Why isn't an AA of 75/25 with a SWR 3.75% the standard??

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Why isn't an AA of 75/25 with a SWR 3.75% the standard??

Post by TheTimeLord » Tue Jan 08, 2019 12:02 pm

Looking at the information provided from the Early Retirement Now forum it would seem like Bogleheads would all be singing the praises of a 3.75% SWR with a 75/25 AA. But I rarely hear it mentioned. The success rates seem to be excellent, so what's the concerns around using this? So before I take the leap I would like to understand the concerns are this SWR and AA.

30 years - 100%
40 years - 98%
50 years - 94%
60 years - 92%

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Re: Why isn't an AA of 75/25 with a SWR 3.75% the standard??

Post by GAAP » Tue Jan 08, 2019 3:18 pm

Just a guess -- but 4% is easier to use for planning -- the 25x thing. The other big reason for many would relate to concerns about the volatility (usually called "risk") of a 75% Equity allocation.

I don't believe in the SWR constant real rate concept, but if you were going to do it, it sounds reasonable.

My personal choices are:
  • Target 70/30 allocation that could basically float between 60/40 and 80/20
  • Global market cap ratio for domestic/international in both equity and fixed income
  • A variable withdrawal method that treats the portfolio as a perpetuity with no defined lifetime
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Re: Why isn't an AA of 75/25 with a SWR 3.75% the standard??

Post by celia » Tue Jan 08, 2019 3:29 pm

Not everyone needs (or wants) a 3.75% withdrawal rate. Some people don't need to withdraw that much. Some people need more (with the corresponding consequences).

Likewise, a 75/25 Asset Allocation is too risky for some while not aggressive enough for others.

Everyone's situation is different, so I don't know how anyone can recommend a "standard".


However, if all your assets were to be in tax-deferred accounts (after spending down everything else, which I don't recommend due to loss of tax diversity), I notice that 3.75% is close to the starting RMD rate of 3.65% at age 70.5. But each year, the percent that needs to be withdrawn is REQUIRED to be more. (The money required to be withdrawn isn't required to be spent, however.)
A dollar in Roth is worth more than a dollar in a taxable account. A dollar in taxable is worth more than a dollar in a tax-deferred account.

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Re: Why isn't an AA of 75/25 with a SWR 3.75% the standard??

Post by mhalley » Tue Jan 08, 2019 3:31 pm

Probably because a lot of retirees might not be able to stay the course with 75% equities. I know in my brain that it would probably be better with 75%, but my pillow says to be 50%.

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Re: Why isn't an AA of 75/25 with a SWR 3.75% the standard??

Post by HomerJ » Tue Jan 08, 2019 3:35 pm

mhalley wrote:
Tue Jan 08, 2019 3:31 pm
Probably because a lot of retirees might not be able to stay the course with 75% equities. I know in my brain that it would probably be better with 75%, but my pillow says to be 50%.
This.

75% stocks is too scary. 25% in bonds isn't enough to keep me feeling safe during an extended crash.

4% instead of 3.75% because the math is simple.

50/50 with 4% on that chart has a 95% success rate. "Failure" is not starving to death, but rather, dropping to 3.5% until the market recovers if the market crashes early in retirement (i.e. skipping a vacation or two) - or going back to (part-time) work.

Here's the thing about 4% "failing". It pretty much only fails if the market is bad early in retirement. A bad crash 5-10 years after you retired (after 5-10 years of growth) isn't going to derail your retirement spending. A crash is only likely to hurt the chances of a 4% withdrawal success if it happens early in retirement.

So 50/50 with 4% withdrawals (with a possible mostly painless adjustment if something bad happens early in retirement) seems pretty good, and pretty easy to me.
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Re: Why isn't an AA of 75/25 with a SWR 3.75% the standard??

Post by TheTimeLord » Tue Jan 08, 2019 4:08 pm

HomerJ wrote:
Tue Jan 08, 2019 3:35 pm
mhalley wrote:
Tue Jan 08, 2019 3:31 pm
Probably because a lot of retirees might not be able to stay the course with 75% equities. I know in my brain that it would probably be better with 75%, but my pillow says to be 50%.
This.

75% stocks is too scary. 25% in bonds isn't enough to keep me feeling safe during an extended crash.

4% instead of 3.75% because the math is simple.

50/50 with 4% on that chart has a 95% success rate. "Failure" is not starving to death, but rather, dropping to 3.5% until the market recovers if the market crashes early in retirement (i.e. skipping a vacation or two) - or going back to (part-time) work.

Here's the thing about 4% "failing". It pretty much only fails if the market is bad early in retirement. A bad crash 5-10 years after you retired (after 5-10 years of growth) isn't going to derail your retirement spending. A crash is only likely to hurt the chances of a 4% withdrawal success if it happens early in retirement.

So 50/50 with 4% withdrawals (with a possible mostly painless adjustment if something bad happens early in retirement) seems pretty good, and pretty easy to me.
I definitely understand the scary part but if you have 25x expenses and you are 75/25 don't you have 6.25 years in safe assets plus you still receive dividends and most people will have SS or even a pension so what they get from their portfolio won't be all that they have. So yes, 75/25 sounds scary but maybe a little less scary when you break it down?
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Re: Why isn't an AA of 75/25 with a SWR 3.75% the standard??

Post by David Jay » Tue Jan 08, 2019 4:14 pm

TheTimeLord wrote:
Tue Jan 08, 2019 4:08 pm
So yes, 75/25 sounds scary but maybe a little less scary when you break it down?
You are allowing your brain to get in the way of your emotions. Not everyone is wired that way.

My sister and BIL sold out at the bottom in 2008, "We had lost over half of our money, so we sold all our stocks". And thus they did, in fact, lose half their money.
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Re: Why isn't an AA of 75/25 with a SWR 3.75% the standard??

Post by JoMoney » Tue Jan 08, 2019 4:22 pm

Other studies had suggested 100% success rate with 60/40 and 4% SWR @ 30 years.
The data from this "study" is a little different. It likely wouldn't be a big deal either way, these percentages are only based on some specific time period that is now in the past, or ranges of data ran through a monte carlo simulation, they are not representative of the future or the unknown future ranges of returns.
There is no "standard", and there shouldn't be, as different situations make a difference. In reality, broad averages rarely represent any individuals situation.
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Re: Why isn't an AA of 75/25 with a SWR 3.75% the standard??

Post by ResearchMed » Tue Jan 08, 2019 4:23 pm

TheTimeLord wrote:
Tue Jan 08, 2019 4:08 pm
HomerJ wrote:
Tue Jan 08, 2019 3:35 pm
mhalley wrote:
Tue Jan 08, 2019 3:31 pm
Probably because a lot of retirees might not be able to stay the course with 75% equities. I know in my brain that it would probably be better with 75%, but my pillow says to be 50%.
This.

75% stocks is too scary. 25% in bonds isn't enough to keep me feeling safe during an extended crash.

