Year 2000 retirees using the '4% rule' - Where are they now?

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Hyperborea
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Re: Year 2000 retirees using the '4% rule' - Where are they now?

Post by Hyperborea » Sun Jan 14, 2018 1:20 pm

grayfox wrote:
Thu Jan 11, 2018 5:18 pm
Hyperborea wrote:
Thu Jan 11, 2018 3:35 pm

I'm reading through the thread and only part way so this may have already been answered. In the late 90's I was reading the old Motley Fool forum started by intercst (one of the elder statesman of the "modern" early retirement "movement"). That was probably the central FIRE forum at the time before lots of bad things went down there. The use of S&P in the calculators was mostly because that was what data was available.

Most people then were planning on broader diversification than just an S&P 500 fund. It may not have been a total world allocation but certainly in the 20%+ ex-US allocation. Personally I was already in the world market weight camp and my accumulation portfolio reflected that. There were others in that global camp too. There was also a fair amount of discussion and probably allocation amongst others in small and value slicing too.
Is this the message board you were talking about?

http://boards.fool.com/retire-early-cam ... e&days=365

The first post is Greetings, Fool! dated 5/5/1999 12:31PM from FoolTools. It looks like a form post when a new forum is opened.
The first real post is Greetings - The Retire Early Home Page from intercst dated 5/5/1999 7:18 PM.
That's the place. Intercst and that board introduced me to the idea of retiring early. It's interesting that it's visible now since at one point they had sequestered it all behind a paywall. Somewhere in the early 2000's it kind of fell apart and the community splintered off to about a half dozen different boards only of which maybe 2 are really still active.
"Plans are worthless, but planning is everything." - Dwight D. Eisenhower

wrongfunds
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Re: Year 2000 retirees using the '4% rule' - Where are they now?

Post by wrongfunds » Mon Jan 15, 2018 10:20 am

It is like a cruise liner with one lifeboat for each person on board. We are guaranteed everyone has a life boat, but we are also guaranteed a lot of leftover unused lifeboats in most scenarios.
Can somebody explain this comparison? What is meant by "leftover unused lifeboats"? Or are you suggesting there are "too many lifeboats" on a cruise liner? This might have been a throw away comparison made by the author but at least for me, it just seemed to have added more confusion to the discussion than any clarity.

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Re: Year 2000 retirees using the '4% rule' - Where are they now?

Post by dbr » Mon Jan 15, 2018 10:29 am

wrongfunds wrote:
Mon Jan 15, 2018 10:20 am
It is like a cruise liner with one lifeboat for each person on board. We are guaranteed everyone has a life boat, but we are also guaranteed a lot of leftover unused lifeboats in most scenarios.
Can somebody explain this comparison? What is meant by "leftover unused lifeboats"? Or are you suggesting there are "too many lifeboats" on a cruise liner? This might have been a throw away comparison made by the author but at least for me, it just seemed to have added more confusion to the discussion than any clarity.
If you fund retirement by holding a portfolio of stocks and bonds and stay at the 4% limit, then most of the outcomes will leave you dying with a very large amount of money, the unused lifeboats. The worst outcome will be that you must run out of money at the limit of the planned timeframe, nominally 30 years. That is the one lifeboat you are always guaranteed will be there for you. The fact that things work this way is why academic financial experts conclude that withdrawal from a portfolio is an inefficient way to use retirement assets and advocate that one should annuitize instead. The lack of enthusiasm for single premium immediate annuities is called the annuity puzzle.

If you want to see the data on this go run FireCalc and look at the graph of results for how much money is still there in retirement.

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Re: Year 2000 retirees using the '4% rule' - Where are they now?

Post by willthrill81 » Mon Jan 15, 2018 11:26 am

dbr wrote:
Mon Jan 15, 2018 10:29 am
If you fund retirement by holding a portfolio of stocks and bonds and stay at the 4% limit, then most of the outcomes will leave you dying with a very large amount of money, the unused lifeboats. The worst outcome will be that you must run out of money at the limit of the planned timeframe, nominally 30 years. That is the one lifeboat you are always guaranteed will be there for you. The fact that things work this way is why academic financial experts conclude that withdrawal from a portfolio is an inefficient way to use retirement assets and advocate that one should annuitize instead. The lack of enthusiasm for single premium immediate annuities is called the annuity puzzle.
Actually, Kitces' theory of the hierarchy of retirement needs explains why investors' tend to shy away from annuities: they require that the investor's current assets be sacrificed for future income. But most investors want to both retain control of their current assets and also have a future income.

Also, while annuitizing a portion of one's portfolio makes a lot of sense, it does involve sacrificing the potential gains that one could experience by using a withdrawal strategy instead, which has been very likely to occur had something like the '4% rule' been used. So when you add the fear of missing out in addition to sacrificing current assets, it seems to explain very well the deep reticence retirees usually have toward annuities.
“It's a dangerous business, Frodo, going out your door. You step onto the road, and if you don't keep your feet, there's no knowing where you might be swept off to.” J.R.R. Tolkien,The Lord of the Rings

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Re: Year 2000 retirees using the '4% rule' - Where are they now?

Post by dbr » Mon Jan 15, 2018 11:37 am

willthrill81 wrote:
Mon Jan 15, 2018 11:26 am
dbr wrote:
Mon Jan 15, 2018 10:29 am
If you fund retirement by holding a portfolio of stocks and bonds and stay at the 4% limit, then most of the outcomes will leave you dying with a very large amount of money, the unused lifeboats. The worst outcome will be that you must run out of money at the limit of the planned timeframe, nominally 30 years. That is the one lifeboat you are always guaranteed will be there for you. The fact that things work this way is why academic financial experts conclude that withdrawal from a portfolio is an inefficient way to use retirement assets and advocate that one should annuitize instead. The lack of enthusiasm for single premium immediate annuities is called the annuity puzzle.
Actually, Kitces' theory of the hierarchy of retirement needs explains why investors' tend to shy away from annuities: they require that the investor's current assets be sacrificed for future income. But most investors want to both retain control of their current assets and also have a future income.

Also, while annuitizing a portion of one's portfolio makes a lot of sense, it does involve sacrificing the potential gains that one could experience by using a withdrawal strategy instead, which has been very likely to occur had something like the '4% rule' been used. So when you add the fear of missing out in addition to sacrificing current assets, it seems to explain very well the deep reticence retirees usually have toward annuities.
Yes, that is right. You are correct to point out rationale reasons annuities are not often elected.

Probably the right perspective is to note that annuities can/should be part of the picture but that complete annuitization is impractical or even foolish.

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Re: Year 2000 retirees using the '4% rule' - Where are they now?

Post by wrongfunds » Mon Jan 15, 2018 12:42 pm

It will be more like putting all of your eggs in a single basket which you know for sure is not bullet proof! The risk of that basket vanishing from you is real. The entity providing you the annuity being there for you until the end has measurable and non-zero risk. For better or worse, the life time experience dealing with entities which are responsible for paying your money back to you (e.g. medical or insurance payout) has colored my outlook of annuity companies. I don't think I am alone.

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Re: Year 2000 retirees using the '4% rule' - Where are they now?

Post by willthrill81 » Mon Jan 15, 2018 1:11 pm

wrongfunds wrote:
Mon Jan 15, 2018 12:42 pm
It will be more like putting all of your eggs in a single basket which you know for sure is not bullet proof! The risk of that basket vanishing from you is real. The entity providing you the annuity being there for you until the end has measurable and non-zero risk. For better or worse, the life time experience dealing with entities which are responsible for paying your money back to you (e.g. medical or insurance payout) has colored my outlook of annuity companies. I don't think I am alone.
State guarantor associations can potentially take on some of that risk, and I think that most would argue that the likelihood of an annuity not being paid is low, but you are absolutely correct that the risk is not zero. That adds yet another reason why few retirees are attracted to annuities.
“It's a dangerous business, Frodo, going out your door. You step onto the road, and if you don't keep your feet, there's no knowing where you might be swept off to.” J.R.R. Tolkien,The Lord of the Rings

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Re: Year 2000 retirees using the '4% rule' - Where are they now?

Post by randomguy » Mon Jan 15, 2018 1:59 pm

dbr wrote:
Mon Jan 15, 2018 10:29 am
The fact that things work this way is why academic financial experts conclude that withdrawal from a portfolio is an inefficient way to use retirement assets and advocate that one should annuitize instead. The lack of enthusiasm for single premium immediate annuities is called the annuity puzzle.
Annuities get rid of risk but they get rid of returns. A couple annuitizing at 65 locks themselves into a 4.5% returns. That is a bottom 10-15% outcome compared to a 60/40 fund in all the studies I have seen. Is it worth doing that to avoid a bottom 5% outcome? That is a real tough sell. Get a product that locks me into an average SWR (something like 6%) and annuities would be a heck of a lot more tempting:)

And if you start hedging (only half the money in annuities), you end up back where we started with having to deal with market risk.

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Re: Year 2000 retirees using the '4% rule' - Where are they now?

