Why isn't an AA of 75/25 with a SWR 3.75% the standard??

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Amadis_of_Gaul
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Re: Why isn't an AA of 75/25 with a SWR 3.75% the standard??

Post by Amadis_of_Gaul »

blahblahsunshine wrote: Sat Jan 12, 2019 6:10 pm The exogenic tail risk scenerio is one that deserves some thought. There is some non-zero chance that some game changing event happens. Could be 1938 germany, could be an asteroid, plague, and early death, who knows. There are a couple ways you can think about something like this: 1) How do I position myself to avoid or minimize its impact on me, and 2) perhaps one should enjoy the here and now before said incident occurs. Net, net, when I start getting down to minute retirement model survivability differences these long tailed exogenic risks take become a real consideration.
In real life, I think the tail risks are probably the biggest danger for most people on this forum. Bogleheads generally don't live paycheck-to-paycheck or pay some investment advisor 2 percent. We're aware that foresight plus planning plus persistence equals a successful retirement. Barring something Real Bad, we're all going to be fine.

However, if there is something in the next 30-60 years that isn't business as usual, that will trip up some Bogleheads too. It might be the folks who are 50/50; it might be the ones who are 100 percent equities. I don't think it's possible for most of us to completely disaster-proof ourselves (unless you're rolling with $100 million in savings or something), but mayyybee the right asset allocation can help. Historically, 75-25 or 80-20 look like the best bets. Will choosing that course make a difference? Who knows? At some point, you have to stop trying to figure out every little thing and make peace with your decisions.
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Re: Why isn't an AA of 75/25 with a SWR 3.75% the standard??

Post by flyingaway »

I am around 70/30 and FI but not fully retired yet. But the recent market dips make me think that I may want to hold 60/40 or 50/50 in retirement. If you have won the game, why keep playing, that seems to make more and more sense to me.
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Re: Why isn't an AA of 75/25 with a SWR 3.75% the standard??

Post by elainet7 »

l. Past performance is meaningless
2. There have been decades of zero returns in equities
3. Sequence of Risk
4. Psychological risk for many with 75% stocks
5. Marginal Utility of Wealth concept
6. Age in Bonds-John Bogle
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Re: Why isn't an AA of 75/25 with a SWR 3.75% the standard??

Post by elainet7 »

One must consider FEES if they use an advisor and pay 1%AUM
4% turns into 5% SWR
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Re: Why isn't an AA of 75/25 with a SWR 3.75% the standard??

Post by ryman554 »

Grt2bOutdoors wrote: Tue Jan 08, 2019 5:07 pm
3.75% is conservative, nearly 28x expenses and that is with zero growth. If bonds yield 3%, equities will have to yield more to entice risk takers.
I think you have this backwards. Nothing ever "makes" equities yield more, except for larger corporate profits (and profit sharing!)

In fact, I think you see equities have a better return on investment when your bond rates are low. Lots of folks are chasing returns then. When bond rates are high, don't you get less demand for stocks -> therefore lower returns in the short term?

Note also that bond may yield 3% today, nominal, but they are much much closer to 0% real in general. Therefore, your entirety of real growth has to come from the equity side.
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Re: Why isn't an AA of 75/25 with a SWR 3.75% the standard??

Post by hafjell »

willthrill81 wrote: Tue Jan 08, 2019 3:38 pmThe person who uses 4% fixed withdrawals but has room to reduce them if the need arises is probably more secure both financially and psychologically than the person with 3.5% fixed withdrawals who cannot tolerate any spending reduction at all.
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Re: Why isn't an AA of 75/25 with a SWR 3.75% the standard??

Post by elainet7 »

age in bonds-Bogle
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Re: Why isn't an AA of 75/25 with a SWR 3.75% the standard??

Post by TheTimeLord »

elainet7 wrote: Tue Jan 15, 2019 11:43 am age in bonds-Bogle
????
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Re: Why isn't an AA of 75/25 with a SWR 3.75% the standard??

Post by elainet7 »

According to John Bogle you should have your allocation in bonds as your age
So a 70yr old has 70% bonds 30% stocks
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Re: Why isn't an AA of 75/25 with a SWR 3.75% the standard??

Post by TheTimeLord »

elainet7 wrote: Wed Jan 16, 2019 7:38 am According to John Bogle you should have your allocation in bonds as your age
So a 70yr old has 70% bonds 30% stocks
LISTEN TO BOGLE-he is smarter than all of us
From what I have read, Bogle does not seem to be dogmatic about age in bonds.

https://finance.yahoo.com/news/jack-bog ... 27705.html

From 2015
Many people over the years have asked Jack Bogle about his portfolio, hoping to divine the perfect investment mix. It’s an especially pressing question now in a volatile market, in which international events are whipsawing stocks.

