Author Topic: Why not do 100% allocation, draw 4% at retirement, and yolo it?  (Read 28239 times)

shinn497

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MMM's post on the long term gains of the stock market have made me pretty comfortable with its volativity. So here is what I'm wondering. Why not just dump everything into a 100% stock porfolio, draw 4% when you need to retire, and just yolo it along the way?

Would it be mathematically better to go with less volatility on retirement? If there are dips early on could these destroy your nest egg if you withdraw? Part of me just underscores the need to remain flexible?

Personally I see it this way. I'm 31, I don't actually hate working, and plan on earning a lot of money in life. I am a data scientist now, but I think when I am older I might pursue something else but still make money doing it. I plan on living in a paid off house ASAP, like dave ramsey suggests. And want 200k for health purposes or something by the time I'm 60. So I don't see the need to not be risky.

jacoavluha

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Re: Why not do 100% allocation, draw 4% at retirement, and yolo it?
« Reply #1 on: May 14, 2018, 10:42:47 PM »
100% equities now might be perfectly appropriate for you now. In retirement, well its good you donít have to commit to that now.

Itís easy to say youíre comfortable with volatility when youre 31 and the markets been on a tear for damn near a decade.

Come back and update when your 100% equity portfolio drops 45%. Imagine how that would feel if thatís your first year of retirement.

MDM

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Re: Why not do 100% allocation, draw 4% at retirement, and yolo it?
« Reply #2 on: May 14, 2018, 10:43:26 PM »
If there are dips early on could these destroy your nest egg if you withdraw?
Yes.

Note that 4% is not a law of nature.  It is "what would have worked in the past" and in the past, some amount of bonds had better success than 100% stocks in retirement.

See
http://www.retailinvestor.org/pdf/Bengen1.pdf
http://www.aaii.com/files/pdf/6794_retirement-savings-choosing-a-withdrawal-rate-that-is-sustainable.pdf
https://www.bogleheads.org/wiki/Trinity_study_update
https://www.bogleheads.org/wiki/Safe_withdrawal_rates
for some reading.

DreamFIRE

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Re: Why not do 100% allocation, draw 4% at retirement, and yolo it?
« Reply #3 on: May 14, 2018, 10:43:31 PM »
100% is fine for 31, but not for a 50 year old who is about to FIRE.  SORR is a factor, especially in this market.  Not everyone's situation is the same as yours.

shinn497

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Re: Why not do 100% allocation, draw 4% at retirement, and yolo it?
« Reply #4 on: May 14, 2018, 11:25:57 PM »
I think I get it. But I still want to take the chance. Hmmm I guess I would rather not feel the FOMO of missing out on those gains.

Here is my question. I can understand changing allocation at like 50 - 65 or so, but should this be done gradually?

Oh I should say. All of my money is in betterment, which has fractional shares. So I can do that more easily.

WalkaboutStache

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Re: Why not do 100% allocation, draw 4% at retirement, and yolo it?
« Reply #5 on: May 15, 2018, 12:56:46 AM »
I would stick with MMM and ERN and plough everything into equity.  My own path before I learned better was real estate, which sort of worked as a savings account.   I think I may have lucked out on one of my properties because it did very well on AirBnB, but if I had to do it again I would definitely go 100% equities.  In fact, I am trying to sell them so that I can put the proceeds into equities now.

The concerns expressed in the thread are about the sequence of returns, and they are real.  However, since you are not on the cusp of FIRE, they are nothing to worry about.

Here is a good article about that risk, but the idea is intuitive.  If you retire and the market tanks shortly thereafter, you could have to backpedal into work again:

https://earlyretirementnow.com/2017/05/17/the-ultimate-guide-to-safe-withdrawal-rates-part-14-sequence-of-return-risk/

As you near retirement, you would want to build an equity glidepath.  The simplest form of that idea is to keep a couple of years of expenses in a bond portfolio.  That way if your equity savings tank, you do not need to touch them.  Here is a better explanation:

https://earlyretirementnow.com/2017/09/13/the-ultimate-guide-to-safe-withdrawal-rates-part-19-equity-glidepaths/

I think ERN actually has an article explaining how the traditional 60/40 or 70/30 equity/bond portfolio underperforms, but I could not find it.  The idea is intuitive enough, though:  if you keep part of your money yielding 2-3% (if that) for years, you are giving up the 7% cumulative gain of that money if it was in an equity portfolio for that time.

100% equities until very close to retirement, then a couple of years of expenses in bonds as you near your retirement date.  Keep that at hand for the first 5-10 years of retirement until your SWR gets to about 3% and the likelihood of failure is nearly 0.  It is not quite what you propose to do, but it is damn close to it.

Actually, re-reading your post, a 50-65% equities allocation does not seem sensible at all at any point - you'd be paying for too much insurance in the name of foregone returns.

« Last Edit: May 15, 2018, 03:35:19 AM by WalkaboutStache »

shinn497

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Re: Why not do 100% allocation, draw 4% at retirement, and yolo it?
« Reply #6 on: May 15, 2018, 01:50:03 AM »
Yeah the whole giving up that 7% is what kills me.

And yeah. I see things this way. I'd like to retire at 50 but I also see it as I have 19 years to figure out how to increase my income and also decrease expenses. My base expenses are already like ~1100$  rn so I think I'm already pretty good! I'm also flexible with home choice, so I think I could move into a cheap city that has cheap real estate if I ever even want a house.

I thinking carving out a base and then moving up there, buying everything in cash, means I'll have enough freedom to be riskier with investments. Ionno just a thought. The biggest thing is as I get older, I'll need to start saving more for health insurance and eventually perhaps even self insurance.