Post by dkturner » Mon Jan 15, 2018 2:13 pm

In preparation for our retirement in late 2011 I began running the 4% initial withdrawal rate, adjusted annually for inflation, scenario for an individual retiring at YE 1999 and YE 2007. I used the actual returns of our portfolio from the performance data provided to us by the Vanguard Group. I used year end withdrawals, because we make single withdrawals from our portfolio in December of each year, with the funds earmarked for spending in the ensuing year.

I’m happy to report that at year end 2017, after making the inflation adjusted withdrawals for 2017 and all prior years, our account balance would be 53.99% percent higher than year end 1999. Using a hypothetical $10,000 portfolio, the $400 withdrawal for year end 2000 would have grown to $582.00 for 2017 and the account balance, after all withdrawals, would have grown to $15,399.48.

Running the numbers for a year end 2007 retirement was more challenging. The 2017 year end balance would have been 21.33% higher than the year end 2007 balance. The $400 withdrawal for 2008 would have grown to $466.30 for 2017 and the initial $10,000 account balance, after all withdrawals, would have grown to $12,132.82.

I have been surprised that our portfolio values have held up as well as they have, considering the ravages of the 2000-2002 and 2008-2009 bear markets. Our returns have been above average, but not excessively so. For the 2008-2017 period we exceed the return of our benchmark by an annualized 64 basis points (due primarily to a switch from Treasuries to corporates in early 2009) and for the 2000-2017 period by an annualized 136 basis points (due primarily to the huge value premium of 2000-2004).

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Re: Year 2000 retirees using the '4% rule' - Where are they now?

Post by Leesbro63 » Mon Jan 15, 2018 2:53 pm

dkturner wrote:
Mon Jan 15, 2018 2:13 pm
In preparation for our retirement in late 2011 I began running the 4% initial withdrawal rate, adjusted annually for inflation, scenario for an individual retiring at YE 1999 and YE 2007. I used the actual returns of our portfolio from the performance data provided to us by the Vanguard Group. I used year end withdrawals, because we make single withdrawals from our portfolio in December of each year, with the funds earmarked for spending in the ensuing year.

I’m happy to report that at year end 2017, after making the inflation adjusted withdrawals for 2017 and all prior years, our account balance would be 53.99% percent higher than year end 1999. Using a hypothetical $10,000 portfolio, the $400 withdrawal for year end 2000 would have grown to $582.00 for 2017 and the account balance, after all withdrawals, would have grown to $15,399.48.

Running the numbers for a year end 2007 retirement was more challenging. The 2017 year end balance would have been 21.33% higher than the year end 2007 balance. The $400 withdrawal for 2008 would have grown to $466.30 for 2017 and the initial $10,000 account balance, after all withdrawals, would have grown to $12,132.82.

I have been surprised that our portfolio values have held up as well as they have, considering the ravages of the 2000-2002 and 2008-2009 bear markets. Our returns have been above average, but not excessively so. For the 2008-2017 period we exceed the return of our benchmark by an annualized 64 basis points (due primarily to a switch from Treasuries to corporates in early 2009) and for the 2000-2017 period by an annualized 136 basis points (due primarily to the huge value premium of 2000-2004).
This is just "in theory". In reality, would you (or the hypothetical retiree) have actually had the guts to ride it out? I remember Jim Cramer screaming something like DOW 6666 was going to something like DOW 3333. OK, Bogleheads don't do Cramer, but would the smug 1999 retiree that you describe REALLY have stayed the course?

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Re: Year 2000 retirees using the '4% rule' - Where are they now?

Post by TravelforFun » Mon Jan 15, 2018 3:33 pm

randomguy wrote:
Mon Jan 15, 2018 1:59 pm
dbr wrote:
Mon Jan 15, 2018 10:29 am
The fact that things work this way is why academic financial experts conclude that withdrawal from a portfolio is an inefficient way to use retirement assets and advocate that one should annuitize instead. The lack of enthusiasm for single premium immediate annuities is called the annuity puzzle.
Annuities get rid of risk but they get rid of returns. A couple annuitizing at 65 locks themselves into a 4.5% returns. That is a bottom 10-15% outcome compared to a 60/40 fund in all the studies I have seen. Is it worth doing that to avoid a bottom 5% outcome? That is a real tough sell. Get a product that locks me into an average SWR (something like 6%) and annuities would be a heck of a lot more tempting:)

And if you start hedging (only half the money in annuities), you end up back where we started with having to deal with market risk.
I am considering using a portion of my portfolio to buy an annuity to supplement my SS benefits, and investing the rest of my portfolio agressively. The annuity would be considered as part of the bond portion of my AA.

TravelforFun

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Re: Year 2000 retirees using the '4% rule' - Where are they now?

Post by 2015 » Mon Jan 15, 2018 3:59 pm

TravelforFun wrote:
Mon Jan 15, 2018 3:33 pm
randomguy wrote:
Mon Jan 15, 2018 1:59 pm
dbr wrote:
Mon Jan 15, 2018 10:29 am
The fact that things work this way is why academic financial experts conclude that withdrawal from a portfolio is an inefficient way to use retirement assets and advocate that one should annuitize instead. The lack of enthusiasm for single premium immediate annuities is called the annuity puzzle.
Annuities get rid of risk but they get rid of returns. A couple annuitizing at 65 locks themselves into a 4.5% returns. That is a bottom 10-15% outcome compared to a 60/40 fund in all the studies I have seen. Is it worth doing that to avoid a bottom 5% outcome? That is a real tough sell. Get a product that locks me into an average SWR (something like 6%) and annuities would be a heck of a lot more tempting:)

And if you start hedging (only half the money in annuities), you end up back where we started with having to deal with market risk.
I am considering using a portion of my portfolio to buy an annuity to supplement my SS benefits, and investing the rest of my portfolio agressively. The annuity would be considered as part of the bond portion of my AA.

TravelforFun
This is a back up strategy I may employ after taking delayed SS at 70 as well, only for me aggressive means 50/50. I have no interest in SWR or staying at the roulette table with a 60/40 at a time of life when more important things interest me besides maximizing the size of my estate.

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Re: Year 2000 retirees using the '4% rule' - Where are they now?

Post by dkturner » Mon Jan 15, 2018 4:35 pm

Leesbro63 wrote:
Mon Jan 15, 2018 2:53 pm
dkturner wrote:
Mon Jan 15, 2018 2:13 pm
In preparation for our retirement in late 2011 I began running the 4% initial withdrawal rate, adjusted annually for inflation, scenario for an individual retiring at YE 1999 and YE 2007. I used the actual returns of our portfolio from the performance data provided to us by the Vanguard Group. I used year end withdrawals, because we make single withdrawals from our portfolio in December of each year, with the funds earmarked for spending in the ensuing year.

I’m happy to report that at year end 2017, after making the inflation adjusted withdrawals for 2017 and all prior years, our account balance would be 53.99% percent higher than year end 1999. Using a hypothetical $10,000 portfolio, the $400 withdrawal for year end 2000 would have grown to $582.00 for 2017 and the account balance, after all withdrawals, would have grown to $15,399.48.

Running the numbers for a year end 2007 retirement was more challenging. The 2017 year end balance would have been 21.33% higher than the year end 2007 balance. The $400 withdrawal for 2008 would have grown to $466.30 for 2017 and the initial $10,000 account balance, after all withdrawals, would have grown to $12,132.82.

I have been surprised that our portfolio values have held up as well as they have, considering the ravages of the 2000-2002 and 2008-2009 bear markets. Our returns have been above average, but not excessively so. For the 2008-2017 period we exceed the return of our benchmark by an annualized 64 basis points (due primarily to a switch from Treasuries to corporates in early 2009) and for the 2000-2017 period by an annualized 136 basis points (due primarily to the huge value premium of 2000-2004).
This is just "in theory". In reality, would you (or the hypothetical retiree) have actually had the guts to ride it out? I remember Jim Cramer screaming something like DOW 6666 was going to something like DOW 3333. OK, Bogleheads don't do Cramer, but would the smug 1999 retiree that you describe REALLY have stayed the course?
“Ride” what out?

Our portfolios are only 50% equity. Since our actual retirement in late 2011 we have only withdraw an average of 2% of our beginning of the year account balances. Based on our actual retirement results, beginning with 2012, the “4% rule” would have resulted in a $10,000 portfolio having a $13,853.62 YE 2017 value. Because of our lower actual withdrawals our $10,000 portfolio was actually worth $15,026.57 at YE 2017.

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Re: Year 2000 retirees using the '4% rule' - Where are they now?

Post by willthrill81 » Mon Jan 15, 2018 5:06 pm

Leesbro63 wrote:
Mon Jan 15, 2018 2:53 pm
This is just "in theory". In reality, would you (or the hypothetical retiree) have actually had the guts to ride it out? I remember Jim Cramer screaming something like DOW 6666 was going to something like DOW 3333. OK, Bogleheads don't do Cramer, but would the smug 1999 retiree that you describe REALLY have stayed the course?
That's the very bitter part of buy-and-hold investing: the occasional massive drawdown, seeing lots of precious money go 'poof'. Some can take it, and some can't.
“It's a dangerous business, Frodo, going out your door. You step onto the road, and if you don't keep your feet, there's no knowing where you might be swept off to.” J.R.R. Tolkien,The Lord of the Rings

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Re: Year 2000 retirees using the '4% rule' - Where are they now?

