Poll: Lowest equity allocation possible from retirement tools

[ERD50]

Overfunding a ladder is a good inflation hedge.

Overfunding is a good hedge against anything.

But that may keep some people working much longer. No free lunch.

-ERD50

Or just how funds are allocated, more fixed income, less equity.

So you didn't really mean "overfunding" as in a larger portfolio relative to spending? You really just meant Asset Allocation? Why didn't you say so?

71% so far could get by on 0% equities.

And every one of those people could also (more than) 'get by' with 100% equities. What's your point? You keep framing this in terms of 0% equities, instead of looking at the whole picture. It's more informative/useful/actionable to look at the whole picture.

I ran FIRECalc "Investigate" for 95% success, for an AA of 0/100 through 100/0 in 10% point increments.

0% equities provides the lowest spend amount for 95% success. 100% equities a much higher spend for 95% success, so has been actually less 'risky' (historically) to a retirees portfolio.

0/100 - 2.83%
100/0 - 3.89%

90/10 - 4.01%
80/20 - 4.03%
70/30 - 4.04%
60/40 - 4.06%
50/50 - 4.02%
40/60 - 3.97%
30/70 - 3.85%
20/80 - 3.59%
10/90 - 3.28%

So the 'sweet spot' is ~ 60/40 for 95% success. On a $1M portfolio, it provides...

NOTE: For the following four points, I'm going to change to 100% success, as FIRECalc doesn't really handle negative balances correctly once you fail. For example, if you ended year 28 at -$10,000, and the market went up 20% in year 29, I'm pretty sure it still multiplies by 1.2, and you are now at -$12,000. So I'll use 100% success to avoid negative multiplication of balances. And for brevity in the table, I removed the low ending balance, as that is just a rounding of hitting as close to zero as possible w/o failing. They were $14 to $341, so not meaningful.

AA	IA spend	AVG END	HIGH END
0/100	$25,469	$782,255	$3,256,498
60/40	$36,729	$1,671,659	$4,867,216
100/0	$34,160	$3,350,441	$9,581,387

And the 20/80 point that "Efficient Frontier" indicates as an optimal balance of risk/reward:

AA	IA spend	AVG END	HIGH END
20/80	$33,496	$821,023.	$3,489,334

So in every case, adding some equities not only allows you to spend more, but your ending average and high balance is higher. Which in most cases, means more to heirs/charity, and/or more to spend if you outlive your 30 years, or run into unexpected expenses.

For just a 20% Equity AA, you'd have been able to spend an extra $8,027 IA annually ($33,496 versus $25,469) on a $1M starting portfolio, 31.5% more (or save up for a rainy day). That's really nothing to sneeze at.

If people choose 0% equities, that's their call. But I just can't see making a case for it, or trying to promote it.

-ERD50

 

[COcheesehead]

As of this morning 72% of the respondents in their current situation could get by with 0% equities at a 95%+ success rate.

 

[ERD50]

As of this morning 72% of the respondents in their current situation could get by with 0% equities at a 95%+ success rate.

And every one of them would likely do better with at least a 20% equity exposure.

And, every one of them would likely do better with a 100% equity exposure.

-ERD50

 

[Koolau]

And every one of them would likely do better with at least a 20% equity exposure.

And, every one of them would likely do better with a 100% equity exposure.

-ERD50

I don't doubt you on the 100%, but I'd sleep better a bit closer to the 20% (roughly 33% now.) Heh, heh, to muddy the waters, I've added a couple percent PMs.

 

[ERD50]

I don't doubt you on the 100%, but I'd sleep better a bit closer to the 20% (roughly 33% now.) Heh, heh, to muddy the waters, I've added a couple percent PMs.

Well, the curve for 'max spend for 100% survival' is pretty flat between 30/70 and 100/0, so really not much difference in that regard. Though I didn't dig into it, I'd expect the scary dips to be more moderate at the lower AA, so I cans see where that might suit one better. I don't do PMs/commodities, but there's something to be said for a little diversification.

I forget your age, but IIRC you may also be at the point of not factoring in a full 30 years (sorry if that's too 'dark'!), and that will move the needle towards lower equity %.

For me personally, since 30/70 is at that inflection point where success/spending drops off, and knowing that history "rhymes" rather than "repeats", I prefer to move away from the edges of the curve. So halfway between 30/70 and 100/0 is 65/35. I'm comfortable with higher volatility, so I'm more like 75/25, which is close anyhow. And with SS/pensions, I expect to leave something for kids/charity, so my investing time-frame should reflect that, I think.

