Should we be using high equity retirement portfolios? - Some cFIREsim scenarios.

Discuss all general (i.e. non-personal) investing questions and issues, investing news, and theory.
Finridge
Posts: 126
Joined: Mon May 16, 2011 7:27 pm

Should we be using high equity retirement portfolios? - Some cFIREsim scenarios.

Post by Finridge » Thu Nov 16, 2017 2:48 am

I came across the cFIREsim tool in this thread:viewtopic.php?f=10&t=231873

After reading this thread I ended up spending a couple of hours playing with the cFIREsim tool (http://www.cfiresim.com/) running all kinds of different scenarios. This tests how a given portfolio would perform given market conditions from 1871 to the present. See more about how this works here: http://www.cfiresim.com/faq.php (But this approach can only go so far - "Past performance is no guarantee of future results." )

I ended up systematically comparing different asset allocations, using the default settings of a $1,000,000 portfolio and no other sources of income.

I compared the following asset allocations (equities/bonds): 0/100, 20/80, 40/60, 50/50, 60/40, 70/30, 80/20, 90/10, 95/5, 100/0. The two parameters I looked at for each was the success rate (success at the portfolio being able to maintain the payout for the full retirement period) and the median size of the ending portfolio.

In each scenario, I deemed the allocation with the best success rate the “winner”. Where there was a tie between two or more allocations in having the highest success rate, I’d go with the one with the highest median ending portfolio.

Scenarios:
  • First, I used the default settings of a 30 year retirement, beginning in 2017, with $40,000 (4% of initial portfolio) withdrawn every year, adjusted for inflation. WINNER: 90/10. (80/20 and 90/10 both had a success rate of 96.61%, but 90/10 has the higher median ending portfolio.)
  • Second, I again used the default settings of a 30 year retirement, beginning in 2017, but with $37,000 (3.7% of initial portfolio) withdrawn every year, adjusted for inflation. WINNER: 100/0. (Strangely, 70/30, 80/20, 90/20, 95/5, and 100/0 all had success rates of 99.15%, but 100/0 had the highest median ending portfolio.)
  • Third, I used a 40 year retirement, beginning in 2017, with $40,000 (4% of initial portfolio) withdrawn every year, adjusted for inflation. WINNER: 100/0. (90/10, 95/5, and 100/0 all had success rates of 91.67%, but 100/0 had the highest median ending portfolio.)
  • Fourth, I used a 40 year retirement, beginning in 2017, with $37,000 (3.7% of initial portfolio) withdrawn every year, adjusted for inflation. WINNER: 95/5. (80/20, 90/10, and 95/5 all had success rates of 91.67%, but 100/0 had the highest median ending portfolio.)
I’m only listing the “winners” above, but here are some of my observations, based on all the outcomes (including the ones I didn't take the time to list:
  • In all four scenarios, the optimal portfolio was 90/10, 95/10, or 100/0. Again, these were the portfolios that were the safest (had the highest success rates), and where there was a tie for highest success rate, the one with the highest median ending portfolio was selected as the winner.
  • Reducing the annual withdrawal amount from 4% of the initial portfolio amount by only 3 tenths of a percent to 3.7% significantly increased success rates across the board in all scenarios and at all asset allocations. Just a small increase in the annual withdrawal (here, going from $40,000 to $37,000) can make significant difference.
  • The “4% rule”may work pretty well using a 30 year retirement, but not as well if you end up living for an additional 10 years past that, especially if you are following the "your age in bonds" rule of thumb.
  • For a 40-year retirement period, having a high equity allocation makes a big difference. For a 40-year retirement using the 4% rule, a 50/50 portfolio only had a 73.15% success rate. The 80/20 portfolio had a 90.74% success rate. The 100/0 portfolio did even better, with a success rate of 91.67, and the highest median ending portfolio.
  • We have been conditioned to believe that when approaching and entering retirement, a significant portion of our portfolio should be in bonds. But at least in these scenarios, and within the universe of the historical data used by cFIREsim, the “safety of bonds” seems illusory for an investor that has the discipline to “stay the course” through thick and thin with a high equity portfolio.
I found this to be an interesting exercise. I am interested in comments from the forum, especially if you disagree with any of my observations. Let me know if you think I am missing something.
Last edited by Finridge on Thu Nov 16, 2017 11:18 pm, edited 1 time in total.

magneto
Posts: 897
Joined: Sun Dec 19, 2010 10:57 am
Location: On Chesil Beach

Re: High equity portfolios in retirement - cFIREsim scenarios.

Post by magneto » Thu Nov 16, 2017 2:53 am

Have you read Frank Armstrong's 'The Informed Investor' chapt 18 ?
'There is a tide in the affairs of men ...', Brutus (Market Timer)

Finridge
Posts: 126
Joined: Mon May 16, 2011 7:27 pm

Re: High equity portfolios in retirement - cFIREsim scenarios.

Post by Finridge » Thu Nov 16, 2017 3:00 am

magneto wrote:
Thu Nov 16, 2017 2:53 am
Have you read Frank Armstrong's 'The Informed Investor' chapt 18 ?
I have not. What is the gist?

AlohaJoe
Posts: 2636
Joined: Mon Nov 26, 2007 2:00 pm
Location: Saigon, Vietnam

Re: Should we be using high equity retirement portfolios? - Some cFIREsim scenarios.

Post by AlohaJoe » Thu Nov 16, 2017 3:05 am

Nope, you're not missing anything.

The volatility of stocks overwhelms bonds so it doesn't really matter how many bonds you have (at least until you get to things like 20% bonds but then you are very exposed to inflation and longevity risks).

Javier Estrada performed a similar exercise in his paper The Retirement Glidepath: An International Perspective which
  • looked at 19 countries and a "global portfolio" from 1900 to 2010
  • Looked at 4 "declining equity" glidepaths (100 to 0, 90 to 10, 80 to 20, 70 to 30)
  • Looked at 4 "rising equity" glidepaths
  • Looked at 11 static allocations (100-0, 90-10, ..., 0-100)
His conclusion was that 100% equities is the safest portfolio for retirees.
In short, although a strategy that fully invests a retirement portfolio in stocks can be perceived as riskier than most alternatives, is that really the case? Is a strategy that has the lowest probability of failure, provides the same or better downside protection, and higher upside potential really riskier than other strategies simply because a retiree is more uncertain about (how much higher will be) his bequest? If not, then having a retirement portfolio fully invested in stocks is a strategy that should be seriously considered by retirees.

magneto
Posts: 897
Joined: Sun Dec 19, 2010 10:57 am
Location: On Chesil Beach

Re: High equity portfolios in retirement - cFIREsim scenarios.

Post by magneto » Thu Nov 16, 2017 3:12 am

Finridge wrote:
Thu Nov 16, 2017 3:00 am
magneto wrote:
Thu Nov 16, 2017 2:53 am
Have you read Frank Armstrong's 'The Informed Investor' chapt 18 ?
I have not. What is the gist?
Side-stepping 'Sequence of Return Risk' entirely through use of two buckets.
The biggest risk of retirees.

Stocks in Bucket 1.
Five or seven years of necessary income in Bucket 2 (ST Bonds and Cash).

Draw from Bucket 2 when Stocks are distressed.
Use Bucket 1 to replenish Bucket 2 and draw income when Stocks are adequately valued.
Frank observes in his on line book that the Pharoah did something similar with notable success.

How would this compare with the data ?


P.S. Picking up on AJ's point above , Frank also notes that if the investor can live within the 'natural yield' of the portfolio then 100% Stocks or other is fine. The problem starts as we are all aware, when the assets are insufficient to live on portfolio 'natural yield' and so need to be gradually sold to turn into income.

P.P.S. On reflection a 100% Stocks portfolio would not have worked out too clever, for someone retiring mid 1929, only to see dividends collapse along with stock prices.
Last edited by magneto on Thu Nov 16, 2017 5:56 am, edited 4 times in total.
'There is a tide in the affairs of men ...', Brutus (Market Timer)

livesoft
Posts: 57301
Joined: Thu Mar 01, 2007 8:00 pm

Re: Should we be using high equity retirement portfolios? - Some cFIREsim scenarios.

Post by livesoft » Thu Nov 16, 2017 3:13 am

Since you liked running scenarios, I think you will like this series of articles:
https://earlyretirementnow.com/2016/12/ ... t-1-intro/
This signature message sponsored by sscritic: Learn to fish.

Finridge
Posts: 126
Joined: Mon May 16, 2011 7:27 pm

Re: High equity portfolios in retirement - cFIREsim scenarios.

