30/70 is as good as 60/40

[GoneOnTilt]

When I used the Vanguard Retirement Nest Egg Calculator to analyze safe withdrawal rates, a 60/40 portfolio has a 91% success rate over 30 years at a 4% withdrawal rate.

A 30/70 portfolio has a success rate of...90%.

Why would anyone take so much more risk to achieve essentially the same result?

[acegolfer]

When I used the Vanguard Retirement Nest Egg Calculator to analyze safe withdrawal rates, a 60/40 portfolio has a 91% success rate over 30 years at a 4% withdrawal rate.

A 30/70 portfolio has a success rate of...90%.

Why would anyone take so much more risk to achieve essentially the same result?

Does "the same result" include the same future balance in 30 yrs? I bet no hence I would not call them same result. You are using a very narrow definition to claim "same result".

[theorist]

Some people are accumulating for the next generation, or for charity. Usually on average, even if both portfolios have a high success rate, the final dollar amount in the one with higher equity allocation is significantly higher.

[abuss368]

I would consider the asset allocation that will allow you to sleep well at night. One portfolio has double the equities. Stocks can lose 50% (or more) in a serious market pullback.

[TheTimeLord]

I don't know for sure but I would guess in while both succeed at essentially the same rate for 30 years , 60/40 is likely to have a higher residual value after 30 years in most cases and position you better if your retirement exceeds 30 years because you have the misfortune of living longer than planned.

[financeperchance]

Well that's weird. And check this out, this is the Monte Carlo of a 25 year-old contributing $6,000 to their Roth IRA for 40 years, in a 30/70 portfolio (notice how the unluckiest 10% still is a millionaire!):

[TheTimeLord]

https://earlyretirementnow.com/2016/12/ ... t-1-intro/

[TheTimeLord]

Well that's weird. And check this out, this is the Monte Carlo of a 25 year-old contributing $6,000 to their Roth IRA for 40 years, in a 30/70 portfolio (notice how the unluckiest 10% still is a millionaire!):

My I ask what you point is?

[Rick Ferri]

This is a good example of the uselessness of past performance.

30-years ago the 10-year Treasury was at 8.4%. Today it's at 1.5%.

Rick Ferri

[financeperchance]

Well that's weird. And check this out, this is the Monte Carlo of a 25 year-old contributing $6,000 to their Roth IRA for 40 years, in a 30/70 portfolio (notice how the unluckiest 10% still is a millionaire!):

My I ask what you point is?

Data can show weird results? Not sure I have a point other than that lol

[Rick Ferri]

You can find data to prove whatever you want to believe.

[GoneOnTilt]

Well that's weird. And check this out, this is the Monte Carlo of a 25 year-old contributing $6,000 to their Roth IRA for 40 years, in a 30/70 portfolio (notice how the unluckiest 10% still is a millionaire!):

My I ask what you point is?

I'll take a stab at that. His point is that you can still do extremely well -- over the long haul, even in the accumulation phase, and with MUCH less risk -- with a 30/70 portfolio.

[GoneOnTilt]

You can find data to prove whatever you want to believe.

Rick - Thanks for responding. I'm a big fan. Can you explain further? Would the Monte Carlo simulation not be considered, at least to some degree, an objective finding, or objective estimate? I wasn't trying to justify a preconceived notion (well, maybe a little ). I was trying to look for an objective analysis.

[financeperchance]

I'll take a stab at that. His point is that you can still do extremely well -- over the long haul, even in the accumulation phase, and with MUCH less risk -- with a 30/70 portfolio.

I'm not sure if that is the point, I've kind of wrestled with that question myself. We are several decades in to a very long bond bull market. But the future is unknowable, and if it doesn't matter whether you're at $2 million or $10 million at retirement, but you very much want the risk of being under $1 million to be as low as possible--then maybe you should be more in bonds than you think. Me personally, I'm at 50/50 and sleep well at night, but I have no need at this point to take excess risk to reach my financial goals.

[HomerJ]

When I used the Vanguard Retirement Nest Egg Calculator to analyze safe withdrawal rates, a 60/40 portfolio has a 91% success rate over 30 years at a 4% withdrawal rate.

A 30/70 portfolio has a success rate of...90%.

Why would anyone take so much more risk to achieve essentially the same result?