-ERD50

 

[ERD50]

Taking that "scary dips" scenario further, I went into FICalc as it's easier to look at a single year.

So I found the max spend for 100/0 30 years 100% success, and it was slightly lower (not sure why), at $23,950. So to keep it apples-apples, I used that spend for a 60/40 AA.

Each case, the low was 1981. The 0/100 portfolio dipped to $330K, while a 60/40 AA dipped to $412K. So the (perceived) 'safety' of fixed income didn't hold, the added equities helped steady the ship.

And the "scary" 100% equities gave even more protection against interim lows - ~$431K in 1981.

-ERD50

 

[Gumby]

I have not done the analysis you have ERD50, but my recollection of crashes past is also that diversification didn't help all that much. All assets suffered.

 

[ERD50]

I have not done the analysis you have ERD50, but my recollection of crashes past is also that diversification didn't help all that much. All assets suffered.

Sure, not a cure-all, they may all dip, but the diversification helps (at least in my sampling, and I don't think those periods were all that unique).

In my previous post, a 100/0 dipped from $1M to $330K, while a 60/40 AA dipped to $412K. And 412/330 = 25% more money. I like more money. Or $82K, if you want to look at it that way - and that's over three years of spending banked away for the future.

Maybe later I'll shorten the time span to see what happened in more recent dips, we can't see the 2008 effect in a 30 year portfolio. Or maybe some one else will beat me too it.

I don't doubt that the 100 fixed will come out ahead in some scenarios, but I suspect it will involve some cherry picking, and the averages favor something closer to 60/40.

-ERD50

 

[unclemick]

Hmmm - best guess 30 - 40% cause that's what my Target Retirement Income roughly tracks.

My opinion/research counts zero since at age 80 I have Godfather's - an offer I can't refuse.' . Namely RMD (da govt.) and my full auto Target since 2006.

Let my expenses drift up since 'you can't take it with you' via travel, entertainment, some charities, and of course mad money stocks! During lockdown - put money into Motley Fool Stock Advisor picks. Losing my shirt like my football picks. Real money is index and root for the Chiefs.

Heh heh heh - Index funds and 4% rule plus or minus got me here so I can goof off in my old age ER.

 

[Koolau]

I forget your age, but IIRC you may also be at the point of not factoring in a full 30 years (sorry if that's too 'dark'!), and that will move the needle towards lower equity %.

-ERD50

Yeah, at 76, I have set my expiry (how's that for dark?) at 99. So, I only have at most 23 years. I much prefer the smooth(er) ride to the maximum spending potential (or maximum remainder potential.)

As it happens, my relatively small allocation to PMs in the 2008 fiasco turned out very well for me - keeping me roughly equal (making up my losses in equities.) Obviously, you can't count on that, but it was at least my "plan" and the plan w*rked this time. YMMV

 

[lucky penny]

0% equities needed so will likely go 100% equities (after age 65 or so).

I've read that theory that if your income from a safe pension is substantial you can safely invest !00% in equities because hey, why not, you might get very rich (& if you lose all your savings, no problem). In real life I find that hard to do.

 

[ERD50]

I've read that theory that if your income from a safe pension is substantial you can safely invest !00& in equities because hey, why not, you might get very rich (& if you lose all your savings, no problem). In real life I find that hard to do.

In what universe would you "lose all your savings" when you are drawing little/nothing from the portfolio (living mostly on pension/SS)? This is a false scenario.

Using portfolio visualizer, the deepest dips I see are a few years after starting in 1972, 2000, and 2007. Even with a 2% IA withdrawal, the lowest balance still retains 37.8% of it's value (while providing 2% IA income), and fully recovers later. Starting with $1M (Dec 31, 1999):

https://tinyurl.com/23899w8l 2007 - dips to $492K

https://tinyurl.com/25eynbu6 2000 - dips to $378K in 2009 (a double hit of the 2007 decline)

https://tinyurl.com/2bnwaugw 1972 - dips to $496K

And even these scenarios are not telling the whole story, it's using tunnel vision. What the proponents of fixed income forget when talking about these scary dips in equities is, you wouldn't be at that peak to fall from, if you weren't in equities to begin with!

