, but I was interested in the first by Gordon Irlam which proposes the use of a dynamic model to determine portfolio allocation and withdrawals. Unfortunately, you have to read online, but the article is available for download for a price (I didn't check the cost)

Here's a link to the article ISSUU - Journal of Personal Finance Vol 13 Issue 2 by IARFC

And a link to the free website tool used in the article https://www.aacalc.com/

The tool is similar to Firecalc or IORP. Those used to Firecal or ORP will want to check the advanced button to get more precision in the outcome.

I'm still digesting the article. I'd be interested in your comments on the paper and the tool.

Rita

Totoro 10-10-2014 02:06 PM

This is developing in my pet peeve of the week.

What is it with this ISSUU thing? Uses flash to read a pdf, displays it badly so that it's almost unreadable on screen and then forces you to register if you want to download it.

Grrrr .. stop breaking the web!

Hermit 10-10-2014 03:06 PM

Quote:

Originally Posted by Totoro (Post 1502293)
This is developing in my pet peeve of the week.

What is it with this ISSUU thing? Uses flash to read a pdf, displays it badly so that it's almost unreadable on screen and then forces you to register if you want to download it.

Grrrr .. stop breaking the web!

I don't have a problem with reading it. It comes up in Adobe Flash Player and I can size it as I like and it goes to a very clear font for whatever size I select. I am using Windows 7 and Chrome. (Sorry to get off track.) I will read the article as soon as I can.

eta2020 10-10-2014 04:45 PM

I tried to read it but I got lost. I want simple strategy like 3% Withdrawal rate or spend dividends only.

It is confusing mess....

samclem 10-10-2014 05:13 PM

I didn't have any technical problems at the link, it displayed okay.

The article was tough sledding, but I think I "got" most of it after enough re-reading. I think many parts could have been written with greater clarity.

Like other MVO approaches, I am left with the feeling that the expected value of the approach is expressed with a level of precision that is not supported by the underlying data (specifically, it's ability to represent the future). The author apparently recognizes the shortcoming himself: after all the optimization to the nth digit using historical return data, he compares the projected results for his system to results from several other methods. . . but first he arbitrarily reduces future equity returns to 5% PA. Now, that might be a good assumption, but it needs to be supported, and we need a better explanation for why his system optimized for the "old truth" is still optimum for the "new truth". And, will bond returns remain unaffected by a reduction in equity returns? He didn't re-jigger his data for that.

I think most people will understand a simpler method better, and it will be easier to stick with--but I'll admit I am a novice. The approach in the article feels like we are laying a 5 foot straightedge on a foot-square blob of jello and attempting to use it to draw a precise line into the future.

Hermit 10-10-2014 07:06 PM

After reading the first three pages of so, here are my general thoghts. Looks like it might work for general allocation guidance of an adviser or investment firm. For me personally, I want to keep longevity probabilities out of the equation. I want to make sure I am solvent even on a small chance that I may live to a ripe old age. As the author points out, optimizing the allocation and reallocating on a yearly basis would be quite an effort for what I think would be a small increase in success probabilities. I wouldn't want to manage my portfolio base on something that complex.

Gotadimple 10-11-2014 11:33 AM

Quote:

Originally Posted by Hermit (Post 1502381)
After reading the first three pages of so, here are my general thoghts. Looks like it might work for general allocation guidance of an adviser or investment firm. For me personally, I want to keep longevity probabilities out of the equation. I want to make sure I am solvent even on a small chance that I may live to a ripe old age. As the author points out, optimizing the allocation and reallocating on a yearly basis would be quite an effort for what I think would be a small increase in success probabilities. I wouldn't want to manage my portfolio base on something that complex.

Hermit,
You're absolutely correct. This publication is written for advisers. I agree that it is wordy, but then, it's written by an economist, and that's what they do to stay employed.

I was also interested in the tool they used. Has anyone looked at that? Any thoughts no the advice given?

Rita

Cut-Throat 10-11-2014 05:51 PM

Use VPW - Variable Percentage Withdrawal.

1.) It cannot fail
2.) It will probably allow you to start with over 4% withdrawal amount. (for those over 60)
3.) You will get to spend far money than any fixed SWR (Which can fail)
4.) It will put the brakes on spending only when you need to (Markets Tank)
5.) Best tool, I've seen in Retirement planning. Will Backtest any historical year.:coolsmiley:
Bogleheads • View topic - Variable Percentage Withdrawal (VPW)

ERD50 10-11-2014 09:48 PM

Off topic - Ignore if you wish....



Quote:

Originally Posted by Totoro (Post 1502293)
This is developing in my pet peeve of the week.

What is it with this ISSUU thing? Uses flash to read a pdf, displays it badly so that it's almost unreadable on screen and then forces you to register if you want to download it.

Grrrr .. stop breaking the web!

Quote:

Originally Posted by Hermit (Post 1502311)
I don't have a problem with reading it. It comes up in Adobe Flash Player and I can size it as I like and it goes to a very clear font for whatever size I select. I am using Windows 7 and Chrome. (Sorry to get off track.) I will read the article as soon as I can.