Post by Snowjob » Mon Jan 15, 2018 5:15 pm

willthrill81 wrote:
Mon Jan 15, 2018 5:06 pm
Leesbro63 wrote:
Mon Jan 15, 2018 2:53 pm
This is just "in theory". In reality, would you (or the hypothetical retiree) have actually had the guts to ride it out? I remember Jim Cramer screaming something like DOW 6666 was going to something like DOW 3333. OK, Bogleheads don't do Cramer, but would the smug 1999 retiree that you describe REALLY have stayed the course?
That's the very bitter part of buy-and-hold investing: the occasional massive drawdown, seeing lots of precious money go 'poof'. Some can take it, and some can't.
Jim gets a lot of flak (I mean who wouldn't if they were trying to give new stock tips on a daily basis??) but he was advocating buying almost anything at the bottom.

Annuitizing will help with the "poofing" of equities, I plan on having half of my desired income in social security and annuities for this reason.

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Re: Year 2000 retirees using the '4% rule' - Where are they now?

Post by Snowjob » Mon Jan 15, 2018 5:19 pm

willthrill81 wrote:
Tue Jan 09, 2018 4:26 pm

I think that's wise advice. Personally, I don't plan on retiring until my portfolio is roughly 50x my base living expenses. I plan on withdrawing around 5% of the portfolio value each year. So even if my portfolio were to be cut in value by half, I'd still have enough to cover the necessities, in addition to SS. Personally, I see no value in being more conservative than that.
50x seems a bit excessive no? at some point I think retiring earlier makes more sense unless you really love you job and are making way more than you know what to do with already.

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Re: Year 2000 retirees using the '4% rule' - Where are they now?

Post by willthrill81 » Mon Jan 15, 2018 5:33 pm

Snowjob wrote:
Mon Jan 15, 2018 5:19 pm
willthrill81 wrote:
Tue Jan 09, 2018 4:26 pm

I think that's wise advice. Personally, I don't plan on retiring until my portfolio is roughly 50x my base living expenses. I plan on withdrawing around 5% of the portfolio value each year. So even if my portfolio were to be cut in value by half, I'd still have enough to cover the necessities, in addition to SS. Personally, I see no value in being more conservative than that.
50x seems a bit excessive no? at some point I think retiring earlier makes more sense unless you really love you job and are making way more than you know what to do with already.
You'll note that I said 50x our base living expenses, meaning the non-discretionary necessities (e.g. utilities, groceries, auto insurance, property taxes). I'd like to spend about that much again on discretionary categories like traveling. But my point is that with 50x my base living expenses, I can pretty much retire 'bullet proof'. If the market doesn't treat us well for a long period, it just means that we'll be traveling less but still very able to pay the bills.
“It's a dangerous business, Frodo, going out your door. You step onto the road, and if you don't keep your feet, there's no knowing where you might be swept off to.” J.R.R. Tolkien,The Lord of the Rings

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Re: Year 2000 retirees using the '4% rule' - Where are they now?

Post by Snowjob » Mon Jan 15, 2018 7:49 pm

willthrill81 wrote:
Mon Jan 15, 2018 5:33 pm

You'll note that I said 50x our base living expenses, meaning the non-discretionary necessities (e.g. utilities, groceries, auto insurance, property taxes). I'd like to spend about that much again on discretionary categories like traveling. But my point is that with 50x my base living expenses, I can pretty much retire 'bullet proof'. If the market doesn't treat us well for a long period, it just means that we'll be traveling less but still very able to pay the bills.
Fair -- If I were to eliminate vacations from my retirement budget and the associated taxes on that income I'd probably end up with 33x everything else and 50x once SS kicks in. And there is a little fluff in those numbers too so maybe i'm not that to dissimilar. I'm planning on a mix of Social Security, Annuities and a flexible 4% of whatever the portfolio balance is after that. Planning to done by 55 at the latest money wise, but there's a long road between now and then so we'll see what life (and the market) looks like in 20 years.

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Re: Year 2000 retirees using the '4% rule' - Where are they now?

Post by willthrill81 » Mon Jan 15, 2018 8:34 pm

Snowjob wrote:
Mon Jan 15, 2018 7:49 pm
I'm planning on a mix of Social Security, Annuities and a flexible 4% of whatever the portfolio balance is after that.
Actually, if your necessities can be covered by SS and annuities, you could probably use a 5% WR with the rest of your portfolio or an even higher rate if you used a flexible (i.e. percentage-of-portfolio) method instead. But if you're planning for a 40 year retirement, 4% might not be overly conservative.
Snowjob wrote:
Mon Jan 15, 2018 7:49 pm
Planning to done by 55 at the latest money wise, but there's a long road between now and then so we'll see what life (and the market) looks like in 20 years.
Very similarly, I'm thinking that I'll probably call it quits between 50-55. And yes, there's a lot of water to go under the bridge between now and then.
“It's a dangerous business, Frodo, going out your door. You step onto the road, and if you don't keep your feet, there's no knowing where you might be swept off to.” J.R.R. Tolkien,The Lord of the Rings

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Re: Year 2000 retirees using the '4% rule' - Where are they now?

Post by aj76er » Mon Jan 15, 2018 8:39 pm

Perhaps I missed it, but with all the talk of using 4-5% of yearly portfolio balance, is there any backtesting on this approach? How well did it hold up? I understand that the portfolio balance can never go to zero with this method, but how did the annual payouts hold up over time? How did the portfolio balance hold up over time? It would be good to show both in real (ie after inflation) terms.
"Buy-and-hold, long-term, all-market-index strategies, implemented at rock-bottom cost, are the surest of all routes to the accumulation of wealth" - John C. Bogle

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Re: Year 2000 retirees using the '4% rule' - Where are they now?

Post by Snowjob » Mon Jan 15, 2018 9:14 pm

willthrill81 wrote:
Mon Jan 15, 2018 8:34 pm
Snowjob wrote:
Mon Jan 15, 2018 7:49 pm
I'm planning on a mix of Social Security, Annuities and a flexible 4% of whatever the portfolio balance is after that.
Actually, if your necessities can be covered by SS and annuities, you could probably use a 5% WR with the rest of your portfolio or an even higher rate if you used a flexible (i.e. percentage-of-portfolio) method instead. But if you're planning for a 40 year retirement, 4% might not be overly conservative.
Snowjob wrote:
Mon Jan 15, 2018 7:49 pm
Planning to done by 55 at the latest money wise, but there's a long road between now and then so we'll see what life (and the market) looks like in 20 years.
Very similarly, I'm thinking that I'll probably call it quits between 50-55. And yes, there's a lot of water to go under the bridge between now and then.
Honestly my original plan was a 3.6% withdrawal rate. All of this discussion back and forth including your (semi-serious?) 6% withdrawal rate got me to bump that up a little. still not sure I'd be comfortable with 5% though !

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Re: Year 2000 retirees using the '4% rule' - Where are they now?

Post by willthrill81 » Mon Jan 15, 2018 10:01 pm

Snowjob wrote:
Mon Jan 15, 2018 9:14 pm
willthrill81 wrote:
Mon Jan 15, 2018 8:34 pm
Snowjob wrote:
Mon Jan 15, 2018 7:49 pm
I'm planning on a mix of Social Security, Annuities and a flexible 4% of whatever the portfolio balance is after that.
Actually, if your necessities can be covered by SS and annuities, you could probably use a 5% WR with the rest of your portfolio or an even higher rate if you used a flexible (i.e. percentage-of-portfolio) method instead. But if you're planning for a 40 year retirement, 4% might not be overly conservative.
Snowjob wrote:
Mon Jan 15, 2018 7:49 pm
Planning to done by 55 at the latest money wise, but there's a long road between now and then so we'll see what life (and the market) looks like in 20 years.
Very similarly, I'm thinking that I'll probably call it quits between 50-55. And yes, there's a lot of water to go under the bridge between now and then.
Honestly my original plan was a 3.6% withdrawal rate. All of this discussion back and forth including your (semi-serious?) 6% withdrawal rate got me to bump that up a little. still not sure I'd be comfortable with 5% though !
6% as a percentage of a portfolio using a trend following approach is something I'm dead serious about. Academic research has shown the historic impact of trend following in the decumulation phase, and it's been substantial.

But even with buy-and-hold portfolios, a flexible WR can be significantly higher than a fixed one because in the event that the portfolio suffers in the initial stages of decumulation, the withdrawals will naturally shrink as well. For instance, a year 2000 retiree using the initial portfolio described in the OP could have taken 5.3% withdrawals as a percentage of the portfolio at the end of each year and had the same balance at the end of 2017 as a retiree using a 4% plus inflation fixed withdrawal rate. So 6% isn't very aggressive, especially since simple trend following has historically smoothed out the returns enough to largely avoid the ravages of sequence of returns risk.
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Re: Year 2000 retirees using the '4% rule' - Where are they now?

