Join Early Retirement Today
Reply
 
Thread Tools Search this Thread Display Modes
Another look at AA and withdrawal strategies
Old 06-23-2020, 07:07 AM   #1
Recycles dryer sheets
 
Join Date: Oct 2015
Posts: 419
Another look at AA and withdrawal strategies

I would guess this has been banged around before, but a friend of mine was promoting his logic behind a somewhat aggressive AA and withdrawal strategy, which made me pause for a min. His argument was keeping a simple equity/cash bucket system between 80/20 - 90/10 had a higher probability of success long term than say a 60/40, specifically if your 40 holds bonds. His point was average bear markets recover on average of around 3 years so if you pull from your 5 or 3 yr cash bucket during a bear market you should, on average, be fine. Of course, my argument back was what about getting caught in the exceptions... say 2000 or 2008 (8 and 6 yrs to recover, depending what source you use)? Additionally, his point was while equities were more volatile, they clearly have more growth potential and bonds have limited room to move except down in the current interest rate climate. Further, he argued even if you wanted to protect for the worst 8 yr recovery, it would put your AA closer to 70/30. So, does this make a real argument for a long term AA no less than 70/30??
__________________

DawgMan is offline   Reply With Quote
Join the #1 Early Retirement and Financial Independence Forum Today - It's Totally Free!

Are you planning to be financially independent as early as possible so you can live life on your own terms? Discuss successful investing strategies, asset allocation models, tax strategies and other related topics in our online forum community. Our members range from young folks just starting their journey to financial independence, military retirees and even multimillionaires. No matter where you fit in you'll find that Early-Retirement.org is a great community to join. Best of all it's totally FREE!

You are currently viewing our boards as a guest so you have limited access to our community. Please take the time to register and you will gain a lot of great new features including; the ability to participate in discussions, network with our members, see fewer ads, upload photographs, create a retirement blog, send private messages and so much, much more!

Old 06-23-2020, 07:16 AM   #2
Give me a museum and I'll fill it. (Picasso) Give me a forum ...
REWahoo's Avatar
 
Join Date: Jun 2002
Location: No Country for Old Men
Posts: 46,862
Testing theories like this vs history is why FIRECalc was created.
__________________

__________________
Numbers is hard

I've become a social vegan - I avoid meet

Retired in 2005 at age 58, no pension
REWahoo is offline   Reply With Quote
Old 06-23-2020, 07:19 AM   #3
Give me a museum and I'll fill it. (Picasso)
Give me a forum ...
audreyh1's Avatar
 
Join Date: Jan 2006
Location: Rio Grande Valley
Posts: 25,874
I think several folks here use this or very similar approach.

Many are drawn to higher equity exposure because your ending portfolio is likely to be much higher, which is certainly a nice bonus for heirs. This may be particularly appealing to folks that have most of their spending needs covered by SS and pensions.

Others feel like they have more than enough, aren’t looking to leave large funds for heirs, and don’t see the point of taking on more short-term risk for a larger pile at the end.

Different retirees have different goals. It comes down to your goals, so there really is no one-size-fits-all AA.
__________________
Retired since summer 1999.
audreyh1 is offline   Reply With Quote
Old 06-23-2020, 07:44 AM   #4
Full time employment: Posting here.
atmsmshr's Avatar
 
Join Date: Mar 2016
Location: An island off the coast of Florida. (Ok - if you really need to know it's Vero Beach)
Posts: 555
When I was working and with a fairly secure income, pedal to the metal and nearly 100% stocks for 32 years. Now that I am drawing down and more acutely aware of Sequence of Returns Risk, allocation is much more conservative, with a plan for an increasing equity glidepath.

As said before, different goals for different people - and add that the goals and risk tolerance change with circumstance.
__________________
DW and I are 59/58. FIRE August 2019. Non-cola pension available but will remain untouched until mid sixties to grow, max SS for DH at FRA or 70. Mega retiree health available. IRA rollover from 401k Jan 2020 for NUA treatment. LTCG next few years. AA 33% stocks, 10% cash and 57% Intermediate Treasury fund. Rising equity glidepath.
atmsmshr is offline   Reply With Quote
Old 06-23-2020, 07:48 AM   #5
Give me a museum and I'll fill it. (Picasso)
Give me a forum ...
pb4uski's Avatar
 
Join Date: Nov 2010
Location: Vermont & Sarasota, FL
Posts: 26,131
Here's what FIRECalc says:

90/10:
Quote:
FIRECalc looked at the 120 possible 30 year periods in the available data, starting with a portfolio of $750,000 and spending your specified amounts each year thereafter.