The founder of Vanguard Group, the world’s largest mutual fund company, used to have a really basic portfolio that followed an asset allocation known as the 60-40 rule — 60 percent in a U.S. stock index fund and 40 percent in a U.S. bond index fund. He maintained that allocation for himself for years.

But he recently shifted his strategy by a hair: He’s now at 50/50, which makes his portfolio slightly more conservative.

“I just like the idea of having an anchor to the windward,” said Bogle, who is 86. “I’m not so much worried about having my estate grow.”
https://www.youngresearch.com/researcha ... ack-bogle/
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Re: Why isn't an AA of 75/25 with a SWR 3.75% the standard??

Post by Clever_Username »

elainet7 wrote: Wed Jan 16, 2019 7:38 am According to John Bogle you should have your allocation in bonds as your age
So a 70yr old has 70% bonds 30% stocks
LISTEN TO BOGLE-he is smarter than all of us
My understanding is that Bogle suggests this as a starting point, not a commandment.

I use age in bonds because I haven't really been through a downturn (unless the last month or so counts?) while really invested so I don't know my true risk tolerance. Others who know their own risk tolerance better can make different decisions, including higher-than-age in bonds or lower-than-age in bonds.
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Re: Why isn't an AA of 75/25 with a SWR 3.75% the standard??

Post by Grt2bOutdoors »

ryman554 wrote: Tue Jan 15, 2019 8:23 am
Grt2bOutdoors wrote: Tue Jan 08, 2019 5:07 pm
3.75% is conservative, nearly 28x expenses and that is with zero growth. If bonds yield 3%, equities will have to yield more to entice risk takers.
I think you have this backwards. Nothing ever "makes" equities yield more, except for larger corporate profits (and profit sharing!)

In fact, I think you see equities have a better return on investment when your bond rates are low. Lots of folks are chasing returns then. When bond rates are high, don't you get less demand for stocks -> therefore lower returns in the short term?

Note also that bond may yield 3% today, nominal, but they are much much closer to 0% real in general. Therefore, your entirety of real growth has to come from the equity side.
My response was less theoretical and more of what a common man might view it as. Why should I invest my money in equities and risk it all when I have enough and 3% will suit me just fine? The common man is thinking equities need to yield more, alot more than just 3%, they aren't thinking about how low rates benefit companies, income statements or balance sheets. The common man is only thinking about one thing, safety of principal and what is the risk to them in keeping that money.
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Re: Why isn't an AA of 75/25 with a SWR 3.75% the standard??

Post by willthrill81 »

ryman554 wrote: Tue Jan 15, 2019 8:23 amNote also that bond may yield 3% today, nominal, but they are much much closer to 0% real in general.
I don't know what you mean by the phrase "in general" here. According to Vanguard, a 100% bond portfolio over the last ~90 years has averaged 5.4% nominal, which worked out to a little better than 2% real. Based on today's inflation, it's currently about 1% real, which isn't too far off the historic average.
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Re: Why isn't an AA of 75/25 with a SWR 3.75% the standard??

Post by Hyperborea »

Amadis_of_Gaul wrote: Sat Jan 12, 2019 7:39 pm In real life, I think the tail risks are probably the biggest danger for most people on this forum. Bogleheads generally don't live paycheck-to-paycheck or pay some investment advisor 2 percent. We're aware that foresight plus planning plus persistence equals a successful retirement. Barring something Real Bad, we're all going to be fine.

However, if there is something in the next 30-60 years that isn't business as usual, that will trip up some Bogleheads too. It might be the folks who are 50/50; it might be the ones who are 100 percent equities. I don't think it's possible for most of us to completely disaster-proof ourselves (unless you're rolling with $100 million in savings or something), but mayyybee the right asset allocation can help. Historically, 75-25 or 80-20 look like the best bets. Will choosing that course make a difference? Who knows? At some point, you have to stop trying to figure out every little thing and make peace with your decisions.
Exactly my thinking on this too. In all the studies of SWR there's a plateau of "safe" equity allocation percentages. How broad it is depends on your retirement horizon and withdrawal rate. If there's going to be failures because things in the future are worse than historical then it is the edges of that allocation plateau that will have problems first. Better to be in the middle of that plateau. It doesn't have to be precise but somewhere in the middle third.
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Re: Why isn't an AA of 75/25 with a SWR 3.75% the standard??