Post by randomguy » Mon Jan 15, 2018 10:55 pm

TravelforFun wrote:
Mon Jan 15, 2018 3:33 pm
randomguy wrote:
Mon Jan 15, 2018 1:59 pm
dbr wrote:
Mon Jan 15, 2018 10:29 am
The fact that things work this way is why academic financial experts conclude that withdrawal from a portfolio is an inefficient way to use retirement assets and advocate that one should annuitize instead. The lack of enthusiasm for single premium immediate annuities is called the annuity puzzle.
Annuities get rid of risk but they get rid of returns. A couple annuitizing at 65 locks themselves into a 4.5% returns. That is a bottom 10-15% outcome compared to a 60/40 fund in all the studies I have seen. Is it worth doing that to avoid a bottom 5% outcome? That is a real tough sell. Get a product that locks me into an average SWR (something like 6%) and annuities would be a heck of a lot more tempting:)

And if you start hedging (only half the money in annuities), you end up back where we started with having to deal with market risk.
I am considering using a portion of my portfolio to buy an annuity to supplement my SS benefits, and investing the rest of my portfolio agressively. The annuity would be considered as part of the bond portion of my AA.

TravelforFun
That is probably my approach but it works because I am looking for a low floor (i.e. I want to live on 150k/year but only really need 60. 30k of SS and 30k inflation adjusted annuity is a fraction of the account. Let the rest ride at 70/30). If I was actually trying to replace all of the 150k income, the opportunity cost of doing is just far too big for me to remotely stomach.

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Re: Year 2000 retirees using the '4% rule' - Where are they now?

Post by randomguy » Mon Jan 15, 2018 11:03 pm

aj76er wrote:
Mon Jan 15, 2018 8:39 pm
Perhaps I missed it, but with all the talk of using 4-5% of yearly portfolio balance, is there any backtesting on this approach? How well did it hold up? I understand that the portfolio balance can never go to zero with this method, but how did the annual payouts hold up over time? How did the portfolio balance hold up over time? It would be good to show both in real (ie after inflation) terms.
Not very exact but https://www.portfoliovisualizer.com/bac ... yNotes1=50

gives you a rough idea how 5% would work. In inflation adjusted terms you end up about where you started but the drops in the 70s were brutal:). Someone who retired at the start of a bull market (say 1981) would have seen a steady increase in the standard of living.

Note the 6% got crushed and the 4%er had some nice portfolio growth.

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Re: Year 2000 retirees using the '4% rule' - Where are they now?

Post by randomguy » Mon Jan 15, 2018 11:06 pm

Snowjob wrote:
Mon Jan 15, 2018 7:49 pm
willthrill81 wrote:
Mon Jan 15, 2018 5:33 pm

You'll note that I said 50x our base living expenses, meaning the non-discretionary necessities (e.g. utilities, groceries, auto insurance, property taxes). I'd like to spend about that much again on discretionary categories like traveling. But my point is that with 50x my base living expenses, I can pretty much retire 'bullet proof'. If the market doesn't treat us well for a long period, it just means that we'll be traveling less but still very able to pay the bills.
Fair -- If I were to eliminate vacations from my retirement budget and the associated taxes on that income I'd probably end up with 33x everything else and 50x once SS kicks in. And there is a little fluff in those numbers too so maybe i'm not that to dissimilar. I'm planning on a mix of Social Security, Annuities and a flexible 4% of whatever the portfolio balance is after that. Planning to done by 55 at the latest money wise, but there's a long road between now and then so we'll see what life (and the market) looks like in 20 years.

Flexible approaches are a sane way of going but you add a lot more complexity to the model. The question is always you retiree in 1966/1973/2000 of how much to cut back. You can do massive cuts (see VPW or any schemes that uses starting year account balances), you can do nothing (4% rule), or you can do gradual changes (10% cuts, skip inflation adjustement,...). Some people favor cutting way back to deal with fear of running out money. Others favor staying the course to avoid running out of time. I am guessing most people split the difference.

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Re: Year 2000 retirees using the '4% rule' - Where are they now?

Post by Snowjob » Mon Jan 15, 2018 11:48 pm

randomguy wrote:
Mon Jan 15, 2018 11:06 pm


Flexible approaches are a sane way of going but you add a lot more complexity to the model. The question is always you retiree in 1966/1973/2000 of how much to cut back. You can do massive cuts (see VPW or any schemes that uses starting year account balances), you can do nothing (4% rule), or you can do gradual changes (10% cuts, skip inflation adjustement,...). Some people favor cutting way back to deal with fear of running out money. Others favor staying the course to avoid running out of time. I am guessing most people split the difference.
No way to tell exactly, but I bet tips might have helped a bit in the 70s. Shooting for a 4% vs 5% starting balance but having a more defensive portfolio is probably the better option. In the out years it doesn't matter as much of course but a little less upfront probably to really guard against sequence of returns seems wise. For a lot of us looking at early retirement or paranoid about the current asset prices impact on future returns this still seems more efficient than a the traditional 4% inflation adjusted rule, and we'll, less scary too!

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Re: Year 2000 retirees using the '4% rule' - Where are they now?

Post by randomguy » Mon Jan 15, 2018 11:58 pm

Snowjob wrote:
Mon Jan 15, 2018 11:48 pm
randomguy wrote:
Mon Jan 15, 2018 11:06 pm


Flexible approaches are a sane way of going but you add a lot more complexity to the model. The question is always you retiree in 1966/1973/2000 of how much to cut back. You can do massive cuts (see VPW or any schemes that uses starting year account balances), you can do nothing (4% rule), or you can do gradual changes (10% cuts, skip inflation adjustement,...). Some people favor cutting way back to deal with fear of running out money. Others favor staying the course to avoid running out of time. I am guessing most people split the difference.
No way to tell exactly, but I bet tips might have helped a bit in the 70s. Shooting for a 4% vs 5% starting balance but having a more defensive portfolio is probably the better option. In the out years it doesn't matter as much of course but a little less upfront probably to really guard against sequence of returns seems wise. For a lot of us looking at early retirement or paranoid about the current asset prices impact on future returns this still seems more efficient than a the traditional 4% inflation adjusted rule, and we'll, less scary too!
The numbers I have seen suggest TIPs would have helped a bit but the gain likely wouldn't have been huge. You do better in the 70s but you don't get the big gains in the 80s( i.e. you don't make as much money from inflation going down). Of course this is all modeling as you couldn't buy TIPs back then.

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Re: Year 2000 retirees using the '4% rule' - Where are they now?

Post by siamond » Tue Jan 16, 2018 10:18 am

aj76er wrote:
Mon Jan 15, 2018 8:39 pm
Perhaps I missed it, but with all the talk of using 4-5% of yearly portfolio balance, is there any backtesting on this approach? How well did it hold up? I understand that the portfolio balance can never go to zero with this method, but how did the annual payouts hold up over time? How did the portfolio balance hold up over time? It would be good to show both in real (ie after inflation) terms.
You can compare the historical performance of various withdrawal methods (fixed or variable) at cfiresim.com. It's a very cool tool, much better than Firecalc imho.

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Re: Year 2000 retirees using the '4% rule' - Where are they now?

Post by aj76er » Tue Jan 16, 2018 2:42 pm

siamond wrote:
Tue Jan 16, 2018 10:18 am
aj76er wrote:
Mon Jan 15, 2018 8:39 pm
Perhaps I missed it, but with all the talk of using 4-5% of yearly portfolio balance, is there any backtesting on this approach? How well did it hold up? I understand that the portfolio balance can never go to zero with this method, but how did the annual payouts hold up over time? How did the portfolio balance hold up over time? It would be good to show both in real (ie after inflation) terms.
You can compare the historical performance of various withdrawal methods (fixed or variable) at cfiresim.com. It's a very cool tool, much better than Firecalc imho.
Wow, great tool. Thank you!
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Re: Year 2000 retirees using the '4% rule' - Where are they now?

Post by ryman554 » Tue Jan 16, 2018 3:30 pm

willthrill81 wrote:
Mon Jan 15, 2018 8:34 pm
But if you're planning for a 40 year retirement, 4% might not be overly conservative.
I keep hearing this from folks, and I can't figure out why the "SWR" for 40 years has to be significantly lower than for 30 years. There's lot of feeling out there, but no real hard data.

Yes, we do not have a whole lot of historical data to go on, but the data I have seen (from Trinity and the like) 30 years is a pretty good approximation for infinity. Or it's at least well on the asymptote <sic> toward such a rate.

I don't believe the data shows 4% is entirely safe, either, but it's close and a good approximation to one significant digit. If the number is good enough for 30 years, it's good enough for 50, modulo a couple 0.1% or so.

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Re: Year 2000 retirees using the '4% rule' - Where are they now?

Post by Hyperborea » Tue Jan 16, 2018 4:08 pm

ryman554 wrote:
Tue Jan 16, 2018 3:30 pm
willthrill81 wrote:
Mon Jan 15, 2018 8:34 pm
But if you're planning for a 40 year retirement, 4% might not be overly conservative.
I keep hearing this from folks, and I can't figure out why the "SWR" for 40 years has to be significantly lower than for 30 years. There's lot of feeling out there, but no real hard data.

Yes, we do not have a whole lot of historical data to go on, but the data I have seen (from Trinity and the like) 30 years is a pretty good approximation for infinity. Or it's at least well on the asymptote <sic> toward such a rate.

