More in equities as you age ?

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tennisplyr
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More in equities as you age ?

Post by tennisplyr »

I've heard recent talk that retirees should increase their equity holdings as they age and get further into retirement so that stocks are allowed time to grow. Therefore you should be withdrawing disproportionately from bonds to do that. Any thoughts?
“Those who move forward with a happy spirit will find that things always work out.” -Retired 13 years 😀
furwut
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Re: More in equities as you age ?

Post by furwut »

Search for rising equity glide path. Plenty of discussion.
larryswedroe
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Re: More in equities as you age ?

Post by larryswedroe »

FWIW
While I have the greatest respect for Michael Kitces, IMO one of the best and smartest guys in personal finance, IMO he is wrong on this one, for two reasons.,

First our analysis of his work with Wade Pfau comes to different conclusion. You can read the analysis here http://www.multifactorworld.com/Lists/P ... spx?ID=148 The bottom line is that the evidence is that what matters is that you start out with a low equity allocation. That is what decides if you have high odds of success or not. Not whether then you have rising or not glide path.

Second, it totally ignores the stomach acid test or willingness to take risk. Even if the math were to show Kitces is correct, which we don't agree with, the analysis totally ignores human behavior. IMO there is literally no way most older investor could stomach high equity allocations in bear markets. Forget about rebalancing, and avoiding panicked selling, but they would lose sleep, and life just too short to not enjoy it. So IMO they are dead wrong and offering really poor advice in this case. Of course, just one man's opinion.

Larry
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nisiprius
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Re: More in equities as you age ?

Post by nisiprius »

It's just a draft paper but I think it is worthy of note:

Bogleheads thread started by Beliavsky: How wealth shocks affect the health of the elderly

Paper: Wealth Shocks and Health Outcomes: Evidence from Stock Market Fluctuations, by Hannes Schwandt.
I find that wealth shocks strongly affect physical health, mental health and survival rates of elderly retirees in the US.
It may not just be a question of "sleep." High stock allocations late in retirement may be hazardous to health.
Annual income twenty pounds, annual expenditure nineteen nineteen and six, result happiness; Annual income twenty pounds, annual expenditure twenty pounds ought and six, result misery.
mwm158
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Re: More in equities as you age ?

Post by mwm158 »

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Last edited by mwm158 on Wed Jan 07, 2015 7:46 pm, edited 1 time in total.
Rodc
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Re: More in equities as you age ?

Post by Rodc »

My analysis as posted in another thread:
(3) A rising equity glide path in retirement helps portfolio longevity. Is this one just a special case of #2?
False. He makes that claim but the paper itself actually says there is no measurable difference between a constant and a raising glide path. Others have shown that a decreasing (for example age in bonds) does not help either. What matters in the end is your average stock/bond split. Due to luck of course one or the other might be best of any random time period.

On Wade's paper:

I suggest these results do not say what most seem to think they say.

First, given their "market expectations data" their 4% and 5% withdrawal rates are so high that the failure rates are such that all allocations are crazy bad. The best is a success rate (for 4%, worse of course for 5%) of 74%, starting 30% moving to 80%. But 50/50 is also 74% (I guess rising allocation wins by a fraction of a percent). The differences in "legacy shortfall is only a couple of percent, well below the level of the accuracy of their methodology. Given the huge failure rates and the various associated near identical metric values, the results are pretty well non-useful, other than to show there is no meaningful difference between static 50/50 and a rising allocation that averages 50/50.

Given their "historical returns" things are better, at least at the 4% withdrawal rate, but the benefit of rising allocations is tiny, it is below the level of noise of what one can learn from a Monte Carlo simulation. For example they show a max success rate of 95% going from 30% to 70%. But a fixed 50/50 gives a success rate of 94%. The difference is just noise.

They show some results that suggest when rising stock allocation fails it fails a little less badly, a couple of percent, at least at the 5th percentile level, but the difference is again way less than the accuracy of their Monte Carlo simulation. At the median you do better with the constant 50/50.

