I've been running simulations again. I was wondering if you optimized your stock allocation for specific, very bad single retirement dates in the past, would some pattern emerge. To do this study, I first ran SWR v6.1 with the following assumptions:
(1) January values for the S&P500
(2) 50% of the annual withdrawal taken at the beginning of the year, 50% at year end.
(3) inflation indexed to the CPI.
(4) fixed income series based on TIPS@2%
(4) 0.20% annual expense ratio
(5) portfolio rebalanced annually
Next I considered two allocation cases:
(I) I used a 60% stock allocation and increased the initial withdrawal rate till I got 10 failures (ie 10 starting years that resulted in portfolio bankruptsy).
(II) I used a 30% stock allocation and increased the initial withdrawal rate till I got 10 failures.
Between the two cases above, I came up with 13 unique years that produced failures with one or both stock allocations.
Finally, I simulated retirement starting in January of each of the failure years and altered the stock allocation in increments of 10% to identify the optimum allocation for retirees who retired during each of these tough times.
Here's the results:
............Optimum ....................
............Stock ....................
............Allocation...................
YEAR....(stock/TIPS).......SWR
1893......100..................5.52%
1903........90..................4.87%
1907........60..................4.63%
1910........70..................4.52%
1929........40..................4.66%
1930........60..................4.66%
1962........70..................4.64%
1964........60..................4.46%
1965........30..................4.32%
1966........10..................4.34%
1967........50..................4.53%
1968........30..................4.46%
1969........30..................4.53%
The optimum allocation if you consider all years is 30% and the overall SWR is 4.30%.
I was surprised at what little this effort showed me. There are a couple of thing that might be worth noting. For one, the initial retirement years that were bad because of high inflation tended to exhibit lower optimum stock allocations than other bad years. A second result that surprised me is that only one year (1966) produced an optimum stock allocation that was lower than the overall optimum allocation. In reality, the optimum allocation may have been shifted downward for three other years, but if that shift were less than 10%, it wouldn't have showed up in this study.
(1) January values for the S&P500
(2) 50% of the annual withdrawal taken at the beginning of the year, 50% at year end.
(3) inflation indexed to the CPI.
(4) fixed income series based on TIPS@2%
(4) 0.20% annual expense ratio
(5) portfolio rebalanced annually
Next I considered two allocation cases:
(I) I used a 60% stock allocation and increased the initial withdrawal rate till I got 10 failures (ie 10 starting years that resulted in portfolio bankruptsy).
(II) I used a 30% stock allocation and increased the initial withdrawal rate till I got 10 failures.
Between the two cases above, I came up with 13 unique years that produced failures with one or both stock allocations.
Finally, I simulated retirement starting in January of each of the failure years and altered the stock allocation in increments of 10% to identify the optimum allocation for retirees who retired during each of these tough times.
Here's the results:
............Optimum ....................
............Stock ....................
............Allocation...................
YEAR....(stock/TIPS).......SWR
1893......100..................5.52%
1903........90..................4.87%
1907........60..................4.63%
1910........70..................4.52%
1929........40..................4.66%
1930........60..................4.66%
1962........70..................4.64%
1964........60..................4.46%
1965........30..................4.32%
1966........10..................4.34%
1967........50..................4.53%
1968........30..................4.46%
1969........30..................4.53%
The optimum allocation if you consider all years is 30% and the overall SWR is 4.30%.
I was surprised at what little this effort showed me. There are a couple of thing that might be worth noting. For one, the initial retirement years that were bad because of high inflation tended to exhibit lower optimum stock allocations than other bad years. A second result that surprised me is that only one year (1966) produced an optimum stock allocation that was lower than the overall optimum allocation. In reality, the optimum allocation may have been shifted downward for three other years, but if that shift were less than 10%, it wouldn't have showed up in this study.