I don't believe the data shows 4% is entirely safe, either, but it's close and a good approximation to one significant digit. If the number is good enough for 30 years, it's good enough for 50, modulo a couple 0.1% or so.
Have a look at the work done on Early Retirement Now for long retirement withdrawals - https://earlyretirementnow.com/2016/12/ ... t-1-intro/

30 year retirements at 4% WR have a number of scenarios where you just barely skid past the 30 year mark with no gas left for another 10-30 years. Those raise the failure rate / drop the WR for the longer retirements.
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Re: Year 2000 retirees using the '4% rule' - Where are they now?

Post by flyingaway » Tue Jan 16, 2018 4:15 pm

ryman554 wrote:
Tue Jan 16, 2018 3:30 pm
willthrill81 wrote:
Mon Jan 15, 2018 8:34 pm
But if you're planning for a 40 year retirement, 4% might not be overly conservative.
I keep hearing this from folks, and I can't figure out why the "SWR" for 40 years has to be significantly lower than for 30 years. There's lot of feeling out there, but no real hard data.

Yes, we do not have a whole lot of historical data to go on, but the data I have seen (from Trinity and the like) 30 years is a pretty good approximation for infinity. Or it's at least well on the asymptote <sic> toward such a rate.

I don't believe the data shows 4% is entirely safe, either, but it's close and a good approximation to one significant digit. If the number is good enough for 30 years, it's good enough for 50, modulo a couple 0.1% or so.
For the same data, 40 year withdrawl has a much higher rate of failure, but surprisingly, has a larger average portfolio size at the end of the withdrawl.

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Re: Year 2000 retirees using the '4% rule' - Where are they now?

Post by siamond » Tue Jan 16, 2018 5:26 pm

Hyperborea wrote:
Tue Jan 16, 2018 4:08 pm
ryman554 wrote:
Tue Jan 16, 2018 3:30 pm
willthrill81 wrote:
Mon Jan 15, 2018 8:34 pm
But if you're planning for a 40 year retirement, 4% might not be overly conservative.
I keep hearing this from folks, and I can't figure out why the "SWR" for 40 years has to be significantly lower than for 30 years. There's lot of feeling out there, but no real hard data.
30 year retirements at 4% WR have a number of scenarios where you just barely skid past the 30 year mark with no gas left for another 10-30 years. Those raise the failure rate / drop the WR for the longer retirements.
That is true, and one might consider it a hard fact. This being said, just a modicum of common sense (some level of adaptability/variability on the withdrawal method), and 30 years is indeed pretty much equivalent to infinity. It would be really foolish for an early retiree (the typical candidate for 40+ years) to not plan for such modicum of common sense. Plus an early retiree would probably use some backup option if the stock market crashes and burns (e.g. Japan-like) during his/her first decade of retirement.

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Re: Year 2000 retirees using the '4% rule' - Where are they now?

Post by Hyperborea » Tue Jan 16, 2018 5:27 pm

flyingaway wrote:
Tue Jan 16, 2018 4:15 pm
ryman554 wrote:
Tue Jan 16, 2018 3:30 pm
willthrill81 wrote:
Mon Jan 15, 2018 8:34 pm
But if you're planning for a 40 year retirement, 4% might not be overly conservative.
I keep hearing this from folks, and I can't figure out why the "SWR" for 40 years has to be significantly lower than for 30 years. There's lot of feeling out there, but no real hard data.

Yes, we do not have a whole lot of historical data to go on, but the data I have seen (from Trinity and the like) 30 years is a pretty good approximation for infinity. Or it's at least well on the asymptote <sic> toward such a rate.

I don't believe the data shows 4% is entirely safe, either, but it's close and a good approximation to one significant digit. If the number is good enough for 30 years, it's good enough for 50, modulo a couple 0.1% or so.
For the same data, 40 year withdrawl has a much higher rate of failure, but surprisingly, has a larger average portfolio size at the end of the withdrawl.
It's not surprising at all that the average ending portfolio size is larger. The low 4% (or 3.5% or lower) WR is intended to protect against the worst years. For the bad but not worst years it's too conservative and even more so for the average or better years. Everybody living off a portfolio is trying to avoid being destitute before we are gone but in most cases we will end up with more. For most of the portfolio, they survived another 10 years and had another 10 years of growth. The portfolios from the top results had some spectacular growth that more than made up for the failures.
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Re: Year 2000 retirees using the '4% rule' - Where are they now?

Post by willthrill81 » Tue Jan 16, 2018 5:37 pm

siamond wrote:
Tue Jan 16, 2018 5:26 pm
Hyperborea wrote:
Tue Jan 16, 2018 4:08 pm
ryman554 wrote:
Tue Jan 16, 2018 3:30 pm
willthrill81 wrote:
Mon Jan 15, 2018 8:34 pm
But if you're planning for a 40 year retirement, 4% might not be overly conservative.
I keep hearing this from folks, and I can't figure out why the "SWR" for 40 years has to be significantly lower than for 30 years. There's lot of feeling out there, but no real hard data.
30 year retirements at 4% WR have a number of scenarios where you just barely skid past the 30 year mark with no gas left for another 10-30 years. Those raise the failure rate / drop the WR for the longer retirements.
That is true, and one might consider it a hard fact. This being said, just a modicum of common sense (some level of adaptability/variability on the withdrawal method), and 30 years is indeed pretty much equivalent to infinity. It would be really foolish for an early retiree (the typical candidate for 40+ years) to not plan for such modicum of common sense. Plus an early retiree would probably use some backup option if the stock market crashes and burns (e.g. Japan-like) during his/her first decade of retirement.
I agree, but I do think that some would-be early retirees may have cut their expenses back so much that they might not be able to reduce their expenses by 25%, for instance, if the market treats them very poorly in the early stages of their retirement. Personally, I'm planning on close to half of my retirement spending being discretionary, which means that our overall spending could be cut by that amount if needed without impacting our ability to pay for the necessities. I doubt that many of the extremely early retirement crowd are factoring in that much cushion into their spending, but, as you say, many of them could reenter the workforce if needed to supplement their spending needs as well, assuming that the economy is good enough to allow for that.
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Re: Year 2000 retirees using the '4% rule' - Where are they now?

Post by siamond » Tue Jan 16, 2018 5:45 pm

willthrill81 wrote:
Tue Jan 16, 2018 5:37 pm
I doubt that many of the extremely early retirement crowd are factoring in that much cushion into their spending, but many of them could reenter the workforce if needed to supplement their spending needs as well.
Yes, many possibilities for an early retiree. Even if not 'extreme' (I early-retired at 52, I do plan for more than 40 years).

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Re: Year 2000 retirees using the '4% rule' - Where are they now?

Post by ryman554 » Tue Jan 16, 2018 10:57 pm

Hyperborea wrote:
Tue Jan 16, 2018 4:08 pm
ryman554 wrote:
Tue Jan 16, 2018 3:30 pm
willthrill81 wrote:
Mon Jan 15, 2018 8:34 pm
But if you're planning for a 40 year retirement, 4% might not be overly conservative.
I keep hearing this from folks, and I can't figure out why the "SWR" for 40 years has to be significantly lower than for 30 years. There's lot of feeling out there, but no real hard data.

Yes, we do not have a whole lot of historical data to go on, but the data I have seen (from Trinity and the like) 30 years is a pretty good approximation for infinity. Or it's at least well on the asymptote <sic> toward such a rate.

I don't believe the data shows 4% is entirely safe, either, but it's close and a good approximation to one significant digit. If the number is good enough for 30 years, it's good enough for 50, modulo a couple 0.1% or so.
Have a look at the work done on Early Retirement Now for long retirement withdrawals - https://earlyretirementnow.com/2016/12/ ... t-1-intro/

30 year retirements at 4% WR have a number of scenarios where you just barely skid past the 30 year mark with no gas left for another 10-30 years. Those raise the failure rate / drop the WR for the longer retirements.
Yeah, that's exactly the data I recall seeing. Funny that we came to completely opposite conclusions!

I had in my mind 3.6 as the sweet spot, and certainly that data backs it up... 60 years is just about the same as 30 years... as long as you are equity heavy. If you start going equity light, the poor (~0% real) returns of "bonds" catch up to you.

I guess that was my hidden assumption -- money has to work for me in retirement. 80/20 until the day I die, since I believe it's riskier long term to pour money into a lower expected returns, even if the volatility is higher in the short term.

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Re: Year 2000 retirees using the '4% rule' - Where are they now?

Post by Hyperborea » Wed Jan 17, 2018 12:46 pm

ryman554 wrote:
Tue Jan 16, 2018 10:57 pm
Hyperborea wrote:
Tue Jan 16, 2018 4:08 pm
ryman554 wrote:
Tue Jan 16, 2018 3:30 pm
willthrill81 wrote:
Mon Jan 15, 2018 8:34 pm
But if you're planning for a 40 year retirement, 4% might not be overly conservative.
I keep hearing this from folks, and I can't figure out why the "SWR" for 40 years has to be significantly lower than for 30 years. There's lot of feeling out there, but no real hard data.

Yes, we do not have a whole lot of historical data to go on, but the data I have seen (from Trinity and the like) 30 years is a pretty good approximation for infinity. Or it's at least well on the asymptote <sic> toward such a rate.

