Are We Too Conservative with Our Numbers?

[daylatedollarshort]

OP said things work out with a zero return. AA also reflects risk preferences. Some folks in MercyMe’s situation might justifiably decide that they don’t need a high expected return, so why take on more risk?

Edit: I just did some math. With a 3.6% inflation rate and a zero nominal return, you need 90x for a 40 year retirement and 140x for 50 years. That is a lot.

With a zero real return, the safe withdrawal rate is 3.3% over 30 years, or 4% for 1.3%. TIPS real yields have been rising with the interest rate hikes and are currently at -.08% to .64% real returns, based on CPI inflation. That is with just the Fed increases so far this year, and they had 6 total increases penciled out as of March.

 

[MercyMe]

I am curious why a 30/70% portfolio?

...You are looking at close to 50 years.

I do want to congratulate you two; so many folks in their 40's in Mr.Mustache forum are applying the 4% rule to retiring in their 40s.

The 30/70 matches our risk tolerance and our need to take risk. And it was suggested to us by Rick Ferri who has a done a few "portfolio second opinions" for us.

A big mistake on my part: I wrote "we're currently on ACA, and have more than two decades before we hit 65". D'oh.... we have two decades until RMD's (not Medicare). My spouse and I are are 52!

 

[MercyMe]

You are being conservative. Whether it is overly conservative is a personal issue. I don't think you are overly conservative.

When is your last day of work?

Dec 31, 2023

 

[MercyMe]

I assume you’ve run your numbers recently, after the market declines. (BTW, is the 70 in bond funds?) You obviously have enough if the numbers work out with a zero nominal rate of return. You can easily do better than 0% with risk-free treasuries and CDs; any return at all provides cushion.
I’m very risk averse, so I continue working for the health insurance. I’ve several more years until Medicare, and am not comfortable assuming that I can count on ACA insurance to be available for that entire period. I can retire in a few years with health insurance, well before I get to 65.

Actually, the nominal return we planned for is -3.6% (0% actual - 3.6% inflation).

 

[MercyMe]

+1

It appears the higher equity portfolios survive longer retirement periods.

https://images.app.goo.gl/znYrgcJBUcDwGgEo9

For 40 years 30/70 looks riskier than 50/50.

According to some sources, 30/70 is not as risky as it seems. Here is an interesting chart (though by no means the end-all, be-all of risk assessment for us). The difference here is .1% on the WR from 30/70 to 50/50.

 

[MercyMe]

OP said things work out with a zero return. AA also reflects risk preferences. Some folks in MercyMe’s situation might justifiably decide that they don’t need a high expected return, so why take on more risk?

Edit: I just did some math. With a 3.6% inflation rate and a zero nominal return, you need 90x for a 40 year retirement and 140x for 50 years. That is a lot.

I'll post our numbers in an introductory post in the next few days.

On our retirement date, we'll have...
120x current essential expenses
85x current essential and current discretionary expenses
52x planned essential and planned discretionary expenses in retirement

 

[daylatedollarshort]

Actually, the nominal return we planned for is -3.6% (0% actual - 3.6% inflation).

Why would you plan for -3.6% when you can get more than 0% real return even now with TIPS?

 

[Phroig]

Actually, the nominal return we planned for is -3.6% (0% actual - 3.6% inflation).

The nominal return is the actual return; the actual return adjusted for inflation is the real return. Regardless, you’re in great shape.
Thanks for posting the interesting Morningstar chart. An equity allocation of 30-60% seems better (in retirement!) than 70% or more regardless of time horizon. I wonder what their assumptions were.

 

[MercyMe]

Why would you plan for -3.6% when you can get more than 0% real return even now with TIPS?

Good question. I struggle to fully understand where they would fit into our portfolio (it never seems to be the right time to buy them) so for now we are just being very, very conservative in our estimates. In real life, we will eventually have 20% in TIPS. I just don't know when that will be.

 

[MercyMe]

The nominal return is the actual return; the actual return adjusted for inflation is the real return. Regardless, you’re in great shape.
Thanks for posting the interesting Morningstar chart. An equity allocation of 30-60% seems better (in retirement!) than 70% or more regardless of time horizon. I wonder what their assumptions were.

Sorry, I confused it with real return.
We foolishly plan for a real return of -3.6%.

 

[GravitySucks]

Oh heck you're fine. In your shoes my biggest problem would be going to work tomorrow.

 

[COcheesehead]

+1

Relying on a 30/70 portfolio is a huge risk over a 40+ year retirement, especially when OP seems worried about higher-than-usual inflation. Of course, it could all work out fine if OP has a net worth of, say, 50x annual spending. But unless I missed it, OP didn't share any of those numbers with us (net worth, annual spending, or the ratio thereof), so it's hard to say what the risk of being so bond-heavy actually is.

I also have a conservative equity allocation 30-35%. I have run it through every calculator/retirement tool I can and the only difference is how much money I die with, never putting the plan success at risk.

If you have a withdrawal rate of 3.4% or less, that allocation will last 40 years according to Retiresoft, FireCalc and Fidelity’s planner. Fidelity shows with an average market return, we’ll die with over $10 million. I am a big advocate of taking only as much risk as you need.

 

[SnowballCamper]

On our retirement date, we'll have...
120x current essential expenses
85x current essential and current discretionary expenses
52x planned essential and planned discretionary expenses in retirement

So an über conservative plan would be to put it all in TIPS and then you're good for 52 years, about age 104. I personally wouldn't do that, but you clearly have enough to retire! Congrats.

