Author Topic: Rick Ferri; 30/70 portfolio for retirees  (Read 15585 times)

Scandium

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Rick Ferri; 30/70 portfolio for retirees
« on: February 06, 2015, 10:59:27 AM »
http://www.rickferri.com/blog/investments/the-center-of-gravity-for-retirees/
That's 30% stocks, 70% bonds. I ran a few variations through CFIREsim, varying time and WR and it didn't do so great.
Thoughts?
« Last Edit: February 06, 2015, 11:01:34 AM by Scandium »

LordSquidworth

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Re: Rick Ferri; 30/70 portfolio for retirees
« Reply #1 on: February 06, 2015, 11:18:23 AM »
All those "60/40, 30/70" etc allocation models are naturally flawed and simply a product of modern wall street ideology.

Everyone is different and there is no perfect answer.

mxt0133

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Re: Rick Ferri; 30/70 portfolio for retirees
« Reply #2 on: February 06, 2015, 11:36:13 AM »
Well if you only need your portfolio to last your 20-25 years, for normal retirement at 65-66, then they are mathematically correct at they assume capital draw down and not capital preservation with the goal of having a lowest volatility priority vs growth.

arebelspy

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Re: Rick Ferri; 30/70 portfolio for retirees
« Reply #3 on: February 06, 2015, 01:06:55 PM »
Well if you only need your portfolio to last your 20-25 years, for normal retirement at 65-66, then they are mathematically correct at they assume capital draw down and not capital preservation with the goal of having a lowest volatility priority vs growth.

This.  His target audience is not the early retiree who has a many decade time horizon.
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skyrefuge

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Re: Rick Ferri; 30/70 portfolio for retirees
« Reply #4 on: February 06, 2015, 01:32:54 PM »
This.  His target audience is not the early retiree who has a many decade time horizon.

Yeah, though he's usually still more insightful than this. That's why I thought this article was kind of weird. This is just the standard "if you've saved too much money, you can stop playing the game" advice.  I figured Ferri would be smart enough to tell the complete picture, which is "...you can stop playing the game. Or, do the complete opposite and double-down. Either one. Doesn't matter. Because you've saved too much money!"

brooklynguy

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Re: Rick Ferri; 30/70 portfolio for retirees
« Reply #5 on: February 06, 2015, 02:51:37 PM »
Moreover, even if he's writing for an audience of traditional age retirees, I would argue that his recommended 30/70 allocation presents a greater risk of portfolio failure than the 60/40 allocation he denounces (or, even better, a 70/30 allocation).  The numbers used in his example indicate that he is assuming a 4% withdrawal rate, and it is not unreasonable to assume a 30-year retirement period for many people retiring today at the age of 65.  If your portfolio needs to support a 4% WR for 30 years, you haven't "won the game" in the sense used here.  According to cfiresim, the historical success rate using those numbers is only 70%.  A more aggressive allocation would significantly reduce the odds of outliving your money, which, in my view, outweighs the perceived drawback of increased volatility -- after all, you're either going to die early, in which case you've saved too much no matter what allocation you hold, or you're going to die late, in which case you need those stock returns to avoid running out of money!

MrMoogle

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Re: Rick Ferri; 30/70 portfolio for retirees
« Reply #6 on: February 06, 2015, 02:59:18 PM »
I saw an argument a while back for normal retirees to start at ~20/80, then work to ~80/20, since the greatest chance of not making it is if the market crashes right after you retire.  The problem was, you had better not live past 30 years, because you're going to be broke.  If you do the normal 80/20 after retiring, after 30 years, you should be back where you started.

FFA

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Re: Rick Ferri; 30/70 portfolio for retirees
« Reply #7 on: February 07, 2015, 08:43:41 AM »
I thought he makes some sense in that retirement investing is primarily income focused so therefore the default portfolio should tilt towards fixed income. Just adding enough stocks to spice up returns a little and offset inflation. As others said the context is not early retirement. It's just a different view, not necessarily a wrong view IMHO.