IOW, all these worst case scenarios occur (obviously), relative to a peak. Well, how did we get to that peak? The very typical scenario is, we invested all along, or stayed invested, so we shared in the ride up. If we look at that dip relative to the inflation adjusted value of the money that we put in, it's probably not a dip at all!

Now, if you were living paycheck to paycheck, and won the lottery in 2000, and dumped it all in the market, and drew $20K IA each year - then you would see those dips (and recovery). You'd never lose your 2% IA withdrawal.

As the charts have shown, you are more likely to "lose all your savings" (depending on WR), with 100% fixed then you are with 100% equities.

-ERD50

 

[ERD50]

Follow-up to my previous post:

... The very typical scenario is, we invested all along, or stayed invested, so we shared in the ride up. If we look at that dip relative to the inflation adjusted value of the money that we put in, it's probably not a dip at all! ...

Well, well, well. Look at this:

https://tinyurl.com/2abyubqy < investing from 1980 to Dec 31, 1999

Starting with $5,000, and adding an inflation adjusted $4,587 each year gets us to $1M EOY 1999 if we put it all in equities. But only $373K invested in Intermediate Treasuries (the Total Bond doesn't go back that far). NOTE: I didn't inflation adjust this, as I wanted to start with $1M in JAN 2000 for that analysis, but it doesn't matter for this analysis.

So equities provide over 2.6x the portfolio going into 2000. So a dip from $1M to $378K in 2009, would actually be 2.6x everything, so the dip would be... ummm, not a dip, but a rise to $1.013M.

-ERD50

 

[Echard]

I need 0% equities and I absolutely understand COCheeseHead's question. If you can achieve your final goal with no equities, it raises the question of whether you really want to hold equities, given some of the higher risks it adds to the plan (note, equities may help hedge some risks, like inflation, but just set that aside for a moment and assume your comfortable with your inflation assumptions).

This becomes an especially important question if there is not a perceived value to dying with more money, or changing your living standard due to having more money. Some people have all the money they want or need.

Personally, I've considered lowering our equity exposure below the current 50/40/10 allocation, to solidify the downside scenario, at the penalty of reducing the upside.

 

[Echard]

Follow-up to my previous post:



Well, well, well. Look at this:

https://tinyurl.com/2abyubqy < investing from 1980 to Dec 31, 1999

Starting with $5,000, and adding an inflation adjusted $4,587 each year gets us to $1M EOY 1999 if we put it all in equities. But only $373K invested in Intermediate Treasuries (the Total Bond doesn't go back that far). NOTE: I didn't inflation adjust this, as I wanted to start with $1M in JAN 2000 for that analysis, but it doesn't matter for this analysis.

So equities provide over 2.6x the portfolio going into 2000. So a dip from $1M to $378K in 2009, would actually be 2.6x everything, so the dip would be... ummm, not a dip, but a rise to $1.013M.

-ERD50

I just read this thread for the first time. ERD50, I'm gently suggesting you step back and make sure you really understand the question, because you keep answering a different question, and quite aggressively I might add. He's looking at the risks of investing in equities and thinking about the scenario of meeting all of your goals without taking on equity risk. That's it. That's the question.

 

[ERD50]

....If you can achieve your final goal with no equities, it raises the question of whether you really want to hold equities, given some of the higher risks it adds to the plan (note, equities may help hedge some risks, like inflation, but just set that aside for a moment and assume you're comfortable with your inflation assumptions).
...

Well, anything is possible if we ignore reality! Just pay no attention to those pesky 1980's.

But the thing is, it has been shown that some equity exposure reduces risk. That's the thing.

-ERD50

 

[ERD50]

I just read this thread for the first time. ERD50, I'm gently suggesting you step back and make sure you really understand the question, because you keep answering a different question, and quite aggressively I might add. He's looking at the risks of investing in equities and thinking about the scenario of meeting all of your goals without taking on equity risk. That's it. That's the question.

Sorry, I missed this post, I hadn't refreshed the page.

I dunno, it sure seems to me he's ignoring the risk of not having some equity exposure.

You can do what you want if you accept those risks, but I don't think he's acknowledged that.

-ERD50

 

[COcheesehead]

Sorry, I missed this post, I hadn't refreshed the page.

I dunno, it sure seems to me he's ignoring the risk of not having some equity exposure.