Seemed to work OK for me in Xubuntu and Chromium browser, it helped to let it go full screen - the zoomed text came in clear at any size.

But I agree with you, why do they need these fancy-pants, oddball methods to display something like this when the a standard web browser works just fine? And since my often-used "Control-F" to find specific words on a page didn't work in that mode, I left w/o reading it. Don't cripple my browser!

-ERD50

braumeister 10-12-2014 05:48 AM

Quote:

Originally Posted by Cut-Throat (Post 1502596)
Use VPW - Variable Percentage Withdrawal.
...
3.) You will get to spend far money than any fixed SWR (Which can fail)

That's the part that always makes me shake my head when I see it mentioned.
We have absolutely no desire to spend more than we do; it wouldn't increase our happiness one bit.

If we leave a pile behind at the end, so what?

I suspect we're not alone in this attitude.

Cut-Throat 10-12-2014 08:11 AM

Quote:

Originally Posted by braumeister (Post 1502634)
That's the part that always makes me shake my head when I see it mentioned.
We have absolutely no desire to spend more than we do; it wouldn't increase our happiness one bit.

If we leave a pile behind at the end, so what?

I suspect we're not alone in this attitude.

No, you are not alone in this attitude. And I would suggest that VPW is not for you then. One of the objectives of VPW is to be able to spend more.

VPW is not for a lot of people in retirement. Some people enjoy frugality and comfort of always having the Big Nest Egg. I have even seen folks where spending money is 'painful' even if they can afford it. Almost everything to them is a 'waste of money'. Some people in retirement are not happy, unless they see their nest egg increase throughout retirement. They enjoy piling it up and enjoy the power that dangling a windfall to potential heirs gives them. Money is power, and for some relinquishing that power is difficult.

For myself, I can adjust my standard of living to any budget available. I have no problem spending my money. I enjoy it. I enjoy Fly Fishing for Exotic Species and far flung travel. This does not come cheap and I always have new ideas. I have no desire to leave a pile after I am gone. Their are many paths in retirement and VPW addresses the goals of people that want to spend their nest egg.

photoguy 10-12-2014 12:32 PM

Quote:

Originally Posted by Cut-Throat (Post 1502596)
Use VPW - Variable Percentage Withdrawal.

1.) It cannot fail

I'm not against variable or percentage based withdrawal schemes but I think stating that they cannot fail is somewhat misleading -- they fail when the allowed withdrawal falls too low to meet minimum living expenses.

Cut-Throat 10-12-2014 01:58 PM

Quote:

Originally Posted by photoguy (Post 1502727)
I'm not against variable or percentage based withdrawal schemes but I think stating that they cannot fail is somewhat misleading -- they fail when the allowed withdrawal falls too low to meet minimum living expenses.

But, remember if this would happen, then any other withdrawal method would have failed long before VPW and would have been a scenario that has not occurred in modern Historical times. And what you are talking about is a 'Complete Financial Meltdown' which even "money under the mattress' would fail.

BTW - No Historical Backtesting Period would 'fail' for me personally in any 40 year period. When you set up your Personal VPW Parameters and your asset allocation, you can backtest it, so that your Parameters (Including your budget) will not Fail. A SWR will be much riskier and if followed woud fail long before VPW.

Gotadimple 10-12-2014 02:06 PM

We have moved to a discussion of VPW. I did look at this spreadsheet last year, and looked again this year.

Yes it is variable, there is a logic behind calculating the withdrawal rate. The logic has a larger withdrawal rate in each year after the first year. It uses historical data to estimate market performance and inflation.

The SWR (4%) rule is not a fixed rate. It starts at 4% and increases for inflation - thus it is also a variable rate.

Others use a fixed percentage of portfolio rate that does not change.

Any withdrawal method can fail the user.

But, back to aacalc.com . . .

Is it a useful tool for either - determining the "number," or providing a withdrawal scheme?
Is it as useful as Firecalc or ORP?
What about the charts included in either the "Compute my number" or "Compute My Asset Allocation" - do you find those useful for your own analysis?

To repeat: the article and the web site are constructed for use by financial advisers. I am always interested in withdrawal schemes. They are a double check on what I have decided I will do for myself.

-- Rita

gordoni 10-15-2014 11:10 PM

I'm the original author of the quoted paper. Answering a few questions:

You can choose to use a simpler strategy than stochastic dynamic programming like a 3% safe withdrawal rate. The problem is unfortunately the results you get will be sub-optimal. With a few caveats SDP produces the optimal result.

Use of 5% for future returns. Choosing a different value than the historical record both reflects present expectations, and makes it harder for SDP to outperform. SDP can give a false sense of confidence when the same data is used to optimize as is used assess performance. Hence use of a different value is desirable. With 86 years of historical data, and an annual standard deviation of 20%, the mean return of 6.5% has a standard deviation of 2.1%. Thus using anywhere from 4.4% to 8.6% would be very reasonable without considering the current consensus that we should expect lower returns in the future.

