rj49 wrote:From the famous studies on Safe Withdrawal Rates in retirement, such as Bengen and the Trinity Study, 25% in stocks has a high risk of failure over 30 years or longer, with only a 70% chance of a portfolio surviving. I believe Bengen considers at least 50% in stocks the minimum to ensure portfolio safety at 4%. If you look up the Firecalc program, it also will show a much higher likelihood of outliving your portfolio with a mostly bonds portfolio, and a significantly higher likelihood of ending with much greater wealth the higher stock allocation.
Yes, there are some periods in FireCalc history where only 25-30% in stocks will cause a failure rate. IMHO, the take away from this is that you should be withdrawing 3.6% or a Variable amount based on Percent of remaining portfolio. NOT that you should be increasing your Stock Allocation to 50% or more.
Why not increase your stock allocation to 70%? Answer: Financially, it's no more risky than 30% stocks. Bengen, Trinity I and II, Wade Pfau all come up with the same result. Believe it or not this makes logical sense. There are two things that can wipe you out in retirement: spending while the market is down and high inflation, particularly early in retirement. High inflation means that you have to constantly increase your withdrawals. Yup, you can tighten your belt for a while, but, eventually you'll have to spend more.
What really matters is not absolute inflation but, rather, returns which don't keep up with inflation. Right now, inflation is running around 2.5% and Total Bond Market is yielding 1.7%. In real terms, right now, bonds have a negative return. Suppose this negative return lasts a decade. Interest rates rise but so does inflation. People with a high percentage of bonds in their portfolios will discover that they need to start dipping into their principal earlier than they planned. They may not run out, but they may find themselves right on the line year after year.
Certainly, a portfolio high in stocks will move around more. Yup, sometimes it'll be down 60% but, other times, it'll be up 180%. As long as you don't withdraw too much money when the market is down, you won't run out of money.
Okay, it's no more risky to have 70% stocks than 30%. Is there any advantage. Yes, in all of the studies, the higher the percentage of stocks the larger the average estate. If you aren't interested in leaving a bequest and the stock market swings cause you discomfort, by all means, hold more bonds. Just don't fool yourself that it's somehow safer.