How does Early Retirement affect an Asset Allocation Plan

[ERD50]

Is asking which survival rate they like better based on an assumption that the portfolios are the same size?

Of course.

ISTM there are two ways to ensure that a portfolio will survive: either increase the stock allocation or increase the size of the portfolio. The choice comes down to, "I am willing to put up with the increased volatility if it means I can safely retire with a smaller portfolio" vs "I am willing to put up with having to save and accumulate for longer if it means I will have less volatility".

That seems like a reasonable way to put it. Though I think people may overestimate just how much volatility they are trading away, and how much they can soften it by increasing the bond side, or even cutting expenses in 'bad times'. I started a thread, must be a couple years old now, something about 'scary dips in net worth', and I get the sense that the kind of dips that people think they will avoid are still possible, even with a lower WR% and more conservative holdings.

The trouble with cutting in 'bad times' is, we don't really know what a 'bad time' is until it's over. If you cut for every bad year, or every consecutive bad two years, I think you will do a lot of cutting. But if you don't, and we have a bad 5 years, you maybe missed 40% of the years you needed to cut. But I don't have a good model for this. But the poor models I've made didn't seem to help much.

-ERD50

 

[chinaco]

Chinaco - So how exactly does one use what you posted ? How exactly does one plan for such ? FWIW I have seen the decreasing real spending models like Bernicke's "Reality Retirement Plan". Still how exactly do you pro[ose to spend down the stash ?

Here's the flaw in all of these schemes. We don't really know how much we will need or how long we'll need it for. So we plan accordingly and probably leave a fair amount of money on the table when we go. That sure beats dying cold hungry and homeless.

Good Question.

Our situation is too complicated to describe in this post (as is the case with most). We do not intend to leave a large estate (we will spend it) so that is not a consideration. Our goal is to live and enjoy while we are still on the younger side of our lives but to make sure our needs are covered when we are older. We have hedged LTC with a low cost/reasonable coverage group policy with inflation protection (of course anything can happen in the future). We intend to hedge some of the longevity risk by delaying my SS (we will take DW at 62). We have no debt and intend to keep it that way. I will set back money to cover spending as we age based on projections (with reduced discretionary spending) at around age 75. In other words, I expect that we will travel less at that age (which accounts for fairly generous discretionary spending before 75). We will still have discretionary money to spend past 75... But at a reduced rate. Past that, we will make decisions as the future unfolds.

Bottom line... we have over saved, it is time to enjoy. If it turns out that we need to tighten the belt, we can do it.

In a nutshell, I have a basic approach and past that, I will deal with reality as it unfolds.