Does the Vanguard Retirement Nest Egg Calculator include all 30 year periods in the past 100 years?

Because the last 40 years have been VERY good for bonds (falling interest rates). The 30 years BEFORE that were not very good for bonds. Those years need to be included in any calculator for one to see what a bad case for bonds looks like.

[acegolfer]

Well that's weird. And check this out, this is the Monte Carlo of a 25 year-old contributing $6,000 to their Roth IRA for 40 years, in a 30/70 portfolio (notice how the unluckiest 10% still is a millionaire!):

Are you sure with the inputs? =FV(6.22%,40,6000,0,1) = $1.04M, no where near close to $1.44M.

To have 10th percentile be $1.44M in 40 yrs, investment requires =RATE(40,-6000,0,1444094,1) = 7.44% annual return. Doubt it at the 10th percentile.

[knpstr]

When I used the Vanguard Retirement Nest Egg Calculator to analyze safe withdrawal rates, a 60/40 portfolio has a 91% success rate over 30 years at a 4% withdrawal rate.

A 30/70 portfolio has a success rate of...90%.

Why would anyone take so much more risk to achieve essentially the same result?

Seems to me a 91% vs 90% success rate is NOT taking on "much more risk", in fact as the numbers show, it is actually LESS risky.

[financeperchance]

You can find data to prove whatever you want to believe.

Would the Monte Carlo simulation not be considered, at least to some degree, an objective finding, or objective estimate?

I'm not Rick, but *ahem* Monte Carlos can show many things. Here's one, obviously not true, but it shows you can retire with $1M all in Microsoft stock and have a 6% safe withdrawal rate, with a 50% chance of making it onto the Forbes 400 list lol:

[tibbitts]

When I used the Vanguard Retirement Nest Egg Calculator to analyze safe withdrawal rates, a 60/40 portfolio has a 91% success rate over 30 years at a 4% withdrawal rate.

A 30/70 portfolio has a success rate of...90%.

Why would anyone take so much more risk to achieve essentially the same result?

90% and 91% are not "essentially the same", but I think almost nobody is treating 4% for 30 years as a reasonable approach these days, regardless of your choice of ratio.

[financeperchance]

Well that's weird. And check this out, this is the Monte Carlo of a 25 year-old contributing $6,000 to their Roth IRA for 40 years, in a 30/70 portfolio (notice how the unluckiest 10% still is a millionaire!):

Are you sure with the inputs? =FV(6.22%,40,6000,0,1) = $1.04M, no where near close to $1.44M.

Contribution increases at inflation rate. I'm not saying the Monte Carlo should inform your investment decision, by the way.

[GoneOnTilt]

When I used the Vanguard Retirement Nest Egg Calculator to analyze safe withdrawal rates, a 60/40 portfolio has a 91% success rate over 30 years at a 4% withdrawal rate.

A 30/70 portfolio has a success rate of...90%.

Why would anyone take so much more risk to achieve essentially the same result?

Seems to me a 91% vs 90% success rate is NOT taking on "much more risk", in fact as the numbers show, it is actually LESS risky.

So, the chance of losing nearly twice your savings in a down market with a 60/40 vs 30/70 portfolio is less risky? That makes no sense.

The worst year of a 60/40 portfolio experienced a 26% loss. The worst year for 30/70 was 14%. So you'd lose 12% more of your savings, for a 1% increased chance of portfolio survival over 30 years.

That's MORE risky, by any standard.

[GoneOnTilt]

When I used the Vanguard Retirement Nest Egg Calculator to analyze safe withdrawal rates, a 60/40 portfolio has a 91% success rate over 30 years at a 4% withdrawal rate.

A 30/70 portfolio has a success rate of...90%.

Why would anyone take so much more risk to achieve essentially the same result?

90% and 91% are not "essentially the same", but I think almost nobody is treating 4% for 30 years as a reasonable approach these days, regardless of your choice of ratio.

I do. I use a 1.5% real return rate.

[nisiprius]

The broad outlines of every study I've seen are about the same as those shown by Vanguard's calculator. However, it is important to distinguish between "safe withdrawal rate" and probability of failure, and "average terminal wealth."