Scandium

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Re: Why not do 100% allocation, draw 4% at retirement, and yolo it?
« Reply #8 on: May 15, 2018, 08:55:10 AM »
Personally I see it this way. I'm 31, I don't actually hate working, and plan on earning a lot of money in life. I am a data scientist now, but I think when I am older I might pursue something else but still make money doing it. I plan on living in a paid off house ASAP, like dave ramsey suggests. And want 200k for health purposes or something by the time I'm 60. So I don't see the need to not be risky.

So you're not 100% stocks then? Paying off your mortgage is comparable to a bond (except it's not liquid).

You were also too young to drink beer the last time the stock market dropped more than 10%, so it's pretty easy to say you're "comfortable" with volatility when you haven't seen $250,000 of your net worth wiped out in a week.

It also sounds like you're single. It's one thing saying you're flexible with spending and can move wherever now, but if you ever have a partner, kids and aging parents to care for that might not be so easy.

MustacheAndaHalf

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Re: Why not do 100% allocation, draw 4% at retirement, and yolo it?
« Reply #9 on: May 15, 2018, 08:59:09 AM »
YOLO doesn't cover going broke in retirement.  But you'll have an 80-90% chance to make it according to Vanguard's nest egg calculator when you go 100% stocks for 25-50 years.

In general 100% stocks allocations get very popular during bull markets (like this one) and after it's been a decade since a massive crash (like 2008).  Watch what happens in the next crash so you know how that feels before you decide to retire on 100% stocks.

Note you can also adjust your withdrawal rate to 3% (ignoring social security) and increase the chance of portfolio survival to 88-96% (between 25-50 years of retirement).

talltexan

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Re: Why not do 100% allocation, draw 4% at retirement, and yolo it?
« Reply #10 on: May 15, 2018, 09:09:49 AM »
On average you should be fine.

The problem is that the downside (portfolio failure substantially reducing your retirement standard-of-living) is catastrophic, while the upside (if you're a mustachian, extra money in retirement shouldn't make you happier) is not that much better. So you're risking a catastrophe in exchange for a premium that is basically not worth much.

ysette9

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Re: Why not do 100% allocation, draw 4% at retirement, and yolo it?
« Reply #11 on: May 15, 2018, 09:29:13 AM »
It sounds to me like you have enthusiasm and are off to a good start. I’d recommend hanging around here more and slowly learning the details and subtleties of things like how robust the 4% “rule” is, what asset allocations are recommended for the long haul, and where to invest.

Personally we have been in mostly equities during this amazing run-up accumulation phase. We are seriously discussing increasing bonds quite a bit in a “bond tent” strategy. https://www.kitces.com/blog/managing-portfolio-size-effect-with-bond-tent-in-retirement-red-zone/. The details of when to start the tent aren’t known, as far as I can tell, but we are a few years out from FI so I think we will be doing it soon. Then the plan is to spend down the bonds in the first ten years or so of RE and end up at practically all equities for the long term. If you are looking at 50 years of retirement you have to have a lot of equities to go the distance, but in the short and mid-term sequence of returns is a real risk.

ysette9

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Re: Why not do 100% allocation, draw 4% at retirement, and yolo it?
« Reply #12 on: May 15, 2018, 09:33:39 AM »
The other thing that catches my attention is that you mentioned Dave Ramsey. I think the general consensus is that he is good at getting the hopeless on a path to get out of debt, but his advice breaks down when it comes to investing, both when and in what. I recommend seriously looking into the threads here on the debate of whether to pay off the mortgage or not. On average you are better off not paying it off early and investing instead unless you have some crazy high interest rate. I’ve run my own scenarios in cFIREsim (my favorite retirement calculator/simulator) and paying off the mortgage early and/or buying in cash adds years to our timeline to reach FI. There are more subtleties to the debate (see the threads on these forums) but that is the big picture view.

Classical_Liberal

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Re: Why not do 100% allocation, draw 4% at retirement, and yolo it?
« Reply #13 on: May 15, 2018, 09:51:25 AM »
On average you should be fine.

The problem is that the downside (portfolio failure substantially reducing your retirement standard-of-living) is catastrophic, while the upside (if you're a mustachian, extra money in retirement shouldn't make you happier) is not that much better. So you're risking a catastrophe in exchange for a premium that is basically not worth much.

This

100% equities early in accumulation is a rockstar move.  One I never had the balls to make.  However, once living off the money, it's a totally different ball game.  As a matter of fact, lower volatility with lower CAGR leads to higher sustained withdrawal rates...  Read that again... lower returns can lead to higher withdrawal rates in drawdown phase.

I highly recommend you read both the above referenced meticulous study on WR from ERN, but also Tyler's Portfolio Charts commentary.  In draw-down, insuring your equity position with options, or choosing non-coorleated asset classes for a portion of portfolio will absolutely reduce failure risk.  The trade off is some of the upside, which just isn't needed anyway. 

Ask yourself, is it worth substantially increasing portfolio failure risk to increase your chances of dying filthy rich?  If the answer is "no" (which for most anticonsumer Mustchians it should be), then 100% equities in drawdown is not in line with your goals.
« Last Edit: May 15, 2018, 10:00:02 AM by Classical_Liberal »

Bateaux

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Re: Why not do 100% allocation, draw 4% at retirement, and yolo it?
« Reply #14 on: May 15, 2018, 01:19:07 PM »
I'm 49 and was 100 percent stock funds until a few months ago.  Now I'm 80 percent stock funds and 20 percent bond fund.  JL Collins approach for me from here to FIRE.

