FireCalc: Equities almost 70% for a 20 year term???

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TheTimeLord
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FireCalc: Equities almost 70% for a 20 year term???

Post by TheTimeLord » Fri Jun 16, 2017 7:26 am

I was playing FireCalc last night when I notice this text on the "Your Portfolio" tab. Not sure it is exactly earth shattering but 70% equities for a 20 year retirement seems in conflict with age in Bonds unless they are making some assumptions about SS or pensions benefits. Thoughts? Are retirees in general too light in Equities or is this "research" too aggressive or does the statement need more context to be properly understood?

From the FireCalc Your Portfolio Tab
Percentage of your portfolio that is in equities, versus fixed income? Research seems to suggest about 50% for a 10 year term, almost 70% for a 20 year term, and around 85% for a 60 year term.
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Re: FireCalc: Equities almost 70% for a 20 year term???

Post by jebmke » Fri Jun 16, 2017 7:34 am

I think decisions like this depend on so many personal situational factors that any generalized statements like this are not particularly helpful.
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Re: FireCalc: Equities almost 70% for a 20 year term???

Post by dbr » Fri Jun 16, 2017 9:09 am

TheTimeLord wrote:I was playing FireCalc last night when I notice this text on the "Your Portfolio" tab. Not sure it is exactly earth shattering but 70% equities for a 20 year retirement seems in conflict with age in Bonds unless they are making some assumptions about SS or pensions benefits. Thoughts? Are retirees in general too light in Equities or is this "research" too aggressive or does the statement need more context to be properly understood?

From the FireCalc Your Portfolio Tab
Percentage of your portfolio that is in equities, versus fixed income? Research seems to suggest about 50% for a 10 year term, almost 70% for a 20 year term, and around 85% for a 60 year term.
Research would mean looking for the AA that maximizes the safe withdrawal rate. It is a fact that historically what they suggest does produce the maximum safe withdrawal rate for those lengths of time. If people don't like that result, then I guess that is too bad.

But the result is a little disingenuous. The maximum is a very shallow one and probably not even real relative to the range of uncertainty that should be assigned to safe withdrawal rate. A more useful analysis in FireCalc would be to see where the failure rate for one's proposed withdrawals starts to increase significantly, say from less than 5% to 20%-30%-40%. That roll-off happens, if it happens at all, as one drops through too low allocations to stocks and happens sooner for longer time periods. While one might propose 70% stocks, the actual need to take risk is more like 40% stocks, for example.

I think what is more unsettling about the results is that the outcome is driven most strongly by when one retires and by how much one wants to withdraw and is relatively insensitive to asset allocation. Accepting that asset allocation is not very important in retirement goes counter to all the attempts here to engineer things by what investments one holds.

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Re: FireCalc: Equities almost 70% for a 20 year term???

Post by pkcrafter » Fri Jun 16, 2017 9:43 am

Age in bonds isn't really a very good rule of thumb, and if taken literally, it's too much unnecessary tweaking. An investor may only need 2-4 changes in AA from start to retirement. At age 25, an investor could run 70% equity until age 50-55 if retiring at 65. But here's a funny problem. Market returns can be highly variable in spans of 10 years or less, but much more reliable in 20 year spans, but isn't a 20 year span just 2-10 year spans?

Starting AA and length of hold is dependent on the investor's need, ability and desire, and people tend to less risk tolerant with age. A reasonable AA might be:

25-40 70% equity
40-55 60%
55-65 45-50

Of course this is dependent on several factors such as savings rate, pensions, inheritance, etc.

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Re: FireCalc: Equities almost 70% for a 20 year term???

Post by knpstr » Fri Jun 16, 2017 9:55 am

Yes, I think in general retirees are too light in equities.
They incorrectly think holding more bonds means less risk, when it actually means more risk.
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Re: FireCalc: Equities almost 70% for a 20 year term???

Post by jebmke » Fri Jun 16, 2017 10:06 am

knpstr wrote:Yes, I think in general retirees are too light in equities.
They incorrectly think holding more bonds means less risk, when it actually means more risk.
What is the average retiree allocation today and what do you think it should be?
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Re: FireCalc: Equities almost 70% for a 20 year term???

Post by ryman554 » Fri Jun 16, 2017 10:07 am

Age in bonds is a horrible rule of thumb.

One needs to plan for retirement to last 30 years. As far as risks vs. rates of returns go, this is close enough to infinity to consider looking at what the asset allocations are for endowments or the like. You will find these extremely equity heavy (or, rather, bond/cash light)

There is a reason why it is suggested for people to invest aggressively in equities when they are young. It grows faster. Plain and simple.

There is only one reason to move toward a more conservative allocation as one nears retirement: emotions. Fear of not being able to handle the variations of the stock market. Fear of running out of money. That fear makes you not sleep at night. I personally don't have that fear, but it cannot be discounted for those that do. I believe this includes the OP, not based on this thread, but many other similar questions over the past couple of years. Perversely, that fear increases the likelihood of going broke.

Historically, by far the safest allocation for 10+ year periods is nearly all equities. On average it grows faster. BUT, the volatility is higher. When you run the simulations in the decumulating phase, using something like FIREcalc, you will find an optimum on the amount of money you can "safely" count on your portfolio generating for the rest of your life based on your AA. This optimum, even with variability taken into account, is higher for high equity portfolios than low equity portfolios. The same result that the endowments empirically found.

Viewed this way, bonds are actually less safe than stocks in retirement. You just have to be willing to dip into principal and ride out the waves. It will help to retire just after a recession, not just before, but even with the sequence of returns risk folks fear about, equities are the way to go.