Post by Finridge » Thu Nov 16, 2017 4:04 am

magneto wrote:
Thu Nov 16, 2017 3:12 am
Finridge wrote:
Thu Nov 16, 2017 3:00 am
magneto wrote:
Thu Nov 16, 2017 2:53 am
Have you read Frank Armstrong's 'The Informed Investor' chapt 18 ?
I have not. What is the gist?
Side-stepping 'Sequence of Return Risk' entirely through use of two buckets.
The biggest risk of retirees.

Stocks in Bucket 1.
Five or seven years of necessary income in Bucket 2 (ST Bonds and Cash).

Draw from Bucket 2 when Stocks are distressed.
Use Bucket 1 to replenish Bucket 2 and draw income when Stocks are adequately valued.
Frank observes in his on line book that the Pharoah did something similar with notable success.

How would this compare with the data ?

Has anyone run sequences using this?

Finridge
Posts: 126
Joined: Mon May 16, 2011 7:27 pm

Re: Should we be using high equity retirement portfolios? - Some cFIREsim scenarios.

Post by Finridge » Thu Nov 16, 2017 4:05 am

livesoft wrote:
Thu Nov 16, 2017 3:13 am
Since you liked running scenarios, I think you will like this series of articles:
https://earlyretirementnow.com/2016/12/ ... t-1-intro/
Thanks! Very interesting.

AlohaJoe
Posts: 2636
Joined: Mon Nov 26, 2007 2:00 pm
Location: Saigon, Vietnam

Re: High equity portfolios in retirement - cFIREsim scenarios.

Post by AlohaJoe » Thu Nov 16, 2017 5:28 am

Finridge wrote:
Thu Nov 16, 2017 4:04 am
magneto wrote:
Thu Nov 16, 2017 3:12 am
Finridge wrote:
Thu Nov 16, 2017 3:00 am
magneto wrote:
Thu Nov 16, 2017 2:53 am
Have you read Frank Armstrong's 'The Informed Investor' chapt 18 ?
I have not. What is the gist?
Side-stepping 'Sequence of Return Risk' entirely through use of two buckets.
The biggest risk of retirees.

Stocks in Bucket 1.
Five or seven years of necessary income in Bucket 2 (ST Bonds and Cash).

Draw from Bucket 2 when Stocks are distressed.
Use Bucket 1 to replenish Bucket 2 and draw income when Stocks are adequately valued.
Frank observes in his on line book that the Pharoah did something similar with notable success.

How would this compare with the data ?
Has anyone run sequences using this?
Yes, people have. But Armstrong's book is not very good in this area. He provides no concrete advice, making it impossible to test his proposal. This is what he writes:
A far superior, alternative strategy would treat the equity and bond portfolios separately, then impose a rule for withdrawals that protects capital during down markets by liquidating only bonds during bad years. During good years withdrawals are funded by sales of equity shares, and any excess accumulation is used to rebalance the portfolio back to the desired asset allocation.
How do you decide what is a down year? What's a good year? How much "excess accumulation" do you use in a single year? The specific answers you use here could be good or could be bad. In Michael McClung's Living Off Your Money there is a chapter on what he calls "income harvesting" on this topic. (This chapter is available for free on the author's website.) After looking at many variants on the basic strategy McClung says
As has been seen before, insulating stocks is generally good advice, but the details matter greatly.
Armstrong doesn't provide any actionable guidance but his suggestion appears similar to what McClung calls "The Rational Strategy". His conclusion after investigating it was:
Overall, the results are not strong. For some retirement periods, the performance is better than annual rebalancing, but during difficult periods (e.g., retirements starting in 1929, 1968, and 1969) when it matters most, the strategy underperforms.
I would not follow Armstrong's advice in this matter.

snarlyjack
Posts: 502
Joined: Fri Aug 28, 2015 12:44 pm
Location: Montana

Re: Should we be using high equity retirement portfolios? - Some cFIREsim scenarios.

Post by snarlyjack » Thu Nov 16, 2017 7:47 am

Finridge,

In my studies of Millionaires (The Millionaires Next Door) on the net.
(Warren Buffett, Ronald Read, Walgreens Millionaire + about 20 more).

They all had some common traits:
1). Very frugal.
2). Very high stock allocation (90-100% stocks).
3). Mostly dividend paying stocks (they were not selling off the portfolio).
4). They were NOT using the 4% rule (Trinity study).
5). They rode the portfolio through everything (Korea, Vietnam, etc.)
6). Their portfolio was put together over a long period of time (50-60 years).
7). Compounding was the big secret.
8). They never ever sold anything (At death they gave the portfolio away to charities/children/family).
9). It was a life long hobby of building the portfolio.
10). They thought long term (40,50,60,70 years). They were not caught up in day to day movements.

Hope I gave you some good thoughts to ponder...Good luck getting yours...

User avatar
Ethelred
Posts: 270
Joined: Sun Oct 30, 2016 9:38 am

Re: Should we be using high equity retirement portfolios? - Some cFIREsim scenarios.

Post by Ethelred » Thu Nov 16, 2017 8:49 am

snarlyjack wrote:
Thu Nov 16, 2017 7:47 am
Finridge,

In my studies of Millionaires (The Millionaires Next Door) on the net.
(Warren Buffett, Ronald Read, Walgreens Millionaire + about 20 more).

They all had some common traits:
1). Very frugal.
2). Very high stock allocation (90-100% stocks).
3). Mostly dividend paying stocks (they were not selling off the portfolio).
4). They were NOT using the 4% rule (Trinity study).
5). They rode the portfolio through everything (Korea, Vietnam, etc.)
6). Their portfolio was put together over a long period of time (50-60 years).
7). Compounding was the big secret.
8). They never ever sold anything (At death they gave the portfolio away to charities/children/family).
9). It was a life long hobby of building the portfolio.
10). They thought long term (40,50,60,70 years). They were not caught up in day to day movements.

Hope I gave you some good thoughts to ponder...Good luck getting yours...
I'm not sure why this is relevant. Most of the people you list are billionaires, not millionaires. As such, they have very little in common with a retiree who relies on their investments for all or most of their income. These people:
1) aren't even all retired
2) often still have or had more income than they could spend coming from just their businesses
3) are not using the 4% rule (or anything similar), because they have so much money they don't need to spend anywhere near that much
4) they "rode the portfolio" when they were younger, because most or all of their net worth was in their business not in their investments
5) massive accumulation of wealth by growing their business was their secret, compounding was just useful
6) they could afford to live off dividends and not sell stocks because they had much more money than they needed to live on
7) the way they invested (individual dividend stocks) is ok, but it's the old way, observed before low-expense mutual funds became available, and unlikely to be the best choice any more. But then they have so much money that it really doesn't matter.

Some of your points are valuable, but they are generally not relevant to this discussion.

azanon
Posts: 1541
Joined: Mon Nov 07, 2011 10:34 am
Location: Little Rock, AR
Contact:

Re: Should we be using high equity retirement portfolios? - Some cFIREsim scenarios.

Post by azanon » Thu Nov 16, 2017 9:07 am

Finridge wrote:
Thu Nov 16, 2017 2:48 am
I found this to be an interesting exercise. I am interested in comments from the forum, especially if you disagree with any of my observations. Let me know if you think I am missing something.
I would say what you're missing is that you're searching for the most optimum portfolio to use, for one of the least efficient, and arguably the most reckless, retirement withdrawal methods (reckless because it has a probability of total failure in the mathematics). In fact, the "adjust for inflation" "withdrawal method" is so bad, I'm open to the discussion as to whether that even qualifies as a retirement withdrawal method. For example, a "Guyton and Klinger's", or our very own Variable Percentage Withdrawal, using a portfolio with a healthy dose of bonds, would outright crush anything you're exploring in terms of maximizing withdrawal rates for the least amount of risk. Those two methods would be less risky, and provide higher withdrawals.

IMO, viable withdrawal methods, have a high "WER" (Withdrawal Efficiency Rate), and 100% success regardless of the stock/bond ratio. Those that agree with that statement realize that "Constant inflation-adjusted spending", is then automatically excluded because the success rate is under 100%, and the WER is generally bottom of the pack on all studies ive seen.

Greg in Idaho
Posts: 48
Joined: Tue Dec 27, 2016 12:59 pm

Re: Should we be using high equity retirement portfolios? - Some cFIREsim scenarios.