Post by travelogue »

Amadis_of_Gaul wrote: Wed Jan 09, 2019 1:41 pm
2. If disaster is on the horizon, a high-stock portfolio may be the best defense. Estrada found that on average, across those 21 countries, the best portfolio was an 85/15 split. I don't know why the number is so high, but I suspect that it's due to a) sovereign defaults on bonds, and b) higher returns that give you enough of a cushion to survive edge cases of disaster.
Great post. In thinking about the stocks as a defense, I'd guess it also relates to hyperinflation protection. Here's an article by Prof. Siegel on the subject of inflation and stocks generally (though not extreme conditions specifically). https://www.kiplinger.com/article/inves ... hedge.html
To best insulate your stock portfolio from inflation, you must diversify internationally. If inflation kicks into overdrive, the dollar will fall and foreign stocks will act as an automatic hedge as money invested in foreign currencies is translated into more dollars back home. But don't run to speculative assets that will deflate in price when inflation slows. For long-term investors, stocks will be an excellent hedge against rising prices.
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Re: Why isn't an AA of 75/25 with a SWR 3.75% the standard??

Post by columbia »

Why?

Because every family has a different tolerance and need for risk.
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Re: Why isn't an AA of 75/25 with a SWR 3.75% the standard??

Post by TheTimeLord »

columbia wrote: Sat Jun 20, 2020 8:43 pm Why?

Because every family has a different tolerance and need for risk.
As opposed to the readily accepted standard of 60/40 with a SWR 4%. Just asking the question based on the data from the study referenced in the OP. But you are correct it is ultimately an individual decision.
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Re: Why isn't an AA of 75/25 with a SWR 3.75% the standard??

Post by Stoic9 »

Thanks for this discussion, I retired 3 years ago next month. I keep a 75/25 AA, I will make my first withdraw this month to buy a house. The withdraw still maintains my retirement date principal so I feel good about the 75/25 AA. Not the same propose as a SWR but I'm interested to see if in 3 years I will be back up to todays balance.
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Re: Why isn't an AA of 75/25 with a SWR 3.75% the standard??

Post by TheTimeLord »

Thought it might be a good time to revisit this thread and see if there is any knew feedback on the topic.
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Re: Why isn't an AA of 75/25 with a SWR 3.75% the standard??

Post by aristotelian »

I am currently 72/28 at age 47. I agree 75/25 or in that range seems like the perfect allocation especially for anyone with > 30 year retirement. I plan to keep this allocation more or less forever. If you want lower volatility you need to compensate with either lower withdrawal rate or shorter retirement. 75/25 hits the sweet spot for me.
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Re: Why isn't an AA of 75/25 with a SWR 3.75% the standard??

Post by tvubpwcisla »

Sounds really good to me. Probably will do quite well with that setup. I would say to lower the SWR to 3.5% or even 3.0% if you can live on less to be extra safe. During super good return years (over 20%) perhaps take out 4%.
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Re: Why isn't an AA of 75/25 with a SWR 3.75% the standard??

Post by BogleFanGal »

I don't believe anyone can give meaningful insights around a standard AA without clearly disclosing their own pension situation first, as that impacts the thinking. Many folks touting higher equity allocations are also collecting pensions. Getting a guaranteed check every 4 weeks makes it easier to recommend higher equity volatility for better long term gains/growth.

When keeping the lights on and food in the fridge is reliant on one's portfolio only, w/some SS to buffer, vulnerability increases - even with an lower SWR. Any inevitable market volatility that hits during a bad stint in life (illness, financial emergency, etc) leaves a more aggressive portfolio at risk of forcing equity sales at the worst time.
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Re: Why isn't an AA of 75/25 with a SWR 3.75% the standard??

Post by TheTimeLord »

BogleFanGal wrote: Sat Feb 05, 2022 12:35 pm I don't believe anyone can give meaningful insights around a standard AA without clearly disclosing their own pension situation first, as that impacts the thinking. Many folks touting higher equity allocations are also collecting pensions. Getting a guaranteed check every 4 weeks makes it easier to recommend higher equity volatility for better long term gains/growth.

When keeping the lights on and food in the fridge is reliant on one's portfolio only, w/some SS to buffer, vulnerability increases - even with an lower SWR. Any inevitable market volatility that hits during a bad stint in life (illness, financial emergency, etc) leaves a more aggressive portfolio at risk of forcing equity sales at the worst time.
Please refer to initial post and the link within.
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Re: Why isn't an AA of 75/25 with a SWR 3.75% the standard??

Post by GAAP »

BogleFanGal wrote: Sat Feb 05, 2022 12:35 pm I don't believe anyone can give meaningful insights around a standard AA without clearly disclosing their own pension situation first, as that impacts the thinking. Many folks touting higher equity allocations are also collecting pensions. Getting a guaranteed check every 4 weeks makes it easier to recommend higher equity volatility for better long term gains/growth.