If your yearly needs are 5% or more of your portfolio, you are at grave risk of running of money, need a backup plan, and better be all-in in equities. An all-bond portfolio isn't going to match this and will likely fail.
If your yearly needs are 4% of your portfolio, you'll likely be ok, but should still tilt toward equities. 60/40+ should see you through, 80/20 will see you through.
If your yearly needs are 3% of your portfolio, it likely doesn't matter much what your asset allocation is. You're good. You're now investing for your heirs/charities. Might as well go all-in and make somebody else happy.

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Re: FireCalc: Equities almost 70% for a 20 year term???

Post by knpstr » Fri Jun 16, 2017 11:51 am

jebmke wrote:What is the average retiree allocation today and what do you think it should be?
I don't know what the average retiree actually is, but since "age in bonds" is the general rule it may be 35/65 at age 65 (35% stocks).
*(Well in general, I think most people have very little retirement saved at all)

I would think that 75% stocks would be more prudent, in general.
However, as you accurately stated there is individuality that needs to be considered for each person. Personal finance isn't a one-size-fits all game.
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Re: FireCalc: Equities almost 70% for a 20 year term???

Post by zaboomafoozarg » Fri Jun 16, 2017 3:51 pm

FireCalc defaults to an allocation of 75/25, which is what I plan on staying at for the rest of my life.

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Re: FireCalc: Equities almost 70% for a 20 year term???

Post by veindoc » Fri Jun 16, 2017 4:02 pm

Viewed this way, bonds are actually less safe than stocks in retirement. You just have to be willing to dip into principal and ride out the waves. It will help to retire just after a recession, not just before, but even with the sequence of returns risk folks fear about, equities are the way to go.
How is this so? Once I reached my 25x expenses, I was planning to move the bulk of the money out of equities to follow the general adage, if you won the game, why keep playing.

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Re: FireCalc: Equities almost 70% for a 20 year term???

Post by randomguy » Fri Jun 16, 2017 4:56 pm

mrsytf wrote:
Viewed this way, bonds are actually less safe than stocks in retirement. You just have to be willing to dip into principal and ride out the waves. It will help to retire just after a recession, not just before, but even with the sequence of returns risk folks fear about, equities are the way to go.
How is this so? Once I reached my 25x expenses, I was planning to move the bulk of the money out of equities to follow the general adage, if you won the game, why keep playing.
If you hold something like 60/40, 25x is not enough "to win the game". If you want to go 20/80, you need something more like 30x to win the game. That is why you keep on playing. You might change your strategy a bit (i.e 50/50 instead of 80/20) but you still need to play the game. There is a vast difference between acceptable risk (i.e holding a diversified 60/40 portfolio) and crazy risky (100% invested in 3 stocks in the same sector).

Historically AA in the 40/60-70/30 range have pretty much identical SWR. The SWR is set by 1966-1981 and over that time period it didn't really matter how you invested. I have never seen any math that suggests age in bonds is better than say just holding 50/50. It is sort of inuitive that towards the end (say after 20 years) that going conservative will pay off (If you shove 10 years of expenses in tips, you will make it to the 30 year mark all the time) but most of the time it isn't needed. And of course if you make it 20 years into a 30 year retirement, your odds of retirement lasting more than 30 years goes way up.

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Re: FireCalc: Equities almost 70% for a 20 year term???

Post by siamond » Fri Jun 16, 2017 5:06 pm

ryman554 wrote:Age in bonds is a horrible rule of thumb. [...] If your yearly needs are 4% of your portfolio, you'll likely be ok, but should still tilt toward equities. 60/40+ should see you through, 80/20 will see you through.
I've been running numbers in many ways in the past 5 years (and early-retired in the midst of it), and I always, always end up with a similar conclusion... Will not paraphrase your post, as you articulated it very well, and I fully agree.

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Re: FireCalc: Equities almost 70% for a 20 year term???

Post by iceport » Fri Jun 16, 2017 5:10 pm

TheTimeLord wrote:I was playing FireCalc last night when I notice this text on the "Your Portfolio" tab. Not sure it is exactly earth shattering but 70% equities for a 20 year retirement seems in conflict with age in Bonds unless they are making some assumptions about SS or pensions benefits. Thoughts?
Pretty much all the research I've read does not support the low equity allocations an "age in bonds" approach would produce, if there is a need to maximize the withdrawal rate. This is certainly nothing new.
dbr wrote:But the result is a little disingenuous. The maximum is a very shallow one and probably not even real relative to the range of uncertainty that should be assigned to safe withdrawal rate. A more useful analysis in FireCalc would be to see where the failure rate for one's proposed withdrawals starts to increase significantly, say from less than 5% to 20%-30%-40%. That roll-off happens, if it happens at all, as one drops through too low allocations to stocks and happens sooner for longer time periods. While one might propose 70% stocks, the actual need to take risk is more like 40% stocks, for example.
This is an excellent point. I'd just like to add that FIRECalc makes it easy to investigate dbr's point. On the last tab, "Investigate," just select the radio button to "Investigate changing my allocation." The results will display a graph of success rate vs. AA.
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Re: FireCalc: Equities almost 70% for a 20 year term???

Post by TheTimeLord » Fri Jun 16, 2017 8:05 pm

siamond wrote:
ryman554 wrote:Age in bonds is a horrible rule of thumb. [...] If your yearly needs are 4% of your portfolio, you'll likely be ok, but should still tilt toward equities. 60/40+ should see you through, 80/20 will see you through.
I've been running numbers in many ways in the past 5 years (and early-retired in the midst of it), and I always, always end up with a similar conclusion... Will not paraphrase your post, as you articulated it very well, and I fully agree.
Well this seems to contradict what happens with Target Date Funds, doesn't it?
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Re: FireCalc: Equities almost 70% for a 20 year term???