Here is how your portfolio would have fared in each of the 120 cycles. The lowest and highest portfolio balance at the end of your retirement was $-507,733 to $5,193,687, with an average at the end of $1,780,352. (Note: this is looking at all the possible periods; values are in terms of the dollars as of the beginning of the retirement period for each cycle.)

For our purposes, failure means the portfolio was depleted before the end of the 30 years. FIRECalc found that 6 cycles failed, for a success rate of 95.0%.
80/20:
Quote:
FIRECalc looked at the 120 possible 30 year periods in the available data, starting with a portfolio of $750,000 and spending your specified amounts each year thereafter.

Here is how your portfolio would have fared in each of the 120 cycles. The lowest and highest portfolio balance at the end of your retirement was $-360,375 to $4,560,354, with an average at the end of $1,526,646. (Note: this is looking at all the possible periods; values are in terms of the dollars as of the beginning of the retirement period for each cycle.)

For our purposes, failure means the portfolio was depleted before the end of the 30 years. FIRECalc found that 6 cycles failed, for a success rate of 95.0%.
60/40:
Quote:
FIRECalc looked at the 120 possible 30 year periods in the available data, starting with a portfolio of $750,000 and spending your specified amounts each year thereafter.

Here is how your portfolio would have fared in each of the 120 cycles. The lowest and highest portfolio balance at the end of your retirement was $-204,356 to $3,423,674, with an average at the end of $1,066,111. (Note: this is looking at all the possible periods; values are in terms of the dollars as of the beginning of the retirement period for each cycle.)

For our purposes, failure means the portfolio was depleted before the end of the 30 years. FIRECalc found that 5 cycles failed, for a success rate of 95.8%
__________________
If something cannot endure laughter.... it cannot endure.
Patience is the art of concealing your impatience.
Slow and steady wins the race.

Retired Jan 2012 at age 56...target 65/35/0 AA TBD
pb4uski is offline   Reply With Quote
Old 06-23-2020, 07:54 AM   #6
Recycles dryer sheets
 
Join Date: Oct 2015
Posts: 419
Quote:
Originally Posted by audreyh1 View Post
I think several folks here use this or very similar approach.

Many are drawn to higher equity exposure because your ending portfolio is likely to be much higher, which is certainly a nice bonus for heirs. This may be particularly appealing to folks that have most of their spending needs covered by SS and pensions.

Others feel like they have more than enough, arenít looking to leave large funds for heirs, and donít see the point of taking on more short-term risk for a larger pile at the end.

Different retirees have different goals. It comes down to your goals, so there really is no one-size-fits-all AA.
I think he was coming from the angle of it's the "safest" and most prudent approach and and offers a higher probability of success if you buy into pulling from that cash bucket and ignoring your equity volatility during the bear market recovery cycle. In other words, being say more conservative than 70/30 with bonds as part of your portfolio is arguably riskier due to the higher probability of the drag of bonds on the over all portfolio, regardless of plans to leave money behind or not. I am not making an argument for or against his position, just putting it out there for discussion.
DawgMan is offline   Reply With Quote
Old 06-23-2020, 07:54 AM   #7
Give me a museum and I'll fill it. (Picasso)
Give me a forum ...
pb4uski's Avatar
 
Join Date: Nov 2010
Location: Vermont & Sarasota, FL
Posts: 26,131
and then there is this, that to me suggests that between 50/50 and 90/10 that AA doesn't influence success vary much... but it does influence ending values for instances where the plan is successful.
Attached Images
File Type: png Capture.PNG (58.3 KB, 47 views)
__________________
If something cannot endure laughter.... it cannot endure.
Patience is the art of concealing your impatience.
Slow and steady wins the race.

