Probability of Success at varying % Equity AA

[big-papa]

I believe that the success rates shown include both historic bond and stock yield averages. However, IMHO, it appears that we'll never see really high bond yields again in our lifetime, given the Fed's manipulation of the $/interest rates, and the need for cheap $ to allow us to continue deficit spending. My theory is that the model over-accounts for the safety given by bonds, since the returns will never return to what they were. Just my theory.... Vanguard's 'balanced asset mix' chart shows bond returns from 1926-2012.

Those types of simulations, unless they're done with Monte Carlo, usually use the actual returns (or synthesized equivalents) of stocks and bonds in the exact sequence that they occurred in the past. There have been other periods of low bond returns, but like everything, they didn't last forever. Now a combination of low bond returns simultaneous with high stock valuations - not so sure there's a lot of precedence there. Good thing the future is unknowable.

 

[CardsFan]

I believe that the success rates shown include both historic bond and stock yield averages. However, IMHO, it appears that we'll never see really high bond yields again in our lifetime, given the Fed's manipulation of the $/interest rates, and the need for cheap $ to allow us to continue deficit spending. My theory is that the model over-accounts for the safety given by bonds, since the returns will never return to what they were. Just my theory.... Vanguard's 'balanced asset mix' chart shows bond returns from 1926-2012.

And in the early 80's we were told we would never see home loan interest rates below 10% in our life time.

"You might be right, I might be crazy", but I will wait and see.

 

[HI Bill]

"You might be right, I might be crazy", but I will wait and see.

+1. I'm just saying that the past bond returns are not necessarily indicative of future bond returns...so your AA might or might not provide as much down side protection as they historic averages indicate.

 

[Midpack]

In 1987 I had no money so it was easy! I tracked everything even back then and our net worth at end year was $7,000 (first year of marriage too!). During other downturns I was employed and making good money so I happily continued to buy all the way through and am coasting on that today. (Net worth 143,000% higher !). The real question is how much of a downturn would shake my confidence now that I don’t have a paycheck coming in and never will again.... I hope I don’t get really tested.

History says you WILL “really be tested,” several times if you have more than 20 years in retirement. I’m glad I was invested in 1987, 2000 & 2008 and I read The Four Pillars of Investing* - I believe I have a good idea how I’ll react, stay the course. If history is FAR worse than anything we’ve ever seen, there may not be any $ defense anyway.

* before Dr Bernstein lost faith in all investors.

 

[Midpack]

Great thread!

I'm often out in the weeds, but in the unlikely event that I'm reading all this correctly, the main difference between a 20/80 and an 80/20 is the volatility during the course of the study and perhaps what is left as a balance at life's end.

Part of the results presented in the earlier thread.

 

[ERD50]

... For example, if you want to retire with a 100% success rate and % equity - history suggests you'd need 167%, or 67% more than another retiree with a 60:40 AA and 95% success rate. That's a LOT more years working to retire, or dramatically less spending in retirement. We all have to assume some risk, it's just deciding what trade off between risk and when to retire (or how much to spend) we can live with. ...

Good post, I couldn't follow your math until I realized you slipped and left out a "zero" in that line...
"For example, if you want to retire with a 100% success rate and [zero] % equity - ...

So I initially read that as "100% success rate and 100% equity", and it wasn't adding up. (And please don't take that as criticism, it is a great post, I just wanted to point out that that missing zero might throw some people off, maybe you have time to edit?)

So yes, I agree. This was something I went back and forth with with a seemingly long gone poster, he kept referring to his 0% equity position as "safe, conservative" , etc. As this shows, and all my previous studies have shown, if you want low volatility, there has (historically) been a high price to pay. People can do what they want, but they should be aware of the consequences.

-ERD50

 

[NW-Bound]

... This was something I went back and forth with with a seemingly long gone poster, he kept referring to his 0% equity position as "safe, conservative" , etc. As this shows, and all my previous studies have shown, if you want low volatility, there has (historically) been a high price to pay. People can do what they want, but they should be aware of the consequences.

-ERD50

I think people who are risk-averse already accept the fact that their spending power will be limited. They are also the more conservative and frugal type who are not going to blow any dough. Their financial survivability is better than the other extreme case of people who put it all on red.

I told earlier of the husband of my sister-in-law. I stopped trying to convince him a long time ago. They are doing quite all right, as far as I know. He's in his early 80s now, so does not spend much anyway.

