Allocation vs withdrawal rates

[rbmrtn]

Paul Merriman maintains an article on asset allocation. Similar to the results REwahoo showed from firecalc, you don't gain much going above 40% stock and increase the volitility.

Fine Tuning Your Asset Allocation 2015 - Paul Merriman

[marko]

Quote:

Originally Posted by REWahoo Here ya go - from FIRECalc. Indicates you need 40% or more equities in your AA to maximize 30 year survivability:

This has come up before but if I'm reading the chart correctly, it doesn't matter if it's 40% or 80%. 80% doesn't seem to get you any more than 40%

I just have a hard time wrapping my head around that.

Or is this solely demonstrating 'survivability' and not growth?

[REWahoo]

Quote:

Originally Posted by marko Or is this solely demonstrating 'survivability' and not growth?

Exactly.

80% will almost certainly have you end up with a larger terminal balance 30 years down the road, but the ride will be much more exciting in getting there.

[marko]

Quote:

Originally Posted by REWahoo Exactly. 80% will almost certainly have you end up with a larger terminal balance 30 years down the road, but the ride will be much more exciting in getting there.

Thanks. I love the term "terminal balance". So............exacting.

[ESRwannabe]

Quote:

Originally Posted by youbet Sadly, Vanguard doesn't say that at all....... Not even close. They don't plan on maintaining a 70/30 allocation in the Managed Payout Fund and preserving capital over the long run at the original investment level or better, despite 4% real annual withdrawals, is only a goal, not a given. They do say, on the link you provided in another post: Vanguard's actual statement is very different than your interpretation.

You all sure do take things literally... From where I'm from, if someone says they "figure" or "reckon" they can do something it doesn't mean 100% guarantee that it will happen... It means that they will *try* to make it happen.

Anyway your calculations are not going to be correct. Vanguard is including 10% in a market neutral fund, and soon another 10% in a "hedge fund" of sorts. They also have 20% in low volatility and 5% in commodities.

Furthermore the AA and the constituents of the fund have shifted many times. Right now they are 5% over weight in emerging market stocks. In the past they have been over weight in reits. I've also seen the overweight in corporate bonds... You are not going to be able to use FireCalc to predict what will happen with this fund.

[youbet]

Quote:

Originally Posted by ESRwannabe You all sure do take things literally... From where I'm from, if someone says they "figure" or "reckon" they can do something it doesn't mean 100% guarantee that it will happen... It means that they will *try* to make it happen. Anyway your calculations are not going to be correct. Vanguard is including 10% in a market neutral fund, and soon another 10% in a "hedge fund" of sorts. They also have 20% in low volatility and 5% in commodities. Furthermore the AA and the constituents of the fund have shifted many times. Right now they are 5% over weight in emerging market stocks. In the past they have been over weight in reits. I've also seen the overweight in corporate bonds... You are not going to be able to use FireCalc to predict what will happen with this fund.

Sounds like you're on top of the fund goals and strategies now.

[rafapark]

Thank you everybody for the responses. Yes, sorry for the typo, I meant 35%/65%

The reason I ask is that I have run firecalc and other tools including OTAR using 20%/80%, 30%/70% and anything in between. Based on my expected budget I get 100%. I even get 100% with 10%/90%.

So even if I get 100% with 10%/90%, should I go to a riskier allocation since all these tools are based on historical returns which is fine for planning purposes I guess. I just wanted to know how people are calculating allocations based on future expected returns ( and yes, I know nobody has a crystal ball, but I was just curious how people are planning and what assumptions people are making when firecal gives them 100% with a low risk allocation).

[pb4uski]

You are in the "won the game" zone and there are two schools of thought.

One is that because your WR is low you can prudently take on more risk and volatility and have a higher stock allocation (high volatility and high potential reward). The opposite end of the spectrum is that since you have plenty that there is no need to take any risk to have what you need to meet your goals (so you would have little in equities and low volatility but low reward).

I lean towards the former just based on my many years of investing (dance with the girl who brung you) and to make it more likely to leave a nice legacy for our kids and favorite charities.

At the end of the day... a personal judgement.

[REWahoo]

Quote:

Originally Posted by pb4uski At the end of the day... a personal judgement.

+1

Two other factors: what is your risk tolerance and do you hope to leave something for your heirs. Both those considerations should influence your judgement.

[Midpack]

Quote:

Originally Posted by pb4uski You are in the "won the game" zone and there are two schools of thought. One is that because your WR is low you can prudently take on more risk and volatility and have a higher stock allocation (high volatility and high potential reward). The opposite end of the spectrum is that since you have plenty that there is no need to take any risk to have what you need to meet your goals (so you would have little in equities and low volatility but low reward). I lean towards the former just based on my many years of investing (dance with the girl who brung you) and to make it more likely to leave a nice legacy for our kids and favorite charities. At the end of the day... a personal judgement.