Scandium

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Re: Rick Ferri; 30/70 portfolio for retirees
« Reply #8 on: February 07, 2015, 05:23:19 PM »
I thought he makes some sense in that retirement investing is primarily income focused so therefore the default portfolio should tilt towards fixed income. Just adding enough stocks to spice up returns a little and offset inflation. As others said the context is not early retirement. It's just a different view, not necessarily a wrong view IMHO.
my problem is that it doesn't work even for normal retirees, with 4% and 30 years. As someone mentioned above the success rate is around 70%. I set it to 40 years and I think it was 35%! Even retiring in 60s going to 100 isn't unthinkable. The more I look at it the less sense his argument makes, which is unusual for Ferri

clifp

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Re: Rick Ferri; 30/70 portfolio for retirees
« Reply #9 on: February 08, 2015, 02:29:45 AM »
I thought he makes some sense in that retirement investing is primarily income focused so therefore the default portfolio should tilt towards fixed income. Just adding enough stocks to spice up returns a little and offset inflation. As others said the context is not early retirement. It's just a different view, not necessarily a wrong view IMHO.
my problem is that it doesn't work even for normal retirees, with 4% and 30 years. As someone mentioned above the success rate is around 70%. I set it to 40 years and I think it was 35%! Even retiring in 60s going to 100 isn't unthinkable. The more I look at it the less sense his argument makes, which is unusual for Ferri

Actually I think 30% works fine for 65 year old retires.

CFiresim puts the failure rate at 30% for 30/70/0 portfolio for 4% withdrawal
FIRECalc using the same input the failure rate at 13% (This is a rather significant difference anybody know why?)

Social Security say that about 1 out ever 10  65 year old will living more than 30 years.  Combining the failures rate gives you an overall success rate of 97.% for CFireSim or 98.7% for FIRECalc.

Only 25% will live past 90 and the 25 years success rate for 30/70 is close to 100%.
Historically the volatility of a 30/70 is much lower than 60/40.

arebelspy

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Re: Rick Ferri; 30/70 portfolio for retirees
« Reply #10 on: February 08, 2015, 02:41:06 AM »
CFiresim puts the failure rate at 30% for 30/70/0 portfolio for 4% withdrawal
FIRECalc using the same input the failure rate at 13% (This is a rather significant difference anybody know why?)

That's a significant difference.  Message bo_knows with the inputs your using (or direct links to sim if possible) and I bet he can figure it out.
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bo_knows

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Re: Rick Ferri; 30/70 portfolio for retirees
« Reply #11 on: February 14, 2015, 06:32:31 AM »
I thought he makes some sense in that retirement investing is primarily income focused so therefore the default portfolio should tilt towards fixed income. Just adding enough stocks to spice up returns a little and offset inflation. As others said the context is not early retirement. It's just a different view, not necessarily a wrong view IMHO.
my problem is that it doesn't work even for normal retirees, with 4% and 30 years. As someone mentioned above the success rate is around 70%. I set it to 40 years and I think it was 35%! Even retiring in 60s going to 100 isn't unthinkable. The more I look at it the less sense his argument makes, which is unusual for Ferri

Actually I think 30% works fine for 65 year old retires.

CFiresim puts the failure rate at 30% for 30/70/0 portfolio for 4% withdrawal
FIRECalc using the same input the failure rate at 13% (This is a rather significant difference anybody know why?)

Social Security say that about 1 out ever 10  65 year old will living more than 30 years.  Combining the failures rate gives you an overall success rate of 97.% for CFireSim or 98.7% for FIRECalc.

Only 25% will live past 90 and the 25 years success rate for 30/70 is close to 100%.
Historically the volatility of a 30/70 is much lower than 60/40.

More than likely, this is because cFIREsim and FireCalc calculate bond returns differently (thus, you'll see this difference get bigger the larger percentage of bonds you have).  This change is documented here: http://www.cfiresim.com/phpbb/viewtopic.php?f=2&t=119  I did a lot of discussing with folks on bogleheads to come to this conclusion.


bo_knows

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Re: Rick Ferri; 30/70 portfolio for retirees
« Reply #12 on: February 14, 2015, 06:35:56 AM »
Well if you only need your portfolio to last your 20-25 years, for normal retirement at 65-66, then they are mathematically correct at they assume capital draw down and not capital preservation with the goal of having a lowest volatility priority vs growth.

This.  His target audience is not the early retiree who has a many decade time horizon.