I don't believe the data shows 4% is entirely safe, either, but it's close and a good approximation to one significant digit. If the number is good enough for 30 years, it's good enough for 50, modulo a couple 0.1% or so.
Have a look at the work done on Early Retirement Now for long retirement withdrawals - https://earlyretirementnow.com/2016/12/ ... t-1-intro/

30 year retirements at 4% WR have a number of scenarios where you just barely skid past the 30 year mark with no gas left for another 10-30 years. Those raise the failure rate / drop the WR for the longer retirements.
Yeah, that's exactly the data I recall seeing. Funny that we came to completely opposite conclusions!

I had in my mind 3.6 as the sweet spot, and certainly that data backs it up... 60 years is just about the same as 30 years... as long as you are equity heavy. If you start going equity light, the poor (~0% real) returns of "bonds" catch up to you.

I guess that was my hidden assumption -- money has to work for me in retirement. 80/20 until the day I die, since I believe it's riskier long term to pour money into a lower expected returns, even if the volatility is higher in the short term.
Yes, I agree. The high equity allocation is the key for longer retirements but even with that the SWR is down to 3.25% to 3.5%. What you hear a lot on this forum is folks retiring and dropping their equity allocation to 25%-50% and many/most of them planning a 4% WR. That might be fine if one is really looking at a 30 year horizon or if their portfolio is only just fun money and they living costs are all borne by pensions and/or SS. Even a 60 year old somewhat early retiree couple has a 10% chance that one of them is around in 40 years.

What is also interesting is that a number of older retirees report back that their 30/70 did well with a 4% WR and so all is fine and everybody should also be fine. This ignores the fact that even if there is an elevated failure rate at low equity allocations it is still only a chance of failure and they happened to be lucky. Nobody knows if any particular sequence going forward will be a failing one but we can know that historically some combinations of allocation and WR were more likely to fail than others.

A forever 80/20 allocation might be sub-optimal at least in the period around retirement. A glide path down and then back up may help one avoid sequence of return risks in some situations. It does reduce the maximum gains would could expect in return for reduced downside - insurance.

In my own case I ran 100/0 during my accumulation phase. I then have shift down and continue to shift down - I will be about 60/40 once I downsize the house. From there I will glide back up to 80/20 over the next n years (a yearly fixed conversion to be accelerated in the event of a downturn). I am taking about 3.5% but have the ability to go to 2% if needed. Our joint life expectancy to 10% is nearly 50. The high equity allocation with glide plus the lower initial WR with the low fallback WR should be enough safety factors. If not then it's not likely that much else would have done well other than the bunker and a case of beans.

I will say that the Early Retirement Now studies are great and the whole series is worth reading for anybody planning to live off a portfolio. He puts some numbers to two areas that have been discussed in the FIRE community for a long time - the higher equity allocation and the lower WR for long retirements.
"Plans are worthless, but planning is everything." - Dwight D. Eisenhower

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Re: Year 2000 retirees using the '4% rule' - Where are they now?

Post by Random Poster » Wed Jan 17, 2018 1:14 pm

Hyperborea wrote:
Wed Jan 17, 2018 12:46 pm
ryman554 wrote:
Tue Jan 16, 2018 10:57 pm
Hyperborea wrote:
Tue Jan 16, 2018 4:08 pm
Have a look at the work done on Early Retirement Now for long retirement withdrawals - https://earlyretirementnow.com/2016/12/ ... t-1-intro/

30 year retirements at 4% WR have a number of scenarios where you just barely skid past the 30 year mark with no gas left for another 10-30 years. Those raise the failure rate / drop the WR for the longer retirements.
Yeah, that's exactly the data I recall seeing. Funny that we came to completely opposite conclusions!

I had in my mind 3.6 as the sweet spot, and certainly that data backs it up... 60 years is just about the same as 30 years... as long as you are equity heavy. If you start going equity light, the poor (~0% real) returns of "bonds" catch up to you.

I guess that was my hidden assumption -- money has to work for me in retirement. 80/20 until the day I die, since I believe it's riskier long term to pour money into a lower expected returns, even if the volatility is higher in the short term.
Yes, I agree. The high equity allocation is the key for longer retirements but even with that the SWR is down to 3.25% to 3.5%. What you hear a lot on this forum is folks retiring and dropping their equity allocation to 25%-50% and many/most of them planning a 4% WR. That might be fine if one is really looking at a 30 year horizon or if their portfolio is only just fun money and they living costs are all borne by pensions and/or SS. Even a 60 year old somewhat early retiree couple has a 10% chance that one of them is around in 40 years.
I've read several of the Early Retirement Now posts and looked closely at many of the colorful charts.

My takeaway from it all is that someone will probably be okay for 60 years of retirement life if they:

1) Retire with a portfolio that has an initial balance equal to at least 50 times their annual expenses; and
2) Maintain a 50/50 allocation.

Of course, no one knows anything about the future with any certainty, and I doubt that many know much about the recent past with much certainty either. But such a strategy should hold up and allow the retiree to be comfortable with the gyrations of the market.

Now, actually walking away once you've got to that 50x number is a completely different matter altogether....

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Re: Year 2000 retirees using the '4% rule' - Where are they now?

Post by randomguy » Wed Jan 17, 2018 1:24 pm

Hyperborea wrote:
Wed Jan 17, 2018 12:46 pm

A forever 80/20 allocation might be sub-optimal at least in the period around retirement. A glide path down and then back up may help one avoid sequence of return risks in some situations. It does reduce the maximum gains would could expect in return for reduced downside - insurance.
Historically 80/20 has been great but you can question how maintainable that is during market swings. Read the posts from 2008-9 about plan b and the like when otherwise stay the course members started to panic.
The numbers for 4% for 40 years look like
80/20 - 86%
60/40 - 80%
50/50 74%
40/60 60%
30/70 48%
20/80 36%

You aren't looking at huge drop until you start looking at equity positions below 50%. You definitely reduce the average portfolio size at death by being more conservative. The problem comes is that they think of more bonds as being more conservative. It isn't. It is less volatile. Those aren't the same thing.


But fixed AA are a bit of a unrealistic plan. If you are winning, you can really up the AA. If you portfolio doubles in the first 15 years, you can afford to take on more risk (think about it this way. At the same AA, you are holding 2x as many bonds in absolute dollars as you started with.) If it falls, you can hit the point where you don't want to take more risk (i..e an 80 year old with 15 years of assets left might feel better setting up a TIPS ladder for 10 years versus holding 80/20 and only have 3 years of bonds. Or even break down and buy that annuity.). And of course mild spending cuts (10-15%) when it is clear you are on a bad path can obviously help everything out.

And of course there is always the chance we will hit a 30 year period where 80/20 doesn't work out well. Compare the japanese 80/20 versus 20/80 guy starting in 1989:)

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Re: Year 2000 retirees using the '4% rule' - Where are they now?

Post by randomguy » Wed Jan 17, 2018 1:35 pm

Random Poster wrote:
Wed Jan 17, 2018 1:14 pm


I've read several of the Early Retirement Now posts and looked closely at many of the colorful charts.

My takeaway from it all is that someone will probably be okay for 60 years of retirement life if they:

1) Retire with a portfolio that has an initial balance equal to at least 50 times their annual expenses; and
2) Maintain a 50/50 allocation.

Of course, no one knows anything about the future with any certainty, and I doubt that many know much about the recent past with much certainty either. But such a strategy should hold up and allow the retiree to be comfortable with the gyrations of the market.

Now, actually walking away once you've got to that 50x number is a completely different matter altogether....
So your saving if you have enough assets that you could build a TIPs ladder and never run out of money is only a probably OK situation?:) Ok there is a little bit of risk in that maybe in the future you will not be able to buy tips paying out .5% real or so but you are off in the extremely, extremely conservative world if you are worried about 50x over any time period. Even a 3% (i.e. 50% higher than you number) is a very conservative number.

Once you get well past the 30x or so, you move from financial risks to lifestyle issues (unexpected inflation in your cost of living like divorce, extra kids, becoming a quad, supporting deadbeat parents,....) and political (i.e. the revolution, dollar gets deflated to zero, global wars, alien invasion, ....) as the dominate risk.

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Re: Year 2000 retirees using the '4% rule' - Where are they now?