4% instead of 3.75% because the math is simple.

50/50 with 4% on that chart has a 95% success rate. "Failure" is not starving to death, but rather, dropping to 3.5% until the market recovers if the market crashes early in retirement (i.e. skipping a vacation or two) - or going back to (part-time) work.

Here's the thing about 4% "failing". It pretty much only fails if the market is bad early in retirement. A bad crash 5-10 years after you retired (after 5-10 years of growth) isn't going to derail your retirement spending. A crash is only likely to hurt the chances of a 4% withdrawal success if it happens early in retirement.

So 50/50 with 4% withdrawals (with a possible mostly painless adjustment if something bad happens early in retirement) seems pretty good, and pretty easy to me.
I definitely understand the scary part but if you have 25x expenses and you are 75/25 don't you have 6.25 years in safe assets plus you still receive dividends and most people will have SS or even a pension so what they get from their portfolio won't be all that they have. So yes, 75/25 sounds scary but maybe a little less scary when you break it down?
If by "... plus you still receive dividends..." you mean dividends from that same large 75/25 portfolio, those dividends need to be kept IN the main portfolio. They are part of the "total return". Or, IF you want to "spend" the dividends as they come in, then you'd need to subtract that amount from whatever you separately remove from the portfolio.

Also, when you look over that chart, don't forget that it is already ultra conservative. It includes some of the very worst years/intervals. Most of us won't experience anything like that. That's why when you look at other charts that show the "expected value of the full portfolio over time", in most cases, the ending total (after you are, er, gone) will be multiples of what you started with.

And that's why there are other approaches like the Variable Withdrawal types, such that IF you don't have the "worst" returns, then you can slowly take more than that "4%".
And that approach also "tries" to help you spend down, so it's great for those without serious legacy desires. It also prevents you from running out, as you still take only a given percentage. However, it *could*, under bad conditions, end up with you having somewhat less than with the 4%, which *could* allow you to run out.
So it's always a mixed bag unless one is SO conservative as to spend something like 2% per year.

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Re: Why isn't an AA of 75/25 with a SWR 3.75% the standard??

Post by HomerJ » Tue Jan 08, 2019 4:28 pm

TheTimeLord wrote:
Tue Jan 08, 2019 4:08 pm
HomerJ wrote:
Tue Jan 08, 2019 3:35 pm
mhalley wrote:
Tue Jan 08, 2019 3:31 pm
Probably because a lot of retirees might not be able to stay the course with 75% equities. I know in my brain that it would probably be better with 75%, but my pillow says to be 50%.
This.

75% stocks is too scary. 25% in bonds isn't enough to keep me feeling safe during an extended crash.

4% instead of 3.75% because the math is simple.

50/50 with 4% on that chart has a 95% success rate. "Failure" is not starving to death, but rather, dropping to 3.5% until the market recovers if the market crashes early in retirement (i.e. skipping a vacation or two) - or going back to (part-time) work.

Here's the thing about 4% "failing". It pretty much only fails if the market is bad early in retirement. A bad crash 5-10 years after you retired (after 5-10 years of growth) isn't going to derail your retirement spending. A crash is only likely to hurt the chances of a 4% withdrawal success if it happens early in retirement.

So 50/50 with 4% withdrawals (with a possible mostly painless adjustment if something bad happens early in retirement) seems pretty good, and pretty easy to me.
I definitely understand the scary part but if you have 25x expenses and you are 75/25 don't you have 6.25 years in safe assets plus you still receive dividends and most people will have SS or even a pension so what they get from their portfolio won't be all that they have. So yes, 75/25 sounds scary but maybe a little less scary when you break it down?
You're absolutely correct, but I'm more conservative than that. I like 50% of my money in bonds and CDs. I could probably meet my basic needs for 30 years just with that 50%. That helps me sleep at night, and ignore what the stock market is doing.
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Re: Why isn't an AA of 75/25 with a SWR 3.75% the standard??

Post by willthrill81 » Tue Jan 08, 2019 4:38 pm

HomerJ wrote:
Tue Jan 08, 2019 3:35 pm
50/50 with 4% on that chart has a 95% success rate. "Failure" is not starving to death, but rather, dropping to 3.5% until the market recovers if the market crashes early in retirement (i.e. skipping a vacation or two) - or going back to (part-time) work.

Here's the thing about 4% "failing". It pretty much only fails if the market is bad early in retirement. A bad crash 5-10 years after you retired (after 5-10 years of growth) isn't going to derail your retirement spending. A crash is only likely to hurt the chances of a 4% withdrawal success if it happens early in retirement.

So 50/50 with 4% withdrawals (with a possible mostly painless adjustment if something bad happens early in retirement) seems pretty good, and pretty easy to me.
+1

Just to add, no one can guarantee "100% success" of any strategy in the future because no one has a working crystal ball. And there's nothing magical about a 100% success rate from a Monte Carlo simulation or even historical returns. The future could look very different from the past. When you realize that this is the case, you see that flexibility is more important than striving to achieve a 100% success rate instead of 95%, 90%, etc.

The person who uses 4% fixed withdrawals but has room to reduce them if the need arises is probably more secure both financially and psychologically than the person with 3.5% fixed withdrawals who cannot tolerate any spending reduction at all.
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Re: Why isn't an AA of 75/25 with a SWR 3.75% the standard??

Post by azanon » Tue Jan 08, 2019 4:42 pm

My response would focus less on the specific allocation and SWR you're proposing, and more on the fact that "constant-dollar" withdrawal method is inferior to just about every other competing retirement withdrawal method (including, but not limited to, constant percentage, variable-percentage, 1/n withdrawals, etc.). If you talk with a retirement income expert, just about all of them will point out that the usefulness of SWR studies, is for planning purposes or to estimate a reasonable FIRST YEAR withdrawal amount. But to propose just inflation-adjusting that amount for subsequent years, and completely putting the blinders on to what's actually happening with your portfolio, and not have some system or method that adjusts for that, borders on lunacy, in my opinion.

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Re: Why isn't an AA of 75/25 with a SWR 3.75% the standard??

Post by TheTimeLord » Tue Jan 08, 2019 4:56 pm

HomerJ wrote:
Tue Jan 08, 2019 4:28 pm
TheTimeLord wrote:
Tue Jan 08, 2019 4:08 pm
HomerJ wrote:
Tue Jan 08, 2019 3:35 pm
mhalley wrote:
Tue Jan 08, 2019 3:31 pm
Probably because a lot of retirees might not be able to stay the course with 75% equities. I know in my brain that it would probably be better with 75%, but my pillow says to be 50%.
This.

75% stocks is too scary. 25% in bonds isn't enough to keep me feeling safe during an extended crash.

4% instead of 3.75% because the math is simple.