Not adjusting bond returns. I would have liked to adjust bond returns but as far as I know there is no academic consensus on that.

A 5 foot square straight edge on a blob of jello. There is some truth to this. Future expected stock returns are difficult to forecast. SDP provides the optimal solution to an uncertain problem. The problem is we don't know how precisely specify this uncertainty. Knowing the optimal solution however makes it possible to benchmark other solutions and see how close to the theoretical maximum they achieve. Then it is up to the individual, do they want to go with a simple to understand solution that yields 90% of the optimal solution, or go with the optimal solution that yields 10% more utility or income.

samclem 10-16-2014 08:08 AM

Quote:

Originally Posted by gordoni (Post 1504200)
I'm the original author of the quoted paper.

Thanks very much for commenting. We kvetch about many academic papers and less formal articles about portfolio planning and retirement withdrawal strategies, it is great to hear from the original authors when possible.

Quote:

Originally Posted by gordoni (Post 1504200)
The problem is unfortunately the results you get will be sub-optimal. With a few caveats SDP produces the optimal result.

Of course, I'm sure you'd agree that SDP will prove to be sub-optimal, too, at least retrospectively. There's no way to prospectively determine the optimal withdrawal strategy without knowing in advance the withdrawal timeframe and future returns of all relevant assets/asset classes (what would that algorithm be worth?!). But it is fair to say that SDP can be expected to provide higher monthly withdrawals at a given level of risk than many other popular methods if future returns are similar to past returns.

Two observations:
1) To determine the "utility weighted" optimal withdrawal rate, we would need to account for the varying marginal value/utility of monthly withdrawal amounts. Simply stated, a retiree who is comfortably living on $3000 per month probably feels a great deal more "negativity" to the idea of living on $2000 per month than he feels "positivity" about the prospect of receiving $4000 per month, though the difference between the two results is the same. As he looks forward and cannot accurately determine either his withdrawal timeline or his portfolio returns, he (rationally) biases his withdrawal strategy to improve the chances of having "enough", even if this is suboptimal if we consider only the absolute value of the expected withdrawals. Not every dollar provides an equal utility to the retiree, and "enough" is likely to be far more important than "optimum". This effect could be incorporated into SDP, at least in a rough sense, with an input that allowed for the retiree to assess the degree of "pain" or "benefit" associated with different withdrawal amounts compared to a baseline.
2) It would be interesting to do a sensitivity analysis on SDP regarding portfolio return rates. The article takes an informal approach to this (with the illustration using arbitrary reduction of expected returns compared to historical rates), and this example does reflect well on the SDP approach. I think many people are sufficiently concerned about the applicability of historical return data going forward that a more formal look at this issue would assist in the acceptance of SDP.

Thanks again for your previous comments, and for the article.

seraphim 10-16-2014 04:39 PM

Quote:

Originally Posted by Cut-Throat (Post 1502659)
No, you are not alone in this attitude. And I would suggest that VPW is not for you then. One of the objectives of VPW is to be able to spend more.

VPW is not for a lot of people in retirement. Some people enjoy frugality and comfort of always having the Big Nest Egg. I have even seen folks where spending money is 'painful' even if they can afford it. Almost everything to them is a 'waste of money'. Some people in retirement are not happy, unless they see their nest egg increase throughout retirement. They enjoy piling it up and enjoy the power that dangling a windfall to potential heirs gives them. Money is power, and for some relinquishing that power is difficult.

For myself, I can adjust my standard of living to any budget available. I have no problem spending my money. I enjoy it. I enjoy Fly Fishing for Exotic Species and far flung travel. This does not come cheap and I always have new ideas. I have no desire to leave a pile after I am gone. Their are many paths in retirement and VPW addresses the goals of people that want to spend their nest egg.


You don't need VPW to live a dream requirement. We don't, and we do. You merely have to accumulate sufficient resources. *grin*. Your stereotyping seems a bit harsh.


Sent from my iPad using Early Retirement Forum

Cut-Throat 10-16-2014 06:21 PM

Quote:

Originally Posted by seraphim (Post 1504581)
You don't need VPW to live a dream requirement. We don't, and we do. You merely have to accumulate sufficient resources. *grin*. Your stereotyping seems a bit harsh.

My response was to the following post:

That's the part that always makes me shake my head when I see it mentioned.We have absolutely no desire to spend more than we do; it wouldn't increase our happiness one bit. If we leave a pile behind at the end, so what? I suspect we're not alone in this attitude.

This poster was 'Shaking his head, when he saw that people would like to spend more in retirement'.... It's just not that hard to understand from my perspective. I see the camper as your avatar; That would not be any part of my 'Dream Retirement'.... I have accumulated sufficient resources that I no longer have to or wish to sleep in one on vacation. ;D But, if you like it, I would not question your choice.


All times are GMT -6. The time now is 03:36 PM.

Powered by vBulletin® Version 3.8.8 Beta 1
Copyright ©2000 - 2018, vBulletin Solutions, Inc.