Post by Hyperborea » Wed Jan 17, 2018 1:56 pm

randomguy wrote:
Wed Jan 17, 2018 1:24 pm
Hyperborea wrote:
Wed Jan 17, 2018 12:46 pm

A forever 80/20 allocation might be sub-optimal at least in the period around retirement. A glide path down and then back up may help one avoid sequence of return risks in some situations. It does reduce the maximum gains would could expect in return for reduced downside - insurance.
Historically 80/20 has been great but you can question how maintainable that is during market swings. Read the posts from 2008-9 about plan b and the like when otherwise stay the course members started to panic.
The numbers for 4% for 40 years look like
80/20 - 86%
60/40 - 80%
50/50 74%
40/60 60%
30/70 48%
20/80 36%

You aren't looking at huge drop until you start looking at equity positions below 50%. You definitely reduce the average portfolio size at death by being more conservative. The problem comes is that they think of more bonds as being more conservative. It isn't. It is less volatile. Those aren't the same thing.
Even the 80/20 at 4% WR success risks are too low for me. Drop the WR to 3.5% and as well increase the duration to 50. At those points the success numbers are roughly 100% for the high equity allocations and in the 90% range for mid equity and falling to 60% for low equity. Most of the time you will succeed with low equity but that doesn't make it a winning choice because the failure cost can be high.

randomguy wrote:
Wed Jan 17, 2018 1:24 pm
But fixed AA are a bit of a unrealistic plan. If you are winning, you can really up the AA. If you portfolio doubles in the first 15 years, you can afford to take on more risk (think about it this way. At the same AA, you are holding 2x as many bonds in absolute dollars as you started with.) If it falls, you can hit the point where you don't want to take more risk (i..e an 80 year old with 15 years of assets left might feel better setting up a TIPS ladder for 10 years versus holding 80/20 and only have 3 years of bonds. Or even break down and buy that annuity.). And of course mild spending cuts (10-15%) when it is clear you are on a bad path can obviously help everything out.
The longer term plan is to look at annuities at the elderly stage - when I'm in the ballpark of 80 or so if I'm still here. That would particularly be a good choice if I was in one of the below average return sequences. It could also be a good compos mentis type insurance so I may do it even if I end up in an above average return sequence. Still have a lot of years to wait though.

randomguy wrote:
Wed Jan 17, 2018 1:24 pm
And of course there is always the chance we will hit a 30 year period where 80/20 doesn't work out well. Compare the japanese 80/20 versus 20/80 guy starting in 1989:)
The Japan investor boogeyman continues to rear its head. If the Japanese investor had been in a world equity weight portfolio they would be doing great. Even with some home market bias they would be fine - perhaps a 60 world/20 Japan/20 fixed portfolio. That would be capped with a nearly 30 year period where total inflation was only 16% compared to 105% in the US. If that Japanese investor had been in the Bogleheads advocated portfolio that was extremely home market biased they would be in more trouble but no rational person would do that.
"Plans are worthless, but planning is everything." - Dwight D. Eisenhower

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Re: Year 2000 retirees using the '4% rule' - Where are they now?

Post by marcopolo » Wed Jan 17, 2018 2:09 pm

Random Poster wrote:
Wed Jan 17, 2018 1:14 pm


My takeaway from it all is that someone will probably be okay for 60 years of retirement life if they:

1) Retire with a portfolio that has an initial balance equal to at least 50 times their annual expenses; and
2) Maintain a 50/50 allocation.
Wow. We are now worried that a 2% withdrawal rate might be risky?!?

I suspect the odds are higher that one would be killed in a car accident driving back and forth to work in the years it takes to go from 40x to 50x than the odds that 40x would cause someone to run out of money in their lifetime.
Once in a while you get shown the light, in the strangest of places if you look at it right.

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Re: Year 2000 retirees using the '4% rule' - Where are they now?

Post by Random Poster » Wed Jan 17, 2018 4:46 pm

marcopolo wrote:
Wed Jan 17, 2018 2:09 pm
Wow. We are now worried that a 2% withdrawal rate might be risky?!?

I suspect the odds are higher that one would be killed in a car accident driving back and forth to work in the years it takes to go from 40x to 50x than the odds that 40x would cause someone to run out of money in their lifetime.
If your annual expenses are low enough and your saving rate is high enough, it really doesn't take all that long to go from having 40 times expenses to 50 times expenses.

But, yes, at least for me, I'm a tad concerned that a 2% withdrawal rate is risky, particularly for a retirement that lasts 40 or 50 years (or longer).

Particularly since what is a 2% withdrawal rate on a $3M 50/50 portfolio can quickly become, in the event of a stock market crash, 2.6% withdrawal rate (or greater) on the now $2.25M portfolio (or lower).

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Re: Year 2000 retirees using the '4% rule' - Where are they now?

Post by randomguy » Wed Jan 17, 2018 5:09 pm

Hyperborea wrote:
Wed Jan 17, 2018 1:56 pm
randomguy wrote:
Wed Jan 17, 2018 1:24 pm



randomguy wrote:
Wed Jan 17, 2018 1:24 pm
And of course there is always the chance we will hit a 30 year period where 80/20 doesn't work out well. Compare the japanese 80/20 versus 20/80 guy starting in 1989:)
The Japan investor boogeyman continues to rear its head. If the Japanese investor had been in a world equity weight portfolio they would be doing great. Even with some home market bias they would be fine - perhaps a 60 world/20 Japan/20 fixed portfolio. That would be capped with a nearly 30 year period where total inflation was only 16% compared to 105% in the US. If that Japanese investor had been in the Bogleheads advocated portfolio that was extremely home market biased they would be in more trouble but no rational person would do that.
Holding 20% of japanese stocks is underweighting your home market by over 50%. I wouldn't call that a home market bias:) Remember in 1989 Japan was about 45% of the global markets while the US was a mere 30%. The fact that it is a mere 10% of todays markets requires knowledge that wasn't available at the time. If you were holding 70% home market/30% ROW (seem like a familiar recommendation that most people would consider rational on this board:)) and rebalancing yearly, life wasn't good. Even with no inflation.

Now I don't think arguing about holding fixed allocations between countries versus floating is the right topic for this thread (although I don't think I have seen a thread about it in a long time). Maybe the world can have below bond level returns for 30+ years and still function. Maybe we can have a global depression that keeps stocks down over 50% for 10 years (i.e. much worse than the great depression). Nobody knows. Past history is clear that taking stock risks has paid off well. But past history is pretty short. We might not have seen any 1:100 events let in the US much less 1:500 ones. Or maybe we have seen 3 1:500 events and it is going to be smooth sailing for the next couple hundred years:)

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Re: Year 2000 retirees using the '4% rule' - Where are they now?

Post by randomguy » Wed Jan 17, 2018 5:18 pm

Random Poster wrote:
Wed Jan 17, 2018 4:46 pm
marcopolo wrote:
Wed Jan 17, 2018 2:09 pm
Wow. We are now worried that a 2% withdrawal rate might be risky?!?

I suspect the odds are higher that one would be killed in a car accident driving back and forth to work in the years it takes to go from 40x to 50x than the odds that 40x would cause someone to run out of money in their lifetime.
If your annual expenses are low enough and your saving rate is high enough, it really doesn't take all that long to go from having 40 times expenses to 50 times expenses.

But, yes, at least for me, I'm a tad concerned that a 2% withdrawal rate is risky, particularly for a retirement that lasts 40 or 50 years (or longer).

Particularly since what is a 2% withdrawal rate on a $3M 50/50 portfolio can quickly become, in the event of a stock market crash, 2.6% withdrawal rate (or greater) on the now $2.25M portfolio (or lower).
And if your SWR goes to 2.66%, who cares? Your failure rate goes from 0% to 0% over 50 years:) I think Marcos point was that your odds of dying in car crash in 1-2 years of commuting is on the order of .01% (hope I got that zero right:) Odds of portfolio failure between 2.5% and 2% is probably the same. If things are grim enough to take out 2.5%, there is a good chance things have broken down enough to take out 2.0% (i.e. odds of the markets falling 90% and staying there are probably about the same as them going to 0 and staying there).

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Re: Year 2000 retirees using the '4% rule' - Where are they now?

Post by marcopolo » Wed Jan 17, 2018 5:23 pm

Random Poster wrote:
Wed Jan 17, 2018 4:46 pm
marcopolo wrote:
Wed Jan 17, 2018 2:09 pm
Wow. We are now worried that a 2% withdrawal rate might be risky?!?

I suspect the odds are higher that one would be killed in a car accident driving back and forth to work in the years it takes to go from 40x to 50x than the odds that 40x would cause someone to run out of money in their lifetime.
If your annual expenses are low enough and your saving rate is high enough, it really doesn't take all that long to go from having 40 times expenses to 50 times expenses.

But, yes, at least for me, I'm a tad concerned that a 2% withdrawal rate is risky, particularly for a retirement that lasts 40 or 50 years (or longer).

Particularly since what is a 2% withdrawal rate on a $3M 50/50 portfolio can quickly become, in the event of a stock market crash, 2.6% withdrawal rate (or greater) on the now $2.25M portfolio (or lower).
I thought i was being very conservative with a planned sub-3% withdrawal rate, but who knows what the future will bring.

Everybody needs to find their own comfort level. So if that is what works for you, then i have no quarrel with that.

For others who maybe reading this and thinking "maybe i need to work 10 more years to get to 50x", i would say consider this:
I think the ERN work shows that 2.6% was HISTORICALLY pretty safe even for long retirements. You are talking about having a 50% drop THEN something worse than the great depression (or 70s inflation) immediately afterwards. Certainly possible, but the odds seem very small. So you are expending a LOT of resources to protect against a very low probability risk.
Once in a while you get shown the light, in the strangest of places if you look at it right.

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Re: Year 2000 retirees using the '4% rule' - Where are they now?