 

[USGrant1962]

I think people who are risk-averse already accept the fact that their spending power will be limited. They are also the more conservative and frugal type who are not going to blow any dough. Their financial survivability is better than the other extreme case of people who put it all on red.
...

Your statement is exactly the opposite of what Midpack's analysis shows, both in this and the prior thread. 100% equity has better survivability than 100% FI over 30 years. So I'm not clear on what you are saying.

 

[NW-Bound]

I don't know the WR of the husband of my sister-in-law, but if he draws only 2%, he has enough to last him a long time if he gets enough return from CD to merely match inflation.

PS. By people who "put it all on red", I do not mean people who go 100% on the S&P. I was talking about people who put it all on bitcoin, or on a single stock hoping to get a 10x return. To me, that is the other extreme opposite of going 100% on CD.

 

[RunningBum]

Well, I think the other end of bitcoin or single stock is putting your money under your mattress or in a hole in your back yard.

 

[FI_RElater]

...not to mention the portfolio left after first of couple passes

That’s right, in choosing between one of the middle allocations, one should look at annual volatility and worse case drawdown over multiple years, versus
worst case and average size of the residual portfolio. Worst case drawdown with the traditional method is portfolio going to 0 unless 100% success is used. And even then it’s designed to drawdown to close to zero worst case over the period specified anyway.

For some people, residual portfolio matters, or they hope to leave at least X amount behind. For others, residual portfolio is of little importance.

I evaluated different withdrawal rates for the %remaining portfolio case, and starting income and max drawdown were major criteria, but also noted the residual portfolio. I only looked at the 50/50 and 60/40 cases though. Evaluating worst case draw down took identifying the worst year and running multiple individual scenarios, so it was a lot of work using FIREcalc. You never went to 0, but worst case drawdown (inflation adjusted) usually took many many years and resulted in a much smaller portfolio and thus much smaller annual income compared to the starting income.

Having read so, so many discussions on AA and seeing even early papers showing that above about 35% equities should give a portfolio a level of survivability from inflation.... decided to keep our AA at 45/55 but use a 3.5% WR as max draw. This is in keeping with the idea that the future may not be as rosy as the past (so SWR may start being closer to those of other developed countries, per Estrada "Maximum Withdrawal Rates, An Empirical and Global Perspective") but slightly higher than minimum equity level since bond yields have been pushed so low.

What I also focused on was the residual portfolio level at the period of the first to die, where if I pass first the pension is halved and the surviving spouse has the higher of the SS benefits. (Don't even include the second SS when testing... so survivability is definitely enhanced during the intervening years when both have benefits; already retired in mid-60's but haven't started SS). Then one can examine the case of portfolio value and income needs for the surviving spouse and determine if it could support those needs. {For us it could, but we've also only been drawing below 2% in these early years, are probably beyond early SOR period, and having looked at the usual "when to draw" aspects...will likely start mine at FRA (since PIA's are similar and spouse is younger, such that if I pass there's SS survivor benefits until they get their own at 70).... looks like we'll have to start ramping up our burn rate }

 

[FI_RElater]

One of the reasons I like PMT based withdrawal methods instead. For a given number of years you want to plan for, you can set the terminal value of the portfolio to be exactly $0 or any other number you want it to be. One trades off the possibility of running out of money prematurely for a more volatile income stream, something that I find more palatable for my situation, especially once SS starts.

One of the things you find when looking at non-SWR-ish types of withdrawal methods is that many of the rules of thumb and even terminology for withdrawals were made assuming SWR. And those might not apply to a variable withdrawal method, or at least not in the same way. For example, you no longer talk about probability of running out of money for an 80/20 vs 60/40 portfolio, but rather what the volatility of withdrawals might look like. And the details of that depend on the actual variable withdrawal method chosen.

...and that's why I would examine a Guyton-Klinger method with guide rails and an averaging so as to reduce income variability but still keep safety paramount.

 

[Dtail]

...and that's why I would examine a Guyton-Klinger method with guide rails and an averaging so as to reduce income variability but still keep safety paramount.

I am currently using the Clyatt version of the % remaining portfolio methodology.
Trying to get some variable spending protection in using a 3%WR instead of a 4%WR. Thus if the 5% cuts get to be too much in multiple years, I would slowly up the WR% to 3.5% to combat the variable effect, which is still below the 4%WR used in the original methodology.