What safe withdrawal rate studies uniformly show is that the safe withdrawal rate is almost independent of asset allocation for a very broad range in the middle, as long as you stay away from the extremes. 100% stocks is bad, 100% bonds is bad.

But do click the "projected savings balance" button.

Yep--the chances of running out of money are about 10% each way, but with 30/70 the "50% range" of final wealth is about $1.2 to $4 million, and with 60/40 it's about $2 to $10 million.





The broad outlines are always about the same, but the interpretations and conclusions people come to are wildly different. The general thing is that if you plan prudently, on the possibility that stocks may do poorly, and look at, say, the 10% percentile of stock market performance, the conclusion you come to is that a bad period for stocks is about the same as a bad period for bonds. But a good period for stocks is far better than a good period for bonds. The result is that a high stock allocation leads to a portfolio that is "riskier" in the sense of being more uncertain, yet it is all "upside risk."

So the paradox is that increased stocks lead to a high probability of greater wealth, yet no more security. If you are trying to be prudent, a high stock allocation does not let you safely save less during accumulation, and it does not let you safely spend more in retirement. I once formulated a notion that, to a conservative investor, stocks are like free lottery tickets with a darned good chance of paying off a decent little jackpot. But you cannot plan on that or count on it.

[Random Walker]

I’ve had MCS done on my own portfolio, and have likewise found the results enlightening and somewhat surprising. The biggest surprise for me is that, after getting clear on specific financial goals, distinguishing needs from wants, there is quite a lack of sensitivity of success rates to basic / stock bond split. For me, I was surprised to see essentially same success rates from 40/60 to 60/40. Yes, as the equity allocation is increased, the mean terminal wealth is also increased. But also the whole potential dispersion of returns widens substantially. This is why at a certain point success rates actually decrease with increasing equity allocation. Based on MCS, I’ve sort of surprised myself with a lower than I expected equity allocation. At age 57, I’m 40% equities.

Dave

[abuss368]

Interesting that the examples only includes Total Stock and Total Bond.

No international, REITs, Small Caps, etc.

[muffins14]

The 30/70 will likely struggle more in an inflationary environment than the 60/40. That’s a risk you’re not accounting for

[garlandwhizzer]

Rick Ferri wrote:

This is a good example of the uselessness of past performance.

30-years ago the 10-year Treasury was at 8.4%. Today it's at 1.5%.

1+

This hits the nail on the head. Investors love backtesting results because it derives a number and a number gives the illusion of certainty. As Rick says the result of backtesting in this case will be a joke going forward. Backtesting is often a very flawed guide to the future and especially so in the case of backtesting bond returns at this point after a massive 3+ decade bull market in bonds that has a zero chance of repeating with current rates at historical lows. Going forward for the foreseeable future safe bonds are unlikely to return significantly more than inflation. Loading up with 70% of safe but zero real return assets is not be a good idea for everyone. At best, backtesting suggests, but it never defines the future.

Garland Whizzer

[KlangFool]

When I used the Vanguard Retirement Nest Egg Calculator to analyze safe withdrawal rates, a 60/40 portfolio has a 91% success rate over 30 years at a 4% withdrawal rate.

A 30/70 portfolio has a success rate of...90%.

Why would anyone take so much more risk to achieve essentially the same result?

bck63,

What is your assumption of the portfolio size? 25X? 30X?

KlangFool

[Forester]

Why would anyone take so much more risk to achieve essentially the same result?

If/when there's a bond bear market the 40%/70% leg will look just as risky as stocks.

[Ramjet]

Delete

[KlangFool]

Why would anyone take so much more risk to achieve essentially the same result?

If/when there's a bond bear market the 40%/70% leg will look just as risky as stocks.

Forester,

A bond bear market will never be as bad as a stock bear market. Especially when someone is using Intermediate-term bond. So, the statement that it is just as risky is not correct.

KlangFool

[rai]

I think the 'same result' is defined by same rate of failure, as in 9-10% failure. But the average portfolio over all outcomes would be higher with the higher stock allocation. IOW the bond heavy portfolio is a lot of swinging for singles and the stocks are more swinging for the fences. Maybe the 3 point shot in basketball would be better, might not be as percentage safe as a layup but it pays off far more.


So if you were on one of the 90% tracks that are not failures you could spend more or have more to pass on at the end.