When keeping the lights on and food in the fridge is reliant on one's portfolio only, w/some SS to buffer, vulnerability increases - even with an lower SWR. Any inevitable market volatility that hits during a bad stint in life (illness, financial emergency, etc) leaves a more aggressive portfolio at risk of forcing equity sales at the worst time.
I'm retired with a 75/25 allocation -- but I have major reservations about the SWR concept, and don't use one. I have no pension. My wife has a pension that is basically sufficient to cover medical insurance and most of the groceries. Neither one of us draws Social Security. Most of our income comes from the portfolio.

As for "forcing equity sales", a major drop would lead to overweight on bonds, not equity -- and thus lead to larger bond sales for a financial emergency. If things get so bad that equity sales are also required, then it is likely that any reasonable AA would be a problem.

People seem to think that portfolio risk is identical during both accumulation and distribution -- it is not. Withdrawals dramatically change the risk profile of any static allocation. Some degree of equity bias has generally helped historically in most of the world for a "typical" 30 year duration. Sometimes, there was no equity risk premium, but there were also long periods of time where bonds did much worse than stocks. If your planning horizon is longer than 30 years (mine is), then equity is likely to be even more important.

My mother essentially lived off life insurance proceeds for 34 years after my father died at age 53 with no pension. She helped two of us through college, paid off the mortgage and remodeled the house. Her allocation was closer to 90/10 when she died. Individual levels of concern about volatility are very much individual, and the response to that concern is very much personal. I consider 50/50 to be the low end of the scale for my needs, but I'm not "advocating" for anything beyond an equity bias in my situation.
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Re: Why isn't an AA of 75/25 with a SWR 3.75% the standard??

Post by sf_tech_saver »

TheTimeLord wrote: Tue Jan 08, 2019 11:02 am Looking at the information provided from the Early Retirement Now forum it would seem like Bogleheads would all be singing the praises of a 3.75% SWR with a 75/25 AA. But I rarely hear it mentioned. The success rates seem to be excellent, so what's the concerns around using this? So before I take the leap I would like to understand the concerns are this SWR and AA.

30 years - 100%
40 years - 98%
50 years - 94%
60 years - 92%

Image
https://earlyretirementnow.com/2016/12/ ... t-1-intro/
The more I look at charts like this the more I think AA is less important than withdraw rate -- and the real risk is not letting your portfolio grow (equities?) enough to achieve 3% as your SWR.

Once you can live off of 3% it seems like the Buffet portfolio is simple and sound and generationally durable! Why not leave the portfolio to your kids to wisely use at a 3% rate next?

The only argument I can see for higher than 25% bonds, to your point, would be 'emotional' tolerances for volatility. Real safety seems to live in the 3% approach to spending. No?
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Re: Why isn't an AA of 75/25 with a SWR 3.75% the standard??

Post by dogagility »

sf_tech_saver wrote: Tue May 30, 2023 12:02 am The only argument I can see for higher than 25% bonds, to your point, would be 'emotional' tolerances for volatility. Real safety seems to live in the 3% approach to spending. No?
I think real safety is the ability to reduce spending if necessary and not use a fixed percentage withdrawal approach.
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Re: Why isn't an AA of 75/25 with a SWR 3.75% the standard??

Post by nisiprius »

TheTimeLord wrote: Tue Jan 08, 2019 11:02 am...So before I take the leap I would like to understand the concerns are this SWR and AA...
1) Because if you aren't risk-tolerant enough to "take the leap" based on what you already know, maybe you aren't risk-tolerant enough for 75% stocks?

2) Because the results of these studies are inconsistent and I don't believe they're more than useful guesstimates.

Consider the Vanguard Retirement Nest Egg Calculator Because it's really doing a fresh Monte Carlo simulation every time you run it, the numbers can vary slightly from run to run. In order to hit 3.75% on the nose I used a $2 million balance and a $75,000 starting withdrawal. Vanguard's tool maxes out at 50 years. So:

Image

30 years - Vanguard 92%, ERN 100%
40 years - Vanguard 87%, ERN 98%
50 years - Vanguard 84%, ERN 94%

The point here is not "who's right." The point is to shake your confidence in the reliability of any SWR study numbers--beyond rough generalizations. Yes, we can say with high confidence that Peter Lynch's 1995 suggestion of 7% withdrawals from a 100%-stocks portfolio was too high.

The point is that these studies are just useful guesses. The way to decide on whether 75/25 is right is to decide if you are able to say "Whee, life is a gamble, and if we get a -60% decline while I'm holding 75% stocks, I know that could happen and if it does I'll just adapt and move on."