Post by randomguy » Fri Jun 16, 2017 8:50 pm

TheTimeLord wrote:
siamond wrote:
ryman554 wrote:Age in bonds is a horrible rule of thumb. [...] If your yearly needs are 4% of your portfolio, you'll likely be ok, but should still tilt toward equities. 60/40+ should see you through, 80/20 will see you through.
I've been running numbers in many ways in the past 5 years (and early-retired in the midst of it), and I always, always end up with a similar conclusion... Will not paraphrase your post, as you articulated it very well, and I fully agree.
Well this seems to contradict what happens with Target Date Funds, doesn't it?
Only if you assume target date funds are designed to maximize SWR. They aren't. Mathematically holding 60/40 or 70/30 in retirement has been the best choice in the past. There aren't periods where holding 30/70 instead of 70/30 would have made a difference. But a lot of people can't handle volatility in retirement. It is one thing to have a 30% loss when you are 60 and you decide to work another year or 2. It is different when you are 70 and no more income is coming in.

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Re: FireCalc: Equities almost 70% for a 20 year term???

Post by David Jay » Fri Jun 16, 2017 9:16 pm

randomguy wrote: But a lot of people can't handle volatility in retirement. It is one thing to have a 30% loss when you are 60 and you decide to work another year or 2. It is different when you are 70 and no more income is coming in.
^^^ This

70/30 or 60/40 are much more likely to outperform (hence Firecalc), but behavioral issues must also be factored into the AA decision.
Last edited by David Jay on Fri Jun 16, 2017 9:46 pm, edited 1 time in total.
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Re: FireCalc: Equities almost 70% for a 20 year term???

Post by AlohaJoe » Fri Jun 16, 2017 9:32 pm

randomguy wrote:Well this seems to contradict what happens with Target Date Funds, doesn't it?
Only if you assume target date funds are designed to maximize SWR. They aren't.[/quote]

To emphasize this point: even as conservative as they are...target date funds still got in heaps of trouble in the 2008 crisis. There were Congressional hearings and everything. From one article at the time on the Congressional hearings
It was a shock to people who thought target-date funds made their money safe as they approached retirement.

Congress held hearings, and critics said the target-date funds were fundamentally flawed.
Here are just 2 randomly Googled articles of the hundreds that were written about it at the time:

https://www.ici.org/401k/background/09_target_fund_tmny
http://www.plansponsor.com/Target-Date- ... -Congress/

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Re: FireCalc: Equities almost 70% for a 20 year term???

Post by TheTimeLord » Fri Jun 16, 2017 9:36 pm

randomguy wrote:
TheTimeLord wrote:
siamond wrote:
ryman554 wrote:Age in bonds is a horrible rule of thumb. [...] If your yearly needs are 4% of your portfolio, you'll likely be ok, but should still tilt toward equities. 60/40+ should see you through, 80/20 will see you through.
I've been running numbers in many ways in the past 5 years (and early-retired in the midst of it), and I always, always end up with a similar conclusion... Will not paraphrase your post, as you articulated it very well, and I fully agree.
Well this seems to contradict what happens with Target Date Funds, doesn't it?
Only if you assume target date funds are designed to maximize SWR. They aren't. Mathematically holding 60/40 or 70/30 in retirement has been the best choice in the past. There aren't periods where holding 30/70 instead of 70/30 would have made a difference. But a lot of people can't handle volatility in retirement. It is one thing to have a 30% loss when you are 60 and you decide to work another year or 2. It is different when you are 70 and no more income is coming in.
Not sure a 70 year should be picking an AA designed to for 20 or 30 years. Perhaps the issue is selecting a Asset Allocation for abnormally long life spans when one selected for an average lifespan would work even if you live an extra decade beyond the average.

From the FireCalc Your Portfolio Tab
Percentage of your portfolio that is in equities, versus fixed income? Research seems to suggest about 50% for a 10 year term, almost 70% for a 20 year term, and around 85% for a 60 year term.
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Re: FireCalc: Equities almost 70% for a 20 year term???

Post by TheTimeLord » Fri Jun 16, 2017 9:44 pm

David Jay wrote:
randomguy wrote: But a lot of people can't handle volatility in retirement. It is one thing to have a 30% loss when you are 60 and you decide to work another year or 2. It is different when you are 70 and no more income is coming in.
^^^ This

70/30 or 60/40 are much more likely to outperform (hence Firecalc), but behavioral issues must also be factored into the decision.
I just found the note in Firecalc surprising given the counsel I had been given in other threads. From my perspective it directly contradicted much of what I had been advised and makes me wonder why anyone would have thought my implemented a rising glide path was such a bad idea. I appreciate the comments in this thread that have helped confirm many of my own assumptions that seemed to go against the grain of the conventional wisdom.
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Re: FireCalc: Equities almost 70% for a 20 year term???

Post by David Jay » Fri Jun 16, 2017 9:49 pm

TheTimeLord wrote:
David Jay wrote:
randomguy wrote: But a lot of people can't handle volatility in retirement. It is one thing to have a 30% loss when you are 60 and you decide to work another year or 2. It is different when you are 70 and no more income is coming in.
^^^ This

70/30 or 60/40 are much more likely to outperform (hence Firecalc), but behavioral issues must also be factored into the AA decision.
I just found the note in Firecalc surprising given the counsel I had been given in other threads. From my perspective it directly contradicted much of what I had been advised and makes me wonder why anyone would have thought my implemented a rising glide path was such a bad idea. I appreciate the comments in this thread that have helped confirm many of my own assumptions that seemed to go against the grain of the conventional wisdom.
There are a lot of threads out there about going conservative at retirement (to avoid sequence of returns risk) and then going more aggressive later in retirement.

I am doing this by putting all of my bridge funds (funds from retirement to start of SS) in bonds, so the equity market can't destroy my bridge funds.
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Re: FireCalc: Equities almost 70% for a 20 year term???