CoffeeR

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Re: Why not do 100% allocation, draw 4% at retirement, and yolo it?
« Reply #15 on: May 15, 2018, 01:34:26 PM »
MMM's post on the long term gains of the stock market have made me pretty comfortable with its volatility. So here is what I'm wondering. Why not just dump everything into a 100% stock portfolio, draw 4% when you need to retire, and just yolo it along the way?
Well, tell me what the stock market returns will be in the future and I will tell you if this is a good idea or not. Social security is an annuity and in many ways behaves like a bond, so is real estate, so you have bond-like exposure any way.

For many years I was 100% stocks since I did not care about volatility, so I am not to judge. Now that retirement is closer to the horizon and having lived through the tech crash and the housing crash, volatility and potential down turn and SORR does mater. It matters a lot. Many of the younger folks here did not live through the last two crashes, but looking back all you see is a quick recovery for those that stayed invested. Well, look back a little further. Look at the late sixties and the decade of stagflation that followed. Look at the great depression and the long recovery time.  Looking at a charts it is real easy to convince yourself that you will not have a problem, but most people deceive themselves thinking they will have the stamina to hold on. You think the great depression and late sixties/seventies cannot happen again? Your are right, they will not happen again, because next time it will be different. It always is.



Dicey

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Re: Why not do 100% allocation, draw 4% at retirement, and yolo it?
« Reply #16 on: May 15, 2018, 01:41:51 PM »
In retrospect, i think it might make sense to go balls-out in equities from say 20 (or younger) until maybe mid-to-late thirties and then gradually ease into a more balanced portfolio.

It's also wise to consider RE (if you have any) as a stabilizing influence on your portfolio, letting you keep more in equities, while still achieving something of a balance. I bought RE fairly early on, and kept a "balanced" portfolio during those years. In retrospect, I believe  that combination is overly conservative.

I also think there's a paradox here. The less you have, the more careful you want to be with it. The more experience and $$ you accumulate, the more risks you are willing to take, because you've learned everything ounces back eventually if you stay the course.

Key takeaway is the earlier in life you start, the fewer dollars you will actually need to reach your goals. The sooner your money your money starts making more that you do, the faster you can achieve the life of your dreams.

ETA - CoffeeR just cross-posted. This is the reason to ease into more conservative investments over time. It doesn't negate the case for going 100% equities in the early years. Assuming you're doing your equities the mustachian way, not speculating in individual stocks or any other stupid shit.

Scortius

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Re: Why not do 100% allocation, draw 4% at retirement, and yolo it?
« Reply #17 on: May 15, 2018, 01:44:57 PM »
Another thing to note is that we're in what is possibly the tail end of nearly a decade of artificially lowered bond rates. It's easy to say 100/0 now because the trade-off to bonds is so abysmal. You may find yourself more willing to go to something like 80/20 if bonds rise back to something like 4-5% instead of the 2-3% or so we're seeing now. Hell, the 70s and 80s saw bond rates in the double digits.

https://fred.stlouisfed.org/series/DGS10 (click on max)

CoffeeR

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Re: Why not do 100% allocation, draw 4% at retirement, and yolo it?
« Reply #18 on: May 15, 2018, 01:51:49 PM »
Another thing to note is that we're in what is possibly the tail end of nearly a decade of artificially lowered bond rates. It's easy to say 100/0 now because the trade-off to bonds is so abysmal. You may find yourself more willing to go to something like 80/20 if bonds rise back to something like 4-5% instead of the 2-3% or so we're seeing now. Hell, the 70s and 80s saw bond rates in the double digits.

https://fred.stlouisfed.org/series/DGS10 (click on max)
I agree that the present time seems like an exceptionally poor time to get into bonds. Yes, I realize this is a market timing statement. Still, I have *never* like bond funds, so if I could (and I cannot in my main retirement account), I might consider laddering treasuries and/or CD's.

Classical_Liberal

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Re: Why not do 100% allocation, draw 4% at retirement, and yolo it?
« Reply #19 on: May 15, 2018, 01:53:25 PM »
@Dicey
I agree all stocks early, the risk is worth the reward if your timing is lucky. I was not that smart, partially because of the paradox you wrote of... the less you have.

However, you're also assuming a fairly long accumulation period. Long accumulation means more SS, more chance some accumulation will be done during a period of asset depression.  If someone is thinking 5-10 years and out, I think more conservative AA's should be considered at about the halfway point (in ETA to FIRE, not dollars).  There's nothing wrong with switching it back up to US stock heavy if CAPE starts to look more favorable later.

shinn497

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Re: Why not do 100% allocation, draw 4% at retirement, and yolo it?
« Reply #20 on: May 15, 2018, 04:30:04 PM »
The other thing that catches my attention is that you mentioned Dave Ramsey. I think the general consensus is that he is good at getting the hopeless on a path to get out of debt, but his advice breaks down when it comes to investing, both when and in what. I recommend seriously looking into the threads here on the debate of whether to pay off the mortgage or not. On average you are better off not paying it off early and investing instead unless you have some crazy high interest rate. Iíve run my own scenarios in cFIREsim (my favorite retirement calculator/simulator) and paying off the mortgage early and/or buying in cash adds years to our timeline to reach FI. There are more subtleties to the debate (see the threads on these forums) but that is the big picture view.

Yeah I am a huge fan of Dave Ramsey. He convinced me how important behaviour and emotion are with money. So yeah. I am never going to f with debt again. I don't even want a mortgage really. I mean I might get one as per his advice (15 year less than 25% of take home) and move up in house if I ever wanted to. I have heard the arguements for holding a mortage, but I personally would never do them. Just not worth the stress.