I learned a lesson year ago when I spent several weeks obsessed with and playing around with the Fidelity Retirement Income Planner, an insanely detailed tool that includes taxes, long-term care, and what years you plan to buy new cars in. I cranked in everything using my desired allocation. The tool came back saying our money would not last and recommended a big boost in stock allocation. I ran it again, after changing stock allocation to its own recommendation and... got virtually identical results! Then, instead of changing stock allocation I knocked down spending by something like $100 or $200/month and, voila! "Success" with both my original and its recommended higher stock allocation.

It's all about the spending.
Last edited by nisiprius on Tue May 30, 2023 6:37 am, edited 1 time in total.
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Re: Why isn't an AA of 75/25 with a SWR 3.75% the standard??

Post by nisiprius »

An important and obvious-when-you-think-about-it point is that if portfolio survival is the metric, the only time high stock allocations help much is when the failure rate is high. That is, if you are using a too-high withdrawal rate, you will get poor success at 25% stocks and poor success at 75% stocks but less bad with more stocks.

Again using the Vanguard calculator to illustrate the point:

7% initial withdrawal, 30 years:

25/75 gives a 10% success rate
75/25 gives a 48% success rate

More stocks gives "higher chance of success," yes, but...

3% initial withdrawal, 30 years:

25/75, 99% success rate
75/25, 97% success rate

High success almost independent of allocation.

The reason for this is that SWR is based on pessimistic, sometimes worst-case scenarios, and the range of outcomes for bonds and stocks spreads upwards from about the same low point. That is, the worst case for stocks and bonds is roughly the same, but the average, median, and best case for stocks is much higher. Hence the perpetual sterile debate in which the risk-tolerant say "if bonds aren't safer, worst-case, why hold bonds at all?" and the risk-averse say "if stocks can't guarantee a higher outcome than bonds, worst-case, why hold stocks at all?

Thus, using the 7%-withdrawal scenario, a highly risk-tolerant person might say "Yes, I am happy with the SWR numbers for 7% withdrawals, and I am going with 100% stocks because that gives me a 52% chance of success and that's good enough for me, while with 25/75 there would hardly be even a chance."
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Re: Why isn't an AA of 75/25 with a SWR 3.75% the standard??

Post by burritoLover »

Why not? Because countries can have very long periods of poor stock returns - think 30+ years. There's nothing built-in to the US market that says that can't happen and it doesn't take Asteroids or war or Mad Max scenarios. And you won't be able to adjust to it because you'll just think it is another typical 15 year US drought. So, you don't want to be too equity-heavy or even too bond-heavy (which can also have long periods of bad).
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Re: Why isn't an AA of 75/25 with a SWR 3.75% the standard??

Post by Wanderingwheelz »

It’s not our plan, but I wouldn’t criticize a DIY investor who’s plan it is to be 75/25 in low cost total market index funds with a 3.75% withdrawal rate.

The likelihood of that failing over 30 years is small. Sure, it’s higher than the person withdrawing 3.5%, but by taking a little more risk hopefully they’re enjoying life to a greater degree. On a $4MM nest egg that’s $10,000 more to travel, help a grandkid with a tutor, or maybe have a boat to enjoy when the weather is nice.

As was mentioned already, the withdrawal rate is what matters. The more you take out the greater your chances of having less to take out later.
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Re: Why isn't an AA of 75/25 with a SWR 3.75% the standard??

Post by smitcat »

Wanderingwheelz wrote: Tue May 30, 2023 8:48 am It’s not our plan, but I wouldn’t criticize a DIY investor who’s plan it is to be 75/25 in low cost total market index funds with a 3.75% withdrawal rate.

The likelihood of that failing over 30 years is small. Sure, it’s higher than the person withdrawing 3.5%, but by taking a little more risk hopefully they’re enjoying life to a greater degree. On a $4MM nest egg that’s $10,000 more to travel, help a grandkid with a tutor, or maybe have a boat to enjoy when the weather is nice.

As was mentioned already, the withdrawal rate is what matters. The more you take out the greater your chances of having less to take out later.

The charts in this series gives a good look at those options .....
https://earlyretirementnow.com/2016/12/ ... depletion/
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Re: Why isn't an AA of 75/25 with a SWR 3.75% the standard??

Post by Wanderingwheelz »

smitcat wrote: Tue May 30, 2023 9:23 am
Wanderingwheelz wrote: Tue May 30, 2023 8:48 am It’s not our plan, but I wouldn’t criticize a DIY investor who’s plan it is to be 75/25 in low cost total market index funds with a 3.75% withdrawal rate.