Post by Greg in Idaho » Thu Nov 16, 2017 10:18 am

azanon wrote:
Thu Nov 16, 2017 9:07 am
Finridge wrote:
Thu Nov 16, 2017 2:48 am
I found this to be an interesting exercise. I am interested in comments from the forum, especially if you disagree with any of my observations. Let me know if you think I am missing something.
I would say what you're missing is that you're searching for the most optimum portfolio to use, for one of the least efficient, and arguably the most reckless, retirement withdrawal methods (reckless because it has a probability of total failure in the mathematics). In fact, the "adjust for inflation" "withdrawal method" is so bad, I'm open to the discussion as to whether that even qualifies as a retirement withdrawal method. For example, a "Guyton and Klinger's", or our very own Variable Percentage Withdrawal, using a portfolio with a healthy dose of bonds, would outright crush anything you're exploring in terms of maximizing withdrawal rates for the least amount of risk. Those two methods would be less risky, and provide higher withdrawals.

IMO, viable withdrawal methods, have a high "WER" (Withdrawal Efficiency Rate), and 100% success regardless of the stock/bond ratio. Those that agree with that statement realize that "Constant inflation-adjusted spending", is then automatically excluded because the success rate is under 100%, and the WER is generally bottom of the pack on all studies ive seen.
It looks like you have been reading McClung...which is what I was thinking about going through this thread. Not to rain on anyone's own explorations, but there are some pretty systematic and thorough comparative analyses out there that seem to address the OP's curiosity

azanon
Posts: 1541
Joined: Mon Nov 07, 2011 10:34 am
Location: Little Rock, AR
Contact:

Re: Should we be using high equity retirement portfolios? - Some cFIREsim scenarios.

Post by azanon » Thu Nov 16, 2017 11:22 am

I don't look at it as raining on someone's explorations. I assume if someone's going to make that level of effort to find an optimized portfolio for that type of retirement withdrawal method, then I would be doing them a favor by pointing out that the withdrawal method itself is very poor and really isn't worth consideration with the possible exception of someone who places a high value on possibly having a very high end balance/large estate. But he made no mention of that also being a goal.

> Even if someone wants a constant percentage style withdrawal method, I think the only viable ones of that type recalculate the percentage annually, taking into account how the portfolio has performed. But to just blindly withdraw 4%, inflation adjusted, of the initial value then never looking again, is as i've already said; reckless. So I don't get the point of trying to optimize that style of withdrawal, is all I'm saying.

roflwaffle
Posts: 364
Joined: Mon Mar 02, 2015 10:08 pm

Re: Should we be using high equity retirement portfolios? - Some cFIREsim scenarios.

Post by roflwaffle » Thu Nov 16, 2017 12:20 pm

The only thing I can think of as missing is investor behavior. If someone can go for a long time without touching/altering their investments, then this approach suits them. If they aren't very good at anticipating their financial needs prior to retirement and/or have a decent chance of getting spooked during a downturn, then they may be better off with fewer equities and more non-equities.

User avatar
David Jay
Posts: 4093
Joined: Mon Mar 30, 2015 5:54 am
Location: Michigan

Re: Should we be using high equity retirement portfolios? - Some cFIREsim scenarios.

Post by David Jay » Thu Nov 16, 2017 12:37 pm

Finridge:

Your numbers are correct. But there are behavioral aspects to consider with high stock portfolios. There can be a substantial change in loss aversion as human capital goes to zero.

The rising equity glidepath has been discussed quite a bit recently, with moderate equity allocations early in retirement, rising over time. ERN took an extensive look at it here: https://earlyretirementnow.com/2017/09/ ... lidepaths/
Prediction is very difficult, especially about the future - Niels Bohr | To get the "risk premium", you really do have to take the risk - nisiprius

Finridge
Posts: 126
Joined: Mon May 16, 2011 7:27 pm

Re: Should we be using high equity retirement portfolios? - Some cFIREsim scenarios.

Post by Finridge » Thu Nov 16, 2017 2:05 pm

snarlyjack wrote:
Thu Nov 16, 2017 7:47 am

In my studies of Millionaires (The Millionaires Next Door) on the net.
(Warren Buffett, Ronald Read, Walgreens Millionaire + about 20 more).

They all had some common traits:
1). Very frugal.
2). Very high stock allocation (90-100% stocks).
3). Mostly dividend paying stocks (they were not selling off the portfolio).
4). They were NOT using the 4% rule (Trinity study).
5). They rode the portfolio through everything (Korea, Vietnam, etc.)
6). Their portfolio was put together over a long period of time (50-60 years).
7). Compounding was the big secret.
8). They never ever sold anything (At death they gave the portfolio away to charities/children/family).
9). It was a life long hobby of building the portfolio.
10). They thought long term (40,50,60,70 years). They were not caught up in day to day movements.
This could describe me so far, except I have a lot fewer commas in my portfolio. I've always had a high equity portfolio. I rode it through the financial crisis without looking any sleep. But I'm always being advised to increase bonds as I approach retirement, and have been resistant to that. I've been struggling with whether I am being reckless and irresponsible by not embracing bonds much more.

skjoldur
Posts: 126
Joined: Thu Sep 25, 2014 3:11 pm

Re: Should we be using high equity retirement portfolios? - Some cFIREsim scenarios.

Post by skjoldur » Thu Nov 16, 2017 2:30 pm

livesoft wrote:
Thu Nov 16, 2017 3:13 am
Since you liked running scenarios, I think you will like this series of articles:
https://earlyretirementnow.com/2016/12/ ... t-1-intro/
Livesoft, I've been following that series quite closely. I've also experimented with the spreadsheet that ERN provides and have paid close attention to his various analyses.

ERN is also a proponent of high stock allocations. Some of the analyses in his articles use 60/40 as the most conservative AA.

Are you inclined to agree?

snarlyjack
Posts: 502
Joined: Fri Aug 28, 2015 12:44 pm
Location: Montana

Re: Should we be using high equity retirement portfolios? - Some cFIREsim scenarios.

Post by snarlyjack » Thu Nov 16, 2017 2:39 pm

Finridge,

All of the millionaires that I have studied are interesting.
My favorite is Ronald Read (graduated from high school went into
the army fought in WW2 & was a mechanic) not highly educated.
He started with zero & brought it up to over 8 Million. At death he
had 6 Million in stocks & 2 Million in cd's. I think he's a pretty
smart guy. Another secret is they were very private & very few
people knew they had money at all.

https://www.cnbc.com/2015/02/09/heres-h ... rtune.html

livesoft
Posts: 57301
Joined: Thu Mar 01, 2007 8:00 pm

Re: Should we be using high equity retirement portfolios? - Some cFIREsim scenarios.

Post by livesoft » Thu Nov 16, 2017 2:40 pm

skjoldur wrote:
Thu Nov 16, 2017 2:30 pm
ERN is also a proponent of high stock allocations. Some of the analyses in his articles use 60/40 as the most conservative AA.

Are you inclined to agree?
Yes, definitely.
This signature message sponsored by sscritic: Learn to fish.

delamer
Posts: 3246
Joined: Tue Feb 08, 2011 6:13 pm

Re: Should we be using high equity retirement portfolios? - Some cFIREsim scenarios.

Post by delamer » Thu Nov 16, 2017 4:10 pm

I would not call the difference between a 96.6% survival rate ($40,000/inflation adjusted) and a 99.2% survival rate ($37,000/inflation adjusted) for a 30-year portfolio "significant."

In either case, it is virtually certain that the portfolio will survive -- assuming past patterns hold. And if past patterns don't hold, then it is all speculation anyway.

For the 40 year portfolio -- "The 80/20 portfolio had a 90.74% success rate. The 100/0 portfolio did even better, with a success rate of 91.67, and the highest median ending portfolio." Same principle as above. The big takeway should be that the failure rate is about 10% regardless of using 80% stocks or 100% stocks.

So I would not advise someone to withdraw $3,000 less from their 30-year portfolio in the hopes of increasing the portfolio survival rate. Nor would I advise someone go 100% stocks for a 40-year portfolio to increase survival likelihood. That advice would give people a false sense of security.

dbr
Posts: 24186
Joined: Sun Mar 04, 2007 9:50 am

Re: Should we be using high equity retirement portfolios? - Some cFIREsim scenarios.

Post by dbr » Thu Nov 16, 2017 4:22 pm

It has been understood for a long time (and probably brushed under the rug a lot as well) that high stock allocations in retirement are not particularly risky in the kind of markets typical at least in the US over the last century or so.

More relevant issues are that outcome depends a lot on how much people try to spend and on the luck of when they retired. The main puzzle in the whole thing is that most outcomes of "safe" rates of spending are that the investor dies with a lot of unspent money. Trying to figure out answers to these is a more productive and not very well met objective than trying to figure out optimal assets allocations, play mental accounting with buckets, devise liability matching portfolios and the like.

snowox
Posts: 132
Joined: Wed Nov 08, 2017 9:17 am

Re: Should we be using high equity retirement portfolios? - Some cFIREsim scenarios.