I do understand that saving up to buy a house in cash is sort of hedging your bets and is equivalent to buying bonds. But I'm fine with that. I mean after a house and base expenses like food and gas. I'm good.

shinn497

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Re: Why not do 100% allocation, draw 4% at retirement, and yolo it?
« Reply #21 on: May 15, 2018, 04:38:50 PM »
So after reading all this advice. I think I will stay 100% stocks for now. Maybe I Will shift to bonds a bit when I am older  and then start a glide path from there.

In the mean time I will continue to research more about AA heavily and investing as well as continue to look into increasing my income.

I think I am a bit more ok with risk since I already have low expenses. Also, being a Dave Ramseyer is making me a lot more conservative in other aspects of my life. E.G. building an emergency fund, getting rid of all debts, seeking to not have a mortage etc. etc. I think this sort of hedge is, in effect, my "bond".

Also, I don't think I hate working. I am currently a data scientist and could do this for a while. If not I will just change jobs or try entrepreneurship or something. I'm confident there will always be good work out there! The stocks are just a bonus. And Ionno. Fking YOLO. I am looking forward to the volatility.

I will look into some of the resources people have posted. I love yummy math but am also wary of paralysis of the analysis and the fact that no one models behaviour .
« Last Edit: May 15, 2018, 04:43:34 PM by shinn497 »

WalkaboutStache

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Re: Why not do 100% allocation, draw 4% at retirement, and yolo it?
« Reply #22 on: May 15, 2018, 07:22:16 PM »

I think I am a bit more ok with risk since I already have low expenses. Also, being a Dave Ramseyer is making me a lot more conservative in other aspects of my life. E.G. building an emergency fund, getting rid of all debts, seeking to not have a mortage etc. etc. I think this sort of hedge is, in effect, my "bond".


Why the emergency fund, though?  It seems that you are avoiding bonds at 2-3% for an emergency fund at [peanuts]%. 

powskier

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Re: Why not do 100% allocation, draw 4% at retirement, and yolo it?
« Reply #23 on: May 15, 2018, 10:04:06 PM »
So after reading all this advice. I think I will stay 100% stocks for now. Maybe I Will shift to bonds a bit when I am older  and then start a glide path from there.

In the mean time I will continue to research more about AA heavily and investing as well as continue to look into increasing my income.

I think I am a bit more ok with risk since I already have low expenses. Also, being a Dave Ramseyer is making me a lot more conservative in other aspects of my life. E.G. building an emergency fund, getting rid of all debts, seeking to not have a mortage etc. etc. I think this sort of hedge is, in effect, my "bond".

Also, I don't think I hate working. I am currently a data scientist and could do this for a while. If not I will just change jobs or try entrepreneurship or something. I'm confident there will always be good work out there! The stocks are just a bonus. And Ionno. Fking YOLO. I am looking forward to the volatility.

I will look into some of the resources people have posted. I love yummy math but am also wary of paralysis of the analysis and the fact that no one models behaviour .
If you love yummy math and data you should look into how good having a good mortgage can be for your investment returns. Dave Ramsey is a good salesman but far from a guru.

Dicey

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Re: Why not do 100% allocation, draw 4% at retirement, and yolo it?
« Reply #24 on: May 15, 2018, 11:45:26 PM »
If you love yummy math and data you should look into how good having a good mortgage can be for your investment returns. Dave Ramsey is a good salesman but far from a guru.
AMEN to both points!

shinn497

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Re: Why not do 100% allocation, draw 4% at retirement, and yolo it?
« Reply #25 on: May 16, 2018, 07:32:21 AM »
Do I really have to explain why I need an emergency fund? In case I need money so I don't have to pull from my investments and prematurely drain them. I won't use debt for this since I don't want credit cards. I'm self-aware enough to know that if I kept CCs for the sake of "emergencies", I'd overuse them.

As for mortgages. No. First I just don't like the idea of having debt and think it reduces quality of life. And two, I am quite certain that keeping and intending to keep a mortgage effects your behaviour in a negative way. Specificallly, it incentivizes you to stay in a larger house, and that is a good way of overleveraging and increasing risk too much. I mean I don't mind people making a case for larger mortgages. But any time I see an argument for them, they always have some convenient assumptions which lead me to believe that are constructed to some convenient conclusions. Which makes sense right? Of course people will mess with the math to justify a pretty house.

I mean I'm still not 100% sure on 100% stocks. And leveraged investing is even riskier.

Scandium

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Re: Why not do 100% allocation, draw 4% at retirement, and yolo it?
« Reply #26 on: May 16, 2018, 08:17:07 AM »
Do I really have to explain why I need an emergency fund? In case I need money so I don't have to pull from my investments and prematurely drain them. I won't use debt for this since I don't want credit cards. I'm self-aware enough to know that if I kept CCs for the sake of "emergencies", I'd overuse them.

That doesn't sound very YOLO to me..

Go 100% EM stocks on margin; now that's YOLO

PDXTabs

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Re: Why not do 100% allocation, draw 4% at retirement, and yolo it?
« Reply #27 on: May 16, 2018, 08:36:15 AM »
Do I really have to explain why I need an emergency fund? In case I need money so I don't have to pull from my investments and prematurely drain them. I won't use debt for this since I don't want credit cards. I'm self-aware enough to know that if I kept CCs for the sake of "emergencies", I'd overuse them.

That doesn't sound very YOLO to me..

Go 100% EM stocks on margin; now that's YOLO


Classical_Liberal

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Re: Why not do 100% allocation, draw 4% at retirement, and yolo it?
« Reply #28 on: May 16, 2018, 03:54:35 PM »
And two, I am quite certain that keeping and intending to keep a mortgage effects your behaviour in a negative way. Specificallly, it incentivizes you to stay in a larger house, and that is a good way of overleveraging and increasing risk too much.