The likelihood of that failing over 30 years is small. Sure, it’s higher than the person withdrawing 3.5%, but by taking a little more risk hopefully they’re enjoying life to a greater degree. On a $4MM nest egg that’s $10,000 more to travel, help a grandkid with a tutor, or maybe have a boat to enjoy when the weather is nice.

As was mentioned already, the withdrawal rate is what matters. The more you take out the greater your chances of having less to take out later.

The charts in this series gives a good look at those options .....
https://earlyretirementnow.com/2016/12/ ... depletion/
Yea. I’m pretty sure it’s those exact charts that began this thread in 2019.
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Re: Why isn't an AA of 75/25 with a SWR 3.75% the standard??

Post by eddot98 »

Our retirement portfolio is 64% stocks and 36% fixed. We are comfortable with that AA.
I am 72 years old and my RMD is 2.3% of our total tax deferred and Roth accounts. DW’s RMD’s don’t start until 2024 and they are negligible as the vast majority of her assets are in a Roth IRA. We are collecting Social Security and I have a good pension with excellent health insurance plus Medicare. Taking 3.75 or 4% from tax deferred accounts would push us into the IRMAA first tier. Since we don’t have children and our plan is to try spend all of our assets, we are considering some Roth IRA withdrawals to increase our withdrawal rate to 4%.
Comments?
Wanderingwheelz
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Re: Why isn't an AA of 75/25 with a SWR 3.75% the standard??

Post by Wanderingwheelz »

eddot98 wrote: Tue May 30, 2023 11:35 am Our retirement portfolio is 64% stocks and 36% fixed. We are comfortable with that AA.
I am 72 years old and my RMD is 2.3% of our total tax deferred and Roth accounts. DW’s RMD’s don’t start until 2024 and they are negligible as the vast majority of her assets are in a Roth IRA. We are collecting Social Security and I have a good pension with excellent health insurance plus Medicare. Taking 3.75 or 4% from tax deferred accounts would push us into the IRMAA first tier. Since we don’t have children and our plan is to try spend all of our assets, we are considering some Roth IRA withdrawals to increase our withdrawal rate to 4%.
Comments?
As long as you have good use for the 4% of withdrawals, there’s no reason at age 72 to take any less. The “4% Rule” assumes a 30 year retirement which gives you the freedom to exceed 4% if you want to- especially since you have SS, a pension, and no desire to die with wealth.
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Re: Why isn't an AA of 75/25 with a SWR 3.75% the standard??

Post by SquawkIdent »

nisiprius wrote: Tue May 30, 2023 6:33 am An important and obvious-when-you-think-about-it point is that if portfolio survival is the metric, the only time high stock allocations help much is when the failure rate is high. That is, if you are using a too-high withdrawal rate, you will get poor success at 25% stocks and poor success at 75% stocks but less bad with more stocks.

Again using the Vanguard calculator to illustrate the point:

7% initial withdrawal, 30 years:

25/75 gives a 10% success rate
75/25 gives a 48% success rate

More stocks gives "higher chance of success," yes, but...

3% initial withdrawal, 30 years:

25/75, 99% success rate
75/25, 97% success rate

High success almost independent of allocation.

The reason for this is that SWR is based on pessimistic, sometimes worst-case scenarios, and the range of outcomes for bonds and stocks spreads upwards from about the same low point. That is, the worst case for stocks and bonds is roughly the same, but the average, median, and best case for stocks is much higher. Hence the perpetual sterile debate in which the risk-tolerant say "if bonds aren't safer, worst-case, why hold bonds at all?" and the risk-averse say "if stocks can't guarantee a higher outcome than bonds, worst-case, why hold stocks at all?

Thus, using the 7%-withdrawal scenario, a highly risk-tolerant person might say "Yes, I am happy with the SWR numbers for 7% withdrawals, and I am going with 100% stocks because that gives me a 52% chance of success and that's good enough for me, while with 25/75 there would hardly be even a chance."
+1 It’s all about the withdrawal rate.

Taking 4% (or whatever withdrawal rate you choose) based on some arbitrary number from when you retired 10 years ago, seems like a recipe for disaster.

IMHO, in retirement the rules don’t change. During working life, if you have more money you can spend it or reinvest it.

Therefore, consider a constant percentage (or even VPW) to spend. I would have a very hard time consistently taking the same percentage (and therefore last years withdrawal plus inflation) after my portfolio has taken a serious hit.

Do 5 year averaging, hold more fixed income, etc. Many ways to smooth out your “spending cash”, if needed. But do take into account what the account has been doing year to year, etc.

