What do BH think of this formula for an early retiree?

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TheTimeLord
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What do BH think of this formula for an early retiree?

Post by TheTimeLord »

What do BH think of this formula for an early retiree who will have his basic living expenses covered by SS, pension and annuities at FRA?


TotPort = Total Portfolio Value (1,200,000)
BasMonExp = Basic Monthly Expenses including taxes (6,000)
MonToFRA = Months to FRA (120)
ExpSet = Expenses Set Aside
FixedIncomeAA = 20%
EquityAA = 80
PortMinusSet = Portfolio minus set aside
FIMinusSet = Fixed income minus set aside
TotEq = Total Equities
TotFI = Total Fixed Income

===========================

ExpSet = BasMonExp * MonToFRA
PortMinusSet = TotPort - ExpSet
FIMinusSet = PortMinusSet * FixedIncomeAA
TotFI = ExpSet + FIMinusSet
TotEq = PortMinusSet - FIMinusSet

720,000 = 6,000 * 120
480,000 = 1,200,000 - 720,000
96,000 = 480,000 * .2
816,000 (Total Fixed Income) = 720,000 + 96,000
384,000 (Total Equities) = 480,000 - 96,000
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Re: What do BH think of this formula for an early retiree?

Post by jebmke »

Why not just start at some round number for equity (70%) and add 5 pts every year. or revisit every 2-3 years. 5 pts either way isn't going to make much difference.

To me, trying to manage with equations takes out other judgemental factors that may be more pertinent. And, if you say "well, I'll look at those as they appear" you are saying that the equation is just an exercise. Seems overly complicated to me.

Edit: I misread your post and assumed the 70% was equity based on all your other posts wherein you were handwringing about holding any bonds. I am now officially confused about what your goals are.
Last edited by jebmke on Tue Jun 20, 2017 11:21 am, edited 1 time in total.
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Re: What do BH think of this formula for an early retiree?

Post by Thesaints »

Looks a little too conservative.
10 years from now you may very well be 100% in stocks. Today, you don't need to be almost 70% in bonds to be sure to make it that far.
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Re: What do BH think of this formula for an early retiree?

Post by dbr »

Instead of "What do BH think of . . ." can you explain what problem you are trying to solve and what the rationale for your solution is?
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Re: What do BH think of this formula for an early retiree?

Post by David Jay »

It works just fine, it keeps everything in one "bucket".

I am sort of doing a "two-bucket" solution, in my structure:
1. You would just drop the entire 480K in LS Aggressive (80/20) and leave it alone, that is the long term portfolio
2 The 720K would then be a chunk (in my case, 2 years) in ST Bond and the remainder in IT Bond.

[edit] The other thing this does is it automatically handles my simplification (especially in case my spouse is the survivor). When I start taking SS my long term portfolio is already 100% in a single fund (in my case, LS Moderate @ 60/40)
Last edited by David Jay on Tue Jun 20, 2017 11:24 am, edited 1 time in total.
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Re: What do BH think of this formula for an early retiree?

Post by Ron »

dbr wrote:Instead of "What do BH think of . . ." can you explain what problem you are trying to solve and what the rationale for your solution is?
Agreed...

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Re: What do BH think of this formula for an early retiree?

Post by David Jay »

OP had a recent thread on increasing AA in late retirement (after sequence-of-returns risk between retirement and start of SS). This is his proposal for protecting the capital needed to get to SS and going to 80/20 after start of SS.

Link here: viewtopic.php?f=10&t=221260
Last edited by David Jay on Tue Jun 20, 2017 11:28 am, edited 1 time in total.
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Re: What do BH think of this formula for an early retiree?

Post by Thesaints »

It's described in the formula, right ? :happy

Ten years from now he will have all of his expenses covered by pensions. He wants to be sure to make it that far with a 1.2M capital. The formula stores all the needed funds in bonds, plus 20% of the residual capital.
Too cobservative, in my opinion.
On the opposite side he could invest 100% in stocks now and, if at any points losses bring him down to the funds needed at that point to reach the 10 year mark, he could switch everything into bonds.
Therefore the "correct" answer must be somewhere in between 0% and 68% bonds AA.
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Re: What do BH think of this formula for an early retiree?