50/50 with 4% on that chart has a 95% success rate. "Failure" is not starving to death, but rather, dropping to 3.5% until the market recovers if the market crashes early in retirement (i.e. skipping a vacation or two) - or going back to (part-time) work.

Here's the thing about 4% "failing". It pretty much only fails if the market is bad early in retirement. A bad crash 5-10 years after you retired (after 5-10 years of growth) isn't going to derail your retirement spending. A crash is only likely to hurt the chances of a 4% withdrawal success if it happens early in retirement.

So 50/50 with 4% withdrawals (with a possible mostly painless adjustment if something bad happens early in retirement) seems pretty good, and pretty easy to me.
I definitely understand the scary part but if you have 25x expenses and you are 75/25 don't you have 6.25 years in safe assets plus you still receive dividends and most people will have SS or even a pension so what they get from their portfolio won't be all that they have. So yes, 75/25 sounds scary but maybe a little less scary when you break it down?
You're absolutely correct, but I'm more conservative than that. I like 50% of my money in bonds and CDs. I could probably meet my basic needs for 30 years just with that 50%. That helps me sleep at night, and ignore what the stock market is doing.
I think I was more curious why with such good success rates from 30-60 years there was more discussion around using s 3.75% SWR with a 75/25 AA. It seems like lots of people recommend an SWR in the 2s for people with 40-50 years retirements (I seriously doubt I will need to worry about that timeframe).
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Re: Why isn't an AA of 75/25 with a SWR 3.75% the standard??

Post by TheTimeLord » Tue Jan 08, 2019 4:58 pm

azanon wrote:
Tue Jan 08, 2019 4:42 pm
My response would focus less on the specific allocation and SWR you're proposing, and more on the fact that "constant-dollar" withdrawal method is inferior to just about every other competing retirement withdrawal method (including, but not limited to, constant percentage, variable-percentage, 1/n withdrawals, etc.). If you talk with a retirement income expert, just about all of them will point out that the usefulness of SWR studies, is for planning purposes or to estimate a reasonable FIRST YEAR withdrawal amount. But to propose just inflation-adjusting that amount for subsequent years, and completely putting the blinders on to what's actually happening with your portfolio, and not have some system or method that adjusts for that, borders on lunacy, in my opinion.
I thought that would be considered a positive to not be captured by the moment but have a longer big picture view?
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Re: Why isn't an AA of 75/25 with a SWR 3.75% the standard??

Post by stimulacra » Tue Jan 08, 2019 5:02 pm

Rule of thumbs are meant to be easy to remember… 

25X expenses is easier to remember and grok than 26.6666666 times expenses.

Also might be too much hair splitting for most people… might as well advocate for 50/50 and 3% SWR Or stick with 4%.

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Re: Why isn't an AA of 75/25 with a SWR 3.75% the standard??

Post by greg24 » Tue Jan 08, 2019 5:03 pm

If you really want to run the numbers, the "standard" would end up being something like 68.2/31.8 and 3.52%.

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Re: Why isn't an AA of 75/25 with a SWR 3.75% the standard??

Post by azanon » Tue Jan 08, 2019 5:03 pm

TheTimeLord wrote:
Tue Jan 08, 2019 4:58 pm
azanon wrote:
Tue Jan 08, 2019 4:42 pm
My response would focus less on the specific allocation and SWR you're proposing, and more on the fact that "constant-dollar" withdrawal method is inferior to just about every other competing retirement withdrawal method (including, but not limited to, constant percentage, variable-percentage, 1/n withdrawals, etc.). If you talk with a retirement income expert, just about all of them will point out that the usefulness of SWR studies, is for planning purposes or to estimate a reasonable FIRST YEAR withdrawal amount. But to propose just inflation-adjusting that amount for subsequent years, and completely putting the blinders on to what's actually happening with your portfolio, and not have some system or method that adjusts for that, borders on lunacy, in my opinion.
I thought that would be considered a positive to not be captured by the moment but have a longer big picture view?
I get what you're saying - that it could help you stay the course - but I would suggest though at least considering a shift to constant percentage, which could accomplish the same thing. But in that case, you would have piece of mind that you have absolutely no chance of running out of money.

Now my personal favorite is longinvest's Variable Percentage withdrawal, because you could get a much higher withdrawal rate than 3.75%, with less equities, and would only have to use the other aspects of the methods to deal with the (very unlikely) possibility that you'd live past 100.

But the experts in the field make reference to "Withdrawal Efficiency Rating". I'm pretty sure that "constant-dollar" method gets the lowest score (not counting "take only the dividends" method). David Blanschett at Morningstar, for example, would be quick to (politely) discourage that method. VPW, in contrast, scores very highly.

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Re: Why isn't an AA of 75/25 with a SWR 3.75% the standard??

Post by staycalm » Tue Jan 08, 2019 5:11 pm

How can there be a standard if everyone's situation is different (non-standard)? I suspect Warren Buffet would have a hard time spending 3.75% of his portfolio and there is no reason he would need to.

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Re: Why isn't an AA of 75/25 with a SWR 3.75% the standard??

Post by azanon » Tue Jan 08, 2019 5:11 pm

TheTimeLord wrote:
Tue Jan 08, 2019 4:58 pm
azanon wrote:
Tue Jan 08, 2019 4:42 pm
My response would focus less on the specific allocation and SWR you're proposing, and more on the fact that "constant-dollar" withdrawal method is inferior to just about every other competing retirement withdrawal method (including, but not limited to, constant percentage, variable-percentage, 1/n withdrawals, etc.). If you talk with a retirement income expert, just about all of them will point out that the usefulness of SWR studies, is for planning purposes or to estimate a reasonable FIRST YEAR withdrawal amount. But to propose just inflation-adjusting that amount for subsequent years, and completely putting the blinders on to what's actually happening with your portfolio, and not have some system or method that adjusts for that, borders on lunacy, in my opinion.
I thought that would be considered a positive to not be captured by the moment but have a longer big picture view?
Another method I like too is the one that Vanguard's Managed Payout Fund uses. They use a 4% Constant Percentage, but smooth it over 3 years. So if you'd be content with an initial first year 3.75%, maybe even give their "interesting" fund a try then you really could just ignore everything and take your monthly checks. But you'd have to be willing to live with ~ 17% in alternatives, and only 55-60% equities.

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Re: Why isn't an AA of 75/25 with a SWR 3.75% the standard??

Post by onthecusp » Tue Jan 08, 2019 5:17 pm

Because 4% and 75% stocks is 99% success with more money to spend.

And 3% and 75% stocks is still 100% success but "really" 100% and more likely to leave an inheritance.

People have different priorities.

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Re: Why isn't an AA of 75/25 with a SWR 3.75% the standard??

Post by suewolf » Tue Jan 08, 2019 5:40 pm

There's too many variables for a "standard".
- Longevity: I personally need assets to last longer than the standard 30 years
- Return: Those tables are based on historic returns. Looking forward, my guess is that returns will be less than average because of the recent bull market
- Sequence of return risk: if you happen to start withdrawing at the wrong time, that 3.75% will be way off.