This part of your thinking is very advanced, IMO.  More advanced than many spendy folks you'll run into in financial forums.

Although the "hold a mortgage" crowd are absolutely correct in the math.  Its been very cheap leverage for them over the past 8-9 years of very low rates (rates subsidized by the government to encourage home ownership).  It doesn't mean they are better off for holding the loan/owning the home.  There is very much a psychological component to home ownership. 

However, your argument breaks down if you are going to own a home anyway (assuming the right size, etc). You should use the cheap leverage.  Liken this to not using a rewards credit card because you are afraid you'll overspend and not pay the balance each month.  Know thyself, but understand there are people out there who use the CC bonus wisely, even if you can't.

I like your current plan of 100% stocks and starting to learn more about investing.  A small E-fund is inconsequential to results, it's not worth arguing about a few grand of allocation.
« Last Edit: May 16, 2018, 03:56:30 PM by Classical_Liberal »

WalkaboutStache

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Re: Why not do 100% allocation, draw 4% at retirement, and yolo it?
« Reply #29 on: May 16, 2018, 07:50:36 PM »
Do I really have to explain why I need an emergency fund? In case I need money so I don't have to pull from my investments and prematurely drain them. I won't use debt for this since I don't want credit cards. I'm self-aware enough to know that if I kept CCs for the sake of "emergencies", I'd overuse them.


You don't need to explain why you need them (I'm not your mother), you might want to understand what it does in terms of returns over the long run.  If you are comfortable foregoing that and with the dissonance between that stance and your questioning the wisdom of bonds on the same grounds, yolo away!

Radagast

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Re: Why not do 100% allocation, draw 4% at retirement, and yolo it?
« Reply #30 on: May 16, 2018, 07:59:23 PM »
I see no issues here. Personally, I can't tell the difference between an emergency fund and a safe bond allocation. Just be sure you are keeping the EF above inflation, and if you are not, consider moving it gradually to I-bonds (very safe, very cash-like after 1 year, and very high returns considering) or to ordinary bonds. A one-off five year CD ladder centered on a hard retirement date might increase your prospects, otherwise consider a ~25% bond allocation when you are finally depending on your money for sustenance.

I like your thinking that mortgages are just another way to justify a McMansion, and it seems like most rent-vs-buy discussions assume a house that is at least 50% larger with higher-end finishes than the hypothetical rental.

shinn497

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Re: Why not do 100% allocation, draw 4% at retirement, and yolo it?
« Reply #31 on: May 16, 2018, 10:54:01 PM »
I mean if someone is going to be in a house and like stay in a house, then I won't fault them. I more than under stand the argument that compares mortgage interest rates to inflation, and states that holding onto a mortgage means you get a house with "cheap money".

But nothing comes for free. You essentially pay for your house this way with increased risk. Which is why I completely don't buy the whole "It is stupid to pay down your mortgage argument". Also why I am not for leveraged real estate. investing in I mean I am sure it can work, but there is a reason people aren't as motivated to take loans of the same scale and invest in the stock market directly. There is just something about homes that makes people forget risk, and that is something I want to be aware of. In millenial speak we call this being #woke or more importantly #wokeasfuk

And yeah, I think behaviour factors a lot into personal finance. Anecdotally, on the path to getting out of debt, I have become noticeably more productive. It's just more motivation to want to work to do this. I actually got a 20% promotion this year and my boss pointed out that something in me "shifted". So were my debt payments really a type of investment that netted me returns in terms of changed behaviour? Ionno.

Then again, I also think that a lot of people make convenient assumptions about money to justify their actions. I am probably doing the same. This is why I am so wary about the overuse of math in personal finance, and I'm a Data Scientist that does nothing but build probabilistic models all day. And I am interested in making my own monte carlo simulations.


shinn497

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Re: Why not do 100% allocation, draw 4% at retirement, and yolo it?
« Reply #32 on: May 16, 2018, 11:03:42 PM »
And two, I am quite certain that keeping and intending to keep a mortgage effects your behaviour in a negative way. Specificallly, it incentivizes you to stay in a larger house, and that is a good way of overleveraging and increasing risk too much.
However, your argument breaks down if you are going to own a home anyway (assuming the right size, etc). You should use the cheap leverage.  Liken this to not using a rewards credit card because you are afraid you'll overspend and not pay the balance each month.  Know thyself, but understand there are people out there who use the CC bonus wisely, even if you can't.

I actually never would use a rewards card for points. Debt is icky to me. I have heard there are studies that state that rewards cards have a 7% chance of being profitable. So yeah. I just don't think the math works for them at all. Then again, I haven't yet seen said studies so I can't say for sure.

I, in general, just assume there is nothing free in finance. You pay for something somewhere. Be it paying with the increased risk of making a mistake or being more cavalier if using a rewards card. Or increased risk over all of your assets when leveraging a house. If you can't see exactly how you are paying something, then you probably just aren't modeling things properly.

But I mean its ok to do so. Money's ultimate purpose is to be enjoyed, even if you die you should hope to spend it in a way that makes you happy. I guess the key is to enjoy wisely and not be naive as to how much your emotions are effecting your decision making.

Classical_Liberal

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Re: Why not do 100% allocation, draw 4% at retirement, and yolo it?
« Reply #33 on: May 16, 2018, 11:15:06 PM »
I actually never would use a rewards card for points. Debt is icky to me. I have heard there are studies that state that rewards cards have a 7% chance of being profitable. So yeah. I just don't think the math works for them at all. Then again, I haven't yet seen said studies so I can't say for sure.

