I am confused by the results I got from FIRECalc. I kept all variables, but two, the same when I ran two scenarios. I don't understand the outcome of the spending level results based on the two variables that I altered. In the Investigate Section, I chose the option that would produce a spending level with a 95% success rate. Here are the altered variables and the 95% spending level results:
mean total portfolio return 10.7
variability (standard deviation) 15
spending level that results in 95% success rate $17,226
Based on a 80% stock and 20% bond allocation
mean total portfolio return 8.6
variability (standard deviation) 6.4
spending level that results in 95% success rate $22,475
Based on a 20% stock, 50% bond (investment grade, high yield, international) and 30% short term bonds
What I don't understand is, why should I be in an asset allocation that is more risky (Scenario A), if the less risky asset allocation produces a higher spending level with a 95% success rate (Scenario B)? Can you help me to understand why the riskier asset allocation produces a lower spending level that results in a 95% success rate? Except for the mean total portfolio return and the standard deviation of the portfolio, I kept all other variables constant. Thank you for your help.
mean total portfolio return 10.7
variability (standard deviation) 15
spending level that results in 95% success rate $17,226
Based on a 80% stock and 20% bond allocation
mean total portfolio return 8.6
variability (standard deviation) 6.4
spending level that results in 95% success rate $22,475
Based on a 20% stock, 50% bond (investment grade, high yield, international) and 30% short term bonds
What I don't understand is, why should I be in an asset allocation that is more risky (Scenario A), if the less risky asset allocation produces a higher spending level with a 95% success rate (Scenario B)? Can you help me to understand why the riskier asset allocation produces a lower spending level that results in a 95% success rate? Except for the mean total portfolio return and the standard deviation of the portfolio, I kept all other variables constant. Thank you for your help.