Post by snowox » Thu Nov 16, 2017 6:56 pm

delamer wrote:
Thu Nov 16, 2017 4:10 pm
I would not call the difference between a 96.6% survival rate ($40,000/inflation adjusted) and a 99.2% survival rate ($37,000/inflation adjusted) for a 30-year portfolio "significant."

In either case, it is virtually certain that the portfolio will survive -- assuming past patterns hold. And if past patterns don't hold, then it is all speculation anyway.

For the 40 year portfolio -- "The 80/20 portfolio had a 90.74% success rate. The 100/0 portfolio did even better, with a success rate of 91.67, and the highest median ending portfolio." Same principle as above. The big takeway should be that the failure rate is about 10% regardless of using 80% stocks or 100% stocks.

So I would not advise someone to withdraw $3,000 less from their 30-year portfolio in the hopes of increasing the portfolio survival rate. Nor would I advise someone go 100% stocks for a 40-year portfolio to increase survival likelihood. That advice would give people a false sense of security.

+1. You wrote what i was thinking! saved me some time
:sharebeer

Finridge
Posts: 126
Joined: Mon May 16, 2011 7:27 pm

Re: Should we be using high equity retirement portfolios? - Some cFIREsim scenarios.

Post by Finridge » Fri Nov 17, 2017 12:21 am

delamer wrote:
Thu Nov 16, 2017 4:10 pm
I would not call the difference between a 96.6% survival rate ($40,000/inflation adjusted) and a 99.2% survival rate ($37,000/inflation adjusted) for a 30-year portfolio "significant."
At $37K there was a risk of failure of less than one percent (.85% to be exact). At 40K, the risk of failure has increased by 300%.

Also, perhaps didn't make myself clear enough. I should have underlined this (and I have edited my post to do so): "I’m only listing the “winners” above, but here are some of my observations, based on all the outcomes." Like I'd said early, I ran the scenarios from 0/100 to 100/0. The biggest differences were seen outside high equity allocations, and particularly in the 40 year scenarios.
delamer wrote:
Thu Nov 16, 2017 4:10 pm

For the 40 year portfolio -- "The 80/20 portfolio had a 90.74% success rate. The 100/0 portfolio did even better, with a success rate of 91.67, and the highest median ending portfolio." Same principle as above. The big takeway should be that the failure rate is about 10% regardless of using 80% stocks or 100% stocks.
Yes, but 80/20 and 100/20 portfolios are all “high equity” -- much higher than what many/most financial advisors would recommend for someone in retirement. The main point here was the one that was left out--that the 50/50 portfolio only had a 73.15% success rate. I didn’t, in my original post, mention the 60/40 portfolio results, but they are only 82.41%.

And even though the 80/20 and 100/20 portfolios are close in their success rates, there is a big difference in the amounts of the median ending portfolio. 80/20 ends with $1,915,080. 100/0 ends with $3,068,053. So they are by no means equivalent. I expect most people don’t hope to “use up” their portfolio, but hope that there will be something left to leave to their surviving family and friends.
delamer wrote:
Thu Nov 16, 2017 4:10 pm

So I would not advise someone to withdraw $3,000 less from their 30-year portfolio in the hopes of increasing the portfolio survival rate. Nor would I advise someone go 100% stocks for a 40-year portfolio to increase survival likelihood. That advice would give people a false sense of security.
It’s not about withdrawing $3,000 less. It’s not the dollar amount that matters, it’s the percentage--and so the dollar amount could be a lot more or a lot less than $3,000 depending on portfolio size. Under the “4% rule,” 4% of the of the beginning portfolio is seen as the maximum “safe” (based on historic data) flat rate withdrawal amount per year if you need the portfolio to survive for 30 years. But it’s just common knowledge that, lower is better, especially since historic data is no assurance of what may happen in the future. A 3.7% rate instead of a 4% rate definitely increases survival likelihood, and when looking at the effect using historic data, the effect is measurable. If you can live comfortably on lower than 4%, why not?

On the Bogleheads personal investing forum, you can see that a lot of people in retirement maintain portfolios that are 50/50 or 60/40. For a 30 year horizon, 50/50 scores 93.33% at 4% withdrawal versus 98.3% at 3.7%.

The real problems come when you outlive your 30 year portfolio. Even if you are “planning” to die earlier, we can at least hope that there will be some major medical breakthroughs in the next 40-50 years that might increase life expectancy. If you make it to 40 years, the 50/50 portfolio only had a success rate of 73.15%.60/40 scores 82.41%--that’s better but that’s a close to 1 in 5 chances of failing.
delamer wrote:
Thu Nov 16, 2017 4:10 pm
Nor would I advise someone go 100% stocks for a 40-year portfolio to increase survival likelihood. That advice would give people a false sense of security.
The data suggests that a high equity portfolio (80/20 - 100/0) increases survival likelihood. It does not have to be a 100/0 portfolio. As I mentioned, for 40 years with the 3.7% withdrawal rate, the highest success rate is at 95/5.

Also, it’s important to note that none of these calculations, or anyone else’s calculations guarantees any result. Not anything I did, not the 4% rule--nothing does. The one thing we can be sure about is that the future will be different from the past. So all the calculations we do could prove to be too pessimistic, or too optimistic. But in planning for the future, the past and the present is all we have to go on. So I agree that it would wrong to advise anyone that a high equity portfolio guarantees the portfolio will survive. But based on the historical data (because that is all we have), we can expect that it should increase survival likelihood.

Finridge
Posts: 126
Joined: Mon May 16, 2011 7:27 pm

Re: Should we be using high equity retirement portfolios? - Some cFIREsim scenarios.

Post by Finridge » Fri Nov 17, 2017 12:33 am

dbr wrote:
Thu Nov 16, 2017 4:22 pm
The main puzzle in the whole thing is that most outcomes of "safe" rates of spending are that the investor dies with a lot of unspent money.
How is that a problem? The more I can leave for the grandkids, the better.

randomguy
Posts: 5027
Joined: Wed Sep 17, 2014 9:00 am

Re: High equity portfolios in retirement - cFIREsim scenarios.

Post by randomguy » Fri Nov 17, 2017 1:26 am

Finridge wrote:
Thu Nov 16, 2017 4:04 am
magneto wrote:
Thu Nov 16, 2017 3:12 am
Finridge wrote:
Thu Nov 16, 2017 3:00 am
magneto wrote:
Thu Nov 16, 2017 2:53 am
Have you read Frank Armstrong's 'The Informed Investor' chapt 18 ?
I have not. What is the gist?
Side-stepping 'Sequence of Return Risk' entirely through use of two buckets.
The biggest risk of retirees.

Stocks in Bucket 1.
Five or seven years of necessary income in Bucket 2 (ST Bonds and Cash).

Draw from Bucket 2 when Stocks are distressed.
Use Bucket 1 to replenish Bucket 2 and draw income when Stocks are adequately valued.
Frank observes in his on line book that the Pharoah did something similar with notable success.

How would this compare with the data ?

Has anyone run sequences using this?
It makes little to no difference. With a normal portfolio you are taking money out of bonds in down markets anyway. The only change this makes is letting the AA float. Sometimes it helps. Sometimes it doesn't. You would need to look at the exact replenishing rules and see how they would have performed. Take 2000-2007. When in that period were you buying bonds since you were down in real dollars for the whole period. Would you really want to be 100% stocks in 2008:) And then see how those same rules would have worked in the 1929 or 1966 case.

itstoomuch
Posts: 4837
Joined: Mon Dec 15, 2014 12:17 pm
Location: midValley OR

Re: Should we be using high equity retirement portfolios? - Some cFIREsim scenarios.

Post by itstoomuch » Fri Nov 17, 2017 3:07 am

Yes, there are some interesting quirks and Quacks in this calculator and in others. :oops:
Ymmg :moneybag
Rev90517; 4 Incm stream buckets: SS+pension; dfr'd GLWB VA & FI anntys, by time & $$ laddered; Discretionary; Rentals. LTCi. Own, not asset. Tax 25%. Early SS. FundRatio (FR) >1.1 67/70yo

dbr
Posts: 24186
Joined: Sun Mar 04, 2007 9:50 am

Re: Should we be using high equity retirement portfolios? - Some cFIREsim scenarios.

Post by dbr » Fri Nov 17, 2017 9:42 am

Finridge wrote:
Fri Nov 17, 2017 12:33 am
dbr wrote:
Thu Nov 16, 2017 4:22 pm
The main puzzle in the whole thing is that most outcomes of "safe" rates of spending are that the investor dies with a lot of unspent money.
How is that a problem? The more I can leave for the grandkids, the better.
Because it means a person may have worked longer than they wanted, spent less than they would have liked while they were saving, and lived at a lower standard of living tghan necessary while they were retired. If if means that a person worked to a certain age no matter what, spent no more than they did for willy nilly reasons, and ended up with more money than they wanted in retirement, and leaving money to others is an objective for them, then it isn't a problem. It is a question of what a person wants to do with their wealth, if they have any. The massive discussion of SWR on this forum would suggest there are a lot of posters who really want to spend all they have or are seriously worried they may spend all they have too soon. Otherwise you are right that the issue is kind of dumb.