[AerialWombat]

deleted

[rai]

I think almost nobody is treating 4% for 30 years as a reasonable approach these days, regardless of your choice of ratio.

I think (speaking for myself) that 4% is a misnomer (because) when age 70 hits the SS payments will cover 30-40% of spending.

maybe 4.3% at age 60 throttle down 3.3% at age 70 (with a bump from SS)

I mean 4% rule sounds like you need to withdraw and spend 4% plus inflation but the fact is when taking SS late that will compensate for anything that 4% had lacking (IMO)?

[randomguy]

You can find data to prove whatever you want to believe.

Rick - Thanks for responding. I'm a big fan. Can you explain further? Would the Monte Carlo simulation not be considered, at least to some degree, an objective finding, or objective estimate? I wasn't trying to justify a preconceived notion (well, maybe a little ). I was trying to look for an objective analysis.

Monte Carlo simulations are biased the developers assumptions and biases. A computer can spit out numbers easily. Doesn't mean they are accurate.

[Nestegg_User]

Why would anyone take so much more risk to achieve essentially the same result?

If/when there's a bond bear market the 40%/70% leg will look just as risky as stocks.

that's if you are in bond funds, an especially if it's in junk or (potentially) foreign bond funds

short to intermediate higher quality won't be as susceptible to losses {I don't use long term bonds, use individual treasuries where I'll get my return and principal, and don't touch international bonds}

I have 45% equities (3.5% max wr, but haven't even hit two since retiring) in retirement in my sixties (still delaying starting SS) as when we planned on retiring we wanted to insure that we didn't have to return to the salt mines....and currently (at just shy of three large plus pension) we don't have to nor do we likely have that much "personal capital" any more to replace any portfolio losses. Hence, the 45% is SWAN
Having looked at prior allocation results, the lowest equity levels for complete survival was at about 35%... but as most of previous periods were at higher bond rates, it seemed prudent to raise the equity level a bit to offset the lower rates with a fairly small concomitant risk of portfolio losses in downturns. We similarly limited max withdrawal rate to 3.5% as that (per papers by Estrada and others) is the safemax that most other developed markets have had and that we expect that the US will fall into the same range in the future as it won't have as favorable tailwind as it had post-WW2.

[nisiprius]

Another detail is that result depends in an obvious way on what, to you, is an acceptable failure rate.

The chances of throwing a "two" with on a pair of dice is 2.7%. For me, personally, that's a reasonably high failure probability when you consider that it is a prediction or a model, and that in real life, things go wrong consistently more often than planned. If you look at SWRs that keep the failure rate at, say, 3%, you generally see a very flat rate, about the same for most asset allocation in the middle, rising only when you get close to 100% stocks or 100% bonds.

If, on the other hand, you are willing to accept a 22% failure rate, then with 5% withdrawals, Vanguard's calculator is showing me a 43% failure rate at 20/80, but 22% failure rate at 80/20.

So, the decision of what is considered "acceptable" determines the results you get. Don't be too quick to accept that a 5% failure rate is necessarily a good one-size-fits-all value. And be skeptical about claims that high stock allocations reduce failure rates, because this tends to be true if and only if you are using a high withdrawal rate and the "lower" failure rate is merely the lowest of many high rates.

Why this happens is easy to understand. Bonds have a low but predictable return, with less variability. Therefore, just as the term "fixed income" suggests, bonds have a certain return they can deliver, with a high rate of success if you stay under it, but falling off a cliff if you exceed it. Stocks have a very soft, gradual, very wide range of possible returns. So with an aggressive rate of withdrawal that is "too high" for bonds, with a high stock allocation you have a chance of sustaining it, but with a high bond allocation that becomes unlikely. But the point is, "lower chances of failure" we are talking about, say 22% with stocks, is only relatively low in comparison to the 43% for bonds.

[nisiprius]

Why would anyone take so much more risk to achieve essentially the same result?

If/when there's a bond bear market the 40%/70% leg will look just as risky as stocks.

It really shouldn't, because virtually all of these SWR studies include results back to at least 1926 (start of CRSP data sets) and often to 1871 (start of Cowles Commission data sets), and thus are supposedly based on time periods that included bond bear markets. That is, they are not supposed to have recency bias (unless you call 1926 "recent.")

