tag:blogger.com,1999:blog-5621914599310831423.post3415495586554632749..comments2024-03-01T03:44:39.796-08:00Comments on The Retirement Café: Unraveling Retirement Strategies: Constant-Dollar Spending (4% Rule)Dirk Cottonhttp://www.blogger.com/profile/05616143752082768155noreply@blogger.comBlogger45125tag:blogger.com,1999:blog-5621914599310831423.post-75244778299828554302018-09-17T22:48:49.126-07:002018-09-17T22:48:49.126-07:00This comment has been removed by a blog administrator.Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-5621914599310831423.post-52769310565919449542018-09-17T09:40:48.023-07:002018-09-17T09:40:48.023-07:00This comment has been removed by a blog administrator.Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-5621914599310831423.post-56631758034003997242018-09-15T22:55:09.968-07:002018-09-15T22:55:09.968-07:00This comment has been removed by a blog administrator.Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-5621914599310831423.post-44604703364228331112018-05-15T19:17:11.258-07:002018-05-15T19:17:11.258-07:00Enjoyed studying this, very good stuff, thanks.Enjoyed studying this, very good stuff, thanks.Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-5621914599310831423.post-62686667905924875572018-02-19T05:05:43.032-08:002018-02-19T05:05:43.032-08:00A couple of years ago, Meb Faber did an analysis l...A couple of years ago, Meb Faber did an analysis looking at a number of published asset allocation models. He just looked at them from an accumulation standpoint from about 1972 to 2013. The basic conclusions was that most of the models clustered fairly close to the traditional 60/40 and that fees were more important than any reasonable asset allocation model. He took the best performing model by Mohamed El-Arian and showed that by adding 1.25% fees it would under-perform most asset allocation models and at 2.25% fees it became the worst performing model. https://www.amazon.com/gp/product/B00TYY3F3C/ref=as_li_tl?ie=UTF8&camp=1789&creative=390957&creativeASIN=B00TYY3F3C&linkCode=as2&tag=worbet-20<br /><br />So a relatively simple diversified asset allocation with 40% - 60% equities and low fees is probably as much certainty as possible in this business.Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-5621914599310831423.post-68026929531754043652018-02-16T11:46:23.134-08:002018-02-16T11:46:23.134-08:00I agree with your analysis. I think there is only ...I agree with your analysis. I think there is only a small chance that Social Security will go away, though a better chance that benefits will be reduced. If it does, what will you do? For most households, it is effectively impossible to finance retirement without it.<br /><br />I am a proponent of looking at retirement from at least two perspectives. First, plan the upside so the probability of bankruptcy is quite low, then have a backup plan (a floor) in case the low probability scenarios come to pass.<br /><br />Thanks for sharing!Dirk Cottonhttps://www.blogger.com/profile/05616143752082768155noreply@blogger.comtag:blogger.com,1999:blog-5621914599310831423.post-4588021854422177002018-02-16T11:11:08.241-08:002018-02-16T11:11:08.241-08:00I hear an interesting undertone from many people w...I hear an interesting undertone from many people who claim that no Social Security or pension will be there for them in the future. As a result, they are entirely focused on their portfolio to save them.<br /><br />I have a different take. We plan on deferring my SS to 70 as mine should be close to the maximum available, recognizing the current actuarial year 2034 21% haircut challenge. My spouse has a NYS pension that is 90% funded using somewhat optimistic assumptions, so it is one of the better pension funds out there.<br /><br />Between our SS and pension, we should have a comfortable middle-class floor income even if there are 20% haircuts down the road on both. This floor income should be largely unassailable in bankruptcy and would be difficult to steal in its entirety through hacking financial accounts. This income alone should cover all of our normal fixed costs and then some.<br /><br />Our portfolio will provide the "fun money" as well as long-term care security etc. The portfolio will have something like a 50/50 stock-bond split with a mix of US and international equities and the fixed income side focused on high quality bonds and some cash.<br /><br />I am under no illusion that if the social, economic, and financial system were to collapse to the point that SS and NYS pensions take 50% + haircuts, that my portfolio would be oblivious to this. Instead, I think we would be looking at a 1930s type of investing scenario or worse. So I throw massive loss of SS etc. into that 20% bucket that Bernstein discusses where all hell breaks loose and the outcome of everything becomes uncertain. So I don't worry about it because I have no idea how to effectively hedge against it short of becoming a billionaire and buying my own island high enough to avoid rising seas.Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-5621914599310831423.post-64430553156464528142018-02-16T10:45:37.925-08:002018-02-16T10:45:37.925-08:00When you publish a comment, do you see a check-box...When you publish a comment, do you see a check-box to the right of the PUBLISH and PREVIEW buttons labelled "Notify Me"? If you see that, then checking the box should notify you when someone responds to your own comment.Dirk Cottonhttps://www.blogger.com/profile/05616143752082768155noreply@blogger.comtag:blogger.com,1999:blog-5621914599310831423.post-50225767087562889442018-02-16T10:43:37.764-08:002018-02-16T10:43:37.764-08:00Paul, you are correct. One of the oldest criticism...Paul, you are correct. One of the oldest criticisms of Bengen's and similar studies, which are based on the probability of ruin, is that they consider a 30-year retirement and treat a plan that supports 9 years or 29 years equal failures and plans that support 30 years or 40 years equal successes. This is one of the reasons I have suggested abandoning P(ruin) as a metric, as has Moshe Milevsky.<br /><br />In simulations of tens of thousands of scenarios, there will be many scenarios that come up just short and many that barely survive. I suspect that they average each other out.<br /><br />The answer is to look at the distribution of outcomes rather than draw a line in the sand and claim victory just on the other side. The answer also includes randomizing life expectancies instead of assuming a 30-year retirement – a portfolio that fails after 20 years isn't a problem if you only live 19.<br /><br />My simulations always provide distributions of outcomes and random lifetimes.<br /><br />Bottom line, a simple SWR simulation with fixed lifetimes and a single hurdle for success like P(ruin) isn't very useful. That's why I don't recommend calculators like the one mentioned in another comment to this post. They provide a very shallow understanding of the problem.Dirk Cottonhttps://www.blogger.com/profile/05616143752082768155noreply@blogger.comtag:blogger.com,1999:blog-5621914599310831423.post-24926271678085396382018-02-16T10:41:43.401-08:002018-02-16T10:41:43.401-08:00
I publish this link with some reluctance as I des...<br />I publish this link with some reluctance as I describe in a reply to the following post. These calculators provide a VERY shallow understanding of the issues. <br /><br />Here are a few concerns with this one. It works with a fixed length of retirement rather than simulating random life expectancies. It uses a constant-dollar withdrawal amount. It simulates 90 scenarios when 10,000 would be more appropriate. It provides mean outcomes when, given the number of expected outliers, the median would be more valuable (and probably lower). A distribution of outcomes would be even better.<br /><br />Play with these simulators if they help but put very little confidence in the results.Dirk Cottonhttps://www.blogger.com/profile/05616143752082768155noreply@blogger.comtag:blogger.com,1999:blog-5621914599310831423.post-14556391476772263082018-02-16T10:40:43.556-08:002018-02-16T10:40:43.556-08:00This comment has been removed by the author.Dirk Cottonhttps://www.blogger.com/profile/05616143752082768155noreply@blogger.comtag:blogger.com,1999:blog-5621914599310831423.post-44573301652884781812018-02-16T10:39:44.891-08:002018-02-16T10:39:44.891-08:00This comment has been removed by the author.Dirk Cottonhttps://www.blogger.com/profile/05616143752082768155noreply@blogger.comtag:blogger.com,1999:blog-5621914599310831423.post-55590254158141104012018-02-16T10:05:33.281-08:002018-02-16T10:05:33.281-08:00As I am on the brink of retirement and now have to...As I am on the brink of retirement and now have to invest a large amount of cash into a portfolio ((UK SIPP) bond yields make this an interesting time. Your articles are always clear and I value them. One thing though, a failure metric based on the number of years unfunded would seem a good parameter but I never seem to see it. Seems to me failure by 1 year is much different from failure by 5 years yet both contribute equally to the single failure probability.<br /><br />Regards<br />PaulAnonymousnoreply@blogger.comtag:blogger.com,1999:blog-5621914599310831423.post-68035966523787417342018-02-16T09:58:32.771-08:002018-02-16T09:58:32.771-08:00Wealth Meta wrote a calculator that does exactly w...Wealth Meta wrote a calculator that does exactly what this post is talking about (sets initial withdraw amount, then adjusts for inflation). It lets you play with the asset allocation and does historical back testing. Worth fiddling with to understand what is going on.<br /><br />https://www.wealthmeta.com/calculator/retirement-nest-egg-simulatorMichaelnoreply@blogger.comtag:blogger.com,1999:blog-5621914599310831423.post-13539660905869760462018-02-16T07:23:33.190-08:002018-02-16T07:23:33.190-08:00That series is what got me interested in retiremen...That series is what got me interested in retirement planning.<br /><br />I think the culprit here is one that, unfortunately, is common in retirement strategy thinking – equating portfolio failure with retirement finance failure.<br /><br />"Poor investment results" doesn't even make the top-ten list of reasons cited for elder bankruptcies.<br /><br />I try to explain to clients who want a portfolio survival rate of 90% to 95% that there is perhaps an 80% chance of their finances failing and that failure may have nothing to do with portfolio failure. Huge medical expenses, for example, could lead to bankruptcy even in a good market.