Asset Allocation during retirement and Safe Withdrawal Rates

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Brit
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Asset Allocation during retirement and Safe Withdrawal Rates

Post by Brit » Tue Jan 02, 2018 4:48 pm

A big thank you to @mhalley for enlightening me on the Trinity Study (I wasn't previously aware of this).

This raises some questions on my current asset allocation strategy.

1. I have an 8 year retirement time horizon.
2. I am currently at 42% bonds and 58% equities allocation (Core Four)
3. I plan to increase my bond allocation by 2% per year for the next 8 years, then 1% for each subsequent year until AA = 75% bonds, 25% equities.
4. I plan to withdraw at 4% and need to portfolio to last 30 years (no expectations of inheritance).

The only logic I have behind this strategy is to align my bond allocation as close to my age as possible (some catchup to do here) and having "some" equity allocation seems logical to portfolio growth.

However, having read the data in the Trinity Study and seeing some posts in this forum, my strategy may not be any better in terms of portfolio success with a 4% withdrawal rate over 30 years than a 50% bond and 50% equities allocation.

Would love to see what other people plan in terms of asset allocation during retirement and the rationale behind the allocation.

Cheers folks!

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Peter Foley
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Re: Asset Allocation during retirement and Safe Withdrawal Rates

Post by Peter Foley » Tue Jan 02, 2018 5:04 pm

I think your current asset allocation is fine and your plan for the future is mainstream as well. If you want a different take on this I would suggest you read about the concept of a Rising Equity Glide Path - Wade Pfau. In very broad terms he suggests one might want to be a little more conservative around the time they retire because that is when they might have the most money at risk. After a few years of retirement if you have not been hit by a poor sequence of returns, you might want to increase your equity exposure a bit.

I'm okay with a 4% withdrawal rate for planning purposes. I know that many people feel that with very low inflation and a low returns from bonds, that a 3% or 3.5% is a better guide for people retiring in the current market. In 8 years, who knows?

Edited once for spelling.
Last edited by Peter Foley on Sun Dec 02, 2018 11:52 pm, edited 2 times in total.

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iceport
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Re: Asset Allocation during retirement and Safe Withdrawal Rates

Post by iceport » Tue Jan 02, 2018 5:16 pm

Hi Brit,

Like you, I started thinking about this more seriously within 10 years of retirement, knowing I wanted a more conservative AA than 70/30. And like you, I found the Trinity Study an important guidepost. It firmly refutes the old "age in bonds" advice, in my opinion.

I described the rationale for my retirement AA here: Re: Your Safety Net

You don't need to be distracted by the virtual "bucket" approach, which many here deride, justifiably, as mental accounting. The important point is that I intend to maintain an overall 56/44 AA throughout. The third bulleted caveat is an important one.

In general, not knowing much detail of your specific situation, I'd consider a 50/50 AA to be at the low end of a suitable equity allocation to theoretically maximize a sustainable withdrawal rate from a portfolio.
"Discipline matters more than allocation.” ─William Bernstein

dbr
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Re: Asset Allocation during retirement and Safe Withdrawal Rates

Post by dbr » Tue Jan 02, 2018 5:19 pm

The Trinity study and about any other model of withdrawals I have seen shows that the one sure way to fail at moderate withdrawal rates is to not have enough in stocks. 25% might be a bare minimum but maybe 40% is safer. The reason is simply that bonds don't have enough real return to sustain inflation indexed withdrawals safely. The sure way to use bonds for a 30 year retirement is a ladder of 30 year TIPS (theoretical construct) which delivers 3.33% if bought at 0% real and 3.8% if bought at 1% real as can almost be attained today. The TIPS ladder does have the extra guarantee that at the end of thirty years income will fall to exactly zero.

If you plan to withdraw at less than around 4% then less in stocks may be fine. What impact the current low yields on bonds has on this can't be good.

If one increases the stock allocation then the tendency is for the greater success that should accrue to higher expected return is undercut by failures due to bad sequences of return which are more and more a problem the more and more volatile the portfolio.

The truth is one cannot asset allocate out of trying to withdraw and spend too much while being unlucky at the same time. Investing at low volatility is not safe nor is trying to invest for high return.