YMMV.
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Re: Why isn't an AA of 75/25 with a SWR 3.75% the standard??

Post by CookieDough »

Really great thread. OP, thanks for articulating a question that I had too.

So often on this forum, I see people talking about 60/40 or 50/50 AAs, especially once in retirement, which made me wonder whether my 75/25 was too aggressive, for reasons my ongoing financial education hadn't exposed yet. I'm relieved to find plenty of people supporting 75/25 as reasonable -- though, of course, only appropriate for someone if it suits their individual situation.

I think the hardest thing about financial planning is the lack of certainty about the future, juxtaposed with the human need for certainty, the need to know that as we age and become more vulnerable, we're going to be all right. That guarantee is elusive because it's impossible, and we all know that, but we all seek it anyway, or at least its closest approximation.
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Re: Why isn't an AA of 75/25 with a SWR 3.75% the standard??

Post by randomguy »

eddot98 wrote: Tue May 30, 2023 11:35 am Our retirement portfolio is 64% stocks and 36% fixed. We are comfortable with that AA.
I am 72 years old and my RMD is 2.3% of our total tax deferred and Roth accounts. DW’s RMD’s don’t start until 2024 and they are negligible as the vast majority of her assets are in a Roth IRA. We are collecting Social Security and I have a good pension with excellent health insurance plus Medicare. Taking 3.75 or 4% from tax deferred accounts would push us into the IRMAA first tier. Since we don’t have children and our plan is to try spend all of our assets, we are considering some Roth IRA withdrawals to increase our withdrawal rate to 4%.
Comments?
Short term that sounds good but by not taking money out of the tax deferred now, you are just sort of pushing the problem to later. That may or may not work out better. Things like you dying at 82 and them living another 5 years could result in total higher income taxes and IRMAA later.
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Re: Why isn't an AA of 75/25 with a SWR 3.75% the standard??

Post by smitcat »

eddot98 wrote: Tue May 30, 2023 11:35 am Our retirement portfolio is 64% stocks and 36% fixed. We are comfortable with that AA.
I am 72 years old and my RMD is 2.3% of our total tax deferred and Roth accounts. DW’s RMD’s don’t start until 2024 and they are negligible as the vast majority of her assets are in a Roth IRA. We are collecting Social Security and I have a good pension with excellent health insurance plus Medicare. Taking 3.75 or 4% from tax deferred accounts would push us into the IRMAA first tier. Since we don’t have children and our plan is to try spend all of our assets, we are considering some Roth IRA withdrawals to increase our withdrawal rate to 4%.
Comments?
"Taking 3.75 or 4% from tax deferred accounts would push us into the IRMAA first tier."
Paying tax is inevitable in your plan (now or later) - spending the funds in the best way is what you really are trying for now.
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Re: Why isn't an AA of 75/25 with a SWR 3.75% the standard??

Post by sambb »

isnt SWR based on historical data, but past performance cant predict future results, so not sure how to interpret.
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Re: Why isn't an AA of 75/25 with a SWR 3.75% the standard??

Post by spectec »

mhalley wrote: Tue Jan 08, 2019 2:31 pm Probably because a lot of retirees might not be able to stay the course with 75% equities. I know in my brain that it would probably be better with 75%, but my pillow says to be 50%.
++++++. Well stated!
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Re: Why isn't an AA of 75/25 with a SWR 3.75% the standard??

Post by secondopinion »

I am not planning for any SWR above the somewhat conservative 3%; but in all honesty, I doubt I will get to choose when I retire and for how long, let alone if I get to reach the point of 4% SWR.
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Re: Why isn't an AA of 75/25 with a SWR 3.75% the standard??

Post by nisiprius »

CookieDough wrote: Tue May 30, 2023 12:31 pm So often on this forum, I see people talking about 60/40 or 50/50 AAs, especially once in retirement, which made me wonder whether my 75/25 was too aggressive...
Just as a side issue. I doubt that it is really possible to distinguish psychologically between 75/25 and 60/40. Unless you've a written rule saying "If loss > 33% then freak out," it's unlikely that you know in advance that you can tolerate a -30% portfolio drop, but not -37.5%. When it is happening, it doesn't feel like a percentage number... and it has at least as much to do with the impact of news items as with percentages.

"Lehman Brothers has collapsed" might be much more important than "now we're another -7.5% down."

The psychology is a belief that something has gone beyond its elastic limit and reached a breaking point.
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Re: Why isn't an AA of 75/25 with a SWR 3.75% the standard??