Post by TheTimeLord » Fri Jun 16, 2017 10:02 pm

David Jay wrote:
TheTimeLord wrote:
David Jay wrote:
randomguy wrote: But a lot of people can't handle volatility in retirement. It is one thing to have a 30% loss when you are 60 and you decide to work another year or 2. It is different when you are 70 and no more income is coming in.
^^^ This

70/30 or 60/40 are much more likely to outperform (hence Firecalc), but behavioral issues must also be factored into the AA decision.
I just found the note in Firecalc surprising given the counsel I had been given in other threads. From my perspective it directly contradicted much of what I had been advised and makes me wonder why anyone would have thought my implemented a rising glide path was such a bad idea. I appreciate the comments in this thread that have helped confirm many of my own assumptions that seemed to go against the grain of the conventional wisdom.
There are a lot of threads out there about going conservative at retirement (to avoid sequence of returns risk) and then going more aggressive later in retirement.

I am doing this by putting all of my bridge funds (funds from retirement to start of SS) in bonds, so the equity market can't destroy my bridge funds.
Which is exactly what I have done. And then I was thinking I should go heavy equity to future contributions until retirement but that seemed a very unpopular idea with many who suggested I should stick to my AA or immediately change to a new AA.
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Re: FireCalc: Equities almost 70% for a 20 year term???

Post by Stormbringer » Sat Jun 17, 2017 9:51 am

ryman554 wrote:Age in bonds is a horrible rule of thumb.
I completely agree.

Bogle says to include Social Security and pensions in your bond allocation. The net present value of SS is often hundreds of thousands of dollars, which means that many people, young people in particular, are already WAY over-allocated to "bonds" even if they are 100% equities in their retirement accounts.
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Re: FireCalc: Equities almost 70% for a 20 year term???

Post by siamond » Sat Jun 17, 2017 10:24 am

AlohaJoe wrote:
randomguy wrote:
TheTimeLord wrote:Well this seems to contradict what happens with Target Date Funds, doesn't it?
Only if you assume target date funds are designed to maximize SWR. They aren't.
To emphasize this point: even as conservative as they are...target date funds still got in heaps of trouble in the 2008 crisis. There were Congressional hearings and everything. From one article at the time on the Congressional hearings
It was a shock to people who thought target-date funds made their money safe as they approached retirement.

Congress held hearings, and critics said the target-date funds were fundamentally flawed.
Here are just 2 randomly Googled articles of the hundreds that were written about it at the time:

https://www.ici.org/401k/background/09_target_fund_tmny
http://www.plansponsor.com/Target-Date- ... -Congress/
Thank you for sharing. When politicians get a hold of those things, who knows what can happen. Clearly, Target-Date Funds were designed as some middle ground between numerous lobbying forces, and some of those forces appear to view target funds as some sort of pension replacement and then balk when they discover this isn't true, sigh... :oops:

I have no clue if target funds ended up finding some equilibrium that would apply to an average investor with an average behavior, I seriously doubt it, but one thing I know is that I am NOT an average investor with an average behavior, I am myself, with my unique circumstances. And so is everybody on this forum. We're all different. Better acknowledge this basic fact, and make your own decisions based on solid thinking and research than go with cookie-cutter rules of thumb (notably when such rules can easily be demonstrated as pretty poor).

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Re: FireCalc: Equities almost 70% for a 20 year term???

Post by randomguy » Sat Jun 17, 2017 12:17 pm

TheTimeLord wrote:
Not sure a 70 year should be picking an AA designed to for 20 or 30 years. Perhaps the issue is selecting a Asset Allocation for abnormally long life spans when one selected for an average lifespan would work even if you live an extra decade beyond the average.

From the FireCalc Your Portfolio Tab
Percentage of your portfolio that is in equities, versus fixed income? Research seems to suggest about 50% for a 10 year term, almost 70% for a 20 year term, and around 85% for a 60 year term.
Average 70 year man is living ~14 years and a female living 16. If you happen to be a nonsmoker, in good health, and so on, you can expect to be beat the averages. But even without that you are looking at 24-26 year terms if add in 10 years for "Abnormally" long lifespance. I didn't look it up but I think your 10 year extentions still leaves you with about a 10% chance of still being alive.

If you are willing to ignore the worst 10-20% results, you can spend a ton more money. Only planning on living for 20 years and not having 1929,1966,2000-2 happen during your first decade of retirement would let you have a 6%+ SWR.

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Re: FireCalc: Equities almost 70% for a 20 year term???

Post by jebmke » Sat Jun 17, 2017 12:39 pm

Stormbringer wrote:
ryman554 wrote:Age in bonds is a horrible rule of thumb.
I completely agree.

Bogle says to include Social Security and pensions in your bond allocation. The net present value of SS is often hundreds of thousands of dollars, which means that many people, young people in particular, are already WAY over-allocated to "bonds" even if they are 100% equities in their retirement accounts.
The problem is that the NPV of SS is not liquid - you cannot rebalance in or out -- and there is no contractual obligation like there is with bonds.
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Re: FireCalc: Equities almost 70% for a 20 year term???

Post by freebeer » Sat Jun 17, 2017 12:51 pm

dbr wrote:.... historically what they suggest does produce the maximum safe withdrawal rate for those lengths of time. ...
But the result is a little disingenuous. The maximum is a very shallow one and probably not even real relative to the range of uncertainty that should be assigned to safe withdrawal rate. A more useful analysis in FireCalc would be to see where the failure rate for one's proposed withdrawals starts to increase significantly, say from less than 5% to 20%-30%-40%. That roll-off happens, if it happens at all, as one drops through too low allocations to stocks and happens sooner for longer time periods. While one might propose 70% stocks, the actual need to take risk is more like 40% stocks, for example. ... the outcome is driven most strongly by when one retires and by how much one wants to withdraw and is relatively insensitive to as
set allocation. Accepting that asset allocation is not very important in retirement goes counter to all the attempts here to engineer things by what investments one holds.
Well most people have bequest motives of varying strengths which changes things considerably. 40/60 may have nearly the same SWR safety as 70/30, based on historical results, but it has FAR less likelihood of leaving a very large inheritance. I am constantly surprised how often Bogleheads discussions make the simplifying assumption that income in retirement is all that matters when it's much more complicated for most people (as evidenced by, among other things, "under" annuitization).