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Sheepdog
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Re: Asset Allocation during retirement and Safe Withdrawal Rates

Post by Sheepdog » Tue Jan 02, 2018 5:28 pm

Brit,
I will repeat here what I have written several times here. I planned a similar path in retirement as you are. I am in my 20th year in retirement. I wrote this last October:

I invest conservatively, live off of my savings and SS very well and have watched it not just maintain, but even grow in value over my 19 years retired. At my age 65 retirement my stock allocation was about 57%. I felt uncomfortable and I did not feel that I needed it. Why take more risk than I need to? Since I didn't believe I needed that risk I started gradually reducing the stock allocation to 100 minus my age. By age 69 I was at 31%. I reduced the percentage annually until it reached 23% at age 77, and I decided not to reduce it any farther. It 47% since 1998 with an average return of 5.30% and after taking out an average of 4.67% each year. Remember that I went thru the 2000-02 and 2008-09 downturns and still had these results.

Addendum. My 2017 investment result with this allocation was 8.34%. I withdrew 4.06%, so my investment value grew again.
Last edited by Sheepdog on Tue Jan 02, 2018 5:33 pm, edited 1 time in total.
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mariezzz
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Re: Asset Allocation during retirement and Safe Withdrawal Rates

Post by mariezzz » Tue Jan 02, 2018 5:31 pm


jebmke
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Re: Asset Allocation during retirement and Safe Withdrawal Rates

Post by jebmke » Tue Jan 02, 2018 5:37 pm

When I retired at 55 we set our allocation at 40/60 to span the first ten years where we were totally dependent on the portfolio.

Ten years later, pension starts this year. RMDs and SS will start in five years. My plan now is to let the allocation drift up if the market keeps going up and avoid taking any taxable gains. So the only re-balance I will do is on the downside.
When you discover that you are riding a dead horse, the best strategy is to dismount.

livesoft
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Re: Asset Allocation during retirement and Safe Withdrawal Rates

Post by livesoft » Tue Jan 02, 2018 6:29 pm

The Trinity study is so old, I think one will want to read the latest:
https://earlyretirementnow.com/2016/12/ ... t-1-intro/

After all, this is how one pays for the rest of their life.

I have set my AA for the rest of my life to about 60% equities and 40% bonds/non-equities. That may change later in life to even higher equities if my portfolio grows into my eighties and beyond as expected.
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Tyler9000
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Re: Asset Allocation during retirement and Safe Withdrawal Rates

Post by Tyler9000 » Tue Jan 02, 2018 6:49 pm

Brit wrote:
Tue Jan 02, 2018 4:48 pm
2. I am currently at 42% bonds and 58% equities allocation (Core Four)
Also, keep in mind that if you're invested in the Core Four then your portfolio contains two assets that the Trinity Study never even considered in its analysis. Not all stocks and bonds are created equal!

This is a complicated topic and a lot more sophisticated than even highly educated investors usually realize. Your asset allocation, home country, retirement duration, withdrawal method, and inheritance goals all play a part in selecting an appropriate withdrawal rate, and reducing it all to percent stocks drastically over-simplifies the assumptions and can lead to some very incorrect conclusions.

If you have a little time to explore, I've compiled a lot of my own thoughts, analysis, and tools here: https://portfoliocharts.com/portfolio/r ... nt-income/

Brit
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Re: Asset Allocation during retirement and Safe Withdrawal Rates

Post by Brit » Sun Dec 02, 2018 2:17 pm

This topic is indeed a real head-scratcher! Having read this post again (thank you to everyone who responded!), and having done some more research, I'm revising my post and would appreciate any further input that anyone has. This basically combines a bunch of things that I read which are applicable to my situation. However, some of them I'm not so sure about as I'm indicating in the emoticons, so please all suggestions are super welcome.

GOALS
1. Minimize impact to portfolio of bad sequences of return in the first 10 years of retirement.
2. Improve success probability of 4% Safe Withdrawal Rate (SWR).

APPROACH

a). I'm an 54 and plan to retire in 8 years at age 62 (if the portfolio performs as Fidelity retirement planner predicts). :?
b). No expectation of leaving an inheretance from the portfolio, we have real-estate equity for inheritance and/or mitigating portfolio shortfall.
c). I am currently at an AA of 56/44, using a Core Four portfolio through Fidelity low cost (very lost cost) funds in an IBM 401k
d). I plan to increase my bond allocation by 2% per year for the next 8 years to catch up on "age in bonds" rule of thumb. 40/60 AA at retirement.
e). At retirement I will allocate 5 years of the "bond" portfolio into a CD to draw on if there Is a downturn in the first 10 years of retirement. :confused
f). Each year after retirement I will increase my equities allocation by 1% until I get to an AA of 50/50 10 years into retirement.
g). I plan to withdraw ~4% from the bond :confused portion of the portfolio until the age of 67, then take SS for additional income.
h). I need to portfolio to last 30 years (no expectations of inheritance per the above statement).