Post by David Jay »

Thesaints wrote:Looks a little too conservative.
10 years from now you may very well be 100% in stocks. Today, you don't need to be almost 70% in bonds to be sure to make it that far.
Actually, no.

"Months to FRA" is dynamic, every month a bit less is needed in bridge funds so ExpSet is on a glideslope to zero. So the total portfolio (i.e. the limit as MontoFRA goes to zero) has a final state of 80/20.
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Re: What do BH think of this formula for an early retiree?

Post by David Jay »

TL:

Yours is more elegant than mine, I will end up with some balance @ start of SS (due to bond gains and expenses deviating from projection) that will need to be transferred to my LS fund.

How often would you re-balance? Annually? Semi-Annually?
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Re: What do BH think of this formula for an early retiree?

Post by Thesaints »

I was saying "it may very well be" since it is a matter of choice. He has chosen 80/20, but there is no real reason why (or why not); his expenses are provided for.

There is a recent support on increasing bond allocation towards the beginning of retirement, only to decrease it later, which is what the OP proposes to do.
I still have to hear a pressing argument in support of such a practice.
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Re: What do BH think of this formula for an early retiree?

Post by jebmke »

Thesaints wrote:I still have to hear a pressing argument in support of such a practice.
I am not sure but one thought is that the lower equity allocation takes the stress out of the early sequence of returns risk situation and, should a deep bear market hit during the early years, the lower equity might make it easier psychologically to re-balance rather than hesitate.
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Re: What do BH think of this formula for an early retiree?

Post by dbr »

jebmke wrote:
Thesaints wrote:I still have to hear a pressing argument in support of such a practice.
I am not sure but one thought is that the lower equity allocation takes the stress out of the early sequence of returns risk situation and, should a deep bear market hit during the early years, the lower equity might make it easier psychologically to re-balance rather than hesitate.
Lower equity also brings lower expected return, so you have to actually model the range of possible outcomes. The result is a distribution of probabilities that depends among other things on the likelihood for both incidence and degree of large negative movements in the market. I don't think any of the existing withdrawal models allow one to input a variable asset allocation as a function of time. Maybe someone has a creative answer to that, but I can't see a meaningful approach to this problem that is less complex than statistically modeling the outcome.
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Re: What do BH think of this formula for an early retiree?

Post by The Wizard »

OP appears to be Setting Aside funds needed for expenses prior to FRA. These funds go into fixed income, either bonds or CDs.

I don't particularly like this approach and it's not what I'm doing.
I retired at 63 with seven years to span before SS at 70.
I annuitized a portion of my accumulation at the outset and withdraw $3000/month from remaining portfolio in lieu of SS. But I keep my portfolio invested at my desired 50/50 AA, though I'm higher in stocks than that lately for certain reasons.
I withdraw pro rata from my accumulation each month, no special fixed income bucket.

If stocks had a serious decline during my seven year bridge period, then my Plan B was simply to start SS earlier. But stocks and my portfolio have done ok thus far. With 33 months to go, I'm reasonably confident that my plan will work...
Last edited by The Wizard on Tue Jun 20, 2017 1:30 pm, edited 1 time in total.
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Re: What do BH think of this formula for an early retiree?

Post by TheTimeLord »

Thesaints wrote:I was saying "it may very well be" since it is a matter of choice. He has chosen 80/20, but there is no real reason why (or why not); his expenses are provided for.

There is a recent support on increasing bond allocation towards the beginning of retirement, only to decrease it later, which is what the OP proposes to do.
I still have to hear a pressing argument in support of such a practice.
First, this is just something I have recently been playing with and was looking for feedback. It is by no means what I would call a finished work product. And this is specifically for someone who plans to retire prior to FRA but will have Social Security, Pension(s) and/or Annuities that will cover their basic living expenses once they reach FRA and collect their benefits. While I am not sure it rises to the point of a pressing argument, but the idea behind it is to protect your pre-FRA years (which are likely to be your most active and healthy) from sequence of return risk while identifying the portion of your portfolio you can comfortably invest more aggressively since your basic expense will be covered once you reach FRA. I look at it as more of a planning tool than a rigid formula by which to runs one's retirement. The formula is pretty easy, straightforward and spreadsheet friendly plus you can play what if scenarios by adjusting Basic Monthly Expenses or the effect of working a couple more months by adjusting Months to FRA and Basic Monthly Expenses. I appreciate everyone's feedback. Again this is a very immature and simplistic idea and a work in progress, it is not something someone should take and use to make personal financial decisions.
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Re: What do BH think of this formula for an early retiree?

