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

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ValueInvestor99
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Joined: Thu Dec 23, 2010 2:25 pm

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

Post by ValueInvestor99 » Tue Nov 21, 2017 1:38 am

Warren Buffets wealth increase by an average of 15% over the past 30 years.
Why can't that be done now?

silver65
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Location: Fairfax, VA

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

Post by silver65 » Tue Jan 09, 2018 7:34 pm

Wow - there are number of great points here.
My sense is that most (some majority) need some amount of money from their investments. I think we are adults - in that we manage our spend and do our best to reduce costs. And accordingly we tighten the belt when needed and spend generously when we want to. For retirees we have some amount of SS and fixed incomes and depending on our lot in life we are trying to figure out the best asset allocation strategy.
Therefore, this is an intellectual problem of trying to determine the optimum asset allocation. Not an emotional problem, i.e. don't like risk, want it simple, think rebalancing is hard or takes too much time. I think I'm like most - I spend and then afterwards (like 10-12 months later) look at the spend and go holy moly! And then I watch the spend until eventually I get sloppy. Go figure.

We all know that the past cannot predict the future. Is it possible that we could lose 40+% in the market? Yes. Yet it was 2008 that was the biggest loss and that happened over a few months. When I look at the Japanese Stock market that downfall lasted 20 years that worries me. So, for me, if the economy is falling off the cliff I have no problem in taking harbor in cash until the worse is over and then getting back in. I've only done this once - 2008 - and only because all signs pointed to an economic collapse. Could I go cash for 20 years - yes - and that would mean I would reduce my planned spend on trips. Instead of European its more USA.

Could this happen gain? Yes and I also believe that everyone on this forum would act and not put their head in the sand. That, IMO, is just being responsible - something that I think most of us do.

Lastly, its my view that those on this forum have the blessing of having the dilemma of having money to invest.

So, what I want to lean is what portfolio asset allocation strategy offers the highest success rate using a 3% distribution rate.
thanks for reading

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

Post by CULater » Thu Jan 11, 2018 2:30 pm

And then there's this from Wade Pfau:
An important and frequently studied question for retirees is: what is the optimal asset allocation during retirement? This article provides a brief but simple message that conservative asset allocations in retirement are quite acceptable after all. A wide range of asset allocations tend to provide very similar results in terms of sustainable withdrawal rates for given probabilities of failure. For example, with Monte Carlo simulations based on historical data parameters, a 4.4 percent withdrawal rate for a 30-year horizon could be supported with a 10 percent chance of failure using a 50/50 asset allocation of stocks and bonds. But the range of stock allocations supporting a withdrawal rate within 0.1 percentage points of this maximum extend from 27 to 87 percent. Though asset allocation will also impact the amount which can be left as bequests, it is the case that relatively low stock allocations can support retirees just as well for a given failure rate and retirement duration.

https://digitalcommons.theamericancolle ... ulty/207/
May you have the hindsight to know where you've been, The foresight to know where you're going, And the insight to know when you've gone too far. ~ Irish Blessing

itstoomuch
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Location: midValley OR

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

Post by itstoomuch » Thu Jan 11, 2018 2:38 pm

IMO,
My greatest mistake was to use a 60/40 portfolio for 30 years.
I should have used a 80/20 which would have enable us to FIRE, to ignore 2007-2009 Great Recession, and to recover from the GR faster.
Our Discretionary Accts is all equity with sojourns into cash. Our deferred annuities are all equity and act as our secured and high yield
component. Our rentals (in total) act as Income annuities/pension of moderate yield.
YMMV
Rev012718; 4 Incm stream buckets: SS+pension; dfr'd GLWB VA & FI anntys, by time & $$ laddered; Discretionary; Rentals. LTCi. Own, not asset. Tax TBT%. Early SS. FundRatio (FR) >1.1 67/70yo

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

Post by gluskap » Thu Jan 11, 2018 5:34 pm

Totally agree with your analysis. This is why my current asset allocation is about 95/5. And the 5% is only because I use muni bonds in my taxable account as a second layer of my emergency fund otherwise I'd be 100/0. As I approach retirement, I slowly plan to increase my bond holding to probably somewhere between 80/20 or 60/40 which would give me about 5-10 years of expenses in bonds as a second bucket to withdraw from in down years. But after I retire, I would not rebalance and as stocks continue to rise over time, I will have a rising equity glidepath in retirement.