You can do what you want if you accept those risks, but I don't think he's acknowledged that.

-ERD50

See post #58.

 

[ERD50]

See post #58.

Ahhh, OK, thanks. I guess I did skim over that (I probably got distracted by the big shiny graph ). I didn't see that you had 27% in equities. Everything else seems to be centered around 0% equities, and it's just an odd way to go about it (IMO).

-ERD50

 

[COcheesehead]

Ahhh, OK, thanks. I guess I did skim over that (I probably got distracted by the big shiny graph ). I didn't see that you had 27% in equities. Everything else seems to be centered around 0% equities, and it's just an odd way to go about it (IMO).

-ERD50

I don’t think you ever understood the question. Your answers consistently addressed something else. Others saw it too.

 

[ERD50]

I don’t think you ever understood the question. Your answers consistently addressed something else. Others saw it too.

And I think I do understand the question, I just think it's pointless and distracting from anything meaningful which makes it misleading.

So test me.

You are asking who could get by on zero equities (as defined by financial calculators like FIRECalc, etc), with their specific conditions (spending, outside income, years to plan, etc).

That's it, right? What's not to understand?

But what's the point? What are we to learn from this? It boils down to years in the plan and WD from portfolio. Everything else is just a set up to get there.

I think I spelled it out earlier, 2% IA from portfolio for (say) 30 years, is 2%. Makes no difference if the spend is 10% and 8% comes from outside sources, or spend is 2% and it all comes from the portfolio. So all this talk about individual circumstances is just noise.

And under those conditions, if you can get by on 0% equities, you can also get by on 100% equities, or anything in between. So?

It's like asking people to respond to a poll on what % they pay in marginal taxes for $1,000 LTCG. It all depends on their other income sources, MFJ or single, other deductions/exemptions. What do we learn? It just complicates things.

Better to just spell out the rules for LTCG, it's just arithmetic and IRS rules. A bunch of data points doesn't help understand the rules as much as just reading the rules. It just complicates it.

And success vs AA is just running a few test cases in the calculators.

What did I get wrong (be specific, maybe I'll learn something)?

-ERD50

 

[COcheesehead]

And I think I do understand the question, I just think it's pointless and distracting from anything meaningful which makes it misleading.

So test me.

You are asking who could get by on zero equities (as defined by financial calculators like FIRECalc, etc), with their specific conditions (spending, outside income, years to plan, etc).

That's it, right? What's not to understand?

But what's the point? What are we to learn from this? It boils down to years in the plan and WD from portfolio. Everything else is just a set up to get there.

I think I spelled it out earlier, 2% IA from portfolio for (say) 30 years, is 2%. Makes no difference if the spend is 10% and 8% comes from outside sources, or spend is 2% and it all comes from the portfolio. So all this talk about individual circumstances is just noise.

And under those conditions, if you can get by on 0% equities, you can also get by on 100% equities, or anything in between. So?

It's like asking people to respond to a poll on what % they pay in marginal taxes for $1,000 LTCG. It all depends on their other income sources, MFJ or single, other deductions/exemptions. What do we learn? It just complicates things.

Better to just spell out the rules for LTCG, it's just arithmetic and IRS rules. A bunch of data points doesn't help understand the rules as much as just reading the rules. It just complicates it.

And success vs AA is just running a few test cases in the calculators.

What did I get wrong (be specific, maybe I'll learn something)?

-ERD50

Starting with post 18, you went off in a different direction. You have an agenda outside of my question. It’s very evident. You come across as angry too. End of story.

 

[ERD50]

Starting with post 18, you went off in a different direction. You have an agenda outside of my question. It’s very evident. You come across as angry too. End of story.

So did I understand the question or not? You keep accusing me of not understanding it, I spelled it out. Do I get an answer? Yes or no?

So time for you to explain - what about my post #18 is in a different direction? It's exactly to the point of AA vs success/spending.

Someone posted earlier, (jollystomper # 43) if you wanted a discussion, you could ask something like "If any AA from 0/100 to 100/0 shows 100% success in the tools for you, how did you choose your AA?". But I just don't see anything in a blanket, "could you", and you did make some assumptions from there that didn't fit, and were called on it (#37, follow ups on #39,40).

-ERD50

 

[Gumby]

I would suggest a retreat to the neutral corners.

 

[ERD50]

I would suggest a retreat to the neutral corners.

Agreed. - ERD50