Post by dbr »

TheTimeLord wrote:
Thesaints wrote:I was saying "it may very well be" since it is a matter of choice. He has chosen 80/20, but there is no real reason why (or why not); his expenses are provided for.

There is a recent support on increasing bond allocation towards the beginning of retirement, only to decrease it later, which is what the OP proposes to do.
I still have to hear a pressing argument in support of such a practice.
First, this is just something I have recently been playing with and was looking for feedback. It is by no means what I would call a finished work product. And this is specifically for someone who plans to retire prior to FRA but will have Social Security, Pension(s) and/or Annuities that will cover their basic living expenses once they reach FRA and collect their benefits. While I am not sure it rises to the point of a pressing argument, but the idea behind it is to protect your pre-FRA years (which are likely to be your most active and healthy) from sequence of return risk while identifying the portion of your portfolio you can comfortably invest more aggressively since your basic expense will be covered once you reach FRA. I look at it as more of a planning tool than a rigid formula by which to runs one's retirement. The formula is pretty easy, straightforward and spreadsheet friendly plus you can play what if scenarios by adjusting Basic Monthly Expenses or the effect of working a couple more months by adjusting Months to FRA and Basic Monthly Expenses. I appreciate everyone's feedback. Again this is a very immature and simplistic idea and a work in progress, it is not something someone should take and use to make personal financial decisions.
I don't think you know what sequence of return risk is in a quantified sense that can be related to other properties of a portfolio. Such properties would include asset allocation, contributions and withdrawals, and time sequence of portfolio value. Ultimately the risk should be a relationship between the expected return and expected variability of return of a portfolio varying over time and the chances of something we care about happening or not happening, such as that we don't run out of money after a period of time while supporting certain expenditures in the presence of income streams that are variable in time.

There are examples of doing this problem with a fixed asset allocation, FireCalc being an example of such. In that model you set a planned amount of spending, assume a certain starting portfolio value, specify an asset allocation, specify a length of time to endpoint, and the output is the chance of not running out of money before the endpoint. It is possible to add increment of expenditure and increments of assets. Sequence of return risk is indirectly adjusted as part of general portfolio risk and return by specifying the asset allocation of the portfolio. Sequence of return risk is not a uniquely different risk from the variability of return of the portfolio itself.

So the unique question you are asking, which is a completely legitimate one, is can or should the portfolio asset allocation be significantly altered during a period of time when income comes mostly from portfolio withdrawal preceeding a time when income is more supported by an income stream. A way to do this might be to use a retirement model ending at the time the new income stream comes on line and tabulating the end point portfolio values you would have as a function of choices of asset allocation during the first period. These could be varied to see if there is an obvious optimum concerning how much wealth you would have starting the second stage. Just taking a preliminary look I suspect the course between Scylla and Charybdis is probably somewhere around a 50/50 asset allocation, which would also be an excellent choice for the duration of the retirement. Conclusion: Use a 50/50 asset allocation and don't mess with it.

The story in short form is that reducing variability of return and therefore sequence of return risk is paid for by reducing expected return and therefore increasing "low return risk." These two classically offset at most asset allocations for most time periods for most withdrawal rates. Someone who wants to pile into this in more detail could probably produce some helpful tabulations.
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Re: What do BH think of this formula for an early retiree?

Post by staythecourse »

All I can guarantee is that ANY formula will not be precise. Think of how many math folks have attempted this through history and NO ONE has a fool proof one yet. Just pick on that sounds good enough and learn to adapt as you go.

It isn't like you have a formula to get from birth to this point in in your life so why expect to have one so precise from this point to death.

