DIESEL article in FPA Journal

[magellan_nh]

Hey,

Did anyone read the DIESEL article in the Sept FPA Journal at http://www.fpanet.org/journal/articles/2006_Issues/jfp0906-art7.cfm


I saw some discussion in Morningstar's forum and thought I'd give it a read.

It's a system for managing withdrawals in such a way that you can supposedly start at 7% and adjust up by 3% per year, without impacting chances for success.

The folks on Morningstar really ripped the article apart because in the period shown (from 1972 to 2005), the system would have only retained around 60% of the retiree's purchasing power (at least the portfolio didn't run out).

I'm kind of surprised that the FPA Journal published this, I've always thought of them as having pretty high standards. Maybe the naysayers at morningstar don't know what they're talking about, but their arguments look solid to me.

In any case, the article is a relatively easy read and it covers quite a bit about managing cashflows during retirement and gives some insight into how the financial planning world works.

One thing the system requires is that all income and dividends are reinvested, then cashflows are skimmed off when rebalancing (quarterly). I can't figure out what the reason for the automatic reinvestment would be (they recommend no-load funds).

Anyhow, reading about the Ray Lucia "buckets" strategy made me think of this other report. I guess everyone is trying to figure out a "system" that gets the withdrawal rate up...

Jim


{Jim - Edited typo in date range }

 

[haha]

I think it is a hard thing to accept, but there really are no magic bullets. Over any long period of time, what you can withdraw from a portfolio is bounded on the top by what the portfolio can earn, plus any upward PE revaluation that takes place over the period of withdrawal. (Of course devaluation of PE can hurt.)

It takes cojones grandes to assume much PE revaluation from here, so you must look to earnings and only earnings to for your withdrawals.

I say bounded on the top, because volatility makes what you can safely withdraw less than what the portfolio earns. Sometimes very much less.

Any plan that gets much fancier than this is data mining, wishful thinking, and financial planners trying to add legitimacy to their firms by getting into print.

4% is probably as good as anything as an upper limit, especially if you have a long time to finance. It may turn out to be too conservative, or too liberal.

It seems to me that if one is going to be a passive investor/acceptor of index returns, the best place to apply effort is in decreasing volatility at the lowest cost in lost yield/return.

Ha

 

[astromeria]

I'm not convinced to withdraw 7%, but it is an interesting asset allocation, if too aggressive for my taste (and I would further subdivide international at least to add small caps):

DIESEL
S&P 500--------25%
DFA SmCap----25%
MSCI EAFE-----22.5%
NAREIT----------5%
GSCI-------------5% (commodities index)
Citi Comp Bond-15% (same as/similar to Vg Total Bond or AGG?)
3-mo T-Bill-------2.5%

Maybe an AA based on it, something like this:

DIESEL-like Allocation
S&P 500--------20%
DFA SmCap----20%
MSCI EAFE-----10%
DFA Sm C Int--10%
NAREIT----------5%
GSCI-------------5% (commodities index)
Citi Comp Bond-15% (same as/similar to Vg Total Bond or AGG?)
5-yr T-Bills------12.5%
3-mo T-Bill-------2.5%

 

[youbet]

I'm not convinced to withdraw 7%, but it is an interesting asset allocation, if too aggressive for my taste (and I would further subdivide international at least to add small caps):

And if we just knew how the various asset classes would perform in the future time period............

 

[astromeria]

No amount of proof could convince me to hold only 17.5% in fixed income in retirement, given that I am pensionless and DH nearly so.

 

[Mr._johngalt]

No amount of proof could convince me to hold only 17.5% in fixed income in retirement, given that I am pensionless and DH nearly so.

I too am "pensionless". Sold my last public stock about 10 years ago.

Here it is folks (greatly compressed for readability):

Real Estate 50%
Bonds and bond funds 40%
Cash/CDs 10%

Not too sure what it was 13 years ago when I first bailed. Not too much difference I suspect.

JG