Thank you in advance for reading this and any input that you may care to share! :D

blahblahsunshine
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Re: Asset Allocation during retirement and Safe Withdrawal Rates

Post by blahblahsunshine » Sun Dec 02, 2018 5:33 pm

Here is some analysis on glide paths that you might want to check out if you haven't. Found it very helpful to me. https://earlyretirementnow.com/2017/09/ ... lidepaths/

Also, I'd check out how Social Security might fit into your SWR if you haven't. For me and the DW it really helps us feel more confident having made it to the second bend point.

Also worth considering what you know of our current situation in the debt cycle and whether that tempers your allocation. Concentration is always risky and a matter of degrees.

jebmke
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Re: Asset Allocation during retirement and Safe Withdrawal Rates

Post by jebmke » Sun Dec 02, 2018 5:48 pm

Looks like you are pretty much staying in the 40-50% range the whole time so it should be fine. It wasn't clear to me if you would be reducing the withdrawal when social security starts or not.

In addition to thinking through the possibility of the downside risk, also consider if things go much better than planned, you might want to delay taking social security until 70 to increase the annuity value of that income stream. This isn't a decision you need to make now but one to consider as you get closer to 67.

I notice that your 401(k) is with IBM. For quite a while, IBM had a defined benefit pension plan - were you eligible for that?
When you discover that you are riding a dead horse, the best strategy is to dismount.

Brit
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Re: Asset Allocation during retirement and Safe Withdrawal Rates

Post by Brit » Sun Dec 02, 2018 6:06 pm

Thanks much @blahblahsunshine and @jebmke.

I plan to use Social Security to increase my yearly budget versus reduce withdrawal rate. However, it will of course adjust my WR based on market conditions at the time. Speaking of which does one consider the entire portfolio performance (ie stocks + bonds) and adjust the WR based on % of total increase or decrease since last year?

I probably need to go back to the Bogleheads Guide to Retirement book and re-read the Withdrawal Strategy chapter . . .

On the Defined Benefit Plan, ah yes I remember that schpiel when I was getting hired in November 2004. For some reason they made my start date 1 January 2005 and voila no surprise HR did that as the DBP stopped on 12/31/2014. I have all the documentation on the plan and tried to challenge HR on the matter but alas I wasn't successful. Oh well, we move on and save more!

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Tyler9000
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Re: Asset Allocation during retirement and Safe Withdrawal Rates

Post by Tyler9000 » Sun Dec 02, 2018 7:09 pm

Brit wrote:
Sun Dec 02, 2018 2:17 pm
GOALS
1. Minimize impact to portfolio of bad sequences of return in the first 10 years of retirement.
2. Improve success probability of 4% Safe Withdrawal Rate (SWR).

c). I am currently at an AA of 56/44, using a Core Four portfolio through Fidelity low cost (very lost cost) funds in an IBM 401k
My first impression is that you're doing fine as-is without the complicated glide path strategies. For example, here's a chart showing the withdrawal rates since 1970 for your portfolio as I interpret it (I assumed 24% US, 24% International, 44% intermediate bonds, and 8% REITs).

Image

BTW, you can read more about how the chart works and modify it to study any AA you like here: https://portfoliocharts.com/portfolio/withdrawal-rates/

Long story short, even in the worst case you're already in pretty good shape without having to over-think it.

That said, if you're looking to mitigate sequence of return risks even further my personal philosophy is to supplement a portfolio with a few more assets that take care of that problem passively with no glide paths required. You can browse these portfolios for examples. Or for the biggest bang for your buck, refocus some of that optimization energy on reducing your expenses and that will likely blow any AA out of the water in terms of making your money last.

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Peter Foley
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Re: Asset Allocation during retirement and Safe Withdrawal Rates

Post by Peter Foley » Sun Dec 02, 2018 11:58 pm

While I think you are well within a reasonable range now, I think your plan to reduce equities for a few years and then let them rise is prudent.

I like it. :happy

Brit
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Re: Asset Allocation during retirement and Safe Withdrawal Rates

Post by Brit » Mon Dec 03, 2018 7:59 am

Many thanks to all for the thoughtful and educational guidance.

While there's never a "perfect" retirement plan, I am much more confident that this is a GOOD plan and the right one for me and my family.