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Re: Why isn't an AA of 75/25 with a SWR 3.75% the standard??

Post by vitaflo » Tue Jan 08, 2019 5:48 pm

I don't see a statistical difference between 99% and 100%. In fact, I don't see a difference between 95% and 100%, in that, once you get a high enough success rate, other factors matter more (dying early, working longer than needed, etc).

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Re: Why isn't an AA of 75/25 with a SWR 3.75% the standard??

Post by CyclingDuo » Tue Jan 08, 2019 5:52 pm

TheTimeLord wrote:
Tue Jan 08, 2019 4:08 pm
I definitely understand the scary part but if you have 25x expenses and you are 75/25 don't you have 6.25 years in safe assets plus you still receive dividends and most people will have SS or even a pension so what they get from their portfolio won't be all that they have. So yes, 75/25 sounds scary but maybe a little less scary when you break it down?
Add this to your reading... :beer

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Re: Why isn't an AA of 75/25 with a SWR 3.75% the standard??

Post by Grt2bOutdoors » Tue Jan 08, 2019 6:03 pm

HomerJ wrote:
Tue Jan 08, 2019 3:35 pm
mhalley wrote:
Tue Jan 08, 2019 3:31 pm
Probably because a lot of retirees might not be able to stay the course with 75% equities. I know in my brain that it would probably be better with 75%, but my pillow says to be 50%.
This.

75% stocks is too scary. 25% in bonds isn't enough to keep me feeling safe during an extended crash.

4% instead of 3.75% because the math is simple.

50/50 with 4% on that chart has a 95% success rate. "Failure" is not starving to death, but rather, dropping to 3.5% until the market recovers if the market crashes early in retirement (i.e. skipping a vacation or two) - or going back to (part-time) work.

Here's the thing about 4% "failing". It pretty much only fails if the market is bad early in retirement. A bad crash 5-10 years after you retired (after 5-10 years of growth) isn't going to derail your retirement spending. A crash is only likely to hurt the chances of a 4% withdrawal success if it happens early in retirement.

So 50/50 with 4% withdrawals (with a possible mostly painless adjustment if something bad happens early in retirement) seems pretty good, and pretty easy to me.
When do you make the transition to 50/50? Is it upon reaching x times expenses, age, a combination of the two?
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Re: Why isn't an AA of 75/25 with a SWR 3.75% the standard??

Post by Grt2bOutdoors » Tue Jan 08, 2019 6:07 pm

suewolf wrote:
Tue Jan 08, 2019 5:40 pm
There's too many variables for a "standard".
- Longevity: I personally need assets to last longer than the standard 30 years
- Return: Those tables are based on historic returns. Looking forward, my guess is that returns will be less than average because of the recent bull market
- Sequence of return risk: if you happen to start withdrawing at the wrong time, that 3.75% will be way off.
3.75% is conservative, nearly 28x expenses and that is with zero growth. If bonds yield 3%, equities will have to yield more to entice risk takers.
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Re: Why isn't an AA of 75/25 with a SWR 3.75% the standard??

Post by willthrill81 » Tue Jan 08, 2019 6:15 pm

TheTimeLord wrote:
Tue Jan 08, 2019 4:56 pm
It seems like lots of people recommend an SWR in the 2s for people with 40-50 years retirements (I seriously doubt I will need to worry about that timeframe).
I agree with you that any initial withdrawal rate, no matter how long the anticipated retirement, that's below 3% does not make sense unless you want to bequeath the majority of your assets.
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Re: Why isn't an AA of 75/25 with a SWR 3.75% the standard??

Post by MathWizard » Tue Jan 08, 2019 7:21 pm

In the linked article, 30 year SWR is shown for each year from the 1800's to 2016.

The year can't be the start of a 30 year period. It must the end of a 30 year period.

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Re: Why isn't an AA of 75/25 with a SWR 3.75% the standard??

Post by dknightd » Tue Jan 08, 2019 7:34 pm

50/50 does not look too bad. 75/25 might be better, but perhaps more uncomfortable. I wonder what the "optimal" is? I assume there is an optimal based on historical returns, and how long you expect to need the money. Likely none of those things will apply to me since history does not predict the future, and, I have no idea how long I might live.

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Re: Why isn't an AA of 75/25 with a SWR 3.75% the standard??

Post by WhiteMaxima » Tue Jan 08, 2019 7:43 pm

dknightd wrote:
Tue Jan 08, 2019 7:34 pm
50/50 does not look too bad. 75/25 might be better, but perhaps more uncomfortable. I wonder what the "optimal" is? I assume there is an optimal based on historical returns, and how long you expect to need the money. Likely none of those things will apply to me since history does not predict the future, and, I have no idea how long I might live.
A typical balanced fund is 60/40. It is a hold it forever AA. No as aggressive as 100/0, not too conservative as 20/80.

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Re: Why isn't an AA of 75/25 with a SWR 3.75% the standard??

Post by dknightd » Tue Jan 08, 2019 8:05 pm

WhiteMaxima wrote:
Tue Jan 08, 2019 7:43 pm
A typical balanced fund is 60/40. It is a hold it forever AA. No as aggressive as 100/0, not too conservative as 20/80.
I suspect between 50/50 and 60/40 will work for me long term.

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Re: Why isn't an AA of 75/25 with a SWR 3.75% the standard??

Post by 2015 » Tue Jan 08, 2019 8:11 pm

Some of us don't want anything to do with the seemingly never ending Battle of the Bands debate over what exactly does and does not constitute a so-called "safe" withdrawal rate. Personally, if I had to choose, I'd choose Metallica or Lil Kim--more music less noise.

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Re: Why isn't an AA of 75/25 with a SWR 3.75% the standard??

Post by Dottie57 » Tue Jan 08, 2019 8:22 pm

HomerJ wrote:
Tue Jan 08, 2019 4:28 pm
TheTimeLord wrote:
Tue Jan 08, 2019 4:08 pm
HomerJ wrote:
Tue Jan 08, 2019 3:35 pm
mhalley wrote:
Tue Jan 08, 2019 3:31 pm
Probably because a lot of retirees might not be able to stay the course with 75% equities. I know in my brain that it would probably be better with 75%, but my pillow says to be 50%.
This.

75% stocks is too scary. 25% in bonds isn't enough to keep me feeling safe during an extended crash.

4% instead of 3.75% because the math is simple.

50/50 with 4% on that chart has a 95% success rate. "Failure" is not starving to death, but rather, dropping to 3.5% until the market recovers if the market crashes early in retirement (i.e. skipping a vacation or two) - or going back to (part-time) work.

Here's the thing about 4% "failing". It pretty much only fails if the market is bad early in retirement. A bad crash 5-10 years after you retired (after 5-10 years of growth) isn't going to derail your retirement spending. A crash is only likely to hurt the chances of a 4% withdrawal success if it happens early in retirement.