Jeff Albertson
Posts: 412
Joined: Sat Apr 06, 2013 7:11 pm
Location: Springfield

Re: Should we be using high equity retirement portfolios? - Some cFIREsim scenarios.

Post by Jeff Albertson » Fri Nov 17, 2017 12:24 pm

"I believe that economists put decimal points in their forecasts to show they have a sense of humor." - William Gilmore Simms
We're talking history here, not science. Future returns are unlikely to look like those from the past.

delamer
Posts: 3246
Joined: Tue Feb 08, 2011 6:13 pm

Re: Should we be using high equity retirement portfolios? - Some cFIREsim scenarios.

Post by delamer » Fri Nov 17, 2017 12:25 pm

Finridge wrote:
Fri Nov 17, 2017 12:21 am
delamer wrote:
Thu Nov 16, 2017 4:10 pm
I would not call the difference between a 96.6% survival rate ($40,000/inflation adjusted) and a 99.2% survival rate ($37,000/inflation adjusted) for a 30-year portfolio "significant."
At $37K there was a risk of failure of less than one percent (.85% to be exact). At 40K, the risk of failure has increased by 300%.

Also, perhaps didn't make myself clear enough. I should have underlined this (and I have edited my post to do so): "I’m only listing the “winners” above, but here are some of my observations, based on all the outcomes." Like I'd said early, I ran the scenarios from 0/100 to 100/0. The biggest differences were seen outside high equity allocations, and particularly in the 40 year scenarios.
delamer wrote:
Thu Nov 16, 2017 4:10 pm

For the 40 year portfolio -- "The 80/20 portfolio had a 90.74% success rate. The 100/0 portfolio did even better, with a success rate of 91.67, and the highest median ending portfolio." Same principle as above. The big takeway should be that the failure rate is about 10% regardless of using 80% stocks or 100% stocks.
Yes, but 80/20 and 100/20 portfolios are all “high equity” -- much higher than what many/most financial advisors would recommend for someone in retirement. The main point here was the one that was left out--that the 50/50 portfolio only had a 73.15% success rate. I didn’t, in my original post, mention the 60/40 portfolio results, but they are only 82.41%.

And even though the 80/20 and 100/20 portfolios are close in their success rates, there is a big difference in the amounts of the median ending portfolio. 80/20 ends with $1,915,080. 100/0 ends with $3,068,053. So they are by no means equivalent. I expect most people don’t hope to “use up” their portfolio, but hope that there will be something left to leave to their surviving family and friends.
delamer wrote:
Thu Nov 16, 2017 4:10 pm

So I would not advise someone to withdraw $3,000 less from their 30-year portfolio in the hopes of increasing the portfolio survival rate. Nor would I advise someone go 100% stocks for a 40-year portfolio to increase survival likelihood. That advice would give people a false sense of security.
It’s not about withdrawing $3,000 less. It’s not the dollar amount that matters, it’s the percentage--and so the dollar amount could be a lot more or a lot less than $3,000 depending on portfolio size. Under the “4% rule,” 4% of the of the beginning portfolio is seen as the maximum “safe” (based on historic data) flat rate withdrawal amount per year if you need the portfolio to survive for 30 years. But it’s just common knowledge that, lower is better, especially since historic data is no assurance of what may happen in the future. A 3.7% rate instead of a 4% rate definitely increases survival likelihood, and when looking at the effect using historic data, the effect is measurable. If you can live comfortably on lower than 4%, why not?

On the Bogleheads personal investing forum, you can see that a lot of people in retirement maintain portfolios that are 50/50 or 60/40. For a 30 year horizon, 50/50 scores 93.33% at 4% withdrawal versus 98.3% at 3.7%.

The real problems come when you outlive your 30 year portfolio. Even if you are “planning” to die earlier, we can at least hope that there will be some major medical breakthroughs in the next 40-50 years that might increase life expectancy. If you make it to 40 years, the 50/50 portfolio only had a success rate of 73.15%.60/40 scores 82.41%--that’s better but that’s a close to 1 in 5 chances of failing.
delamer wrote:
Thu Nov 16, 2017 4:10 pm
Nor would I advise someone go 100% stocks for a 40-year portfolio to increase survival likelihood. That advice would give people a false sense of security.
The data suggests that a high equity portfolio (80/20 - 100/0) increases survival likelihood. It does not have to be a 100/0 portfolio. As I mentioned, for 40 years with the 3.7% withdrawal rate, the highest success rate is at 95/5.

Also, it’s important to note that none of these calculations, or anyone else’s calculations guarantees any result. Not anything I did, not the 4% rule--nothing does. The one thing we can be sure about is that the future will be different from the past. So all the calculations we do could prove to be too pessimistic, or too optimistic. But in planning for the future, the past and the present is all we have to go on. So I agree that it would wrong to advise anyone that a high equity portfolio guarantees the portfolio will survive. But based on the historical data (because that is all we have), we can expect that it should increase survival likelihood.
I disagree with some of your interpretations.

Saying that one risk is 300% higher than another risk of .85% is just math. The correct interpretation is that in either case the risk of failure is virtually nonexistent -- again, if past patterns hold.

There is no difference between a 90.7% survival and a 91.7% survival in this context, as a practical matter, for the 40-year. If your point was to show the difference between those rates and the 73.2% rate then we are in agreement. I would have said "there's about a 90% survival rate at high levels of stocks, compared to a 73% survival rate at 50/50." The amount of money left in the different portfolios is a separate issue, if your main point was the efficacy of the higher stock allocation for survival.
But it’s just common knowledge that, lower is better, especially since historic data is no assurance of what may happen in the future. A 3.7% rate instead of a 4% rate definitely increases survival likelihood, and when looking at the effect using historic data, the effect is measurable. If you can live comfortably on lower than 4%, why not?
You say the difference is measurable, I say that your results show that in the long-run the difference between a 4.0% withdrawal rate and a 3.7% withdrawal is not significant in terms of the portfolio surviving. I can flip it the other way -- if you'll be able to vacation in Florida each winter with the $3,000 difference (your choice to use the $3,000 example, not mine) then go ahead and do so without worrying about spending down your assets (based on a 80/20, 30-year portfolio).

Also, while the difference is 0.3 percentage points between the two rates, the percent decrease is 7.5%. So by advocating for the 3.7% rate, you are talking about an income decrease of almost 8 percent (assuming no other income sources).

Based on the example that you cited above, the 100/0 portfolio does have much higher ending balance than the 80/20. So if someone's goal was to provide the largest inheritance, then the 100/0 is the way to go. But you didn't include that information in your original post.

One thing to consider -- if you'd written your original post using no decimals for the percentages, would the data look different to you?

Also, let's say that my doctor wants me to take a medication that will cut my risk of dying prematurely by 50%. Let's also say that the drug costs $500/month. I don't like the price, but it is my health after all.

But then my doctor tells me that my current risk is 4% and it will drop to 2% -- the 50% decline above. No way am I paying $500/month to prevent something that is already very unlikely to happen.

To me that is no different than the 99% and 97% survival rates for a portfolio. The difference does not matter, so do what makes you comfortable or meets other goals.

Finridge
Posts: 126
Joined: Mon May 16, 2011 7:27 pm

Re: Should we be using high equity retirement portfolios? - Some cFIREsim scenarios.

Post by Finridge » Fri Nov 17, 2017 1:42 pm

delamer wrote:
Fri Nov 17, 2017 12:25 pm

I disagree with some of your interpretations.
...
There is no difference between a 90.7% survival and a 91.7% survival in this context, as a practical matter, for the 40-year.
Since you are implying that I'm saying there is a big difference between 90.7% and 91.7%. I think it's safe to say that you don't understand my interpretations on this. This is the second time you are raising this, and all I can do is repeat what I said when I responded before, " The main point here was the one that was left out [that you, left out]--that the 50/50 portfolio only had a 73.15% success rate." Also, as I already mentioned, the big difference when looking at the 90.7% and 91.7% outcomes isn't in the percentage, but rather the median ending portfolio.

And on some of the other points, it's clear that you are less risk-averse than me. That's fine.

Jeff Albertson
Posts: 412
Joined: Sat Apr 06, 2013 7:11 pm
Location: Springfield

Re: Should we be using high equity retirement portfolios? - Some cFIREsim scenarios.