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Re: FireCalc: Equities almost 70% for a 20 year term???

Post by dbr » Sat Jun 17, 2017 1:03 pm

freebeer wrote:
dbr wrote:.... historically what they suggest does produce the maximum safe withdrawal rate for those lengths of time. ...
But the result is a little disingenuous. The maximum is a very shallow one and probably not even real relative to the range of uncertainty that should be assigned to safe withdrawal rate. A more useful analysis in FireCalc would be to see where the failure rate for one's proposed withdrawals starts to increase significantly, say from less than 5% to 20%-30%-40%. That roll-off happens, if it happens at all, as one drops through too low allocations to stocks and happens sooner for longer time periods. While one might propose 70% stocks, the actual need to take risk is more like 40% stocks, for example. ... the outcome is driven most strongly by when one retires and by how much one wants to withdraw and is relatively insensitive to as
set allocation. Accepting that asset allocation is not very important in retirement goes counter to all the attempts here to engineer things by what investments one holds.
Well most people have bequest motives of varying strengths which changes things considerably. 40/60 may have nearly the same SWR safety as 70/30, based on historical results, but it has FAR less likelihood of leaving a very large inheritance. I am constantly surprised how often Bogleheads discussions make the simplifying assumption that income in retirement is all that matters when it's much more complicated for most people (as evidenced by, among other things, "under" annuitization).
You are absolutely right. But, the struggle is to get the OP in any given situation to be clear what is important to them. Probably anxiety about having enough to retire dominates postings over those wanting to leave large legacies. What is hard is to get people to look at how things work for themselves rather than ask what they "should" do.

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Re: FireCalc: Equities almost 70% for a 20 year term???

Post by randomguy » Sat Jun 17, 2017 3:15 pm

dbr wrote:
You are absolutely right. But, the struggle is to get the OP in any given situation to be clear what is important to them. Probably anxiety about having enough to retire dominates postings over those wanting to leave large legacies. What is hard is to get people to look at how things work for themselves rather than ask what they "should" do.
I disagreee. If people were worried about paying fo retirement, SPIAs would be an easy sell. You can buy an inflation adjusted one at 65 that pays 4% joint. Nobody buys them cause the idea of losing money (i.e. you and your spouse die before like 90) makes them unappealing compared to the alternative of putting 10-20 years of money in TIPs and the rest in stocks.

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Re: FireCalc: Equities almost 70% for a 20 year term???

Post by TheTimeLord » Sat Jun 17, 2017 3:30 pm

dbr wrote:
freebeer wrote:
dbr wrote:.... historically what they suggest does produce the maximum safe withdrawal rate for those lengths of time. ...
But the result is a little disingenuous. The maximum is a very shallow one and probably not even real relative to the range of uncertainty that should be assigned to safe withdrawal rate. A more useful analysis in FireCalc would be to see where the failure rate for one's proposed withdrawals starts to increase significantly, say from less than 5% to 20%-30%-40%. That roll-off happens, if it happens at all, as one drops through too low allocations to stocks and happens sooner for longer time periods. While one might propose 70% stocks, the actual need to take risk is more like 40% stocks, for example. ... the outcome is driven most strongly by when one retires and by how much one wants to withdraw and is relatively insensitive to as
set allocation. Accepting that asset allocation is not very important in retirement goes counter to all the attempts here to engineer things by what investments one holds.
Well most people have bequest motives of varying strengths which changes things considerably. 40/60 may have nearly the same SWR safety as 70/30, based on historical results, but it has FAR less likelihood of leaving a very large inheritance. I am constantly surprised how often Bogleheads discussions make the simplifying assumption that income in retirement is all that matters when it's much more complicated for most people (as evidenced by, among other things, "under" annuitization).
You are absolutely right. But, the struggle is to get the OP in any given situation to be clear what is important to them. Probably anxiety about having enough to retire dominates postings over those wanting to leave large legacies. What is hard is to get people to look at how things work for themselves rather than ask what they "should" do.
Thank you for your feedback. To be honest I do not give one second's thought to leaving a legacy in regards to how I will invest my portfolio, the function of my portfolio is to provide for myself and my spouse. From what I can tell the odds are excellent that there will be a fair sum of money left once I am gone and I will have left instructions as to the people and causes that will receive it. As I have said many times my main goal is to be able to maximize my ability to do the things I enjoy from retirement to roughly age 70 as I believe these are going to be my healthiest and most active years. So avoiding sequence of return risk is a major consideration and I have attempted to address this by setting aside enough in Fixed Income to cover this period irregardless of the performance of Equities. Beyond that I am just looking to provide a comfortable lifestyle for my spouse and myself and be positioned so that either of us passing doesn't financially endanger the other. By any reasonable definition I believe I have "enough" but that does not preclude my ability to utilize more, I do have an excellent imagination.
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Re: FireCalc: Equities almost 70% for a 20 year term???

Post by munemaker » Sun Jun 18, 2017 8:18 am

jebmke wrote:
Stormbringer wrote:
ryman554 wrote:Age in bonds is a horrible rule of thumb.
I completely agree.

Bogle says to include Social Security and pensions in your bond allocation. The net present value of SS is often hundreds of thousands of dollars, which means that many people, young people in particular, are already WAY over-allocated to "bonds" even if they are 100% equities in their retirement accounts.
The problem is that the NPV of SS is not liquid - you cannot rebalance in or out -- and there is no contractual obligation like there is with bonds.
You can use the other part of your portfolio to rebalance, i.e. adjust your bonds.

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Re: FireCalc: Equities almost 70% for a 20 year term???