Right, so for 7% a rewards CC is a great idea and supplemental income source, see some of the threads around here, people bank thousands a year from them.  I bet the numbers would be similar with mortgage use.  7% would likely spend the same on a home with mortgage as they would if paying cash.  All that means is it's a bad idea for the 93% of people who utilize the financial tool incorrectly (or correctly as the bankers and financial company shareholders see it). For those of us in the 7%, we make bank on other peoples foolish behavior.  Here you will find many of those 7%.  Again, know thyself, if you can't be one of the 7%, don't even try.  As you point out, the odds are stacked.  However, that doesn't mean it's a bad idea.

shinn497

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Re: Why not do 100% allocation, draw 4% at retirement, and yolo it?
« Reply #34 on: May 16, 2018, 11:44:05 PM »
I see moresoe that, if you use a credit card, you have a 7% probability of making money off of it.

Here is a question. Of the many, many, many people that have lost money through credit cards, how many are likely to brag about it online? How many are even aware?

Classical_Liberal

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Re: Why not do 100% allocation, draw 4% at retirement, and yolo it?
« Reply #35 on: May 17, 2018, 12:06:48 AM »
I see moresoe that, if you use a credit card, you have a 7% probability of making money off of it.
I see moresoe that, if you use a credit card, you have a 100% probability of making money off of it, if you use it correctly.
Slight correction in italics.

Here is a question. Of the many, many, many people that have lost money through credit cards, how many are likely to brag about it online? How many are even aware?
Agreed

CoffeeR

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Re: Why not do 100% allocation, draw 4% at retirement, and yolo it?
« Reply #36 on: May 17, 2018, 09:01:58 AM »
As for mortgages. No. First I just don't like the idea of having debt and think it reduces quality of life. And two, I am quite certain that keeping and intending to keep a mortgage effects your behaviour in a negative way. Specificallly, it incentivizes you to stay in a larger house, and that is a good way of overleveraging and increasing risk too much. I mean I don't mind people making a case for larger mortgages. But any time I see an argument for them, they always have some convenient assumptions which lead me to believe that are constructed to some convenient conclusions. Which makes sense right? Of course people will mess with the math to justify a pretty house.
Warning you will now encounter the "mortgage-is-good" MMM police that cannot leave a comment like this alone. I agree with you, no debt which includes no mortgage. Can debt be used to increase leverage and increase wealth? Yes, most definitely. Companies do this all the time. Some succeed spectacularly, other go bankrupt trying.

Dicey

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Re: Why not do 100% allocation, draw 4% at retirement, and yolo it?
« Reply #37 on: May 17, 2018, 09:34:05 AM »
As for mortgages. No. First I just don't like the idea of having debt and think it reduces quality of life. And two, I am quite certain that keeping and intending to keep a mortgage effects your behaviour in a negative way. Specificallly, it incentivizes you to stay in a larger house, and that is a good way of overleveraging and increasing risk too much. I mean I don't mind people making a case for larger mortgages. But any time I see an argument for them, they always have some convenient assumptions which lead me to believe that are constructed to some convenient conclusions. Which makes sense right? Of course people will mess with the math to justify a pretty house.
Warning you will now encounter the "mortgage-is-good" MMM police that cannot leave a comment like this alone. I agree with you, no debt which includes no mortgage. Can debt be used to increase leverage and increase wealth? Yes, most definitely. Companies do this all the time. Some succeed spectacularly, other go bankrupt trying.
I, for one, can totally leave it alone. I find "I actually never would use a rewards card for points. Debt is icky to me" to be a total non-sequiter. FFS, we are mustachians here! We know how to manage our spending and how to purchase the right size abode for our needs. We are not Consumer Sukkas.

Real Estate, mortgages, prudent use of credit cards and creative frugality hoisted my non-high-wage-earning ass all the way to FIRE and wealth beyond my wildest imagination, but hey, what do I know? Why should I care about helping others find an easier path to FIRE? Oh, wait, isn't that the point of MMM? Let's not forget where we are, folks.

« Last Edit: May 17, 2018, 03:26:46 PM by Dicey »

sherr

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Re: Why not do 100% allocation, draw 4% at retirement, and yolo it?
« Reply #38 on: May 17, 2018, 11:14:06 AM »
I see moresoe that, if you use a credit card, you have a 7% probability of making money off of it.

Here is a question. Of the many, many, many people that have lost money through credit cards, how many are likely to brag about it online? How many are even aware?

It's not a "randomized chance" percentage. You can choose to use the tool well and be guaranteed to come out ahead. Or you can not pay attention and carry a balance like 93% of people (apparently) and be guaranteed to come out behind.

Same goes for mortgages. You do you, but it's just a tool and like all tools it can either be used well or poorly.

Scortius

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Re: Why not do 100% allocation, draw 4% at retirement, and yolo it?
« Reply #39 on: May 17, 2018, 04:41:44 PM »
Not using reward credit cards because of an aversion to debt is like not going to the doctor because they take a few weeks to send you the bill.

Eric

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Re: Why not do 100% allocation, draw 4% at retirement, and yolo it?
« Reply #40 on: May 17, 2018, 05:37:48 PM »
I think I get it. But I still want to take the chance. Hmmm I guess I would rather not feel the FOMO of missing out on those gains.

Here is my question. I can understand changing allocation at like 50 - 65 or so, but should this be done gradually?

Oh I should say. All of my money is in betterment, which has fractional shares. So I can do that more easily.

I also have a fear of missing out on FOMO due to a fear of FOMO and missing out.


shinn497

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Re: Why not do 100% allocation, draw 4% at retirement, and yolo it?
« Reply #41 on: May 17, 2018, 08:39:08 PM »
BRAH

That is meta

elysianfields

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Re: Why not do 100% allocation, draw 4% at retirement, and yolo it?
« Reply #42 on: May 17, 2018, 11:48:15 PM »
So after reading all this advice. I think I will stay 100% stocks for now. Maybe I Will shift to bonds a bit when I am older  and then start a glide path from there.