Retired Jan 2012 at age 56...target 65/35/0 AA TBD
pb4uski is offline   Reply With Quote
Old 06-23-2020, 08:03 AM   #8
Thinks s/he gets paid by the post
RetireAge50's Avatar
 
Join Date: Aug 2013
Posts: 1,441
Iím almost there at 64/9/27 age 53. Got enough cash to last until SS and pensions start. This year replaced most of our bonds with cash.
This fits well for our situation as all of the stock funds are discretionary spending.
RetireAge50 is offline   Reply With Quote
Old 06-23-2020, 08:09 AM   #9
Recycles dryer sheets
 
Join Date: Oct 2015
Posts: 419
Quote:
Originally Posted by pb4uski View Post
and then there is this, that to me suggests that between 50/50 and 90/10 that AA doesn't influence success vary much... but it does influence ending values for instances where the plan is successful.
I suppose where his argument differs some with FIREcalc is I believe FIREcalc assumes re-balancing every year. His point was once you are withdrawing your assets, you will have refill bucket rules based on how the equities perform.

Eg: AA of 8/20 (5 year cash bucket is your 20)

Scenario 1: Bear market that takes 5 yrs to recover... he is pulling cash each year and letting equities ride so no re-balancing and his AA effectively goes to 100% equities after which he starts replenishing his 5 yr bucket since the market is recovering.

Scenario 2: Bull market... spend dividends/interest first before touching cash bucket keeping cash bucket refilled as market grows.

Scenario 3: Mix of Bull and Bear... combo of the above.

Again, just putting it out there as another approach.
DawgMan is offline   Reply With Quote
Old 06-23-2020, 08:14 AM   #10
Give me a museum and I'll fill it. (Picasso)
Give me a forum ...
pb4uski's Avatar
 
Join Date: Nov 2010
Location: Vermont & Sarasota, FL
Posts: 26,131
Quote:
Originally Posted by DawgMan View Post
I think he was coming from the angle of it's the "safest" and most prudent approach and and offers a higher probability of success if you buy into pulling from that cash bucket and ignoring your equity volatility during the bear market recovery cycle. In other words, being say more conservative than 70/30 with bonds as part of your portfolio is arguably riskier due to the higher probability of the drag of bonds on the over all portfolio, regardless of plans to leave money behind or not. I am not making an argument for or against his position, just putting it out there for discussion.
That is an approach that I have sometimes thought about but never bothered to try to model.... so for example, if your target is 90/10 and let's say that you rebalance annually in December... if you had a decision rule that if in December your stocks exceed 90% that you withdraw any excess up to your withdrawal and if there is still excess then your rebalance to 90/10, but if in December your stocks are less than 90% you leave the stocks alone and withdraw from bonds.

So in other words, in good times you withdraw from stocks and rebalance but in bad times you withdraw from bonds. I think it would be "sort of" like a bucket system.
__________________
If something cannot endure laughter.... it cannot endure.
Patience is the art of concealing your impatience.
Slow and steady wins the race.

Retired Jan 2012 at age 56...target 65/35/0 AA TBD
pb4uski is offline   Reply With Quote
Old 06-23-2020, 08:14 AM   #11
Thinks s/he gets paid by the post
Eagle43's Avatar
 
Join Date: Jan 2005
Location: DFW
Posts: 1,977
Quote:
Originally Posted by audreyh1 View Post
I think several folks here use this or very similar approach.



Others feel like they have more than enough, arenít looking to leave large funds for heirs, and donít see the point of taking on more short-term risk for a larger pile at the end.

Different retirees have different goals. It comes down to your goals, so there really is no one-size-fits-all AA.
i like the "if you've won the game why keep playing" adage. Every year afrer RMD withdrawls, the taxes are paid and remainder goes to cash and/or CDs.
__________________
Resist much. Obey Little. . . . Ed Abbey

Disclaimer: My Posts are for my amusement only.
Eagle43 is offline   Reply With Quote
Old 06-23-2020, 08:33 AM   #12
Give me a museum and I'll fill it. (Picasso)
Give me a forum ...
audreyh1's Avatar
 
Join Date: Jan 2006
Location: Rio Grande Valley
Posts: 25,874
Quote:
Originally Posted by DawgMan View Post
I think he was coming from the angle of it's the "safest" and most prudent approach and and offers a higher probability of success if you buy into pulling from that cash bucket and ignoring your equity volatility during the bear market recovery cycle. In other words, being say more conservative than 70/30 with bonds as part of your portfolio is arguably riskier due to the higher probability of the drag of bonds on the over all portfolio, regardless of plans to leave money behind or not. I am not making an argument for or against his position, just putting it out there for discussion.
That’s his opinion. Ignoring equity volatility is very very difficult to do during bear markets, which many retirees discover to their chagrin at the worst of times. And some make panicky decisions to suddenly change to a lower equity allocation even after a big loss because they realize how uncomfortable they feel. Not to mention that long term portfolio growth, once retired, is not the only consideration.