So 50/50 with 4% withdrawals (with a possible mostly painless adjustment if something bad happens early in retirement) seems pretty good, and pretty easy to me.
I definitely understand the scary part but if you have 25x expenses and you are 75/25 don't you have 6.25 years in safe assets plus you still receive dividends and most people will have SS or even a pension so what they get from their portfolio won't be all that they have. So yes, 75/25 sounds scary but maybe a little less scary when you break it down?
You're absolutely correct, but I'm more conservative than that. I like 50% of my money in bonds and CDs. I could probably meet my basic needs for 30 years just with that 50%. That helps me sleep at night, and ignore what the stock market is doing.
I could make a basic retirement with bonds an SS. Stocks are gravy.

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Re: Why isn't an AA of 75/25 with a SWR 3.75% the standard??

Post by AlohaJoe » Tue Jan 08, 2019 8:47 pm

TheTimeLord wrote:
Tue Jan 08, 2019 12:02 pm
Looking at the information provided from the Early Retirement Now forum it would seem like Bogleheads would all be singing the praises of a 3.75% SWR with a 75/25 AA. But I rarely hear it mentioned. The success rates seem to be excellent, so what's the concerns around using this? So before I take the leap I would like to understand the concerns are this SWR and AA.
If someone went around telling new posters to use 75/25 with 3.75% I wouldn't have any issues with that. I don't think it is somehow optimal, though.

A two part answer :happy

First on asset allocation:
Failure rate should never be the only criteria due to its flaws. But even looking at failure rate the differences between the different asset allocations is not material.

At 40 years and 3.75% we have:
  • 100% stocks: 97%
  • 75% stocks: 98%
  • 50% stocks: 93%
  • 25% stocks: 64%
We can all agree that 25% stocks is taking too much risk. But anything from 50% stocks to 100% stocks has the same failure rate. ERN has done good work with his series but by not having confidence intervals it gives the false impression of precision.

Gordon Irlam has a great paper "Asset Allocation Confidence Intervals in Retirement" where he finds
confidence intervals arise as a result of uncertainty in the true value of the equity premium given the limited historical data and its considerable volatility. The confidence intervals are substantial. For the scenario I study the 95% confidence interval for a 65 year old retiree with $400k in assets allocated between stocks and bonds is 10 to 82% stocks
Also keep in mind all of the small differences between the portfolio that ERN tested and a real person's actual portfolio. You aren't invested 75% in the S&P 500 and 25% in 10-year Treasuries that you rollover every year (i.e. every January you sell all of your now 9-year Treasuries and buy new 10-year Treasuries). Real people have subtle (and not so subtle differences). They use TSM instead of the S&P 500. They use TBM instead of 10-year Treasuries. Or they use TIPS. Or they use Vanguard's Intermediate Term Treasury Fund (VFITX), which has an effective maturity of 6 years and not 10 years. Or they invest in International. Or they use CDs. Or they perform tax loss harvesting. Or they have to take RMDs and pay taxes. Or they have fees on their funds (the simulation assumes the ER is 0).

For a less mathematical take on the same thing William Bernstein suggests that any failure rate above 80% is identical.

So it seems clear to me that ERN's results simply re-confirm the long-standing advice that any asset allocation from 50-100% has identical results and we can't categorically say one is better than another. (At least as measured by this metric.)

Second on a 3.75% SWR:
Here I think there's more room to agree to disagree (as in, if someone went around telling people to use 3.75% I would consider that "fine" and certainly not something worth arguing over), though I'd start by taking a similar line of argument.

Over a 30-year retirement, with a 75% equity allocation, the difference between 3.75% and 4% is 100% vs 99%. That's a meaningless difference and false precision.

If we argue that 30-year retirement horizons are overly short these days (an argument I am strongly sympathetic to), then we're talking about the difference between 98% and 93%, which I would still consider not especially meaningful.

Finally SWR studies have the same recurring set of flaws that make its results overly conservative that have been argued about ad nauseum: constant dollar spending is a bad rule that no one follows in practice; the rule ignores Social Security which is a massive part of virtually everyone's retirement; SPIAs are an option; real retirees don't have their spending track CPI-U; most retirees (especially on Bogleheads) will have home equity as an additional cushion for use in tail-risk scenarios; mortality is stochastic & at least one partner is virtually guaranteed to die (with the subsequence result of spending going down at least somewhat) before the end of the retirement period); and so on.

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Re: Why isn't an AA of 75/25 with a SWR 3.75% the standard??

Post by David Jay » Wed Jan 09, 2019 9:30 am

TheTimeLord wrote:
Tue Jan 08, 2019 4:56 pm
It seems like lots of people recommend an SWR in the 2s for people with 40-50 years retirements (I seriously doubt I will need to worry about that timeframe).
Have you really seen any serious recommendation for 2% by anyone? I haven't. I have read some people here on BH say their personal withdrawal rate is 2%, but I always felt there was a legacy goal in that number.

Studies put the perpetual withdrawal rate (no loss of capital) in the vicinity of 2.5%, so essentially any SWR strategy (i.e drawing down the capital) for 40 years is bulletproof at 3%, it doesn't matter if the AA is 30% stocks, 50% stocks or 70% stocks.
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Re: Why isn't an AA of 75/25 with a SWR 3.75% the standard??

Post by aristotelian » Wed Jan 09, 2019 10:07 am

willthrill81 wrote:
Tue Jan 08, 2019 6:15 pm
TheTimeLord wrote:
Tue Jan 08, 2019 4:56 pm
It seems like lots of people recommend an SWR in the 2s for people with 40-50 years retirements (I seriously doubt I will need to worry about that timeframe).
I agree with you that any initial withdrawal rate, no matter how long the anticipated retirement, that's below 3% does not make sense unless you want to bequeath the majority of your assets.
It is worth keeping in mind that even as high as 4%, the most likely outcome is that you will die with more than you started. If you go down to 3%, it is almost guaranteed.

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Re: Why isn't an AA of 75/25 with a SWR 3.75% the standard??

Post by TheTimeLord » Wed Jan 09, 2019 10:25 am

David Jay wrote:
Wed Jan 09, 2019 9:30 am
TheTimeLord wrote:
Tue Jan 08, 2019 4:56 pm
It seems like lots of people recommend an SWR in the 2s for people with 40-50 years retirements (I seriously doubt I will need to worry about that timeframe).
Have you really seen any serious recommendation for 2% by anyone? I haven't. I have read some people here on BH say their personal withdrawal rate is 2%, but I always felt there was a legacy goal in that number.