Good luck.
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Re: What do BH think of this formula for an early retiree?

Post by TD2626 »

I think that the income from the portfolio needs to be taken into account more fully.

A 6% rate of return on a $1,200,000 portfolio yields $72,000 a year, which could cover 100% of expenses. Unfortunately, 6% withdrawal rates are not "safe".

A more conservative 3 to 4% withdrawal rate would still likely cover 50% plus of expenses.

The wild swings in AA over a relatively short number of years aren't ideal. Maybe being somewhat more conservative over the 120 months (50/50 instead of 80/20) could be possible if you factor in portfolio income into calculations.

A substantial cash allocation (of a few year's expenses) and/or a willingness to try to find other sources of income if the market crashes a lot could go a long way.

A very interesting plan, and a lot of interesting ideas to think about. I think that there's a way to make some sort of plan work in this situation. There are enough assets to bridge the gap to pensions, it's just a matter of allocating them.
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Re: What do BH think of this formula for an early retiree?

Post by David Jay »

TD2626 wrote:A 6% rate of return on a $1,200,000 portfolio yields $72,000 a year, which could cover 100% of expenses. Unfortunately, 6% withdrawal rates are not "safe".

A more conservative 3 to 4% withdrawal rate would still likely cover 50% plus of expenses.
A 3%-4% withdrawal rate is appropriate for thirty years. The OP is withdrawing at a 6% withdrawal rate for ten years. That is totally safe, without any gains whatsoever (stick it in the mattress...) with a half-million left over.
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Re: What do BH think of this formula for an early retiree?

Post by ebeard »

dbr wrote:
There are examples of doing this problem with a fixed asset allocation, FireCalc being an example of such. In that model you set a planned amount of spending, assume a certain starting portfolio value, specify an asset allocation, specify a length of time to endpoint, and the output is the chance of not running out of money before the endpoint. It is possible to add increment of expenditure and increments of assets. Sequence of return risk is indirectly adjusted as part of general portfolio risk and return by specifying the asset allocation of the portfolio. Sequence of return risk is not a uniquely different risk from the variability of return of the portfolio itself.

So the unique question you are asking, which is a completely legitimate one, is can or should the portfolio asset allocation be significantly altered during a period of time when income comes mostly from portfolio withdrawal preceeding a time when income is more supported by an income stream. A way to do this might be to use a retirement model ending at the time the new income stream comes on line and tabulating the end point portfolio values you would have as a function of choices of asset allocation during the first period. These could be varied to see if there is an obvious optimum concerning how much wealth you would have starting the second stage. Just taking a preliminary look I suspect the course between Scylla and Charybdis is probably somewhere around a 50/50 asset allocation, which would also be an excellent choice for the duration of the retirement. Conclusion: Use a 50/50 asset allocation and don't mess with it.

I would use the tools from

"The Ultimate Guide to Safe Withdrawal Rates"

In the spreadsheet you can alter your portfolio AA, the length of time and inject extra income monthly (like SS). The summary tools will give SWR in several different CAPE markets. Very nice tool!
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Re: What do BH think of this formula for an early retiree?

Post by dbr »

ebeard wrote:
dbr wrote:
There are examples of doing this problem with a fixed asset allocation, FireCalc being an example of such. In that model you set a planned amount of spending, assume a certain starting portfolio value, specify an asset allocation, specify a length of time to endpoint, and the output is the chance of not running out of money before the endpoint. It is possible to add increment of expenditure and increments of assets. Sequence of return risk is indirectly adjusted as part of general portfolio risk and return by specifying the asset allocation of the portfolio. Sequence of return risk is not a uniquely different risk from the variability of return of the portfolio itself.

So the unique question you are asking, which is a completely legitimate one, is can or should the portfolio asset allocation be significantly altered during a period of time when income comes mostly from portfolio withdrawal preceeding a time when income is more supported by an income stream. A way to do this might be to use a retirement model ending at the time the new income stream comes on line and tabulating the end point portfolio values you would have as a function of choices of asset allocation during the first period. These could be varied to see if there is an obvious optimum concerning how much wealth you would have starting the second stage. Just taking a preliminary look I suspect the course between Scylla and Charybdis is probably somewhere around a 50/50 asset allocation, which would also be an excellent choice for the duration of the retirement. Conclusion: Use a 50/50 asset allocation and don't mess with it.