Describing a lower allocation to bonds and cash as “safer” - that’s a stretch, IMO. People always think they know what is going to happen with interest rates and position short-term accordingly, but are usually surprised year in and year out. The rest of us simply rebalance. Also, some folks are focused on the higher growth long term, others are focused less volatility short-term. Many deliberately choose to strike a particular balance between the two when they choose their AA.

I don’t worry about “drag” of bonds or cash because our portfolio is large enough to support our inflation-adjusted needs according to the models. IMO if the models say your retirement survival rates are very good given your retirement situation, then that’s safe enough.
__________________
Retired since summer 1999.
audreyh1 is offline   Reply With Quote
Old 06-23-2020, 09:39 AM   #13
Thinks s/he gets paid by the post
VanWinkle's Avatar
 
Join Date: Oct 2017
Location: Brighton
Posts: 1,458
I'm not in the high equity allocation camp at 50/50. I do worry about the distaste being shown for bonds. In my portfolio, bonds are for protection from large equity tumbles. The last 2 years, including this year to date, my intermediate bond funds have a total return of 10% and 6.5%. Some people were saying to get out of bonds 2 years ago as the returns were to be minimal or even negative. Will I someday lose principle in bond funds? Yes. The same can be said for most other investments, except a pile of zero interest cash.
__________________
Retired May 13th(Friday) 2016 at age 61.
VanWinkle is offline   Reply With Quote
Old 06-23-2020, 10:20 AM   #14
Give me a museum and I'll fill it. (Picasso)
Give me a forum ...
pb4uski's Avatar
 
Join Date: Nov 2010
Location: Vermont & Sarasota, FL
Posts: 26,131
I like fixed income but am wary of bonds at this juncture.... bonds seem to be a combination of low yields or high credit risk in a recession and a boatload of interest rate risk (the flip side of most of the 10% and 6.5% return of the last couple years).

I prefer CDs at this point.... no credit risk and no interest rate risk and slightly higher yields.
__________________
If something cannot endure laughter.... it cannot endure.
Patience is the art of concealing your impatience.
Slow and steady wins the race.

Retired Jan 2012 at age 56...target 65/35/0 AA TBD
pb4uski is offline   Reply With Quote
Old 06-23-2020, 10:33 AM   #15
Thinks s/he gets paid by the post
VanWinkle's Avatar
 
Join Date: Oct 2017
Location: Brighton
Posts: 1,458
Quote:
Originally Posted by pb4uski View Post
I like fixed income but am wary of bonds at this juncture.... bonds seem to be a combination of low yields or high credit risk in a recession and a boatload of interest rate risk (the flip side of most of the 10% and 6.5% return of the last couple years).

I prefer CDs at this point.... no credit risk and no interest rate risk and slightly higher yields.
How long ago did bonds seem to be a combination of low yields or high credit risk in a recession and a boatload of interest rate risk............

Nothing against CD's as I think they are a fine alternative for income, not so much for positive ballast in a down market.

Best to you,

VW
__________________
Retired May 13th(Friday) 2016 at age 61.
VanWinkle is offline   Reply With Quote
Old 06-23-2020, 11:22 AM   #16
Give me a museum and I'll fill it. (Picasso)
Give me a forum ...
pb4uski's Avatar
 
Join Date: Nov 2010
Location: Vermont & Sarasota, FL
Posts: 26,131
How can they not be positive ballast in a down market? They just bumble along and earn interest... 3% in my case.

Just a reminder, bonds don't always zig when stocks zag.... the fact that they don't do that reliably any longer are part of why I prefer CDs... I know what CDs are going to do... bonds, not so much.
__________________
If something cannot endure laughter.... it cannot endure.
Patience is the art of concealing your impatience.
Slow and steady wins the race.

Retired Jan 2012 at age 56...target 65/35/0 AA TBD
pb4uski is offline   Reply With Quote
Old 06-23-2020, 11:37 AM   #17
Give me a museum and I'll fill it. (Picasso)
Give me a forum ...
 
Join Date: Jan 2018
Location: Tampa
Posts: 6,226
Quote:
Originally Posted by pb4uski View Post
I like fixed income but am wary of bonds at this juncture.... bonds seem to be a combination of low yields or high credit risk in a recession and a boatload of interest rate risk (the flip side of most of the 10% and 6.5% return of the last couple years).