+1.  I believe that this very same theme was discussed about this article on bogleheads.  A lot of people cited Pfau/Kitces research stating that this might be a good allocation for the first 3-5 years, but that gradually increasing equities as you age would be better.

aj_yooper

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Re: Rick Ferri; 30/70 portfolio for retirees
« Reply #13 on: February 14, 2015, 06:50:24 AM »
I thought he makes some sense in that retirement investing is primarily income focused so therefore the default portfolio should tilt towards fixed income. Just adding enough stocks to spice up returns a little and offset inflation. As others said the context is not early retirement. It's just a different view, not necessarily a wrong view IMHO.
my problem is that it doesn't work even for normal retirees, with 4% and 30 years. As someone mentioned above the success rate is around 70%. I set it to 40 years and I think it was 35%! Even retiring in 60s going to 100 isn't unthinkable. The more I look at it the less sense his argument makes, which is unusual for Ferri

Actually I think 30% works fine for 65 year old retires.

CFiresim puts the failure rate at 30% for 30/70/0 portfolio for 4% withdrawal
FIRECalc using the same input the failure rate at 13% (This is a rather significant difference anybody know why?)

Social Security say that about 1 out ever 10  65 year old will living more than 30 years.  Combining the failures rate gives you an overall success rate of 97.% for CFireSim or 98.7% for FIRECalc.

Only 25% will live past 90 and the 25 years success rate for 30/70 is close to 100%.
Historically the volatility of a 30/70 is much lower than 60/40.

Thanks cliffp!

Scandium

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Re: Rick Ferri; 30/70 portfolio for retirees
« Reply #14 on: February 14, 2015, 10:38:37 AM »
Well if you only need your portfolio to last your 20-25 years, for normal retirement at 65-66, then they are mathematically correct at they assume capital draw down and not capital preservation with the goal of having a lowest volatility priority vs growth.

This.  His target audience is not the early retiree who has a many decade time horizon.

+1.  I believe that this very same theme was discussed about this article on bogleheads.  A lot of people cited Pfau/Kitces research stating that this might be a good allocation for the first 3-5 years, but that gradually increasing equities as you age would be better.
Well maybe he should have said. I didn't see anything saying "this works if your retirement last no more than 20 years. If not you'll die destitute and starving."

arebelspy

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Re: Rick Ferri; 30/70 portfolio for retirees
« Reply #15 on: February 14, 2015, 11:35:16 AM »
More than likely, this is because cFIREsim and FireCalc calculate bond returns differently (thus, you'll see this difference get bigger the larger percentage of bonds you have).  This change is documented here: http://www.cfiresim.com/phpbb/viewtopic.php?f=2&t=119  I did a lot of discussing with folks on bogleheads to come to this conclusion.

WOW, I had no idea FIRECalc was so inaccurate on that.  How unfortunate.
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bo_knows

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Re: Rick Ferri; 30/70 portfolio for retirees
« Reply #16 on: February 14, 2015, 11:40:21 AM »
More than likely, this is because cFIREsim and FireCalc calculate bond returns differently (thus, you'll see this difference get bigger the larger percentage of bonds you have).  This change is documented here: http://www.cfiresim.com/phpbb/viewtopic.php?f=2&t=119  I did a lot of discussing with folks on bogleheads to come to this conclusion.

WOW, I had no idea FIRECalc was so inaccurate on that.  How unfortunate.

I am not an expert on financial calculations (despite my website, lol), but I was a bit surprised when it was brought up to me as well.

skyrefuge

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Re: Rick Ferri; 30/70 portfolio for retirees
« Reply #17 on: February 16, 2015, 08:53:03 PM »
More than likely, this is because cFIREsim and FireCalc calculate bond returns differently (thus, you'll see this difference get bigger the larger percentage of bonds you have).  This change is documented here: http://www.cfiresim.com/phpbb/viewtopic.php?f=2&t=119  I did a lot of discussing with folks on bogleheads to come to this conclusion.

A while ago when I was trying to figure out why Trinity, Pfau, FIRECalc, and cFIREsim all gave different SWRs. I figured it was something to do with using different data sources (and likely the bond sources in particular), but then I was surprised that I couldn't find anything describing the actual data sources used for cFIREsim, even after reading the whole cFIREsim FAQ (not that the other research is terribly forthcoming either). I guess I should have asked, and even now, should probably be posting this at the cFIREsim forums, but this is my lazy way of saying: add this to the FAQ! Even just that link to the forum would be better than nothing (I believe I also quickly browsed the forum but didn't find that thread).