Post by Jeff Albertson » Fri Nov 17, 2017 2:51 pm

Read William Bernstein's five part series on the "Retirement Calculator from Hell."
Wade Pfau provides links and a summary here:
https://www.mcleanam.com/william-bernst ... from-hell/

from part three:
... Consider the implications of the above 97% success rate at a withdrawal of $2,500 per month ($30,000 per year). For this to be a useful estimate of your true chance of not running out of money, the "success rate" of your ambient political, economic, and military environment must be at least 97% over this 40-year period. Do you think that this is likely? Only if you are an historical illiterate (which, I’m afraid, subsumes many finance academics).
...
Back-of-the-envelope, that’s about an 80% survival rate over the next 40 years. Thus, any estimate of long-term financial success greater than about 80% is meaningless.
...
But history teaches us that depriving ourselves to boost our 40-year success probability much beyond 80% is a fool’s errand ...

NPT
Posts: 21
Joined: Sat Jul 01, 2017 12:25 pm

Re: Should we be using high equity retirement portfolios? - Some cFIREsim scenarios.

Post by NPT » Fri Nov 17, 2017 3:10 pm

When talking about safe withdrawal rates and about the risk of running out of money before you die, I think it needs to be acknowledged that different people can have substantially different goals and preferences, and consequently a single correct approach cannot possibly exist, not even in theory.

Estimates about safe withdrawal rates try to balance the subjective utility of increasing the likelihood of not running out of money against the subjective utility of spending more (or saving less). People's interpretation and estimates of risk can vary greatly. Our propensity to spend varies perhaps even more. Thus, safe withdrawal rates are at least as much a function of one's desire for safety versus spending, as they are a function of how financial assets behave.

For example, beyond a certain point that I consider my basic level of comfort, I get very little incremental satisfaction from spending more. Instead, saving the excess contributes much more to my subjective well-being than spending would, because it helps better insure myself against the unexpected, be it bad market conditions or personal emergencies (which are usually ignored in discussions about SWR, but in my opinion should not be). I hope to die rich, I will consider that a huge success (even if ignoring the inheritance left behind): I will have maintained both a satisfactory and comfortable standard of living and also a very generous safety margin providing peace of mind.
(The relative preference for safety in this sense is completely unrelated to what one thinks about the risks of equities versus fixed income. I happen to have a higher allocation to stocks than what the majority of people would want.)

A statement like "the 4% rule succeeded even in the worst environment" (assuming for a moment that we accept it as technically accurate) does not mean to me what it means to many people, who conclude that the risk is almost nonexistent. To me it means that the 4% rule almost failed, and even if the future is quite similar to the past, the worst case in the future could very easily be at least slightly worse than it was in the past, therefore it makes sense to treat the 4% rule as a generous and optimistic upper limit.

Not everyone will agree but the disagreement is often caused by genuine differences in subjective preferences. Does spending more or having a bigger safety margin make one happier in a particular set of circumstances, and by how much? This disagreement cannot, need not and should not be resolved. Instead, people with significantly different preferences need different advice even if they fully agree on the expected behavior of financial assets.
:happy

itstoomuch
Posts: 4837
Joined: Mon Dec 15, 2014 12:17 pm
Location: midValley OR

Re: Should we be using high equity retirement portfolios? - Some cFIREsim scenarios.

Post by itstoomuch » Fri Nov 17, 2017 4:12 pm

OP.
In 2008, I was pondering SSR while caring for my Mother, 24/7, and after my older Bro's (professional economist, risk management, big bank) visitation. I discovered more detailed algorithmic retirement and longevity calculators over the relatively simple MFs' calculators.
The detailed calculators like, cfiresum, Otar, ask more and different questions that I simply could not fill in the entry blanks without knowing more about alternative retirement programs such as pension, annuities, bonds, stocks, RE.
Ymmv
Rev90517; 4 Incm stream buckets: SS+pension; dfr'd GLWB VA & FI anntys, by time & $$ laddered; Discretionary; Rentals. LTCi. Own, not asset. Tax 25%. Early SS. FundRatio (FR) >1.1 67/70yo

RudyS
Posts: 838
Joined: Tue Oct 27, 2015 10:11 am

Re: Should we be using high equity retirement portfolios? - Some cFIREsim scenarios.

Post by RudyS » Fri Nov 17, 2017 4:46 pm

Simple models don't tell all. At 76/81, our AA is 65/35 as it has been for years. Some suggest this is pretty risky. DW and I have discussed the BH philosophy, and the concept of asset allocation. She's familiar enough with our finances to carry on if I go first, but otherwise doesn't spend time on our finances. But DW says, it all depends on what other income you have. She's 100% right as mentioned in the above post. SS and pension help a lot. BTW, we are happy if fortune shines on us and we leave a legacy to kids/grandkids.

Finridge
Posts: 126
Joined: Mon May 16, 2011 7:27 pm

Re: Should we be using high equity retirement portfolios? - Some cFIREsim scenarios.

Post by Finridge » Fri Nov 17, 2017 4:53 pm

itstoomuch wrote:
Fri Nov 17, 2017 4:12 pm
OP.
In 2008, I was pondering SSR while caring for my Mother, 24/7, and after my older Bro's (professional economist, risk management, big bank) visitation. I discovered more detailed algorithmic retirement and longevity calculators over the relatively simple MFs' calculators.
The detailed calculators like, cfiresum, Otar, ask more and different questions that I simply could not fill in the entry blanks without knowing more about alternative retirement programs such as pension, annuities, bonds, stocks, RE.
Ymmv
I just googled up Otar. I notice that it is software that you have to purchase. Do you know of a any good free web calculators in addition to cFIREsim?

dbr
Posts: 24186
Joined: Sun Mar 04, 2007 9:50 am

Re: Should we be using high equity retirement portfolios? - Some cFIREsim scenarios.

Post by dbr » Fri Nov 17, 2017 4:56 pm

Finridge wrote:
Fri Nov 17, 2017 4:53 pm
itstoomuch wrote:
Fri Nov 17, 2017 4:12 pm
OP.
In 2008, I was pondering SSR while caring for my Mother, 24/7, and after my older Bro's (professional economist, risk management, big bank) visitation. I discovered more detailed algorithmic retirement and longevity calculators over the relatively simple MFs' calculators.
The detailed calculators like, cfiresum, Otar, ask more and different questions that I simply could not fill in the entry blanks without knowing more about alternative retirement programs such as pension, annuities, bonds, stocks, RE.
Ymmv
I just googled up Otar. I notice that it is software that you have to purchase. Do you know of a any good free web calculators in addition to cFIREsim?
There are 38 of them listed here, not all of them free. https://www.bogleheads.org/wiki/Retirem ... d_spending Strangely cFIREsim is not in that list.

munemaker
Posts: 2229
Joined: Sat Jan 18, 2014 6:14 pm

Re: Should we be using high equity retirement portfolios? - Some cFIREsim scenarios.

Post by munemaker » Fri Nov 17, 2017 5:10 pm

Ethelred wrote:
Thu Nov 16, 2017 8:49 am
snarlyjack wrote:
Thu Nov 16, 2017 7:47 am
Finridge,

In my studies of Millionaires (The Millionaires Next Door) on the net.
(Warren Buffett, Ronald Read, Walgreens Millionaire + about 20 more).

They all had some common traits:
1). Very frugal.
2). Very high stock allocation (90-100% stocks).
3). Mostly dividend paying stocks (they were not selling off the portfolio).
4). They were NOT using the 4% rule (Trinity study).
5). They rode the portfolio through everything (Korea, Vietnam, etc.)
6). Their portfolio was put together over a long period of time (50-60 years).
7). Compounding was the big secret.
8). They never ever sold anything (At death they gave the portfolio away to charities/children/family).
9). It was a life long hobby of building the portfolio.
10). They thought long term (40,50,60,70 years). They were not caught up in day to day movements.

Hope I gave you some good thoughts to ponder...Good luck getting yours...
I'm not sure why this is relevant. Most of the people you list are billionaires, not millionaires. As such, they have very little in common with a retiree who relies on their investments for all or most of their income. These people:
1) aren't even all retired
2) often still have or had more income than they could spend coming from just their businesses
3) are not using the 4% rule (or anything similar), because they have so much money they don't need to spend anywhere near that much
4) they "rode the portfolio" when they were younger, because most or all of their net worth was in their business not in their investments
5) massive accumulation of wealth by growing their business was their secret, compounding was just useful
6) they could afford to live off dividends and not sell stocks because they had much more money than they needed to live on
7) the way they invested (individual dividend stocks) is ok, but it's the old way, observed before low-expense mutual funds became available, and unlikely to be the best choice any more. But then they have so much money that it really doesn't matter.