The max sustainable rate at the 10% failure rate is a dead heat 4.4% vs 4.3%, the difference way below the accuracy available in their simulation.

If they did a proper analysis with error bars or confidence intervals it would be clear they have shown there is no value whatsoever in rising stock allocations.

Also, it should be noted that no one likely ever would actually implement either of these strategies. Real people in a down market stop spending so much; they don't blindly stick to a spending plan as their portfolio crashes. These are really nothing more and nothing less than ways to roughly estimate what level of spending a portfolio of stocks and bonds might generate in the future.

And everyone comes to precisely the same answer if they look at historical data (either directly or indirectly by using Monte Carlo with parameters chosen from a look at history): you can take out about 4%, maybe a shade more or less depending on just how sure you want to be, over a very broad middle range of stock/bond allocations.

If you assume the future will be worse than the historical record, well, you get a little less than suggested by the historical record. No surprise there.
We live a world with knowledge of the future markets has less than one significant figure. And people will still and always demand answers to three significant digits.
Rodc
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Re: More in equities as you age ?

Post by Rodc »

Second, it totally ignores the stomach acid test or willingness to take risk. Even if the math were to show Kitces is correct, which we don't agree with, the analysis totally ignores human behavior.
I agree. This is a huge issue. A computer algorithm has nerves of steel. Or silicon. People not so much.
We live a world with knowledge of the future markets has less than one significant figure. And people will still and always demand answers to three significant digits.
azanon
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Re: More in equities as you age ?

Post by azanon »

larryswedroe wrote:FWIW
While I have the greatest respect for Michael Kitces, IMO one of the best and smartest guys in personal finance, IMO he is wrong on this one, for two reasons.,
I'd like to add a few more reasons (one a variation of yours). Opinions too, of course.

1. (Variation) What good is research such as this which has little, if any, chance to actually be implemented. I actually see the volatility of the higher equities, in an of themselves, less relevant than the fact that you'd be asking gradually aging individuals (who'd have a more and more difficult time to re-enter the workforce in an emergency) to be constantly raising their risk level. You know, it's one thing to annually rebalance which, in and of itself, has you buying into drops, and yet a whole other level to ask someone to even raise their equity gradually as their time horizon continues to shrink along with their skin and height (going for a visual there to make a point).

2. I could see how a starting point of 40% equities worked great in the past, especially with interest rates having fallen for 30 years straight. But when you now have yields in the ~ 2% range (less if short or mid treasuries), you "ain't" going to be able to put 60-something-odd percent in bonds and expect anything near 4% SWR. It just ain't happening. And at current US valuations, you'd not likely to get much better there either. If you're retiring today, and want anything north of 3% SWR, you better break the 50% equity position out of the gate (I'd suggest 60-70%), and probably have at least half of that in foreign equities. If you guys haven't seen this recent release, check out this work by research affiliates on forecasted 10-year returns: http://www.researchaffiliates.com/Asset ... rview.aspx

3. A gentle jab at Dr. Phau; It's really odd for me to see a guy who's so high on advocating (grossly conservative, very expensive, very low paying because of current interest rates) SPIAs, advocate at the same time a gradually raising stock portfolio in retirement. I can believe someone could support one, or the other (not agreeing with either), but certainly not both at the same time. I see this as a research peace that was designed to attack a very popular, and widely accepted convention, to see how much attention one could get but, privately knowing that you'd never actually do this yourself. Be honest, Dr. Phau, you know you wouldn't do this when you retire. Heck, even I wouldn't do it, and I'm far more open to the risk of equities than you are. I don't mean this as an attack, rather just saying that I'm not believing that either of them would put this sort of thing into practice into their own lives. I just don't find it to be consistent with any of their other work.

I have a few other thoughts, but that's enough for now....
LongerPrimer
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Re: More in equities as you age ?