Post by munemaker » Sun Jun 18, 2017 8:21 am

Stormbringer wrote:
ryman554 wrote:Age in bonds is a horrible rule of thumb.
I completely agree.

Bogle says to include Social Security and pensions in your bond allocation. The net present value of SS is often hundreds of thousands of dollars, which means that many people, young people in particular, are already WAY over-allocated to "bonds" even if they are 100% equities in their retirement accounts.
I wouldn't/didn't include SS when I was young. Don't include in your asset allocation until you are old enough that you have some confidence of what the program will look like when you retire. Some changes will have to be made, and they could have a significant effect on future SS benefits.

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Re: FireCalc: Equities almost 70% for a 20 year term???

Post by Greg in Idaho » Sun Jun 18, 2017 10:57 am

A very helpful discussion here, thanks all....

I wonder if high equity allocations would get such wide endorsements in late 2008?

...ok, just spent some time back in late 2008 BH-Land, and while I didn't see much in the way of studies analyzing different AA's in the context of retirement, a great deal of the discussion of AA I saw referenced 60/40, 50/50, 40/60...

Have we progressed in our understanding of AA and risk in retirement, or has our thinking been influenced by recency effects (or perhaps these two are entangled)...?

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Re: FireCalc: Equities almost 70% for a 20 year term???

Post by dbr » Sun Jun 18, 2017 11:37 am

Greg in Idaho wrote:A very helpful discussion here, thanks all....

I wonder if high equity allocations would get such wide endorsements in late 2008?

...ok, just spent some time back in late 2008 BH-Land, and while I didn't see much in the way of studies analyzing different AA's in the context of retirement, a great deal of the discussion of AA I saw referenced 60/40, 50/50, 40/60...

Have we progressed in our understanding of AA and risk in retirement, or has our thinking been influenced by recency effects (or perhaps these two are entangled)...?
This forum is hugely influenced by recency in terms of postings that are put up by posters that want to raise issues. I am pretty sure the vast majority of readers here have kept a steady course through the various gyrations of the market. I would absolutely not use a "sentiment of the Bogleheads" as a source of advice on any question in investing. Instead I would use the forum as a source of information and understanding that can be used to make your own decisions about what to do. I absolutely cringe when I see posts that ask "Does anyone here . . ." and I think any post that uses the phrase "should I" as a question anywhere in the title or text should not be allowed to be posted. Well, not really either of those, of course, but you get the idea.

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Re: FireCalc: Equities almost 70% for a 20 year term???

Post by randomguy » Sun Jun 18, 2017 12:00 pm

Greg in Idaho wrote:A very helpful discussion here, thanks all....

I wonder if high equity allocations would get such wide endorsements in late 2008?

...ok, just spent some time back in late 2008 BH-Land, and while I didn't see much in the way of studies analyzing different AA's in the context of retirement, a great deal of the discussion of AA I saw referenced 60/40, 50/50, 40/60...

Have we progressed in our understanding of AA and risk in retirement, or has our thinking been influenced by recency effects (or perhaps these two are entangled)...?
https://www.portfoliovisualizer.com/bac ... alBond2=70

So far 70/30 would have done better than 30/70 starting in 2007. Or think about the 2009 retiree who has just watched a big market meltdown

https://www.portfoliovisualizer.com/bac ... alBond2=70

Now I am not saying 70/30 is always better over short periods.

https://www.portfoliovisualizer.com/bac ... alBond2=70

But the odds drastically favor it. But that is all mathematically. If that extra 15% drop causes you to panic (and yes in 2008-9 there were a bunch of bogleheads panicing. Or to to be charitable learning that their loss limit was only 50%), it doesn't work out.

Now the great unknown is can we get a 20+ year market where stocks don't perform? So far it hasn't happened in the US. Doesn't mean it can't. One the same note we haven't had many periods of times where bonds get destroyed (inflatin, currency devaluation,....) in US history.

Recency is hard to evaluated. Are people more effected by the 2 historically large market crashes in a 10 year period or than the 2 bull markets on either side of those crashes? It is probably both. with some people going 20/80 because of the crashes and others going 90%+ because of the great returns from stocks.

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Re: FireCalc: Equities almost 70% for a 20 year term???

Post by Dottie57 » Sun Jun 18, 2017 1:25 pm

I have been running firecalc with reduced SS amounts. I' first ran it with 50/50 asset allocation. Then 60 stock/40 fixed income. The success rate went down with 60/40 but a possibility of much higher ending value. Is this expected?

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Re: FireCalc: Equities almost 70% for a 20 year term???

Post by dbr » Sun Jun 18, 2017 3:07 pm

Dottie57 wrote:I have been running firecalc with reduced SS amounts. I' first ran it with 50/50 asset allocation. Then 60 stock/40 fixed income. The success rate went down with 60/40 but a possibility of much higher ending value. Is this expected?
It is neither expected or not expected but in general success rates have small optimums around 40/60 - 60/40 depending a lot on withdrawal rate. So, yes, what you saw might happen.

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Re: FireCalc: Equities almost 70% for a 20 year term???

Post by ryman554 » Sun Jun 18, 2017 3:25 pm

Greg in Idaho wrote:A very helpful discussion here, thanks all....

I wonder if high equity allocations would get such wide endorsements in late 2008?

...ok, just spent some time back in late 2008 BH-Land, and while I didn't see much in the way of studies analyzing different AA's in the context of retirement, a great deal of the discussion of AA I saw referenced 60/40, 50/50, 40/60...

Have we progressed in our understanding of AA and risk in retirement, or has our thinking been influenced by recency effects (or perhaps these two are entangled)...?
It got my endorsement in 2008 with all my new money. Of course. I didn't know about this place then. And now, I'm actually worried than things are a bit too toasty for me, which is the exact opposite of 2008. I'm the guy who will sell high and buy low, I guess.