 

[Koolau]

The good news about being "too conservative" is that you can always BTD (Blow that dough) once you've test driven your FIRE plan. Good luck and YMMV.

 

[lucky penny]

...Understand that the 4 percent rule is ALREADY conservative. And it ALREADY contemplates SORR. Many of us still cut it back, but being conservative there buys a lot everywhere else...

What is SORR? (I hoped to figure it out from reading this thread, but it's still not clear to me.)

 

[SevenUp]

What is SORR? (I hoped to figure it out from reading this thread, but it's still not clear to me.)

That and other acronyms are spelled out in Acronyms and Slang Frequently Used on the Forum

 

[pjigar]

We plan to retire at 50 and we use almost the same assumptions except: Lifetime Average Return on All Investments".



I think the near term returns will be lower than what they have been recently but overall real returns will be positive over a long term. If the real returns are below zero for a long time then we have a bigger problem on our hand as a society/world. I do think that the debt returns are going to be lower because the central banks around the world don't have the courage to take the candy jar away and they keep refilling it every time the market has a road bump. So our plan is to have a high equity exposure and ride the market humps.


On SORR: If you are really worried about SORR then start with 5 years of expenses. SORR goes down over time so you don't have to replenish the buffer fund or you can if you are so inclined.

 

[COcheesehead]

What is SORR? (I hoped to figure it out from reading this thread, but it's still not clear to me.)

Sequence of return risk. Having a declining balance due to a bad market while at the same time needing to pull money out so when the market returns, you have less to rebound.

 

[Vincenzo Corleone]

I also have a conservative equity allocation 30-35%. I have run it through every calculator/retirement tool I can and the only difference is how much money I die with, never putting the plan success at risk.

If you have a withdrawal rate of 3.4% or less, that allocation will last 40 years according to Retiresoft, FireCalc and Fidelity’s planner. Fidelity shows with an average market return, we’ll die with over $10 million. I am a big advocate of taking only as much risk as you need.

I'm obviously missing something. I plugged in my NW, 40-year time horizon, an allocation of 30% equities with the remainder in 5-year treasuries into FireCalc, and used the "Investigate" feature to show how much I could spend given a 100% success rate. The result was 2.93%, not 3.4%. Those were my only inputs. I suppose it might be you're using a slightly lower success rate.

 

[Montecfo]

MercyMe,

As more info comes out in the thread, you are undoubtedly in very good shape.

As an aside, if pundits are correct, there may be little penalty for a while holding bonds compared to equities, particularly on a risk adjusted basis. Of course caution is in order right now due to rising rate environment.

People who hold large amounts of bonds presumably have some treasuries of various vintages which would be useful to address any lingering concerns about SORR.

All the best,

Monte

 

[ZachTB]

FWIW, agree with COcheesehead (and most other posters here). You have a number of conservative assumptions, which is wise considering your very long time horizon.

Consider also a worst-case scenario: if everything really, REALLY falls apart, such that you run out of money despite your conservative planning, you'll likely be able to go back to work anyway. And you'll still be much better off than the vast majority of people, who would have been broke long before you.

As for a 50-year-long retirement..."I Can Only Imagine"

 

[Montecfo]

ZackTB,

I saw what you did there...nice.

 

[ZachTB]

I saw what you did there...nice.

Thanks!

That reminds me of one of my favorite memes: https://i.kym-cdn.com/photos/images/original/000/000/681/what-you-did-there-i-see-it.thumbnail.jpg

 

[FI_RElater]

I'm obviously missing something. I plugged in my NW, 40-year time horizon, an allocation of 30% equities with the remainder in 5-year treasuries into FireCalc, and used the "Investigate" feature to show how much I could spend given a 100% success rate. The result was 2.93%, not 3.4%. Those were my only inputs. I suppose it might be you're using a slightly lower success rate.

That's entirely consistent with what I said upthread... somewhere between 2.5 and 3.0 percent. (see also earlyretirementnow site which, in one of the parts talked about different allocations and retirement lengths). and that's somewhat hedged due to the potential lower returns in the immediate future... and loss of those returns requires deeper cuts into the portfolio leaving less to grow in better times

For us, before retirement, we had set up a five year CD ladder (back when CD's had slightly better returns) to give some safety wrt SORR. That it didn't immediately materialize was good, but it served as a backstop for any required cash cushion; we depleted it after the first seven years and only then started pulling from the portfolio... leaving years for the portfolio to grow in those better years. Unfortunately, that strategy might not result in as favorable of conditions due to the lower CD rates and likely poorer returns in the immediate period.

 

[COcheesehead]

I'm obviously missing something. I plugged in my NW, 40-year time horizon, an allocation of 30% equities with the remainder in 5-year treasuries into FireCalc, and used the "Investigate" feature to show how much I could spend given a 100% success rate. The result was 2.93%, not 3.4%. Those were my only inputs. I suppose it might be you're using a slightly lower success rate.

We are at 100% success rate. I include 70% of our anticipated social security benefits. Currently, even with the market correction, we have 40x expenses. With social security we have about 70x expenses. FireCalc actually gives us the highest WD rate at 4%. Retiresoft the lowest at 3.4%.
I also use a 10 yr ladder of bonds so our yield is higher than the 5 yr. I go more with the long bond rate for FireCalc.
Folks forget equities are not the only way to hedge for inflation. Our limited exposure has been very welcome with the current market.