Post by LongerPrimer »

^ We are nearly 100% equities, no bonds, some cash. However, I added a floor to the equity equation by purchasing/was sold, deferred variable annuities. I abandoned the equity-bond model in 2008 because I wasn't confident that we could recover by "Staying The Course". We also no longer had any human capital remaining. :annoyed

Now, today, the annuities have performed their job, and the future is secure no matter what the economy or politics can do. Plus some careful stock trading has virtually added a supplemental post-70 yo lifestyle. The only insecure portion, ironically are the Index funds. :annoyed

Plan to keep high proportion of equities. However, I am mulling intermediate - long bonds as a deflation hedge. :annoyed
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wade
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Re: More in equities as you age ?

Post by wade »

A few quick thoughts on this topic...

Larry, we did offer a rebuttal to Jared's blog post here:
http://wpfau.blogspot.com/2014/09/a-cha ... ising.html

As for other issues:

-the article does assume constant inflation-adjusted spending. The conclusions might change with a dynamic spending strategy. We are starting to look into this.

-the article is meant to look at the appropriate default glidepath for target date funds in the post-retirement period. We look at this as a U-shaped lifetime equity allocation glidepath. Have the lowest volatility when most vulnerable to portfolio losses

-Those on top of their finances do not need to use a default. Asset allocation can be based on the funded status. What percent of assets is needed to secure lifetime spending goals? What percent of assets is 'discretionary' in nature? Would I use a rising glidepath? Probably... if I use a conservative withdrawal rate, then as long as stocks do not experience really bad returns in the early part of my retirement, my assets will continue to grow and my time horizon will get shorter. This means that less assets are needed to secure my lifestyle and more assets are discretionary. Hence, a rising equity glidepath.

-Nisiprius brings up a good point. And there are behavior issues. But we are speaking toward the 4% rule styled asset allocation advice, which is to hold 50-75% stocks through the whole retirement. We are saying it is okay to end up there, but you can go ahead and start with a lower stock allocation, and so a lower lifetime stock allocation. This should be comforting. The behavioral concern I do see is that once someone is used to less volatility, it may be hard to get back into the volatility mindset. One could simply split the portfolio into two parts if necessary and be very conservative with the part needed to fund lifestyle

-About SPIAs, what led us down the path is that we observed that part of the reason a stocks/SPIA strategy seems to work so well is because it does imply a rising equity glidepath from a total household balance sheet perspective in the typical case for a retiree with a conservative withdrawal rate. The present value of the SPIA will decline more quickly than the stocks, and so one experiences a rising glidepath

-azanon, I'm not really anti-stocks. My point about SPIAs is that they can replace a retiree's bonds, not that they should replace a retiree's stocks.

-Rodc, if we ever did misspeak in a way to imply some sort of statistical significance for the rising glidepath, that was a mistake. I don't think statistical significance can be shown. What I would say is that one can experience the same, or even *possibly* slightly better outcomes, on the downside with a much lower average stock allocation by using a rising equity glidepath. For those concerned about holding lots of stocks in retirement, this can be reassuring.
IlliniDave
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Re: More in equities as you age ?

Post by IlliniDave »

I understand all the fungibility and whatnot, but intuitively for my situation I am very comfortable with the idea of funding some level of "lifestyle" in a conservative manner, and investing the balance of my assets in more of a growth-oriented posture (essentially I'll be stewarding most of that money for future generations). It's blatant bucketing, and I don't care--and isn't completely unlike the liability-matching concept. The most likely outcome is a rising equity glide path from a relatively conservative position (for me) at the onset of retirement. I won't be managing to the outcome, i.e., I won't be taking deliberate steps to ensure some specific glide path is adhered to, but resultant drift in allocation based on how I'll set up and manage my finances will probably mean a higher percentage of stocks in the out years. The concept resonates strongly with me.

All the analysis and intellectual dialogue in the literature is fun to read, but I can't get past what I feel in my gut. I hope it is not my undoing someday!
Don't do something. Just stand there!
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galeno
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Re: More in equities as you age ?

Post by galeno »

I've got nerves of steel. Therefore we will go through retirement with a 60/40 port using a 3% initial AWR.
KISS & STC.
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