Anyway, this topic also goes along with my "why do we trust who we trust" musings. It's funny how even today, all we see during discussions of SWR are references to "Bengen" or "The Trinity Study". That shit is old news. It has been far-surpassed by the Trinity-style flexible simulation-engines of FIRECalc and cFIREsim, and now we see that cFIREsim has gone even further and found and corrected what I see as a major error/omission in those original works.

But still, we'll continue to reference that hoary old research. Why? Because the guys that did that hoary old research had fancy letters before or after their names, and wrote their stuff in a serif font on two-columned dead-tree paper (now PDFs) rather than on the wild-and-crazy World Wide Web. It's just dumb how a forum like this is filled with people every bit as smart or even smarter than those guys, who have done as much or more work and research and insight-creation, and we fail to recognize that. So this is me trying to recognize it. Awesome work, bo_knows! (and NW-Bound at the e-r.org forums)

Bengen and The Trinity Study should no longer be mentioned by anyone, except as the creators of the (very valuable) prior work to cFIREsim.

It was also interesting how the NW-Bound thread came out of analyzing the Y2K retiree, and thus, there seemed to a belief that incorporating price-changes into bonds would raise the SWR. But after programming it into cFIREsim, we see that, although it did raise the returns for that Y2K retiree, it actually lowered the SWR. Just more evidence of how hard it is to grasp/remember that SWR is a worst-case number, not an average-case number!

arebelspy

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Re: Rick Ferri; 30/70 portfolio for retirees
« Reply #18 on: March 17, 2015, 01:30:36 PM »
MOD NOTE: Discussion on Pfau's latest research on variable withdrawal strategies split off to here: http://forum.mrmoneymustache.com/investor-alley/pfau-on-variable-withdrawal-strategies/
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skyrefuge

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Re: Rick Ferri; 30/70 portfolio for retirees
« Reply #19 on: March 17, 2015, 01:54:40 PM »
I think the bogleheads people are just more academic than here, percentage-wise.  We have just as smart of posters, but we also have a huge chunk of young, non-academic posters.  So when you do a percent, they skew higher.  I could be wrong, but that's my impression on both.

I don't have any reason to believe that bogleheads skew more "academic" than Mustachians, but I can certainly agree that they're older, which I think holds sufficient explanatory power on its own for the observed difference. Older people in general tend to have more respect for institutions than younger people. Much of this was out of necessity; before technological developments that democratized knowledge and information (i.e, the Internet), institutions *were* really the best sources of trustworthy information. Want to know if you're sick? See a doctor. Want to know what to do with your money? Talk to a financial adviser at a building with big stone pillars out front. Want to get a job? Get a degree from a good university. The younger generation is more likely to check their symptoms on WebMD, post their financial questions at mrmoneymustache.com, and score a job using the smartphone app they created as their resume.

Great observation, which leads me to question why the bogleheads forum has no poster-ranking system while our own, with its more democratic ethos, does?

I would say that neither forum really has a poster-ranking system. Yeah, here we grade members by their post count, but that's such a crude metric to use for a reputation system that it shouldn't even be considered one.

It looks like Simple Machines does have a built in "karma" reputation system, and then an even-better Advanced Reputation System mod available. I've never participated in a community with a sophisticated reputation system (where the opinions of people with higher reputation have a bigger influence on others' reputation, like Google's PageRank), so I admit being very curious to see how it would operate in practice. But I do concede that enabling it could have a bigger effect on forum culture than something like shutting down generic avatars, so I'll wait at least a month before petitioning our Sith Lord for this one. :-)

I also don't think having such a reputation system is at odds with a more-democratic, less institutionally-dependent community. As long as the reputation mechanism is transparent, and reputations are determined democratically, then it's something quite different than "you should listen to this guy because he paid some guys in black robes to let him use the letters 'Dr.' in front of his name". An appeal-to-authority should always be shot down as the logical fallacy that it is, whether that "authority" is derived from those "Dr." letters or "karma: 18728".

arebelspy

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Re: Rick Ferri; 30/70 portfolio for retirees
« Reply #20 on: March 17, 2015, 02:01:35 PM »
An appeal-to-authority should always be shot down as the logical fallacy that it is

This is true, because skyrefuge said it, and he's very smart.
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brooklynguy

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Re: Rick Ferri; 30/70 portfolio for retirees
« Reply #21 on: March 17, 2015, 02:40:26 PM »
Yeah, here we grade members by their post count, but that's such a crude metric to use for a reputation system that it shouldn't even be considered one.