Studies put the perpetual withdrawal rate (no loss of capital) in the vicinity of 2.5%, so essentially any SWR strategy (i.e drawing down the capital) for 40 years is bulletproof at 3%, it doesn't matter if the AA is 30% stocks, 50% stocks or 70% stocks.
Not saying it is the majority but I see people recommend it or say they need that to retire. Given the research by Early Retirement Now it just seems really conservative. Here is a recent example of a recommendations in the 2s and it is only pretty safe.
dknightd wrote:
Mon Jan 07, 2019 2:01 pm
Jefferson wrote:
Mon Jan 07, 2019 1:53 pm
I’m looking at the possibility of selling my company for a large amount of money. My wife and I both own/operate it, so we would both be unemployed in this scenario. We would both find some other form of work, but likely at a much lower income level. For purposes of this question, I want to ignore future jobs.

What is a safe withdrawal rate for us (ages 38/37)? Something like 2.5%? 2%?

What about allocations? I’m currently at 80/20 stocks/bonds, but that’s because I don’t intend to make withdrawals for decades. That wouldn’t be the case here.
There is lots of research on this. I'm sure you have found some of it.
2-2.5% is pretty safe on any AA between 70/30 and 30/70 if memory serves.
All this based on past returns.
Random Poster wrote:
Tue Jan 08, 2019 4:16 pm
Jefferson wrote:
Tue Jan 08, 2019 2:45 pm
I think what I'm trying to get at (and perhaps not articulating it very well) is what kind of income we could reasonably expect from this money. I'm trying to figure out a range (in dollars) by starting with a percentage.
I'd go with 2.5%, based on a portfolio comprised of 40% Total US Market, 10% Total International Market, and 50% Total Bond Market (or something similar to it), with the thought being that 2.5% is roughly the dividend and interest yield on such a portfolio, and so one could "reasonably expect" to receive that yield and income on a relatively reliable basis.

And in years where the combined yield on a 50/50 portfolio is less than 2.5%, you could sell a little to make-up any shortfalls, and in years where the combined yield is greater than 2.5%, you just reinvest the difference.
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Re: Why isn't an AA of 75/25 with a SWR 3.75% the standard??

Post by David Jay » Wed Jan 09, 2019 10:38 am

TheTimeLord wrote:
Wed Jan 09, 2019 10:25 am
David Jay wrote:
Wed Jan 09, 2019 9:30 am
TheTimeLord wrote:
Tue Jan 08, 2019 4:56 pm
It seems like lots of people recommend an SWR in the 2s for people with 40-50 years retirements (I seriously doubt I will need to worry about that timeframe).
Have you really seen any serious recommendation for 2% by anyone? I haven't. I have read some people here on BH say their personal withdrawal rate is 2%, but I always felt there was a legacy goal in that number.

Studies put the perpetual withdrawal rate (no loss of capital) in the vicinity of 2.5%, so essentially any SWR strategy (i.e drawing down the capital) for 40 years is bulletproof at 3%, it doesn't matter if the AA is 30% stocks, 50% stocks or 70% stocks.
Not saying it is the majority but I see people recommend it or say they need that to retire. Given the research by Early Retirement Now it just seems really conservative. Here is a recent example of a recommendations in the 2s and it is only pretty safe.
dknightd wrote:
Mon Jan 07, 2019 2:01 pm
Jefferson wrote:
Mon Jan 07, 2019 1:53 pm
I’m looking at the possibility of selling my company for a large amount of money. My wife and I both own/operate it, so we would both be unemployed in this scenario. We would both find some other form of work, but likely at a much lower income level. For purposes of this question, I want to ignore future jobs.

What is a safe withdrawal rate for us (ages 38/37)? Something like 2.5%? 2%?

What about allocations? I’m currently at 80/20 stocks/bonds, but that’s because I don’t intend to make withdrawals for decades. That wouldn’t be the case here.
There is lots of research on this. I'm sure you have found some of it.
2-2.5% is pretty safe on any AA between 70/30 and 30/70 if memory serves.
All this based on past returns.
Random Poster wrote:
Tue Jan 08, 2019 4:16 pm
Jefferson wrote:
Tue Jan 08, 2019 2:45 pm
I think what I'm trying to get at (and perhaps not articulating it very well) is what kind of income we could reasonably expect from this money. I'm trying to figure out a range (in dollars) by starting with a percentage.
I'd go with 2.5%, based on a portfolio comprised of 40% Total US Market, 10% Total International Market, and 50% Total Bond Market (or something similar to it), with the thought being that 2.5% is roughly the dividend and interest yield on such a portfolio, and so one could "reasonably expect" to receive that yield and income on a relatively reliable basis.

And in years where the combined yield on a 50/50 portfolio is less than 2.5%, you could sell a little to make-up any shortfalls, and in years where the combined yield is greater than 2.5%, you just reinvest the difference.
Yea, I was thinking of some study or serious "show-your-work" analysis for a 40 year retirement. Note that Jefferson is 38 years old, so looking at a 60+ year timeframe. On these long timeframes you are limited on drawdown, so I would say yes, using the perpetual rate (2.5%) in his case is justified.

[edit] P.S. I really like the work that ERN has done.
Last edited by David Jay on Wed Jan 09, 2019 10:45 am, edited 3 times in total.
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Re: Why isn't an AA of 75/25 with a SWR 3.75% the standard??

Post by AlohaJoe » Wed Jan 09, 2019 10:40 am

aristotelian wrote:
Wed Jan 09, 2019 10:07 am
It is worth keeping in mind that even as high as 4%, the most likely outcome is that you will die with more than you started. If you go down to 3%, it is almost guaranteed.
The way you've phrased this isn't quite true (though I know what you meant) simply because you are quite likely to die :). For instance, there's something like a 1-in-3 chance you'll be dead within 10 years of retiring, no matter what withdrawal rate you use. And even with a 3% withdrawal rate there's something like a 1-in-4 chance that after 10 years your portfolio is still lower than where you started, just due to a bear market. So that's, what?, a one-in-12 chance that you die with less than you started even when using 3% withdrawals?

To extend my needless hair-splitting technicality even further :shock: , we know that stock market crashes negatively affect health[1], so the probabilities aren't actually independent. So maybe 1-in-10 by back of the napkin math? Something like that?

Of course, the longer you stay alive, the smaller that chance becomes, since markets (maybe? probably?) mean revert.

[1]: "Wealth Shocks and Health Outcomes: Evidence from Stock Market Fluctuations"
This means that among 100 retirees losing 10% of their remaining life-time wealth 2.5 will develop an additional health condition and one additional retiree will not survive the next two years

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Re: Why isn't an AA of 75/25 with a SWR 3.75% the standard??

Post by Jack FFR1846 » Wed Jan 09, 2019 10:48 am

David Jay wrote:
Wed Jan 09, 2019 9:30 am
TheTimeLord wrote:
Tue Jan 08, 2019 4:56 pm
It seems like lots of people recommend an SWR in the 2s for people with 40-50 years retirements (I seriously doubt I will need to worry about that timeframe).
Have you really seen any serious recommendation for 2% by anyone? I haven't. I have read some people here on BH say their personal withdrawal rate is 2%, but I always felt there was a legacy goal in that number.