It's pretty simple. You invest in the places that have the highest expected long-term return if you are investing for 10+ years out. Those aren't bonds. And this holds true even during the retirement phase.

The crucial piece is being able to control emotions and not sell low.

When are are focusing on items needed <5years out, you better have it in the highest expected short-term returns convolved (wrong word) with
a volatility (worst-case draw-down) component. This is why folks move to bonds and/or cash at retirement, although it is my opinion that folks move too much. Again, it's an emotional decision, not necessarily a rational decision. Humans are not rational creatures.

Summary:

Rationally, folks should be 100% (or close to it) in a diversified equity fund for long term results, including retirement.
Emotionally, the variance of such funds keeps people awake at night and/or causes capitulation at the worst time.

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Re: FireCalc: Equities almost 70% for a 20 year term???

Post by Admiral » Mon Jun 19, 2017 11:49 am

On some level it comes down to this: is the risk associated with a high equity allocation worth the reward when you already have "enough."

If I have $10m on the day I retire at 70 and my expenses are $60k a year, then sure, I'll put 10% in bonds and $9m in equities. Done. There is no risk to running out of money. The only "risk" is that I will earn less on my investments than I otherwise would. (i.e. my heirs or favorite charity will only get $7m if the market has a long correction)

But if my savings and expenses are such that I am more borderline (I retire at 55 with $1m and the same $60k per year in expenses) then I'm less worried about maximizing my returns and more worries about keeping what I have so I don't run out of money when I'm 80. In this situation, sequence of return risk is very real, and a bear market may not allow my portfolio enough time to recover. Try telling this person at age 70 whose portfolio is now $400k that they should put 80% in stocks because stocks always earn more and "hey, the recovery is right around the corner!"

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Re: FireCalc: Equities almost 70% for a 20 year term???

Post by dbr » Mon Jun 19, 2017 12:07 pm

Admiral wrote:On some level it comes down to this: is the risk associated with a high equity allocation worth the reward when you already have "enough."

If I have $10m on the day I retire at 70 and my expenses are $60k a year, then sure, I'll put 10% in bonds and $9m in equities. Done. There is no risk to running out of money. The only "risk" is that I will earn less on my investments than I otherwise would. (i.e. my heirs or favorite charity will only get $7m if the market has a long correction)

But if my savings and expenses are such that I am more borderline (I retire at 55 with $1m and the same $60k per year in expenses) then I'm less worried about maximizing my returns and more worries about keeping what I have so I don't run out of money when I'm 80. In this situation, sequence of return risk is very real, and a bear market may not allow my portfolio enough time to recover. Try telling this person at age 70 whose portfolio is now $400k that they should put 80% in stocks because stocks always earn more and "hey, the recovery is right around the corner!"
Analysis of past behavior of stocks and bonds says that how much trouble you are in will depend on your withdrawal rate, the luck of when you retire, and only secondarily on asset allocation. Your example, which you may not really mean, is one in which the withdrawal rate is high enough to have a significant chance of failure at any asset allocation. The higher the withdrawal rate, the more succeeding with that plan depends on having enough in stocks. More than that, high stock allocations do not have significantly higher failure rates than lower ones, but high bond allocations can have very high failure rates. This behavior is more subtle and complex than merely avoiding some sequence of returns risk.

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Re: FireCalc: Equities almost 70% for a 20 year term???

Post by Admiral » Mon Jun 19, 2017 1:02 pm

dbr wrote:
Admiral wrote:On some level it comes down to this: is the risk associated with a high equity allocation worth the reward when you already have "enough."

If I have $10m on the day I retire at 70 and my expenses are $60k a year, then sure, I'll put 10% in bonds and $9m in equities. Done. There is no risk to running out of money. The only "risk" is that I will earn less on my investments than I otherwise would. (i.e. my heirs or favorite charity will only get $7m if the market has a long correction)

But if my savings and expenses are such that I am more borderline (I retire at 55 with $1m and the same $60k per year in expenses) then I'm less worried about maximizing my returns and more worries about keeping what I have so I don't run out of money when I'm 80. In this situation, sequence of return risk is very real, and a bear market may not allow my portfolio enough time to recover. Try telling this person at age 70 whose portfolio is now $400k that they should put 80% in stocks because stocks always earn more and "hey, the recovery is right around the corner!"
Analysis of past behavior of stocks and bonds says that how much trouble you are in will depend on your withdrawal rate, the luck of when you retire, and only secondarily on asset allocation. Your example, which you may not really mean, is one in which the withdrawal rate is high enough to have a significant chance of failure at any asset allocation. The higher the withdrawal rate, the more succeeding with that plan depends on having enough in stocks. More than that, high stock allocations do not have significantly higher failure rates than lower ones, but high bond allocations can have very high failure rates. This behavior is more subtle and complex than merely avoiding some sequence of returns risk.
I was assuming some SS income and therefore an appx 4% withdrawal rate in either case.

But: For a 70 YO with $10m in assets, a 4% SWR would be 400k per year. This hypothetical person is not going to run out of money, period. I don't care how it's invested. Even assuming they were taking only from the $1m in bonds and letting the rest ride in the market, they are still not going to run out of money, no matter what the market does, since their expenses are a fraction of a percent of their portfolio.

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Re: FireCalc: Equities almost 70% for a 20 year term???

Post by ryman554 » Tue Jun 20, 2017 8:37 am

Admiral wrote: I was assuming some SS income and therefore an appx 4% withdrawal rate in either case.

But: For a 70 YO with $10m in assets, a 4% SWR would be 400k per year. This hypothetical person is not going to run out of money, period. I don't care how it's invested. Even assuming they were taking only from the $1m in bonds and letting the rest ride in the market, they are still not going to run out of money, no matter what the market does, since their expenses are a fraction of a percent of their portfolio.
It does not matter what you are assuming in terms of income floor, what dbr said was absolutely correct.