Vanguard, for example, says--my underlining

For stock market returns we use the Standard & Poor’s 500 Index from 1926 to 1970, the Dow Jones Wilshire 5000 Index from 1971 through April 2005, and the MSCI US Broad Market Index thereafter. For bond market returns, we use the Standard & Poor’s High Grade Corporate Index from 1926 to 1968, the Citigroup High Grade Index from 1969 to 1972, the Barclays US Long Credit AA Index from 1973 to 1975, and the Barclays Capital US Aggregate Bond Index thereafter. For the returns on short-term reserves (i.e., ‘cash’), we use the Citigroup 3-Month Treasury Bill Index. For inflation, we use the changes in the annual Consumer Price Index from 1926 through last year.

[watchnerd]

I don't know for sure but I would guess in while both succeed at essentially the same rate for 30 years , 60/40 is likely to have a higher residual value after 30 years in most cases and position you better if your retirement exceeds 30 years because you have the misfortune of living longer than planned.

This is why I love this site...

Only on Bogleheads is an unexpectedly long life considered a misfortune.

[randomguy]

When I used the Vanguard Retirement Nest Egg Calculator to analyze safe withdrawal rates, a 60/40 portfolio has a 91% success rate over 30 years at a 4% withdrawal rate.

A 30/70 portfolio has a success rate of...90%.

Why would anyone take so much more risk to achieve essentially the same result?

Why would anyone go 30/70 instead of 60/40? Why would you pick a path that results in
a) lower succcess rate (granted not by much)
b) lower portfolio terminal velocity
c) more risk if you live an extra 5-10 years. Sure it isn't likely but why take on more risk when you don't have to
d) more risk if I end up needing more money in 20 years. I am estimating expenses. I could be wrong.

Why would you pass up all those benefits for a slightly smoother ride?

[Nestegg_User]

I don't know for sure but I would guess in while both succeed at essentially the same rate for 30 years , 60/40 is likely to have a higher residual value after 30 years in most cases and position you better if your retirement exceeds 30 years because you have the misfortune of living longer than planned.

This is why I love this site...

Only on Bogleheads is an unexpectedly long life considered a misfortune.

Watchnerd

I consider the range of expected lifespan to be 78 with sd of about 7.4, so to me age 93 is at effectively the third sd, and with a history of no real longevity in the family (only one past 85 in all known family) and given prior history for longevity for those in my prior career (definitely a consideration of the environmental versus hereditary factors), the odds that I'd go beyond thirty years of retirement is extremely low but even then I wouldn't be totally out of money as I'd still have SS and pension (along with the paid off house) in the absolute worst case.

eta (for randomguy): the marginal benefits of the funds are negligible for us (no "hares")
If we had wanted more we would have kept w@rking, but at 33% fed marginal rate plus state taxes it really didn't move the needle for us as to retirement readiness... it was time.

[watchnerd]

This is a good example of the uselessness of past performance.

30-years ago the 10-year Treasury was at 8.4%. Today it's at 1.5%.

Rick Ferri

+1

In my planning, I'm assuming 0.7% to 2.2% nominal returns for various types of Treasuries over next 10 years.

[luckyducky99]

When I used the Vanguard Retirement Nest Egg Calculator to analyze safe withdrawal rates, a 60/40 portfolio has a 91% success rate over 30 years at a 4% withdrawal rate.

A 30/70 portfolio has a success rate of...90%.

Why would anyone take so much more risk to achieve essentially the same result?

Seems to me a 91% vs 90% success rate is NOT taking on "much more risk", in fact as the numbers show, it is actually LESS risky.

So, the chance of losing nearly twice your savings in a down market with a 60/40 vs 30/70 portfolio is less risky? That makes no sense.

The worst year of a 60/40 portfolio experienced a 26% loss. The worst year for 30/70 was 14%. So you'd lose 12% more of your savings, for a 1% increased chance of portfolio survival over 30 years.

That's MORE risky, by any standard.

But the question that simulator is trying to guess at an answer at is "how likely are you to be broke after 30 years". That is the standard that analysis is using.

So by that standard, no, it is not more risky.

If you want to consider other aspects like "worst year" or "biggest drawdown" or anything else as part of what you're evaluating, then you need to do an analysis that includes those other features. This nest egg monte carlo simulator doesn't care about those things. They are not "risks" at all in this framework.