Post by Hyperborea » Wed Jan 17, 2018 6:10 pm

Fixed attribution error in quoted post.
randomguy wrote:
Wed Jan 17, 2018 5:09 pm
Hyperborea wrote:
Wed Jan 17, 2018 1:56 pm
randomguy wrote:
Wed Jan 17, 2018 1:24 pm
And of course there is always the chance we will hit a 30 year period where 80/20 doesn't work out well. Compare the japanese 80/20 versus 20/80 guy starting in 1989:)
The Japan investor boogeyman continues to rear its head. If the Japanese investor had been in a world equity weight portfolio they would be doing great. Even with some home market bias they would be fine - perhaps a 60 world/20 Japan/20 fixed portfolio. That would be capped with a nearly 30 year period where total inflation was only 16% compared to 105% in the US. If that Japanese investor had been in the Bogleheads advocated portfolio that was extremely home market biased they would be in more trouble but no rational person would do that.
Holding 20% of japanese stocks is underweighting your home market by over 50%. I wouldn't call that a home market bias:) Remember in 1989 Japan was about 45% of the global markets while the US was a mere 30%. The fact that it is a mere 10% of todays markets requires knowledge that wasn't available at the time. If you were holding 70% home market/30% ROW (seem like a familiar recommendation that most people would consider rational on this board:)) and rebalancing yearly, life wasn't good. Even with no inflation.

Now I don't think arguing about holding fixed allocations between countries versus floating is the right topic for this thread (although I don't think I have seen a thread about it in a long time). Maybe the world can have below bond level returns for 30+ years and still function. Maybe we can have a global depression that keeps stocks down over 50% for 10 years (i.e. much worse than the great depression). Nobody knows. Past history is clear that taking stock risks has paid off well. But past history is pretty short. We might not have seen any 1:100 events let in the US much less 1:500 ones. Or maybe we have seen 3 1:500 events and it is going to be smooth sailing for the next couple hundred years:)
Actually, I had said 60% world and 20% Japan overweighting. That world amount would have included Japan in it. According to the World Bank data the total world market capitalization at the time was US$11.37T and Japan market capitalization was US$4.26T. So, Japan was about a 37% of world market capitalization. That would make a 20% Japan overweighting sum up to about 42% (37% of 60% + 20%) of the total portfolio. If you were world cap weighted you were at about 30% of total portfolio in the Japanese markets. I agree that many on this board recommend incredibly lopsided country equity allocations just like some here also recommend overall low equity allocations with too high withdrawal rates. Even worse, some suggest both.

Second, nobody had a pot of money that they put into the market on the peak of the Nikkei and then retired on it. They were investing since they were 30 in 1959 (age 60 in 1989) or even for early retirees since 1969 when they were 30 (age 50 in 1989). They got the amazing runup during that time that inflated their portfolio and as they rebalanced they were buying the markets of the ROW on the cheap.

I suspect that an investor who followed such a program would have been fine. They would have a long sustained drop in a portion of their equity portfolio that had seen an amazing amount of growth followed by sharp rise in the remainder of their equities. They would have 20% in cash/bonds to live on coupled with dividends. And they would have had zero inflation. It would be interesting to run the numbers and see how it would have worked out.

I think some home country bias, particularly when one's home country is a small %age of the world market cap, is probably a good thing. So, a Canadian or Brit, for example, may want to hold an over-weighting of 20% of home market to better track domestic inflation. For somebody in a country that already is 20% of more world capitalization (as the US is now or Japan was then) it doesn't seem to make much sense. The oft-quoted Japanese investment boogeyman scenario is really a cautionary tale on too much home market bias.

As for downturns worse and longer than the great depression, I'm not sure that any portfolio would survive and not for direct financial reasons but for political reasons. During the great depression many countries of the world including the US and Britain were on the verge of revolution and anything worse or without the relief that FDR brought to the US would probably have led to the end of the existing financial system.
"Plans are worthless, but planning is everything." - Dwight D. Eisenhower

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Re: Year 2000 retirees using the '4% rule' - Where are they now?

Post by willthrill81 » Wed Jan 17, 2018 7:44 pm

marcopolo wrote:
Wed Jan 17, 2018 2:09 pm
Wow. We are now worried that a 2% withdrawal rate might be risky?!?

I suspect the odds are higher that one would be killed in a car accident driving back and forth to work in the years it takes to go from 40x to 50x than the odds that 40x would cause someone to run out of money in their lifetime.
In all seriousness, the likelihood of a 65 year old surviving to just 84 is only about 50%. And the 'survival curve' drops off like a cliff shortly beyond that age.

Even for children born in 2014, the situation isn't expected to change dramatically, barring some kind of radical breakthrough in life expectancy beyond anything the world has ever seen. Fewer than 1% are expected to survive to age 100.

Image
randomguy wrote:
Wed Jan 17, 2018 5:18 pm
Random Poster wrote:
Wed Jan 17, 2018 4:46 pm
marcopolo wrote:
Wed Jan 17, 2018 2:09 pm
Wow. We are now worried that a 2% withdrawal rate might be risky?!?

I suspect the odds are higher that one would be killed in a car accident driving back and forth to work in the years it takes to go from 40x to 50x than the odds that 40x would cause someone to run out of money in their lifetime.
If your annual expenses are low enough and your saving rate is high enough, it really doesn't take all that long to go from having 40 times expenses to 50 times expenses.

But, yes, at least for me, I'm a tad concerned that a 2% withdrawal rate is risky, particularly for a retirement that lasts 40 or 50 years (or longer).

Particularly since what is a 2% withdrawal rate on a $3M 50/50 portfolio can quickly become, in the event of a stock market crash, 2.6% withdrawal rate (or greater) on the now $2.25M portfolio (or lower).
And if your SWR goes to 2.66%, who cares? Your failure rate goes from 0% to 0% over 50 years:) I think Marcos point was that your odds of dying in car crash in 1-2 years of commuting is on the order of .01% (hope I got that zero right:) Odds of portfolio failure between 2.5% and 2% is probably the same. If things are grim enough to take out 2.5%, there is a good chance things have broken down enough to take out 2.0% (i.e. odds of the markets falling 90% and staying there are probably about the same as them going to 0 and staying there).
Anytime someone starts talking a WR under 3%, my mind says "richest guy in the cemetery" and "hope his heirs don't fight over all that money." I've witnessed both.
Last edited by willthrill81 on Wed Jan 17, 2018 11:51 pm, edited 1 time in total.
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Re: Year 2000 retirees using the '4% rule' - Where are they now?

Post by randomguy » Wed Jan 17, 2018 10:03 pm

Hyperborea wrote:
Wed Jan 17, 2018 6:10 pm
Actually, I had said 60% world and 20% Japan overweighting. That world amount would have included Japan in it. According to the World Bank data the total world market capitalization at the time was US$11.37T and Japan market capitalization was US$4.26T. So, Japan was about a 37% of world market capitalization. That would make a 20% Japan overweighting sum up to about 42% (37% of 60% + 20%) of the total portfolio. If you were world cap weighted you were at about 30% of total portfolio in the Japanese markets. I agree that many on this board recommend incredibly lopsided country equity allocations just like some here also recommend overall low equity allocations with too high withdrawal rates. Even worse, some suggest both.

Second, nobody had a pot of money that they put into the market on the peak of the Nikkei and then retired on it. They were investing since they were 30 in 1959 (age 60 in 1989) or even for early retirees since 1969 when they were 30 (age 50 in 1989). They got the amazing runup during that time that inflated their portfolio and as they rebalanced they were buying the markets of the ROW on the cheap.

I suspect that an investor who followed such a program would have been fine. They would have a long sustained drop in a portion of their equity portfolio that had seen an amazing amount of growth followed by sharp rise in the remainder of their equities. They would have 20% in cash/bonds to live on coupled with dividends. And they would have had zero inflation. It would be interesting to run the numbers and see how it would have worked out.

I think some home country bias, particularly when one's home country is a small %age of the world market cap, is probably a good thing. So, a Canadian or Brit, for example, may want to hold an over-weighting of 20% of home market to better track domestic inflation. For somebody in a country that already is 20% of more world capitalization (as the US is now or Japan was then) it doesn't seem to make much sense. The oft-quoted Japanese investment boogeyman scenario is really a cautionary tale on too much home market bias.

As for downturns worse and longer than the great depression, I'm not sure that any portfolio would survive and not for direct financial reasons but for political reasons. During the great depression many countries of the world including the US and Britain were on the verge of revolution and anything worse or without the relief that FDR brought to the US would probably have led to the end of the existing financial system.
I don't know where you go your numbers exactly but I am guessing they are start of the year 1989. If you use intrayear it goes up to ~45% (Nikki rose ~30k to 37k that year before crashing down) And yes they had a big run up (something like 10x in 10 years). That was great. But if that just got you to 25x, then it really doesn't matter. If it got you to 100x, it is a different story:) The other unknowable question is can you get those type of market returns AND poor bond returns (I want to say japan went from ~8% to 1% over the 10 years the followed. What if they started at say 3 Could you also have noticeable inflation)?

You can google around and find some data on various japanese SWR cases. For most of them something like a 60/40 with 4% SWR has you a bit below your starting value (something like 800k yen if memory serves) after all these years. That is good if your planning on a 30 year retirement. If your looking at 50 it is in that too early to tell stage. I don't remember any 80/20 charts.

And it should be said that we can keep mixing up portfolios for a while. Something with ~40% SV has some really good historical numbers.:)

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