 

[FI_RElater]

...that's in part why I used the 3.5% WR as my max (but we've only been below 2% so far in our retirement...)

(fortunately, we'd saved a lot, so are far from on the edge... with no debt, pension, able to start SS at any time, and have most all income for discretionary...)

 

[Callitaday2022]

Very interesting, but I do need to leave a legacy for one of my sons care...link to other comparison please and thankyou .

 

[LRDave]

Yes. I think the ubiquitous "risk tolerance assessment" questionnaires found on the internet are completely useless. I have always liked Fred Schwed's discussion of the issue:

There are certain things that cannot be adequately explained to a virgin either by words or pictures. Nor can any description that I might offer here even approximate what it feels like to lose a real chunk of money that you used to own.
​

The first hit is the worst. 1987 for us. With each subsequent wild ride it gets easier to relax and enjoy the views. We have never sold even a dime's worth of stock in any downturn.

In those events, I was a younger man and still working and saving. I just didn't look at my "retirement account" statements when they arrived monthly in the mail.

This next downturn (assuming it ever arrives) will be the first for us when our "retirement account" is more than just the target for our saving goals. We won't have to sell equities - even if it lasts 10 years or more. But I am not sure how I'll do in the nap department. DW will do fine.

 

[Midpack]

Very interesting, but I do need to leave a legacy for one of my sons care...link to other comparison please and thankyou .

FIRECALC allows that choice too, just use it. It’s the last button on the last tab. FIRECALC is more versatile than some folks realize...

https://firecalc.com/

Leave some money in the portfolio for my estate
There should be a minimum of $__ left in the portfolio at all times, including at the end.

 

[OldShooter]

In those events, I was a younger man and still working and saving. I just didn't look at my "retirement account" statements when they arrived monthly in the mail.

This next downturn (assuming it ever arrives) will be the first for us when our "retirement account" is more than just the target for our saving goals. We won't have to sell equities - even if it lasts 10 years or more. But I am not sure how I'll do in the nap department. DW will do fine.

You'll nap well, too. Being self-aware is the first step plus you will get coaching from DW and from here. Not to worry; ten years is a more than adequate buffer.

 

[Dd852]

History says you WILL “really be tested,” several times if you have more than 20 years in retirement. I’m glad I was invested in 1987, 2000 & 2008 and I read The Four Pillars of Investing* - I believe I have a good idea how I’ll react, stay the course. If history is FAR worse than anything we’ve ever seen, there may not be any $ defense anyway.

* before Dr Bernstein lost faith in all investors.

Absolutely and I know that - I just can’t be wholly sure of my psychological reaction without a paycheck. So I do what I can to massage my own psyche — keep a year and a half expenses in cash, for example, and have a current dividend yield of about 60% of the year’s expenses. SO those together should keep me from being twitchy and doing anything silly!

 

[FREE866]

If one of your goals is having a higher ending balance the heavier stock portfolios--90%+ show a SUBSTANTIALLY higher balance than 50/50 over a couple of decades.

 

[footenote]

FIRECALC allows that choice too, just use it. It’s the last button on the last tab. FIRECALC is more versatile than some folks realize...

https://firecalc.com/

Thanks, Midpack, for reminding folks about this feature.

(I use it as a long-term care backstop, setting the average cost of total (multi-year) LTC as always available. That means we may leave a legacy we don't necessarily want/need to leave, but it's a useful way to model the problem if you don't have LTC insurance.)

 

[Tiger8693]

This is a great thread! Very interesting about the "remaining value vs % equity", and I think I will try to run the same analysis to and show the graph of remaining portfolio value as well, unless you have that information already? Would be interesting I think...

Thanks for this one!

 

[Midpack]

This is a great thread! Very interesting about the "remaining value vs % equity", and I think I will try to run the same analysis to and show the graph of remaining portfolio value as well, unless you have that information already? Would be interesting I think...

Thanks for this one!

The first thread included residuals, high-low-average, for 95% success at least.

http://www.early-retirement.org/forums/f28/portfolio-required-v-equity-asset-allocation-101660.html

 

[FREE866]

The first thread included residuals, high-low-average, for 95% success at least.

http://www.early-retirement.org/forums/f28/portfolio-required-v-equity-asset-allocation-101660.html

very cool


do you have a graph for 15 years?

 

[Tiger8693]

Oh, thanks! I'll go back to that thread and check it out.