[Garco]

The strategy may well depend a lot on how old you are and what stage in career you are at now.

I'm 75 years old, retired for 5.5 years. Living on Social Security + RMD's from my main 401k retirement account. In addition I have a much smaller investment account that's a mix with about 33% in tax-deferred and 67% in taxable investments. Zero debt or other major financial obligations (no loans of any kind). Total net worth (counting real estate) of >$4 million, based largely on my 43-year working career.

At this stage and age, it doesn't much matter whether I have 30/70 or 60/40 in my main retirement account. As it happens, I've got 49/51 in that account and see no compelling reason to micromanage the percentages according to a glide-path formula. I need to generate cash to meet RMD's (both in my main retirement account and my supplemental [about 25% of that is in tax-deferred IRA, the rest in a brokerage account]). Otherwise I occasionally draw on my supplemental non-tax deferred investments to purchase a big-ticket item such as a car.

[Unladen_Swallow]

When I used the Vanguard Retirement Nest Egg Calculator to analyze safe withdrawal rates, a 60/40 portfolio has a 91% success rate over 30 years at a 4% withdrawal rate.

A 30/70 portfolio has a success rate of...90%.

Why would anyone take so much more risk to achieve essentially the same result?

Seems to me a 91% vs 90% success rate is NOT taking on "much more risk", in fact as the numbers show, it is actually LESS risky.

. Keen eye..

[GoneOnTilt]

When I used the Vanguard Retirement Nest Egg Calculator to analyze safe withdrawal rates, a 60/40 portfolio has a 91% success rate over 30 years at a 4% withdrawal rate.

A 30/70 portfolio has a success rate of...90%.

Why would anyone take so much more risk to achieve essentially the same result?

Seems to me a 91% vs 90% success rate is NOT taking on "much more risk", in fact as the numbers show, it is actually LESS risky.

. Keen eye..

But incorrect.

[GoneOnTilt]

When I used the Vanguard Retirement Nest Egg Calculator to analyze safe withdrawal rates, a 60/40 portfolio has a 91% success rate over 30 years at a 4% withdrawal rate.

A 30/70 portfolio has a success rate of...90%.

Why would anyone take so much more risk to achieve essentially the same result?

Seems to me a 91% vs 90% success rate is NOT taking on "much more risk", in fact as the numbers show, it is actually LESS risky.

So, the chance of losing nearly twice your savings in a down market with a 60/40 vs 30/70 portfolio is less risky? That makes no sense.

The worst year of a 60/40 portfolio experienced a 26% loss. The worst year for 30/70 was 14%. So you'd lose 12% more of your savings, for a 1% increased chance of portfolio survival over 30 years.

That's MORE risky, by any standard.

If you want to consider other aspects like "worst year" or "biggest drawdown" or anything else as part of what you're evaluating, then you need to do an analysis that includes those other features.

I did, right in the post. I analyzed the benefit of having 1% more survival rate vs the risk of losing 14% more of your portfolio. To me at least, it's a no brainer. The minuscule benefit isn't worth the significant additional risk.

[Northern Flicker]

When I used the Vanguard Retirement Nest Egg Calculator to analyze safe withdrawal rates, a 60/40 portfolio has a 91% success rate over 30 years at a 4% withdrawal rate.

A 30/70 portfolio has a success rate of...90%.

Why would anyone take so much more risk to achieve essentially the same result?

What is your measure of risk? If it is the risk of running out of money while still needing to make withdrawals, then the calculation or simulation is suggesting that 60/40 is not riskier than 30/70 with that one risk measure.

[MotoTrojan]

Because bond returns of the past are unlikely to continue.

[Unladen_Swallow]

When I used the Vanguard Retirement Nest Egg Calculator to analyze safe withdrawal rates, a 60/40 portfolio has a 91% success rate over 30 years at a 4% withdrawal rate.

A 30/70 portfolio has a success rate of...90%.

Why would anyone take so much more risk to achieve essentially the same result?

Seems to me a 91% vs 90% success rate is NOT taking on "much more risk", in fact as the numbers show, it is actually LESS risky.

. Keen eye..

But incorrect.

Nope.