<br /><br />Thanks for the comment!Dirk Cottonhttps://www.blogger.com/profile/05616143752082768155noreply@blogger.comtag:blogger.com,1999:blog-5621914599310831423.post-37807518169547116602018-02-16T07:16:17.231-08:002018-02-16T07:16:17.231-08:00"In all the discussions of SWR I have not see..."<i>In all the discussions of SWR I have not seen any definitive information of what asset allocation it should be based on."</i><br /><br />Not sure what you've been reading, but all of the research I read considers asset allocations. So does Bengen's Book, <i>Conserving Client Portfolios During Retirement</i>, which you can find at Amazon.<br /><br />Having said that, as my post points out, constant-dollar SWR strategies suggested in that book are a bad idea.<br /><br /><i>"A 70/30 allocation will permit a whole different withdrawal rate than a 30/70 split. What should asset allocation be based on different scenarios - expenses covered by pensions and SS, no pension but 80% of expenses covered by SS etc. etc."</i><br /><br />Are you looking for the withdrawal rate that you <i>need</i> or the withdrawal rates that various allocations might support? Those issues after your hyphen determine the former. If you have a high floor, then you will need to spend less from the upside portfolio and vice versa. I would think a more logical approach would be to start with the amount of spending you need from the upside portfolio, not with asset allocations.<br /><br />A "good" asset allocation depends on what you are trying to achieve.<br /><br />If you are trying to find the optimal asset allocation to grow your portfolio, good luck with that. Gordon Irlam, who developed AAcalc.com, found that the optimal asset allocation to achieve this in one of his studies fell within a 95% confidence interval of 10% to over 80% equities. If your future holds great market returns, something like 80% would be great. If poor returns lie ahead, 10% might be optimal. Since future returns are uncertain, there is no way to know which will work best for you.<br /><br />Are you, instead, trying to find an asset allocation that lets you sleep at night, whose volatility won't tempt you to sell at the worst time? I have suggested Bernstein's guidance, which you can determine my taking the worst portfolio decline you could accept in a bear market and allocating twice that percentage plus 10% of your portfolio to equities. (Be aware that your estimate of how big a loss you can stomach tends to be significantly higher in good times than when you actually start losing tons of money in a bear market.)<br /><br />I find that AACalc.com calculations tend to be higher than most people can stomach. It suggests 85% equities for me, but I can only stomach the volatility of a 40% or 50% equity allocation. I've received similar comments from readers. So, again, it depends on what you are trying to achieve, portfolio growth or less stress.<br /><br />Thirdly, perhaps you are trying to find the asset allocation that is most likely to support the spending rate you choose. The charts in Bengen show that the best allocations tend to be in the middle of the range, with portfolio survivability dropping off below 30% and above 70%.<br /><br />Most simulations I run show the same. When I analyze all failed-portfolio scenarios in a simulation, the majority of them occur below 30% and above 70% equity allocations.<br /><br />Lastly, you have to consider the rest of your retirement plan. What is your remaining life expectancy? Are you single or married? How much total wealth do you have?<br /><br />My "elevator answer" to this question is to allocate 40% to 60% to equities depending on your risk tolerance as suggested by Bernstein.<br /><br />Or you can do what Harry Markowitz, the father of Modern Portfolio Theory, did with his retirement portfolio – throw up your hands and invest half in stocks and half in bonds. There are a lot of arguments that end up somewhere around that allocation.<br /><br />Frankly, I believe market uncertainty is so great that trying to find the perfect asset allocation is a waste of time. Just don't pick a really bad one. Good luck and thanks for writing!Dirk Cottonhttps://www.blogger.com/profile/05616143752082768155noreply@blogger.comtag:blogger.com,1999:blog-5621914599310831423.post-55382712150701057142018-02-16T06:51:20.626-08:002018-02-16T06:51:20.626-08:00Bill Bernstein looked at a variant of the SWR calc...Bill Bernstein looked at a variant of the SWR calculation a almost two decades ago in his "The Retirement Calculator from Hell" series. In Part III, he looked at the question of how safe that 95% probability of not running out of money was. His conclusion was that anything over 80% was likely to be over-precise compared to the data set: http://www.efficientfrontier.com/ef/901/hell3.htm<br /><br />The US had a major civil war in the mid 1800s. Where is it written that there won't be one 30 years from now? Almost nobody suspected that the biggest economic, financial, and military conflagrations were likely a decade before they occurred.<br /><br />So while I don't think Togo is a valid comparison to the US, the European countries certainly are potential waypoints over the next century. We have major advantages over those countries, such as the past proven ability to assimilate immigrants in and make them Americans (Canada is similar) unlike many European and Asian countries. However, we do do go through waves where this is less possible. Who knows when a wave will not actually recede and go back to building our strength?