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

Post by Sandi_k » Fri Jan 12, 2018 5:42 pm

We have been 80/20 to 95/5 in stocks for a long time, depending on rebalancing bands. Our plan is to have a "withdrawal" account of $250k in cash/CDs upon retirement.

Our withdrawal plan from the portfolio is to start with 3.75% for the first 5 years, then drop to 3.5% when DH elects SS at his full retirement age. With RMDs starting for him 3 years after that, and 5 years for me (the higher earner, delaying to age 70), we have no qualms about that being a SWR.

Our execution plan does NOT assume a COLA on the 3.75% withdrawal rate - we'll just withdraw a flat 3.75% of the portfolio balance on January 2 each year. Since my pension and our SS will be COLA-adjusted, we feel that not doing inflation adjustments on the portfolio withdrawals will give us an extra edge.

Simple, clean, and not stressful - with a very high rate of modeled success.

Grt2bOutdoors
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Location: New York

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

Post by Grt2bOutdoors » Fri Jan 12, 2018 6:06 pm

Sandi_k wrote:
Fri Jan 12, 2018 5:42 pm
We have been 80/20 to 95/5 in stocks for a long time, depending on rebalancing bands. Our plan is to have a "withdrawal" account of $250k in cash/CDs upon retirement.

Our withdrawal plan from the portfolio is to start with 3.75% for the first 5 years, then drop to 3.5% when DH elects SS at his full retirement age. With RMDs starting for him 3 years after that, and 5 years for me (the higher earner, delaying to age 70), we have no qualms about that being a SWR.

Our execution plan does NOT assume a COLA on the 3.75% withdrawal rate - we'll just withdraw a flat 3.75% of the portfolio balance on January 2 each year. Since my pension and our SS will be COLA-adjusted, we feel that not doing inflation adjustments on the portfolio withdrawals will give us an extra edge.

Simple, clean, and not stressful - with a very high rate of modeled success.
The key term is your retirement plan has a “floor”. One can talk about having a high equity allocation but without that “floor” would you be so sure about having a high rate of success and one that is not stressful to you. Have you been 80/20+ including the value of your pension? How about including Social Security?

Those reading this thread should pay particular attention to the components of many of the various posters portfolio before trying this out in “real life”. It’s one thing to model it or backtest, it’s another to live it in “real-time”. The average retiree will not do well holding a 90+% equity portfolio.
"One should invest based on their need, ability and willingness to take risk - Larry Swedroe" Asking Portfolio Questions

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

Post by flyingaway » Fri Jan 12, 2018 7:24 pm

garlandwhizzer wrote:
Sun Nov 19, 2017 8:04 pm
nedsaid wrote:
I don't know. From my experience and having known a lot of "old" people and becoming one myself, it just doesn't seem practical that people are going to maintain 100% and 90% stock allocations throughout retirement. It seems that most people I know get more risk averse as they get older.
1+

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

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

Garland Whizzer
I totally agree.

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

Post by Sandi_k » Fri Jan 12, 2018 7:24 pm

Grt2bOutdoors wrote:
Fri Jan 12, 2018 6:06 pm

The key term is your retirement plan has a “floor”. One can talk about having a high equity allocation but without that “floor” would you be so sure about having a high rate of success and one that is not stressful to you. Have you been 80/20+ including the value of your pension? How about including Social Security?

Those reading this thread should pay particular attention to the components of many of the various posters portfolio before trying this out in “real life”. It’s one thing to model it or backtest, it’s another to live it in “real-time”. The average retiree will not do well holding a 90+% equity portfolio.
Absolutely agreed. You are correct, one reason I was willing to be 90/10 for years was because I treated my pension and SS as "bonds" in my thinking about my portfolio.

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