Some of your points are valuable, but they are generally not relevant to this discussion.
SnarlyJack: In your study, you should distinguish between billionaires and millionaires. Someone who has a few million to live off of for the rest of their life is probably not going to have a "very high stock allocation (90-100% stocks)." I don't think Warren Buffet is representative of the concept of millionaire next door. You need to fine tune your studies a little more before drawing these conclusions.

Finridge
Posts: 126
Joined: Mon May 16, 2011 7:27 pm

Re: Should we be using high equity retirement portfolios? - Some cFIREsim scenarios.

Post by Finridge » Fri Nov 17, 2017 6:16 pm

munemaker wrote:
Fri Nov 17, 2017 5:10 pm
Someone who has a few million to live off of for the rest of their life is probably not going to have a "very high stock allocation (90-100% stocks)."
Well, now this goes to the very heart of inquiry: asset allocation and the pros/cons of high equity allocation. Why wouldn't someone who has a few million to live off for the rest of their life have a 90/10, or even 100/0 allocation?

Well, sure because some FA tells them to buy their age in bonds. Because--so the FA says--this reduces volatility, making the portfolio safer. They point to historic data showing that a high equity allocation is more volatile. This is true, but when use the exact same data to look at portfolio survival rates, high equity portfolios outperform other portfolios.

I know the big fear of FA's is that we can't psychologically deal with the volatility of a high equity portfolio. We'll sell all the equities at the bottom of a dip, they fear. But for people who won't sell on a dip, why wouldn't they want to use a high equity allocation?

Personally, I refer to any portfolio with 80% or more in equity has "high equity." My own portfolio is about 95% equities. It used to be 100% equity. But then a fee-only FA recommended 80/20 and I was upping my bond allocation. At one point I made it all the way to 85/15. But then I did some backsliding. The equity portion expanded, but also my new purchases were all of equity. That brought me to where I am now.

For the past several weeks I've been spending time on these forums, and also hitting the books. The purpose was to try to develop some backbone to increase my bond allocation. But I'm not seeing anything that makes me want to increase my bond allocation, except maybe to 10%. But I'm not seeing using even a 90/10 portfolio as being a significant improvement on 100/0?

So, back to my question: Why wouldn't someone who has a few million to live off for the rest of their life have a 90/10, or even 100/0 allocation?

snarlyjack
Posts: 502
Joined: Fri Aug 28, 2015 12:44 pm
Location: Montana

Re: Should we be using high equity retirement portfolios? - Some cFIREsim scenarios.

Post by snarlyjack » Fri Nov 17, 2017 7:09 pm

Munemaker,

Sorry, in my studies of millionaires (The Millionaire Next Door types) are
all millionaires except Warren Buffett who is a Billionaire.

None of their money was inherited money. Warren Buffett basically
started with zero & built it up through the stock market.

They basically were stock market investors and invested all of their
life. They used a frugal lifestyle & compounding to achieve their wealth.
They were not stock market traders but were long term buy & hold
investors. They did their best when they made their buy's & never sold.

User avatar
Ethelred
Posts: 270
Joined: Sun Oct 30, 2016 9:38 am

Re: Should we be using high equity retirement portfolios? - Some cFIREsim scenarios.

Post by Ethelred » Fri Nov 17, 2017 7:59 pm

Finridge wrote:
Fri Nov 17, 2017 6:16 pm
So, back to my question: Why wouldn't someone who has a few million to live off for the rest of their life have a 90/10, or even 100/0 allocation?
Honestly, I agree with you, at least to some extent, and so do quite a few financial bloggers who've studied the forecasts. This is especially true in the early retirement community, because their portfolio has to last for considerably longer. Have you read through this series of posts from earlyretirementnow.com that others provided earlier in the thread? Equity percentage is only one of many things covered. And I don't agree with everything he says, but I suspect you'll find it fascinating.
https://earlyretirementnow.com/2016/12/ ... t-1-intro/

High-stock allocations are generally suitable for longer timelines. This is commonly interpreted to mean that people a long way from retirement should have a higher stock percentage. But even a person at normal retirement age could easily need their money to last 20 years or more.

snarlyjack
Posts: 502
Joined: Fri Aug 28, 2015 12:44 pm
Location: Montana

Re: Should we be using high equity retirement portfolios? - Some cFIREsim scenarios.

Post by snarlyjack » Fri Nov 17, 2017 8:46 pm

For all of us Millennials (1980 - 2000).

Researchers are suggesting that we could have a longer life span
that will effect everything... From retirement spending to social security to
retirement date. I' am sure the government will be passing new retirement
laws.

I' am 23 years old... If you take my mortality age 100 - current age 23 = 77
more years to age 100. And to be honest that might not be long enough
considering all the medical advances. It could be age 110 or 120. I could
be looking at a life span of another 90 years (age 113) is very possible.

How do you plan for that? In all of my studies you must invest as much as
possible, for as long as possible, as efficiently as possible. In my mind that
means Vanguard funds with low ER's. Long term buy & hold (years & decades).
That also means a high AA like 90 or 100% stocks. You just have to learn to
deal with the volatility (toughen up cupcake). That's the world I see and I don't
think the world is going to end on our watch so plan & invest we must.
Jack Bogle is correct about... (just about everything). He might be wrong
about international, tho...

itstoomuch
Posts: 4837
Joined: Mon Dec 15, 2014 12:17 pm
Location: midValley OR

Re: Should we be using high equity retirement portfolios? - Some cFIREsim scenarios.

Post by itstoomuch » Fri Nov 17, 2017 9:15 pm

RudyS wrote:
Fri Nov 17, 2017 4:46 pm
Simple models don't tell all. At 76/81, our AA is 65/35 as it has been for years. Some suggest this is pretty risky. DW and I have discussed the BH philosophy, and the concept of asset allocation. She's familiar enough with our finances to carry on if I go first, but otherwise doesn't spend time on our finances. But DW says, it all depends on what other income you have. She's 100% right as mentioned in the above post. SS and pension help a lot. BTW, we are happy if fortune shines on us and we leave a legacy to kids/grandkids.
I totally agree. :moneybag :greedy :moneybag :sharebeer
Rev90517; 4 Incm stream buckets: SS+pension; dfr'd GLWB VA & FI anntys, by time & $$ laddered; Discretionary; Rentals. LTCi. Own, not asset. Tax 25%. Early SS. FundRatio (FR) >1.1 67/70yo

munemaker
Posts: 2229
Joined: Sat Jan 18, 2014 6:14 pm

Re: Should we be using high equity retirement portfolios? - Some cFIREsim scenarios.

Post by munemaker » Sat Nov 18, 2017 12:39 pm

I don't think you understand asset allocation. You should read the book "All About Asset Allocation" by Richard Ferri (borrow from the library). Asset allocation is not just some financial adviser telling you that you should have part of your portfolio in bonds. I generally avoid financial advisers, but the few I have talked with seem to push "guaranteed income" like annuities rather than controlling your risk through asset allocation.

If one has a few million and a pension, annuities or other guaranteed income to cover your living expenses, then no big deal. Put all your assets in the stock market.

If, however, you are living off of that money, what you don't want to do is to have to sell stocks to pay your daily living expenses when the value of those equities is down 50% or more. Personally I don't want to be watching my expenses at age 80 because the stock market is down by 50 or 60%.

User avatar
nedsaid
Posts: 8851
Joined: Fri Nov 23, 2012 12:33 pm

Re: Should we be using high equity retirement portfolios? - Some cFIREsim scenarios.

Post by nedsaid » Sat Nov 18, 2017 12:50 pm

I don't know. From my experience and having known a lot of "old" people and becoming one myself, it just doesn't seem practical that people are going to maintain 100% and 90% stock allocations throughout retirement. It seems that most people I know get more risk averse as they get older.
A fool and his money are good for business.

jmk
Posts: 289
Joined: Tue Nov 01, 2011 7:48 pm

Re: Should we be using high equity retirement portfolios? - Some cFIREsim scenarios.

Post by jmk » Sat Nov 18, 2017 2:29 pm

We have been conditioned to believe that when approaching and entering retirement, a significant portion of our portfolio should be in bonds. But at least in these scenarios, and within the universe of the historical data used by cFIREsim, the “safety of bonds” seems illusory for an investor that has the discipline to “stay the course” through thick and thin with a high equity portfolio
.

You’re ignoring the risk (1) the future might not resemble the past with black swans and secular trends (2) the firec modeling itself might not be correct. These factors might or might not matter depending on how important your overall confidence needs to be.