Agree, and that was my point -- I was really asking why we have a false non-ranking ranking system based solely on post count.  And I was satisfied with Rebs' answer ("for funsies").

I cast my vote against implementing a true ranking system in light of the effects it could (or would) have on forum culture.

arebelspy

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Re: Rick Ferri; 30/70 portfolio for retirees
« Reply #22 on: March 17, 2015, 03:03:06 PM »
I cast my vote against implementing a true ranking system in light of the effects it could (or would) have on forum culture.

I'm against it as well, so rest easy.  :)
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frugalman

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Re: Rick Ferri; 30/70 portfolio for retirees
« Reply #23 on: March 20, 2015, 01:10:54 PM »
I'm a 65 year old about to retire in 8 months.
My IRA stash is at Vanguard in VBIAX (60/40). I'll also be adding my work 401k to this stash.
Between social security and a pension, I may never have to touch this stash! I have no plans for any withdrawals.
I also have about 100k cash savings.

So why don't I go 100/0 allocation? Vanguard's investing primer shows that a 60/40 allocation over 88 years has an average CAGR of 8.8%, with a worst drawdown year of -26.6%, versus a 100/0 allocation CAGR of 10.2%, and worst drawdown year of -43.1%. https://personal.vanguard.com/us/insights/investingtruths/investing-truth-about-risk

This will meet my needs very well, and is as simple as you can get (one fund). I will be sorely tempted if we are down over 20 percent someday, of shifting some of it to VTSAX all stocks, enough to make an 80/20 allocation. And if we are down 40 percent, I'll put it ALL in VTSAX.
« Last Edit: March 20, 2015, 01:12:47 PM by frugalman »

Kaspian

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Re: Rick Ferri; 30/70 portfolio for retirees
« Reply #24 on: March 20, 2015, 01:30:06 PM »
I know we talk a lot here about asset allocation vs. risk tolerance vs. age threshold vs. diversification, so I was pretty damn amazed when I was shown data that the allocation difference in an index portfolio made extremely little difference over the long term.  In the case of the diversified index funds I use, a 70/30 bond/equity spilt made almost the same as a 10/90 bond/equity split.  7.04% vs. 7.21%.   (Almost fell out my chair seeing that!)  Conservative and aggressive ended up in pretty much the same spot.  (Though I assume the aggressive person had a few more stressful moments over the years?)  This  doesn't account for withdrawals going forward though.

So, I have to conclude MMM and Bogle are right--stash away as much as you can, don't worry about it, and keep your fees low.  The rest is just semantics.

http://canadiancouchpotato.com/wp-content/uploads/2015/01/CCP-Model-Portfolios-TD-e-Series.pdf

« Last Edit: March 20, 2015, 01:35:39 PM by Kaspian »

skyrefuge

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Re: Rick Ferri; 30/70 portfolio for retirees
« Reply #25 on: March 20, 2015, 02:29:41 PM »
I know we talk a lot here about asset allocation vs. risk tolerance vs. age threshold vs. diversification, so I was pretty damn amazed when I was shown data that the allocation difference in an index portfolio made extremely little difference over the long term.  In the case of the diversified index funds I use, a 70/30 bond/equity spilt made almost the same as a 10/90 bond/equity split.  7.04% vs. 7.21%.   (Almost fell out my chair seeing that!)

That's really only because the 20-year historical period you're looking at was a historical anomaly. Bonds had freakishly-high returns over that period, while stocks had normal-ish to low returns. It's extremely unlikely for bonds to repeat that performance going forward. If you look at almost any other 20-year period in the past, the effects of different allocations on returns would be much more obvious.

Yes, saving your money in any form is the critical first step, but an early retiree settling on a 30/70 stock/bond portfolio (simply because it returned about the same as a 90/10 portfolio from 1995-2014) would be pretty foolish.