Post by secondopinion »

nisiprius wrote: Tue May 30, 2023 5:06 pm
CookieDough wrote: Tue May 30, 2023 12:31 pm So often on this forum, I see people talking about 60/40 or 50/50 AAs, especially once in retirement, which made me wonder whether my 75/25 was too aggressive...
Just as a side issue. I doubt that it is really possible to distinguish psychologically between 75/25 and 60/40. Unless you've a written rule saying "If loss > 33% then freak out," it's unlikely that you know in advance that you can tolerate a -30% portfolio drop, but not -37.5%. When it is happening, it doesn't feel like a percentage number... and it has at least as much to do with the impact of news items as with percentages.

"Lehman Brothers has collapsed" might be much more important than "now we're another -7.5% down."

The psychology is a belief that something has gone beyond its elastic limit and reached a breaking point.
Really? Being down -7.5% is more important than Lehman Brothers collapsing. I ignore the news because it is mostly noise anyway.
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Re: Why isn't an AA of 75/25 with a SWR 3.75% the standard??

Post by bmelikia »

TheTimeLord wrote: Tue Jan 08, 2019 3:08 pm
HomerJ wrote: Tue Jan 08, 2019 2:35 pm
mhalley wrote: Tue Jan 08, 2019 2:31 pm Probably because a lot of retirees might not be able to stay the course with 75% equities. I know in my brain that it would probably be better with 75%, but my pillow says to be 50%.
This.

75% stocks is too scary. 25% in bonds isn't enough to keep me feeling safe during an extended crash.

4% instead of 3.75% because the math is simple.

50/50 with 4% on that chart has a 95% success rate. "Failure" is not starving to death, but rather, dropping to 3.5% until the market recovers if the market crashes early in retirement (i.e. skipping a vacation or two) - or going back to (part-time) work.

Here's the thing about 4% "failing". It pretty much only fails if the market is bad early in retirement. A bad crash 5-10 years after you retired (after 5-10 years of growth) isn't going to derail your retirement spending. A crash is only likely to hurt the chances of a 4% withdrawal success if it happens early in retirement.

So 50/50 with 4% withdrawals (with a possible mostly painless adjustment if something bad happens early in retirement) seems pretty good, and pretty easy to me.
I definitely understand the scary part but if you have 25x expenses and you are 75/25 don't you have 6.25 years in safe assets plus you still receive dividends and most people will have SS or even a pension so what they get from their portfolio won't be all that they have. So yes, 75/25 sounds scary but maybe a little less scary when you break it down?
In my mind it always comes down to the concept of "past performance is not a guarantee of future results". . .
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Re: Why isn't an AA of 75/25 with a SWR 3.75% the standard??

Post by CookieDough »

nisiprius wrote: Tue May 30, 2023 5:06 pm
CookieDough wrote: Tue May 30, 2023 12:31 pm So often on this forum, I see people talking about 60/40 or 50/50 AAs, especially once in retirement, which made me wonder whether my 75/25 was too aggressive...
Just as a side issue. I doubt that it is really possible to distinguish psychologically between 75/25 and 60/40. Unless you've a written rule saying "If loss > 33% then freak out," it's unlikely that you know in advance that you can tolerate a -30% portfolio drop, but not -37.5%. When it is happening, it doesn't feel like a percentage number... and it has at least as much to do with the impact of news items as with percentages.

"Lehman Brothers has collapsed" might be much more important than "now we're another -7.5% down."

The psychology is a belief that something has gone beyond its elastic limit and reached a breaking point.
That's a fair point, especially if the biggest AA risk is the behavioral side. I'd personally rather be 100/0, but I figure having ~6-10 years' expenses in a less volatile asset type will both help me sleep at night and make it less likely I'll act in blind panic during a market crash.

I just keep wondering if there's something else I'm missing besides the potential for bad financial decisions during a freak-out based on a market drop. So many people seem so sure that 60/40 (or even 40/60) is quite enough risk, thank you very much. And yeah, I get the SORR issue. But I've been left pretty cold by VBTLX's weak performance over the past 7 years (since I started managing my own portfolio), so I can't help but see bonds as a big opportunity risk. I keep telling myself that theoretically, it should all work out over time, and I'm not going to make any changes right now. I know there are reasons why VBTLX is essentially flat right now from where it was 7 years ago, and I know there are other fixed-income options. Maybe I'll start looking into them, for down the road.
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Re: Why isn't an AA of 75/25 with a SWR 3.75% the standard??

Post by welderwannabe »

David Jay wrote: Tue Jan 08, 2019 3:14 pm You are allowing your brain to get in the way of your emotions. Not everyone is wired that way.
and many people who think they're wired a certain way find out they aren't when the market crashes and loses 25%+ in a short period of time.
I am not an investment professional, but I did stay at a Holiday Inn Express last night.
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