Asset Allocation & The 4% Rule

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Boxtrap
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Asset Allocation & The 4% Rule

Post by Boxtrap » Wed Dec 06, 2017 5:04 pm

Hi all - I'd like to throw out a question about asset allocation in connection with the 4% "safe" withdrawal rate and the quest to ensure that we don't outlive our retirement money.

I've seen various charts, including some based off the original Trinity study, showing that with an asset allocation of 75% stocks / 25% bonds you could withdraw an inflation-adjusted 4% annually and have a 100% success rate of not running out of money. I've seen this in a couple places, although the most recent is in JL Collins' book "The Simple Path To Wealth". (Collins is also a staunch advocate of index investing and Vanguard).

This boggles my mind. A 100% success rate (or as close to 100% as is conceivable) via 4% inflation adjusted withdrawals and I *only* need to reduce my stock holdings to 75% to achieve it?! This seems to fly in the face of all the conventional advice stating that by the time you retire you should probably be 50/50 on stocks/bonds. I am 40 years old currently and started a bit late on saving/investing for retirement, so I am 90 stocks/10 bonds right now. Many would say that's too aggressive for a 40 year old. Maybe they're right. But if that chart is indeed true, and I can be nearly guaranteed to not run out of money with a 75/25 portfolio as long as I don't withdraw more than 4%, why on earth wouldn't I want to be 90/10 right now when I most likely still have a good 25 years of work life ahead of me?

Would appreciate your thoughts, comments and advice on this!

livesoft
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Re: Asset Allocation & The 4% Rule

Post by livesoft » Wed Dec 06, 2017 5:10 pm

You are now ready to read this series of articles:
https://earlyretirementnow.com/2016/12/ ... t-1-intro/
Your quest for knowledge will continue.
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Conch55
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Re: Asset Allocation & The 4% Rule

Post by Conch55 » Wed Dec 06, 2017 5:16 pm

if that chart is indeed true, and I can be nearly guaranteed to not run out of money with a 75/25 portfolio as long as I don't withdraw more than 4%, why on earth wouldn't I want to be 90/10 right now when I most likely still have a good 25 years of work life ahead of me?
Maybe that portfolio met circumstances for past periods and maybe will meet them in the future. You just don't know so continue to refine your approach while determining your comfort level for risk.

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JDCarpenter
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Re: Asset Allocation & The 4% Rule

Post by JDCarpenter » Wed Dec 06, 2017 5:18 pm

livesoft wrote:
Wed Dec 06, 2017 5:10 pm
You are now ready to read this series of articles:
https://earlyretirementnow.com/2016/12/ ... t-1-intro/
Your quest for knowledge will continue.
+ more than 1. ERN's dissection of the SWR is well worth devoting some study to. Livesoft justifiably refers a lot of people to it.
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Boxtrap
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Re: Asset Allocation & The 4% Rule

Post by Boxtrap » Wed Dec 06, 2017 5:20 pm

Actually, perhaps a better and more accurate question for me to ask is this - why on earth would I ever reduce my asset allocation to anything past 75% stocks/25% bonds if I can remain at that allocation and be nearly guaranteed to be fine. Even though I will lower my equity exposure over time, it seems that I should never lower it past 75% based on the chart I referenced.

livesoft
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Re: Asset Allocation & The 4% Rule

Post by livesoft » Wed Dec 06, 2017 5:30 pm

I think you will cross that 75% bridge when you come to it. Everybody does.

But Larry Swedroe wrote about the Need, Ability, and Willingness to assume risk back in the 1990s. I suspect all of those will change for you later on in life. You can ponder all this now, but I don't think it will do you much good until later.
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livesoft
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Re: Asset Allocation & The 4% Rule

Post by livesoft » Wed Dec 06, 2017 5:35 pm

Also, I was reminded of this old post earlier this week:
viewtopic.php?p=3403299#p3403299

In it I showed that one's asset allocation didn't make much difference over the past 20 years. This is partly because of the 2 market dumps (2000-2002 and 2008-2009) where bonds saved your portfolio.
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Tyler9000
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Re: Asset Allocation & The 4% Rule

Post by Tyler9000 » Wed Dec 06, 2017 6:17 pm

If you have a little time, I recommend reading through each of these articles. They discuss things like how asset allocation (including investment options never considered by most retirement studies) affects SWRs and how your home country also affects the numbers in ways that might surprise you.

https://portfoliocharts.com/portfolio/r ... nt-income/

Thesaints
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Re: Asset Allocation & The 4% Rule

Post by Thesaints » Wed Dec 06, 2017 6:47 pm

The first comment should be that the 100% success rate quoted is based on past markets. It does not mean that there will be a 100% success rate in the future.

Going more into depth, the 4% "safe" withdrawal rate is essentially based on an average market return around 9-10% for stocks and 6-7% for bonds.
The 2018 retiree won't see such returns for many years to come. A 4% withdrawal rate can only be supported by eating one's capital and even when (if ?) markets will "normalize" years from now the reduced capital will increase the risk of shortfall.

Relatively simple back of the envelope estimates point to a safe rate around 3% instead. Where for "safe" we intend being able to support suxh withdrawal for >40 years. Same estimates surprisingly agree quite well with what Vanguard's VCMM suggest the 10-year returns are going to be.

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