In the mean time I will continue to research more about AA heavily and investing as well as continue to look into increasing my income.

I think I am a bit more ok with risk since I already have low expenses. Also, being a Dave Ramseyer is making me a lot more conservative in other aspects of my life. E.G. building an emergency fund, getting rid of all debts, seeking to not have a mortage etc. etc. I think this sort of hedge is, in effect, my "bond".

Also, I don't think I hate working. I am currently a data scientist and could do this for a while. If not I will just change jobs or try entrepreneurship or something. I'm confident there will always be good work out there! The stocks are just a bonus. And Ionno. Fking YOLO. I am looking forward to the volatility.

I will look into some of the resources people have posted. I love yummy math but am also wary of paralysis of the analysis and the fact that no one models behaviour .

You don't mention where you work, and most employers in the private sector don't offer pensions anymore, but if you happen to qualify for a pension, that could serve as your bond / safe cash fund.

As @Nords has written about extensively, having a government pension is equivalent to having an inflation-adjusted annuity.  As I stand to qualify for a USG pension myself, I see no need to add more bonds to my portfolio and therefore use a 100% stock allocation.  Well maybe closer to 98% stock and 2% options, but that's a discussion for a different thread.

privatefarmer

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Re: Why not do 100% allocation, draw 4% at retirement, and yolo it?
« Reply #43 on: May 18, 2018, 05:11:54 AM »
I would stick with MMM and ERN and plough everything into equity.  My own path before I learned better was real estate, which sort of worked as a savings account.   I think I may have lucked out on one of my properties because it did very well on AirBnB, but if I had to do it again I would definitely go 100% equities.  In fact, I am trying to sell them so that I can put the proceeds into equities now.

The concerns expressed in the thread are about the sequence of returns, and they are real.  However, since you are not on the cusp of FIRE, they are nothing to worry about.

Here is a good article about that risk, but the idea is intuitive.  If you retire and the market tanks shortly thereafter, you could have to backpedal into work again:

https://earlyretirementnow.com/2017/05/17/the-ultimate-guide-to-safe-withdrawal-rates-part-14-sequence-of-return-risk/

As you near retirement, you would want to build an equity glidepath.  The simplest form of that idea is to keep a couple of years of expenses in a bond portfolio.  That way if your equity savings tank, you do not need to touch them.  Here is a better explanation:

https://earlyretirementnow.com/2017/09/13/the-ultimate-guide-to-safe-withdrawal-rates-part-19-equity-glidepaths/

I think ERN actually has an article explaining how the traditional 60/40 or 70/30 equity/bond portfolio underperforms, but I could not find it.  The idea is intuitive enough, though:  if you keep part of your money yielding 2-3% (if that) for years, you are giving up the 7% cumulative gain of that money if it was in an equity portfolio for that time.

100% equities until very close to retirement, then a couple of years of expenses in bonds as you near your retirement date.  Keep that at hand for the first 5-10 years of retirement until your SWR gets to about 3% and the likelihood of failure is nearly 0.  It is not quite what you propose to do, but it is damn close to it.

Actually, re-reading your post, a 50-65% equities allocation does not seem sensible at all at any point - you'd be paying for too much insurance in the name of foregone returns.

bingo.

privatefarmer

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Re: Why not do 100% allocation, draw 4% at retirement, and yolo it?
« Reply #44 on: May 18, 2018, 05:27:00 AM »
Not using reward credit cards because of an aversion to debt is like not going to the doctor because they take a few weeks to send you the bill.

good analogy. BTW I just finished converting $3000 of visa gift cards from grocery stores --> my Amex serve accounts using discover/chase 5% cash back cards, netting $114 after less than an hours work.

credit cards are a game. know the game. play the game. win the game. you absolutely can make $$ off cc's, it's not complicated, just be aware of what you are doing. if you are on a MMM forum then clearly you are "advanced" enough to know how to game the credit card system.

shinn497

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Re: Why not do 100% allocation, draw 4% at retirement, and yolo it?
« Reply #45 on: May 18, 2018, 07:06:36 AM »
That is a terrible analogy. Going to a doctor has a high probability of improving your situation, and cost should not be an issue if you have saved and have health insurance. By comparison, credit card churning has a low probability of working. Maybe the conditional probability is higher or something, but, if you are going to assume you are "One of the few" that is better than average with financial behaviour, than that is something that flies in the face of most of the facts. Most likely you are average, perhaps especially if you think you aren't.

I don't play credit games with money because it isn't worth the headache for something that has a small probability of succeeding, and has a small payout.  I think this because I do not make the assumption that I have perfect behaviour and that everything will go according to as planned. It should be noted. People, and especially Americans, have a natural tendency to overestimate how well things will occur. It is why we buy lottery tickets, take out loans to get degrees, and invest in bitcoin.

And no. I don't think being on a forum means you are good with money. That is intention not execution. Money isn't about ideas, it is about actually sticking to your guns and making those ideas reality. And that is considerably considerably more difficult.

shinn497

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Re: Why not do 100% allocation, draw 4% at retirement, and yolo it?
« Reply #46 on: May 18, 2018, 07:10:07 AM »
So after reading all this advice. I think I will stay 100% stocks for now. Maybe I Will shift to bonds a bit when I am older  and then start a glide path from there.

In the mean time I will continue to research more about AA heavily and investing as well as continue to look into increasing my income.