I prefer CDs at this point.... no credit risk and no interest rate risk and slightly higher yields.
Same here, but if there is another beginning of a large down leg in stocks, might jump into 30 year treasuries for a short period.
__________________
TGIM
Dtail is offline   Reply With Quote
Old 06-23-2020, 09:02 PM   #18
Full time employment: Posting here.
 
Join Date: Oct 2012
Location: Reno
Posts: 886
There is little question that--if the goal is inheritance to heirs or, probably, higher spending down the line--the higher equity allocation likely will result in a higher estate or higher spending (like long-term/memory care) over 20-30 years, as Old Shooter and others note.

But I'm most concerned about the next 4 years before full SS, so I've used a gliding path and decreased the stock allocation from 60-65% to 45% over the last 2 years. The market kept running in late 2019 and early 2020, so I kept scraping to lower the stock allocation, which was interesting.

Once I hit SS, I will raise the stock allocation, eventually back to 65% when DW can claim full SS (in 8 years). That's just me, though; it's clear that if I/we weather the next 4 years without too much of a scar, we safely can both withdraw more and increase stock allocation, likely even in an '08 event. For many of you, like those withdrawing 2.5% or less, none of this would matter; circumstances matter to the AA.

February/March was a dry run/test; luckily I had scraped 1/2 of 2019 gains from Nov-early February. I didn't do much other than harvesting tax losses in the brokerage account in March, shifting from one CEF to another, although I did sell some higher risk holdings like small-caps and emerging markets at the end of the 3rd week of February.



I do need to shove a chunk of the cash pile into short-term bonds though, or even some CDs, or I'm giving up 5-7k/year. I've been lazy.
RobLJ is offline   Reply With Quote
Old 06-23-2020, 09:33 PM   #19
Give me a museum and I'll fill it. (Picasso)
Give me a forum ...
pb4uski's Avatar
 
Join Date: Nov 2010
Location: Vermont & Sarasota, FL
Posts: 26,131
^^^ one thing that you might consider is to bifurcate your portfolio into a SS bridge (with a CD ladder) and then invest the remainder more aggressively (65/35 or whatever AA is aggressive for you. It may be that combined portfolio is 45/55 or whatever your current AA is, but it is just another way to skin the cat.
__________________
If something cannot endure laughter.... it cannot endure.
Patience is the art of concealing your impatience.
Slow and steady wins the race.

Retired Jan 2012 at age 56...target 65/35/0 AA TBD
pb4uski is offline   Reply With Quote
Old 06-23-2020, 10:10 PM   #20
Thinks s/he gets paid by the post
jollystomper's Avatar
 
Join Date: Apr 2012
Posts: 2,755
One problem with the theory (AAs with high stock allocations) is the "human" factor practice when markets do go down. Few seem to model what their portfolio would look like, in currency terms, when stocks fall by 30, 40, 50% or more. AA becomes good in their abstract, but when they see in a down market a high currency loss (e.g. several hundred thousand dollars or more), it becomes a shock to them, and they may well panic.
__________________

__________________
FIREd date: June 26, 2018 - wwwwwwhat a rush!
jollystomper is offline   Reply With Quote
Reply


Currently Active Users Viewing This Thread: 1 (0 members and 1 guests)
 
Thread Tools Search this Thread
Search this Thread:

Advanced Search
Display Modes

Posting Rules
You may not post new threads
You may not post replies
You may not post attachments
You may not edit your posts

BB code is On
Smilies are On
[IMG] code is On
HTML code is Off
Trackbacks are Off
Pingbacks are Off
Refbacks are Off


Similar Threads
Thread Thread Starter Forum Replies Last Post
High 401K Balance, RMD's and Withdrawal Strategies RIGM FIRE and Money 98 08-21-2019 10:11 AM
Rebalancing and Withdrawal Strategies Gotadimple FIRE and Money 4 01-02-2016 11:13 AM
The New Look for Women's Figures...a look not seen in nature? Amethyst Other topics 19 11-15-2015 05:55 AM
At a Glance Look at Pricing Strategies TromboneAl FIRE and Money 7 03-21-2015 07:17 AM

» Quick Links

 
All times are GMT -6. The time now is 12:31 AM.
 
Powered by vBulletin® Version 3.8.8 Beta 1
Copyright ©2000 - 2020, vBulletin Solutions, Inc.
×