Good description of the choices.

Though I was completely comfortable with plenty of risk during accumulation (100/0 until almost age 50), now that we're in distribution I don't see any reason to take more risk than necessary now that we've 'won the game' somewhat. I'm close to 60/40 now and expect to adjust down to 40/60 or less in the decade(s) ahead.

Unlike pb4uski, we don't have kids, so legacy/residual estate isn't high on our priorities. If we did, I suspect we'd agree with pb4uski. Odds are we'll still leave a tidy sum for charities.

Though we've had/have some zero risk folks here, almost no one should go below 20/80 IMO (unless maybe if you're truly near the end like my 93 yo Dad). That requires a 40-60% larger nest egg than even 30/70, something few can afford. Zero risk is very expensive...

[Dawg52]

Quote:

Originally Posted by REWahoo +1 Two other factors: what is your risk tolerance and do you hope to leave something for your heirs. Both those considerations should influence your judgement.

As you know, my risk tolerance is low and with no children there is really no need to take on the extra volatility that comes with a higher tilt towards equities. I wouldn't mind leaving some to nephews and charities, but I would like to keep the old liver as healthy as possible too.

[mathjak107]

after the wild 6 figure swings at day 1 of my retirement i am finding i am no longer comfortable watching almost 100k vanish in one session .

i think i may reduce from 50/50 to 35-40% and do the rising glide path thing back up over years .

this early on downside risk is very important since all the success rates do not figure large extended hits right at the gate .

this is my 3rd week in retirement and seen 130k or so evaporate in that time frame .

while i was 90% equity's my whole life after yesterdays wild day i am finding i am no longer as immune to seeing such large sums swing like that .

i think 40/60 may also be a lot more comfortable assuming less aggressive funds .

[rafapark]

That's my point. Why would I endure the stress of worrying about the stock market with a high equity allocation when I don't have to? I don't plan to get rich by investing in the stock market when I retire anyway. I am staying with 30%/70% and don't worry about what the market does too much. Even with this allocation, I'd have a significant amount of money left at 95 according to the calculators. No heirs, so I guess charities will be happy.

[mathjak107]

i agree , if you already won the game why keep playing .

boy if i could live on 2% withdrawals i would be in cd's , short term bonds , tips and maybe 15% equity's .

but i can't , but if i could ha ha ha .

the problem i have is it isn't percentages that get me it is dollars .

being down 10% when you are still accumulating money may barely be a blip in dollars compared to when you are at your peak in savings .

a 100k swing in one day is not even comprehensible to me at this stage after yesrdays ride .

i am realizing i want to reduce this ride .

[hnzw_rui]

Quote:

Originally Posted by mathjak107 this early on downside risk is very important since all the success rates do not figure large extended hits right at the gate.

Isn't this exactly the point of FIRECalc?

[mathjak107]

history does not have many scenarios where retirees got whacked day 1 and it was prolonged . the only real prime example is thwe y2k retiree and that cycle is not complete at 30 years yet .

getting whacked after up cycles first is far more common .

[hnzw_rui]

Quote:

Originally Posted by mathjak107 history does not have many scenarios where retirees got whacked day 1 and it was prolonged . the only real prime example is thwe y2k retiree and that cycle is not complete at 30 years yet . getting whacked after up cycles first is far more common .

I'd say 1929 is a fairly good example of someone's portfolio getting whacked repeatedly.

[mathjak107]

kitces says close but the 2000 retire may still be a failure point while the 1929 retire was not . the length of the recovery in 2000 is the main difference .

in dollar terms the 1929 retiree recovered pretty quick since consumer prices fell 18% and dividends were double digits .

[hnzw_rui]

Quote:

Originally Posted by mathjak107 kitces says close but the 2000 retire may still be a failure point while the 1929 retire was not . the length of the recovery in 2000 is the main difference . in dollar terms the 1929 retiree recovered pretty quick since consumer prices fell 18% and dividends were double digits .

As my crystal ball and time machine both aren't working, we'll just have to see what happens.

Right now, the 2000 retiree looks to still be ahead of the 1929 retiree based on the withdrawal rates (70/30 portfolio).

Revisiting the worst times to retire in history (2014 update) | Investing For A Living

A quick calculation of inflation adjusted balances at year 15 are as follows:

1929: 458,598
1966: 361,352
2000: 581,206

[mathjak107]

here is kitces workup on the subject


https://www.kitces.com/blog/how-has-...sis/#more-7856