Studies put the perpetual withdrawal rate (no loss of capital) in the vicinity of 2.5%, so essentially any SWR strategy (i.e drawing down the capital) for 40 years is bulletproof at 3%, it doesn't matter if the AA is 30% stocks, 50% stocks or 70% stocks.
My SWR goal is 2% and I'm at 50/50 and none of it is for legacy. It's because I live my life with planned safety nets in everything. I could do a thesis or take a graduate exam (PhD entrance exam) with 2 extra classes to finish my Masters. I did both because my company was footing the bill and I HAD to return by February 28, 1990. How's that for burned into my brain?

I am afraid of black swans. My fear was realized in 2018 and 2 legal issues had me sending lawyer checks out (big ones) at least once a week. It's now over. Like Mulder in the X Files.....Trust No One. I have no trust that things will go as planned.
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Re: Why isn't an AA of 75/25 with a SWR 3.75% the standard??

Post by DetroitRick » Wed Jan 09, 2019 11:06 am

As many others have said (here and elsewhere), we are just all too different for there ever to be "a standard". It wouldn't make sense. Neither would the idea of ignoring all particulars and then just using one standard withdrawal rate (even one adjusted by inflation) every year throughout retirement. I don't, I'm retired, and never plan to. But these studies have great value as our starting points. What they don't do is simply hand you an inflexible rate that you "should' use no matter what.

Many of us go through life with highly variable income streams - unemployment, promotions, demotions, commissions, executive bonuses, whatever. At least for me, comfort with that variability has trickled down into my retirement. Plus there is the individual capacity to deal with varying expenses. Some can, some can't, and this has a huge impact on withdrawal needs and timing. Plus income sources outside the portfolio - soc sec, annuities, rentals, royalties, etc.. Again we're all different. These factors will influence both allocation and withdrawal rates.

Then you have the individual risk tolerances as investors. Example, "Retiree A" freaks out with a 30% equity market drop, and immediately goes to cash. Meanwhile, "Retiree B" is fine, stands pat and adapts. Those two investors should have radically different asset allocations. And a final example - in retirement, some lose most ability to deal well with uncertainty, while others don't. This also drives asset allocation decisions. Plus this can change over your retirement years.

We should not expect reasonable people to ever come to an agreement on one standard. The value in all this stuff is simply to get us thinking. It's just a starting point, nothing more.

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Re: Why isn't an AA of 75/25 with a SWR 3.75% the standard??

Post by willthrill81 » Wed Jan 09, 2019 11:23 am

aristotelian wrote:
Wed Jan 09, 2019 10:07 am
willthrill81 wrote:
Tue Jan 08, 2019 6:15 pm
TheTimeLord wrote:
Tue Jan 08, 2019 4:56 pm
It seems like lots of people recommend an SWR in the 2s for people with 40-50 years retirements (I seriously doubt I will need to worry about that timeframe).
I agree with you that any initial withdrawal rate, no matter how long the anticipated retirement, that's below 3% does not make sense unless you want to bequeath the majority of your assets.
It is worth keeping in mind that even as high as 4%, the most likely outcome is that you will die with more than you started. If you go down to 3%, it is almost guaranteed.
I've heard the 'richest man in the graveyard' issue come up before in this context, but I wonder whether it should really be an issue. How many retirees would feel locked in to their initial 3% WR if their portfolio had doubled in size in real dollars during their first decade of retirement? If they don't increase their spending, it's probably due to their lack of desire to increase their spending more so than anything else.

Historically, 3% has been so conservative that retirees could adjust their spending upward every year by the greater of last year's withdrawal plus inflation or 3% of their current portfolio value and still maintain their inflation-adjusted starting capital over the long-term.
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Re: Why isn't an AA of 75/25 with a SWR 3.75% the standard??

Post by onthecusp » Wed Jan 09, 2019 12:01 pm

willthrill81 wrote:
Wed Jan 09, 2019 11:23 am
aristotelian wrote:
Wed Jan 09, 2019 10:07 am
willthrill81 wrote:
Tue Jan 08, 2019 6:15 pm
TheTimeLord wrote:
Tue Jan 08, 2019 4:56 pm
It seems like lots of people recommend an SWR in the 2s for people with 40-50 years retirements (I seriously doubt I will need to worry about that timeframe).
I agree with you that any initial withdrawal rate, no matter how long the anticipated retirement, that's below 3% does not make sense unless you want to bequeath the majority of your assets.
It is worth keeping in mind that even as high as 4%, the most likely outcome is that you will die with more than you started. If you go down to 3%, it is almost guaranteed.
I've heard the 'richest man in the graveyard' issue come up before in this context, but I wonder whether it should really be an issue. How many retirees would feel locked in to their initial 3% WR if their portfolio had doubled in size in real dollars during their first decade of retirement? If they don't increase their spending, it's probably due to their lack of desire to increase their spending more so than anything else.

Historically, 3% has been so conservative that retirees could adjust their spending upward every year by the greater of last year's withdrawal plus inflation or 3% of their current portfolio value and still maintain their inflation-adjusted starting capital over the long-term.
I certainly would not feel locked in, however my focus has been on finding a comfortable spending number for approximately 7 years between retirement and taking social security. That is a higher withdrawal now and lower later. Firecalc and I-ORP do a pretty good job of that. I don't mind spending down some of the savings in that time so my initial rate will be well above 4%. However a rate (somewhere about 8% for those few years) that "just" gives 100% success looks uncomfortable because with this plan the minimum (predicted) portfolio value comes in only 7 or 8 years. Then after Social Security kicks in the (predicted) value ramps up quite nicely as my spending falls to 3% or even less of the remaining portfolio.

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Re: Why isn't an AA of 75/25 with a SWR 3.75% the standard??

Post by Amadis_of_Gaul » Wed Jan 09, 2019 2:41 pm

CyclingDuo wrote:
Tue Jan 08, 2019 5:52 pm
TheTimeLord wrote:
Tue Jan 08, 2019 4:08 pm
I definitely understand the scary part but if you have 25x expenses and you are 75/25 don't you have 6.25 years in safe assets plus you still receive dividends and most people will have SS or even a pension so what they get from their portfolio won't be all that they have. So yes, 75/25 sounds scary but maybe a little less scary when you break it down?
Add this to your reading... :beer

viewtopic.php?f=10&t=269091
The fascinating thing about the papers linked to in the article is that they are based on a historical database of 21 countries from 1900 to 2014, a much larger sample than the usual "US stock and bond markets from 1871 on".

They reveal a couple of interesting tidbits:

1. The possibility of disaster is always greater than zero. In the US, we tend to forget that things could absolutely crater because our country hasn't seen a problem like that since the Civil War. However, in the 1900-2014 time frame, only about half of (hypothetical) German retiree portfolios would have made it 30 years. If you retire in the equivalent of 1938 Germany, it doesn't matter what your asset allocation is or how much money you have. You're doomed.