<br /><br />We also have a big moat which reduces the potential for invasion, but nuclear weapons on missiles in more and more hands makes that moat less important. An EMP explosion or two would likely crater our economy for years. It could be our version of the Blitzkrieg hitting Holland, Belgium, and France.Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-5621914599310831423.post-59565052007013315752018-02-15T14:47:07.243-08:002018-02-15T14:47:07.243-08:00In all the discussions of SWR I have not seen any ...In all the discussions of SWR I have not seen any definitive information of what asset allocation it should be based on. A 70/30 allocation will permit a whole different withdrawal rate than a 30/70 split. What should asset allocation be based on different scenarios - expenses covered by pensions and SS, no pension but 80% of expenses covered by SS etc. etc. Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-5621914599310831423.post-61055782498483744092018-02-14T17:03:36.491-08:002018-02-14T17:03:36.491-08:00Thanks. Good to know. Apparently, only the author ...Thanks. Good to know. Apparently, only the author gets notifications. Sorry I couldn't help.Dirk Cottonhttps://www.blogger.com/profile/05616143752082768155noreply@blogger.comtag:blogger.com,1999:blog-5621914599310831423.post-43151862233706576092018-02-14T16:52:59.688-08:002018-02-14T16:52:59.688-08:00Thanks. And just so you know, I wasn't notifie...Thanks. And just so you know, I wasn't notified when you replied to my comment.Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-5621914599310831423.post-6202750502838582152018-02-14T14:38:55.069-08:002018-02-14T14:38:55.069-08:00Let me quote from that post. "The floor-and-u...Let me quote from that post. "<i>The floor-and-upside strategy for financing retirement is sometimes referred to as “safety first” and derives from The Theory of Life-Cycle Saving and Investing."</i><br /><br />The primary goal of TS is to match the duration of liabilities to the duration of investments, not necessarily to provide a floor. An annuity, for example, would be an unlikely component of a pure TS strategy. I'll explain that in a future post. I don't consider it a safety-first strategy.<br /><br />Correct, there is no such place to click to receive further comments on a blog post, though if someone replies to <i>your</i> comment, I believe you will be notified.Dirk Cottonhttps://www.blogger.com/profile/05616143752082768155noreply@blogger.comtag:blogger.com,1999:blog-5621914599310831423.post-2608693791449038332018-02-14T14:31:02.512-08:002018-02-14T14:31:02.512-08:00Sorry, I should restate that. Lowering mean-varian...Sorry, I should restate that. Lowering mean-variance always helps but equity sub-allocations don't lower it enough to make a big difference. Changing your stock-bond allocation would also lower mean-variance and have a significantly greater impact on sequence risk. Once you've done that, you're tweaking.Dirk Cottonhttps://www.blogger.com/profile/05616143752082768155noreply@blogger.comtag:blogger.com,1999:blog-5621914599310831423.post-36783132996490525912018-02-14T14:26:54.027-08:002018-02-14T14:26:54.027-08:00This comment has been removed by the author.Dirk Cottonhttps://www.blogger.com/profile/05616143752082768155noreply@blogger.comtag:blogger.com,1999:blog-5621914599310831423.post-29505347411338659562018-02-14T14:13:27.557-08:002018-02-14T14:13:27.557-08:00Thanks. So is 'safety first' the same as &...Thanks. So is 'safety first' the same as 'floor and upside'? And 'time segmentation/retirement buckets' is not considered floor and upside? Trying to clarify all this. <br />There's no place to click to request to receive further comments after commenting on your blog, as I've done with other blogs....<br />Thanks again.Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-5621914599310831423.post-91453546134634074922018-02-14T13:46:38.316-08:002018-02-14T13:46:38.316-08:00Dave, I respect your opinion, but disagree. I kno...Dave, I respect your opinion, but disagree. I know retirees who have gone bankrupt with an SWR strategy. I also have great respect for Michael Kitces, but don't agree that SWR is another form of floor-and-upside and I don't believe most researchers agree, either.<br /><br />I think Pfau's international research is indeed relevant. I think it shows that the U.S. won the 20th century economically and there is no reason to believe it will win the 21st. Countries, like companies, grow old and their economy has to slow, just like that of a small growth company.<br /><br />Do you have data to support your statement about most retirees not caring if they leave a lot behind? Because, I just worked with two families and both wanted to maximize consumption and not worry about a bequest.<br /><br />Regardless, what most retirees want is irrelevant to your own personal plan desires.<br /><br />A 3% withdrawal rate should weather most storms but what if it doesn't weather yours? I'm not willing to take that risk when I don't have to.<br /><br />As I said, I respect your opinion and I hope that works out for you, but I don't find much I agree with.<br /><br />Thanks for writing, Dave.Dirk Cottonhttps://www.blogger.com/profile/05616143752082768155noreply@blogger.com