People talk about winning the game, and it's the folks you have quoted above ($10m in assets) are the only ones who have done it.

If you're talking about a 3.5% or 4% (or higher) SWR, then you have not won the game. Period. You still need your money to work for you to ensure the lifestyle you want. You have an extremely high (near certainty) of having it, but it does not change the fact that your money has to do the work. Because you need your money to work for you, you need to be tilting toward the kids of things which make you more money, rather than the "safer" things which earn you less and lose the ability to live your lifestyle.

The higher the SWR, the more you need to make your money work for you. It's only when you get 3% or below that you can really go heavily toward bond-ish like stuff, and the AA truly doesn't matter.

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Re: FireCalc: Equities almost 70% for a 20 year term???

Post by Admiral » Tue Jun 20, 2017 8:49 am

ryman554 wrote:
Admiral wrote: I was assuming some SS income and therefore an appx 4% withdrawal rate in either case.

But: For a 70 YO with $10m in assets, a 4% SWR would be 400k per year. This hypothetical person is not going to run out of money, period. I don't care how it's invested. Even assuming they were taking only from the $1m in bonds and letting the rest ride in the market, they are still not going to run out of money, no matter what the market does, since their expenses are a fraction of a percent of their portfolio.
It does not matter what you are assuming in terms of income floor, what dbr said was absolutely correct.

People talk about winning the game, and it's the folks you have quoted above ($10m in assets) are the only ones who have done it.

If you're talking about a 3.5% or 4% (or higher) SWR, then you have not won the game. Period. You still need your money to work for you to ensure the lifestyle you want. You have an extremely high (near certainty) of having it, but it does not change the fact that your money has to do the work. Because you need your money to work for you, you need to be tilting toward the kids of things which make you more money, rather than the "safer" things which earn you less and lose the ability to live your lifestyle.

The higher the SWR, the more you need to make your money work for you. It's only when you get 3% or below that you can really go heavily toward bond-ish like stuff, and the AA truly doesn't matter.
But this is exactly my point! That depending on one's cost of living and portfolio balance, there ARE indeed situations where there is no need to accept more risk than is necessary: i.e. one can have a high bond allocation. Personally I don't see myself ever having more than 40% bonds, but that also has do with my personal circumstances.

One you have "won the game" you certainly CAN put 90% of your money in equities. But this amount of risk will not materially affect your life. You don't need to chase returns when you have enough. You can if you want.

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Re: FireCalc: Equities almost 70% for a 20 year term???

Post by TheTimeLord » Tue Jun 20, 2017 8:57 am

ryman554 wrote:
Admiral wrote: I was assuming some SS income and therefore an appx 4% withdrawal rate in either case.

But: For a 70 YO with $10m in assets, a 4% SWR would be 400k per year. This hypothetical person is not going to run out of money, period. I don't care how it's invested. Even assuming they were taking only from the $1m in bonds and letting the rest ride in the market, they are still not going to run out of money, no matter what the market does, since their expenses are a fraction of a percent of their portfolio.
It does not matter what you are assuming in terms of income floor, what dbr said was absolutely correct.

People talk about winning the game, and it's the folks you have quoted above ($10m in assets) are the only ones who have done it.

If you're talking about a 3.5% or 4% (or higher) SWR, then you have not won the game. Period. You still need your money to work for you to ensure the lifestyle you want. You have an extremely high (near certainty) of having it, but it does not change the fact that your money has to do the work. Because you need your money to work for you, you need to be tilting toward the kids of things which make you more money, rather than the "safer" things which earn you less and lose the ability to live your lifestyle.

The higher the SWR, the more you need to make your money work for you. It's only when you get 3% or below that you can really go heavily toward bond-ish like stuff, and the AA truly doesn't matter.
Quoting a SWR without the context of the planned duration of the retirement is incomplete.
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Re: FireCalc: Equities almost 70% for a 20 year term???

Post by Greg in Idaho » Tue Jun 20, 2017 9:00 am

Admiral wrote:
ryman554 wrote:
Admiral wrote: I was assuming some SS income and therefore an appx 4% withdrawal rate in either case.

But: For a 70 YO with $10m in assets, a 4% SWR would be 400k per year. This hypothetical person is not going to run out of money, period. I don't care how it's invested. Even assuming they were taking only from the $1m in bonds and letting the rest ride in the market, they are still not going to run out of money, no matter what the market does, since their expenses are a fraction of a percent of their portfolio.
It does not matter what you are assuming in terms of income floor, what dbr said was absolutely correct.

People talk about winning the game, and it's the folks you have quoted above ($10m in assets) are the only ones who have done it.

If you're talking about a 3.5% or 4% (or higher) SWR, then you have not won the game. Period. You still need your money to work for you to ensure the lifestyle you want. You have an extremely high (near certainty) of having it, but it does not change the fact that your money has to do the work. Because you need your money to work for you, you need to be tilting toward the kids of things which make you more money, rather than the "safer" things which earn you less and lose the ability to live your lifestyle.

The higher the SWR, the more you need to make your money work for you. It's only when you get 3% or below that you can really go heavily toward bond-ish like stuff, and the AA truly doesn't matter.
But this is exactly my point! That depending on one's cost of living and portfolio balance, there ARE indeed situations where there is no need to accept more risk than is necessary: i.e. one can have a high bond allocation. Personally I don't see myself ever having more than 40% bonds, but that also has do with my personal circumstances.

One you have "won the game" you certainly CAN put 90% of your money in equities. But this amount of risk will not materially affect your life. You don't need to chase returns when you have enough. You can if you want.
Yes, I think you two might be talking past each other from the same side...the choice of example made it a bit less clear in this context, and I think that putting 90% in bonds after winning was the sought after illustration (thus showing your money doesn't need to do any real work for you any longer). But if you have enough, sure...put it where you want it...

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