I would use the tools from

"The Ultimate Guide to Safe Withdrawal Rates"

In the spreadsheet you can alter your portfolio AA, the length of time and inject extra income monthly (like SS). The summary tools will give SWR in several different CAPE markets. Very nice tool!
That is helpful. The OP is recommended to look there for some ideas.
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Re: What do BH think of this formula for an early retiree?

Post by TheTimeLord »

The Wizard wrote:OP appears to be Setting Aside funds needed for expenses prior to FRA. These funds go into fixed income, either bonds or CDs.

I don't particularly like this approach and it's not what I'm doing.
I retired at 63 with seven years to span before SS at 70.
I annuitized a portion of my accumulation at the outset and withdraw $3000/month from remaining portfolio in lieu of SS. But I keep my portfolio invested at my desired 50/50 AA, though I'm higher in stocks than that lately for certain reasons.
I withdraw pro rata from my accumulation each month, no special fixed income bucket.

If stocks had a serious decline during my seven year bridge period, then my Plan B was simply to start SS earlier. But stocks and my portfolio have done ok thus far. With 33 months to go, I'm reasonably confident that my plan will work...
First my congratulation. Your plan has worked with the first 4+ years of your retirement being a bull market, something any retiree would hope for but no one can count on. My intent is to design a plan by to make my years from retirement to FRA virtually impervious to the gyrations of the market because as I have often stated I value these years the most because of the likelihood of being active and having good health.
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Re: What do BH think of this formula for an early retiree?

Post by TheTimeLord »

dbr wrote:Instead of "What do BH think of . . ." can you explain what problem you are trying to solve and what the rationale for your solution is?
This is nothing that hasn't been stated before but I will reiterate. My top priority is guaranteeing (as much as anything can be guaranteed in a world where control is an illusion) that I am able to take maximum advantage of the years from my retirement until FRA since I believe these will the healthiest and most active years I have remaining. Beyond that I would like to do my best to set aside enough so that my post FRA years are comfortable and still filled with whatever adventures I am up for or tackle the majority of possible challenges that may occur.
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Re: What do BH think of this formula for an early retiree?

Post by J295 »

The TL.
Do you have a specific retirement date declared?
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Re: What do BH think of this formula for an early retiree?

Post by TheTimeLord »

J295 wrote:The TL.
Do you have a specific retirement date declared?
I do not. I have a date I use for planning purposes and calculating the amount of Fixed income needed to execute my plan. If I go past that I can use a new date to plan or use the additional Fixed Income to increase the monthly withdrawal amount.
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Re: What do BH think of this formula for an early retiree?

Post by gtwhitegold »

Why not use a TIPS ladder or a CD ladder and have the rest in your desired future asset allocation?

I would personally have more in my ladder than recommended to allow for the unexpected, but the goal is the same.
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Re: What do BH think of this formula for an early retiree?

Post by heyyou »

(1) Sequence risk is based on blindly continuing to WD at an unsustainable level for decades after a market crash reduces your retirement day asset level, coupled with no real portfolio growth for more than a decade. The emphasis is on the long period of time. No BH is going to spend like that.

(2) All retirees will experience market crashes during 30 year retirements. Only two of the samples experienced sequence risk, the 1966 and the 1968 retirees. Note that the 1967 retiree lasted the full 30 years. A variable spending plan based on recent portfolio value completely buffers sequence risk. Sequence risk is so 20th century.

With your future necessary expenses covered by steady income sources, you are a good candidate for variable spending from the portfolio, so the bridge years are all that need to be planned. McClung did consider market valuations (CAPE10) when choosing his initial WD %.

My suggestion is to bail out from work, monitor your spending, and you will see that it will all work just fine. Yes, it feels risky, but you just have to continue to live within your means in retirement, and you already have 30 years of experience at that. Are you now living on your proposed early retirement budget, essentially practicing for your retirement spending except for those bucket list expenses?
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