firecalc default portfolio

[mathjak107]

just curious why 75% equity's was chosen as the default portfolio for retirement ?

i think most folks who depend on their portfolio's for income are going to have much smaller equity positions , typically 40-60% .

i think if they have pensions that cover most of their expenses they will have higher equity positions since they can take the risk and in reality never left the accumulation stage since the pay check never stopped , but then again their draw rates are so low odds are success rate isn't a concern .

so just wondering why the default wasn't a more typical 50/50 or 60/40 mix and then let the user alter it from there if need be ..

 

[MichaelB]

The 75% allocation isn't for people in retirement, it is for all users. My guess is the majority of users are still working and have a higher equity allocation. It really doesn't make a difference, because the asset allocation can be adjusted to suit the specific user's situation.

 

[mathjak107]

i would agree with you except that is not how firecalc defines the default allocation .

i would just assume they picked that allocation because folks projecting are still in their accumulation stage but that is not what firecalc says and that is why i am questioning the allocation used as a default .

" your retirement portfolio is invested in a "couch potato" portfolio of 75% stock index and 25% bond funds, with a 0.18% fee to the fund."

i think 40-60% is going to be far more typical . i only bring it up because i have seen quite a few folks use it in default mode and get totally different results then their actual situation . i was just thinking if the default was more typical it is one less thing most will have to change .

 

[MichaelB]

i would agree with you except that is not how firecalc defines the default allocation .

" your retirement portfolio is invested in a "couch potato" portfolio of 75% stock index and 25% bond funds, with a 0.18% fee to the fund."

It's a retirement portfolio even if you are still working.

 

[ERD50]

Plus, 75% is near the mid-range of highest success for most scenarios.

Run the 'investigate' tab for asset allocation. The success rate drops off a little on the high end at ~ 95/5 , and at the low end at ~ 35/65.

-ERD50

 

[mathjak107]

well obviously you get good results with 75% , the only question is as a default is it to high considering most retirees will not be in that range unless they are drawing very little and can take the risk . in fact many retirees have no clue what their allocations really are so they just run the default

 

[MichaelB]

well obviously you get good results with 75% , the only question is as a default is it to high considering most retirees will not be in that range unless they are drawing very little and can take the risk . in fact many retirees have no clue what their allocations really are so they just run the default

Considering it's for working people and retirees, there are more people working, the default allocation isn't bad, it can can be changed, and one size does not fit all, isn't this much ado about nothing?

 

[mathjak107]

i don't think i would have brought it up if it wasn't for the fact they specifically use the words retirement portfolio for the couch potato . i would have just assumed it is for working people .
i just thought if they were trying to reflect a typical retirement portfolio as the wording suggests that would be a bit untypical .

 

[ERD50]

well obviously you get good results with 75% , the only question is as a default is it to high considering most retirees will not be in that range unless they are drawing very little and can take the risk . in fact many retirees have no clue what their allocations really are so they just run the default

I'm not sure you can make those assumptions about retiree AAs. And I consider it 'risky' to have an AA much lower than 75/25. That puts you closer to the steeper drop off you see at 35/65.

There might be a poll on AA, though I don't take much/any stock (no pun intended) in self-selected polls.

-ERD50

 

[mathjak107]

well like you say , most survey's for what they are worth show the bulk of the respondents in the 40-60% range . rules of thumb and even target funds are in that range so i would think that most retirees will be in that range . unless they have pensions that cover their needs and have very low draw rates . then for all purposes the pay check never stopped and they really can still be considered in the accumulation stage from a risk stand point .

i know my upper limit now is about 50/50 or so . up to now i was always 90-100% equity .

 

[Major Tom]

It's very easy to change it. As for anyone who is paying so little attention that they just run the default scenario without looking into how to change it well, you can only do so much to help folk.............

I could see an argument for setting the default at something closer to 60/40, as that is the "classic" AA but then, it is so easy to change (oh, I already said that).
MichaelB's comment about a higher equity allocation for those still in the accumulation phase is very valid, I think.

 

[rodi]

mathjak - you are free to set it to match your preferred asset allocation. Just as I do (I run a 60/40 AA).

The same is true for expense ratio/fees.... Several posters here use FA's that charge a fee for AUM... You need to reflect that in your inputs to firecalc. The default is vanguard index funds level of expense ratios.

As for your assumptions about what would be better... No matter what is chosen, someone will say it's too conservative or too aggressive. But since you can change it to fit your preferred asset allocation, no worries and no reason to complain.

If people don't explore all the tabs - they are missing a lot of value in the tool. Which is why I always suggest they explore all the tabs.

I think the bigger risk is someone having everything in CD's and expecting the tool with default settings to be accurate.

 

[MBSC]

just curious why 75% equity's was chosen as the default portfolio?

FireCalc is based on The Trinity Study. For 30 years at 4% WR, the Trinity Study found 75/25 had a higher success rate than the other four portfolios tested, 100/0, 50/50, 25/75 and 0/100. The Trinity Study did not test 60/40 or 40/60.

Success Rate Table: https://www.bogleheads.org/wiki/File:TrinityTable3.jpg

 

[mathjak107]

that is interesting that they never ran 60/40 in the trinity