I think I am a bit more ok with risk since I already have low expenses. Also, being a Dave Ramseyer is making me a lot more conservative in other aspects of my life. E.G. building an emergency fund, getting rid of all debts, seeking to not have a mortage etc. etc. I think this sort of hedge is, in effect, my "bond".

Also, I don't think I hate working. I am currently a data scientist and could do this for a while. If not I will just change jobs or try entrepreneurship or something. I'm confident there will always be good work out there! The stocks are just a bonus. And Ionno. Fking YOLO. I am looking forward to the volatility.

I will look into some of the resources people have posted. I love yummy math but am also wary of paralysis of the analysis and the fact that no one models behaviour .

You don't mention where you work, and most employers in the private sector don't offer pensions anymore, but if you happen to qualify for a pension, that could serve as your bond / safe cash fund.

As @Nords has written about extensively, having a government pension is equivalent to having an inflation-adjusted annuity.  As I stand to qualify for a USG pension myself, I see no need to add more bonds to my portfolio and therefore use a 100% stock allocation.  Well maybe closer to 98% stock and 2% options, but that's a discussion for a different thread.

I work for a medium sized startup  that only offers a 401(k). I plan to only ever work in the private sector. I like small innovative companies that could possibly fail but are about delivering meaningful solutions over ones that are large, slow movie, and don't think of new ideas.

This is one of the reasons why I'd rather have an emergency fund. Over my carreer there is a high probability I will need to change jobs involuntarily.

Much Fishing to Do

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Re: Why not do 100% allocation, draw 4% at retirement, and yolo it?
« Reply #47 on: May 18, 2018, 07:42:53 AM »
If you're very young and don't consider returning to work while still fairly young a disaster (I don't), and/or have leeway in your withdraws, then I think 100% allocation with 4% withdraw is fine.  But do not let the bounce back of the markets and thus portfolios for those not yet retired and still contributing over the past couple decades make you think its by any means safe if you don't accept these risks.  Someone who retired in 2000 using the 4% withdraw method and $1M with a 100% allocation to the Total Market has an approx nest egg today in inflation adjusted dollars of $415k, so at this point they are hitting the egg at almost 10% year.  For someone who retired at 65 this is not exactly a disaster scenario as the money will still likely outlive the person, but someone retiring a lot earlier than that will likely see it completely evaporate before too long at that draw-down.

But again, given thats a pretty worse case scenario and I dont think having to work more later on is so unthinkable I think its a fine option to choose, just do it with eyes wide open
« Last Edit: May 18, 2018, 07:47:59 AM by Strick »

Scortius

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Re: Why not do 100% allocation, draw 4% at retirement, and yolo it?
« Reply #48 on: May 18, 2018, 09:43:38 AM »
That is a terrible analogy. Going to a doctor has a high probability of improving your situation, and cost should not be an issue if you have saved and have health insurance. By comparison, credit card churning has a low probability of working. Maybe the conditional probability is higher or something, but, if you are going to assume you are "One of the few" that is better than average with financial behaviour, than that is something that flies in the face of most of the facts. Most likely you are average, perhaps especially if you think you aren't.

I don't play credit games with money because it isn't worth the headache for something that has a small probability of succeeding, and has a small payout.  I think this because I do not make the assumption that I have perfect behaviour and that everything will go according to as planned. It should be noted. People, and especially Americans, have a natural tendency to overestimate how well things will occur. It is why we buy lottery tickets, take out loans to get degrees, and invest in bitcoin.

And no. I don't think being on a forum means you are good with money. That is intention not execution. Money isn't about ideas, it is about actually sticking to your guns and making those ideas reality. And that is considerably considerably more difficult.

Games? I've had a simple 1% reward card for over 5 years (Chase Freedom). It's on autopay. There's simply no way to lose. It earns me hundreds of dollars per year (mostly through the 5% quarterly reward categories). It's like getting an invoice for your purchases two weeks later, except they pay you money to not pay up front. This has nothing to do with lottery tickets or bitcoin...

bacchi

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Re: Why not do 100% allocation, draw 4% at retirement, and yolo it?
« Reply #49 on: May 18, 2018, 11:34:54 AM »
That is a terrible analogy. Going to a doctor has a high probability of improving your situation, and cost should not be an issue if you have saved and have health insurance. By comparison, credit card churning has a low probability of working. Maybe the conditional probability is higher or something, but, if you are going to assume you are "One of the few" that is better than average with financial behaviour, than that is something that flies in the face of most of the facts. Most likely you are average, perhaps especially if you think you aren't.

I don't play credit games with money because it isn't worth the headache for something that has a small probability of succeeding, and has a small payout.  I think this because I do not make the assumption that I have perfect behaviour and that everything will go according to as planned. It should be noted. People, and especially Americans, have a natural tendency to overestimate how well things will occur. It is why we buy lottery tickets, take out loans to get degrees, and invest in bitcoin.

And no. I don't think being on a forum means you are good with money. That is intention not execution. Money isn't about ideas, it is about actually sticking to your guns and making those ideas reality. And that is considerably considerably more difficult.

Games? I've had a simple 1% reward card for over 5 years (Chase Freedom). It's on autopay. There's simply no way to lose. It earns me hundreds of dollars per year (mostly through the 5% quarterly reward categories). It's like getting an invoice for your purchases two weeks later, except they pay you money to not pay up front. This has nothing to do with lottery tickets or bitcoin...

Yeah, that's an odd opinion.

I have about 3 cards in play at any moment, and another 15 cards that are either no-fee or waiting to be canceled/downgraded. That's risking a fuck-up but the risk-reward is well worth it.

But just getting a new card every 6 months for the points/miles/cash back is extremely low risk. Or, as you (Scortius) noted, get a rewards card and use it exclusively.

There is obviously a scale on what "considerably more difficult" means.