Worldwide in that time period, doomed retirement cohorts were dismayingly frequent. All of us ought to acknowledge that regardless of how diligently we save and how wisely we plan, we may be sunk too. There ain't no such thing as a disaster-proofed retirement.

2. If disaster is on the horizon, a high-stock portfolio may be the best defense. Estrada found that on average, across those 21 countries, the best portfolio was an 85/15 split. I don't know why the number is so high, but I suspect that it's due to a) sovereign defaults on bonds, and b) higher returns that give you enough of a cushion to survive edge cases of disaster.

It's worth noting that 85/15 is a VERY different optimal ratio than Vanguard's Retirement Nest-Egg Calculator (for instance) will hand you. I tend to agree with ERN's critique of Monte Carlo simulators, though. Even though VG's simulator uses historical returns, it does so randomly rather than sequentially. In consequence, the results don't display the same reversion to the mean that historical results do. It's also true that VG's results are very bond-friendly because it draws its data from US history, and the US government has never defaulted on its debt obligations. World history probably provides a better guide to the future.

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Re: Why isn't an AA of 75/25 with a SWR 3.75% the standard??

Post by Random Poster » Wed Jan 09, 2019 4:36 pm

Amadis_of_Gaul wrote:
Wed Jan 09, 2019 2:41 pm
The fascinating thing about the papers linked to in the article is that they are based on a historical database of 21 countries from 1900 to 2014, a much larger sample than the usual "US stock and bond markets from 1871 on".

They reveal a couple of interesting tidbits:

1. The possibility of disaster is always greater than zero. In the US, we tend to forget that things could absolutely crater because our country hasn't seen a problem like that since the Civil War. However, in the 1900-2014 time frame, only about half of (hypothetical) German retiree portfolios would have made it 30 years. If you retire in the equivalent of 1938 Germany, it doesn't matter what your asset allocation is or how much money you have. You're doomed.
I'm not so sure.

If you have "enough" money in 1938 Germany (whatever "enough" may be, but I'll go with a couple of million dollars, or marks or whatever), wouldn't you also have the ability to get out of 1938 Germany and into a better/safer/more welcoming location?

And if so, and if you did, then wouldn't you no longer be doomed?

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Re: Why isn't an AA of 75/25 with a SWR 3.75% the standard??

Post by Phineas J. Whoopee » Wed Jan 09, 2019 5:26 pm

Because over a period of decades it's overly precise. Four percent, if one uses that for planning purposes, is precise to one part in one hundred. 3.75% is precise to one part in ten thousand.
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Re: Why isn't an AA of 75/25 with a SWR 3.75% the standard??

Post by Amadis_of_Gaul » Wed Jan 09, 2019 5:37 pm

Random Poster wrote:
Wed Jan 09, 2019 4:36 pm
Amadis_of_Gaul wrote:
Wed Jan 09, 2019 2:41 pm
The fascinating thing about the papers linked to in the article is that they are based on a historical database of 21 countries from 1900 to 2014, a much larger sample than the usual "US stock and bond markets from 1871 on".

They reveal a couple of interesting tidbits:

1. The possibility of disaster is always greater than zero. In the US, we tend to forget that things could absolutely crater because our country hasn't seen a problem like that since the Civil War. However, in the 1900-2014 time frame, only about half of (hypothetical) German retiree portfolios would have made it 30 years. If you retire in the equivalent of 1938 Germany, it doesn't matter what your asset allocation is or how much money you have. You're doomed.
I'm not so sure.

If you have "enough" money in 1938 Germany (whatever "enough" may be, but I'll go with a couple of million dollars, or marks or whatever), wouldn't you also have the ability to get out of 1938 Germany and into a better/safer/more welcoming location?

And if so, and if you did, then wouldn't you no longer be doomed?
With hindsight, yes, getting out of Dodge would have been a great idea. At the time, though, I think most Germans were very happy with the direction the country was headed. The scope of the calamity did not become apparent until Germany began to lose World War II, and by that point, no Germans were emigrating anywhere. It's just as hard to market-time national disaster as it is to time the market!

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Clever_Username
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Re: Why isn't an AA of 75/25 with a SWR 3.75% the standard??

Post by Clever_Username » Thu Jan 10, 2019 4:57 pm

I like the math behind it, but for me, I have never been under 30% bonds and, other than the past few months, haven't seen any serious negative stock market action while seriously invested. I still have no idea what my risk tolerance is.

If I knew that 75/25 was within my risk tolerance, even when approaching retirement, I'd be down for this.

Also, looking at my savings rate and spending rate, I suspect I'll need less than 3.75% of my accumulation the first year when retirement comes.
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Re: Why isn't an AA of 75/25 with a SWR 3.75% the standard??

Post by willthrill81 » Thu Jan 10, 2019 7:33 pm

Amadis_of_Gaul wrote:
Wed Jan 09, 2019 2:41 pm
The possibility of disaster is always greater than zero. In the US, we tend to forget that things could absolutely crater because our country hasn't seen a problem like that since the Civil War. However, in the 1900-2014 time frame, only about half of (hypothetical) German retiree portfolios would have made it 30 years. If you retire in the equivalent of 1938 Germany, it doesn't matter what your asset allocation is or how much money you have. You're doomed.
I entirely agree that the future could entail situations that would seem quite dire to us now. In the instance you cite, you wouldn't have to be completely 'doomed', but it seems that we're not allowed to discuss here what would be involved in such preparations nor what would precipitate the need for them.
“It's a dangerous business, Frodo, going out your door. You step onto the road, and if you don't keep your feet, there's no knowing where you might be swept off to.” J.R.R. Tolkien,The Lord of the Rings

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Re: Why isn't an AA of 75/25 with a SWR 3.75% the standard??

Post by blahblahsunshine » Sat Jan 12, 2019 7:10 pm

The exogenic tail risk scenerio is one that deserves some thought. There is some non-zero chance that some game changing event happens. Could be 1938 germany, could be an asteroid, plague, and early death, who knows. There are a couple ways you can think about something like this: 1) How do I position myself to avoid or minimize its impact on me, and 2) perhaps one should enjoy the here and now before said incident occurs. Net, net, when I start getting down to minute retirement model survivability differences these long tailed exogenic risks take become a real consideration.

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Re: Why isn't an AA of 75/25 with a SWR 3.75% the standard??

Post by Case59 » Sat Jan 12, 2019 7:26 pm

Referencing back to the original post, that is the AA and withdrawal strategy I largely follow (without being quite so precise), and I did use the Early Retirement studies plus related information to come to that conclusion. Though I shoot for more in the range of 3-3.5%. I have long-lived genes (my father turns 98 this week), and 75% equities does seem to be a sweet spot for long-horizon investing. The volatility just goes with the territory.
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