Most of us with 50% bonds don’t challenge the math that within assumption that the next forty years will resemble the past 100 years 100% offers better survivorship. But in broader terms of all the risk, can one afford to lose if 1 and 2 kick in?

Which is why ones need and willingness to take risk is relevant. If it weren’t for 1 and 2 above,everyone would be 100% stocks. But some of us have to sacrifice expected return because we can’t risk the model itself or history being different. So we opt for the safety of bonds for at least our core liabilities.
Last edited by jmk on Sat Nov 18, 2017 2:39 pm, edited 1 time in total.

JW-Retired
Posts: 6540
Joined: Sun Dec 16, 2007 12:25 pm

Re: Should we be using high equity retirement portfolios? - Some cFIREsim scenarios.

Post by JW-Retired » Sat Nov 18, 2017 2:33 pm

Finridge wrote:
Fri Nov 17, 2017 6:16 pm
But for people who won't sell on a dip, why wouldn't they want to use a high equity allocation?
..................................
So, back to my question: Why wouldn't someone who has a few million to live off for the rest of their life have a 90/10, or even 100/0 allocation?
To answer for our case:

Never had any thought of selling on a dip and we have gone through all of them since 1970-something. Also, it's turned out that DW and I have saved plenty more than what we can imagine we will ever need for living expenses. Nevertheless, we are still at 60/40 anyway.

Our reasoning is (1) we would like to leave a useful amount to the kids but a fortune might even be counterproductive, (2), we can easily imagine there might be much much poorer equity performance for the rest of our lives than worst case Monte Carlo model projections based on the last 100 years of data. Wild things could happen!

Plus (3), I read "The Great Depression: A Diary" by Benjamin Roth.
JW
Retired at Last

itstoomuch
Posts: 4837
Joined: Mon Dec 15, 2014 12:17 pm
Location: midValley OR

Re: Should we be using high equity retirement portfolios? - Some cFIREsim scenarios.

Post by itstoomuch » Sat Nov 18, 2017 2:50 pm

NPT wrote:
Fri Nov 17, 2017 3:10 pm
When talking about safe withdrawal rates and about the risk of running out of money before you die, I think it needs to be acknowledged that different people can have substantially different goals and preferences, and consequently a single correct approach cannot possibly exist, not even in theory.

Estimates about safe withdrawal rates try to balance the subjective utility of increasing the likelihood of not running out of money against the subjective utility of spending more (or saving less). People's interpretation and estimates of risk can vary greatly. Our propensity to spend varies perhaps even more. Thus, safe withdrawal rates are at least as much a function of one's desire for safety versus spending, as they are a function of how financial assets behave.

For example, beyond a certain point that I consider my basic level of comfort, I get very little incremental satisfaction from spending more. Instead, saving the excess contributes much more to my subjective well-being than spending would, because it helps better insure myself against the unexpected, be it bad market conditions or personal emergencies (which are usually ignored in discussions about SWR, but in my opinion should not be). I hope to die rich, I will consider that a huge success (even if ignoring the inheritance left behind): I will have maintained both a satisfactory and comfortable standard of living and also a very generous safety margin providing peace of mind.
(The relative preference for safety in this sense is completely unrelated to what one thinks about the risks of equities versus fixed income. I happen to have a higher allocation to stocks than what the majority of people would want.)

A statement like "the 4% rule succeeded even in the worst environment" (assuming for a moment that we accept it as technically accurate) does not mean to me what it means to many people, who conclude that the risk is almost nonexistent. To me it means that the 4% rule almost failed, and even if the future is quite similar to the past, the worst case in the future could very easily be at least slightly worse than it was in the past, therefore it makes sense to treat the 4% rule as a generous and optimistic upper limit.

Not everyone will agree but the disagreement is often caused by genuine differences in subjective preferences. Does spending more or having a bigger safety margin make one happier in a particular set of circumstances, and by how much? This disagreement cannot, need not and should not be resolved. Instead, people with significantly different preferences need different advice even if they fully agree on the expected behavior of financial assets.
:happy
I like this :thumbsup :thumbsup :thumbsup
Rev90517; 4 Incm stream buckets: SS+pension; dfr'd GLWB VA & FI anntys, by time & $$ laddered; Discretionary; Rentals. LTCi. Own, not asset. Tax 25%. Early SS. FundRatio (FR) >1.1 67/70yo

dbr
Posts: 24186
Joined: Sun Mar 04, 2007 9:50 am

Re: Should we be using high equity retirement portfolios? - Some cFIREsim scenarios.

Post by dbr » Sun Nov 19, 2017 10:04 am

NPT wrote:
Fri Nov 17, 2017 3:10 pm
When talking about safe withdrawal rates and about the risk of running out of money before you die, I think it needs to be acknowledged that different people can have substantially different goals and preferences, and consequently a single correct approach cannot possibly exist, not even in theory.

Estimates about safe withdrawal rates try to balance the subjective utility of increasing the likelihood of not running out of money against the subjective utility of spending more (or saving less). People's interpretation and estimates of risk can vary greatly. Our propensity to spend varies perhaps even more. Thus, safe withdrawal rates are at least as much a function of one's desire for safety versus spending, as they are a function of how financial assets behave.

For example, beyond a certain point that I consider my basic level of comfort, I get very little incremental satisfaction from spending more. Instead, saving the excess contributes much more to my subjective well-being than spending would, because it helps better insure myself against the unexpected, be it bad market conditions or personal emergencies (which are usually ignored in discussions about SWR, but in my opinion should not be). I hope to die rich, I will consider that a huge success (even if ignoring the inheritance left behind): I will have maintained both a satisfactory and comfortable standard of living and also a very generous safety margin providing peace of mind.
(The relative preference for safety in this sense is completely unrelated to what one thinks about the risks of equities versus fixed income. I happen to have a higher allocation to stocks than what the majority of people would want.)

A statement like "the 4% rule succeeded even in the worst environment" (assuming for a moment that we accept it as technically accurate) does not mean to me what it means to many people, who conclude that the risk is almost nonexistent. To me it means that the 4% rule almost failed, and even if the future is quite similar to the past, the worst case in the future could very easily be at least slightly worse than it was in the past, therefore it makes sense to treat the 4% rule as a generous and optimistic upper limit.

Not everyone will agree but the disagreement is often caused by genuine differences in subjective preferences. Does spending more or having a bigger safety margin make one happier in a particular set of circumstances, and by how much? This disagreement cannot, need not and should not be resolved. Instead, people with significantly different preferences need different advice even if they fully agree on the expected behavior of financial assets.
:happy
This is all so true. But you can talk yourself blue in the face trying to remind people that they have to understand their own judgement and preferences rather than ask someone else what to do and end up following some formula. If someone starts out with "I want to be safe." then the first question should be "What does that mean to you?"

There is still considerable discussion to be had regarding what more or less the consequences of what decisions will turn out to be.

garlandwhizzer
Posts: 1671
Joined: Fri Aug 06, 2010 3:42 pm

Re: Should we be using high equity retirement portfolios? - Some cFIREsim scenarios.

Post by garlandwhizzer » Sun Nov 19, 2017 8:04 pm

nedsaid wrote:
I don't know. From my experience and having known a lot of "old" people and becoming one myself, it just doesn't seem practical that people are going to maintain 100% and 90% stock allocations throughout retirement. It seems that most people I know get more risk averse as they get older.
1+

I am not becoming old, I am already there (70). Very high equity allocations (75% - 100%) have lost their appeal for me. Most of us get less aggressive/more risk averse as aging reminds us of our vulnerability in terms of lifespan, health status, and asset base. I believe this is completely natural. There is also the point that Bernstein and others have made: when you
have won the game, why keep playing? There are potential reasons to keep playing but the choice is optional.

I have always been the opposite of risk averse. For the first 15 years of my investing career I was 100% equity, often high beta equity, with the goal of maximal capital appreciation. Having grown older, and after the ravages of 2 severe bear markets in the last 17 years, bonds look better to me all the time. I'm still mostly equities, slightly more than 60%, but my investment goal shifts slowly and steadily every year now from capital appreciation to capital preservation. Although the future expected returns of bonds are expected to lag those of stocks, stocks are much more volatile and hence pose greater risk of inducing behavioral errors, selling at exactly the wrong time. Sustaining huge losses in a bear market is more difficult to tolerate emotional when you're retired and have no labor capital remaining to make up for losses. Very high equity allocations during retirement may work well on computer programs, but computers don't have emotions to deal with. Lots of high quality bonds and cash is a good treatment for investor anxiety/panic during a severe market crash. It's hard to put a dollar value on peace of mind, but clearly it's worth something, a fact that computer programs do not recognize.

Garland Whizzer

Post Reply