Sticking with it!

gamboolman
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Re: Asset Allocation during retirement and Safe Withdrawal Rates

Post by gamboolman » Mon Dec 03, 2018 11:23 am

We’re currently about 60/40 but moving towards about 45/55 ish for retirement end of next year at age 60

Withdrawal rate between age 60 to 67 estimated to be ~4 to 5 %
After 67 and starting SS it will go to ~3 to 4% ish

livesoft
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Re: Asset Allocation during retirement and Safe Withdrawal Rates

Post by livesoft » Wed Dec 05, 2018 12:19 am

Your revised approach is fine, but it is also mostly for your peace of mind and probably offers no special benefits to doing nothing at all. In my opinion, just sticking to 56/44 and doing nothing will probably have just as good an outcome as what you planned to do.
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aristotelian
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Re: Asset Allocation during retirement and Safe Withdrawal Rates

Post by aristotelian » Wed Dec 05, 2018 7:19 am

By going bond heavy, you expose yourself to inflation risk. You should take a look at the Early Retirement Now data as well as trying your numbers on Firecalc. Probably doesn't matter, as 4% should work for 30 years in any case.

retiredflyboy
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Re: Asset Allocation during retirement and Safe Withdrawal Rates

Post by retiredflyboy » Wed Dec 05, 2018 11:24 pm

To complicated for me. 40% stock 60% fixed and rebalance if you hit 30% stock 70% fixed or 50% stock 50% fixed. Simple is almost always better particularly when we filter through our human emotions and tendencies. You should not be heavy in stock early in retirement and when you get later into retirement you won’t want to be heavy in stock.
Facts are stubborn things. Everything works until it doesn’t.

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Re: Asset Allocation during retirement and Safe Withdrawal Rates

Post by OregonDucksFan » Thu Dec 06, 2018 12:16 am

According to this trinity study https://www.forbes.com/sites/wadepfau/2 ... ee82416860... 25% stocks / 75% bonds at 4% withdrawal rate has 100% success for up to 25 years, and 87% success rate for 30 years, 71% for 35 years, 45% for 40 years. If that's good enough for you, then I see no reason to change your plans.

If you want to double check, there is also monte carlo simulation to vary asset allocations (30% stocks/70% bonds, 35% stocks/65% bonds, etc) to see differences in probability how long the money will last. This is one example https://www.retirementsimulation.com/. I used it to look at worst case (bottom 1% case) to ensure the assets will last until age 90's. In this case, the 50-percentile portfolio size in age 90's of course differ by different asset allocation but I care more about the worst 1% case to ensure the money lasts until age 90's.

magneto
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Re: Asset Allocation during retirement and Safe Withdrawal Rates

Post by magneto » Thu Dec 06, 2018 4:06 am

Frank Armstrong covers this subject quite well in chapter 18 of 'The Informed Investor'.

There is nothing special or sacred about the Constant Ratio (CR).
Even CR investors hold a greater quantity of Stock shares when prices are low, while a lesser quantity of Stock shares when prices are high. The fact that the $ amount ratio is aimed constant is just a curiosity, but with the important advantage that the investor need not understand values.
Freed from CR and with a sensible measuring system, the movement of assets can be taken a stage further (sometimes referred to as 'overbalancing'), the world is then an investors' oyster.
The retiree could sidestep the Sequence of Returns Risk.

More Asset Classes exist than just Stocks or Bonds, which in turn can play a part in the retirees investment plan; helping to obviate the need to sell Stocks or even Bonds at unreasonably low prices. Whether Bonds are now the default safe alternative shown during the past 35 year plus Bond Bull Market is now being openly debated.
But then maybe the worst is over for Bonds?
Or maybe not?
The more Asset Classes, the more options for divergence and probably income.
'There is a tide in the affairs of men ...', Brutus (Market Timer)

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galeno
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Re: Asset Allocation during retirement and Safe Withdrawal Rates

Post by galeno » Thu Dec 06, 2018 9:51 pm

Wife and I are 61 and retired. We use "age in bonds" as our conservative AA. We're 40/60. We use a 4% AWR.
AA = 40/55/5. Expected CAGR = 3.8%. GSD (5y) = 6.2%. USD inflation (10 y) = 1.8%. AWR = 4.0%. TER = 0.4%. Port Yield = 2.82%. Term = 33 yr. FI Duration = 6.0 yr. Portfolio survival probability = 95%.

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