Author Topic: "Your age in bonds". A bad choice for early retirement?  (Read 13120 times)

kpd905

  • Handlebar Stache
  • *****
  • Posts: 1734
Re: "Your age in bonds". A bad choice for early retirement?
« Reply #50 on: July 05, 2015, 05:14:52 PM »
I've been at 90/10 and plan to keep this allocation for a while.  My balances are small enough that my contributions are what really makes a difference.  Maybe when I get more money invested I'll get scared and decide to drop the volatility a bit to 75/25 or something.

johnny847

  • Magnum Stache
  • ******
  • Posts: 3196
    • My Blog
Re: "Your age in bonds". A bad choice for early retirement?
« Reply #51 on: July 05, 2015, 05:26:57 PM »
Look at the worst years for each portfolio.  Find one that wouldn't scare the crap out of you or wreck your retirement.  Also keep in mind dollar cost averaging works in reverse once you retire so lots of volatility when you are withdrawing from your portfolio hurts a lot more than when you are adding to it.  For this reason the absolute max aggressive portfolio I would consider for someone drawing down their portfolio is 70/30.  Most investors are probably better off with a 50/50 or 60/40, but even for a conservative investor the most conservative they should probably go is a 30/70.

Keep in mind that the length of your retirement is incredibly important when deciding on an appropriate asset allocation.

For the "standard" 30 year retirement ("standard" because a) the Trinity study uses 15-30 year retirements and b) this is the default setting in cFIREsim) a 50/50 allocation has a 89.6% success rate. I would question stepping down as low as 30/70 though, as your success rate is now at 70.4% (but I haven't added SS into the simulation because I haven't looked at SS payout numbers at all).

But what about a 50 year retirement? Somebody FIREing in their 30s and living until their 80s? (or whatever start age you prefer, really)
With a constant 4% inflation adjusted withdrawal rate, here are the success rates:
50/50: 56.8%
60/40: 70.5%
70/30: 76.8%
80/20: 80%
90/10: 85.3%
100/0: 85.3%

And then with a variable spending rate of 3.5% to 4.5% of the initial portfolio, inflation adjusted every year:
50/50: 75.8%
60/40: 87.4%
70/30: 93.7%
80/20: 95.8%
90/10: 96.8%
100/0: 95.8%

Let's tone it down a bit. What about 40 year retirements?
Here's the constant 4% inflation adjusted withdrawal rate success rates:
50/50: 65.7%
60/40: 75.2%
70/30: 81%
80/20: 82.9%
90/10: 86.7%
100/0: 87.6%

And here's the numbers when you have a variable spending scheme of 3.5% to 4.5% of the original portfolio, inflation adjusted every year.
50/50: 87.6%
60/40:93.3%
70/30: 94.3%
80/20: 94.3%
90/10: 96.2%
100/0: 95.2%



With longer retirements (such as 40 or 50 years), withdrawing 4% of the initial portfolio with inflation adjustments every year from a portfolio with a 50/50 or 60/40 allocation does not give good success rates (at least, in my book, below 80-85% is not good enough). For a 50 year retirement, even 70/30, which Indexer considers to be an "absolute max", is not good enough. So you have three options as I see it:
1) Invest more aggressively. The 4% rule still hits my benchmark of 80-85% success rate at 80/20 even for a 50 year retirement.
2) Be flexible in your spending. Spending between 3.5% and 4.5% of your initial portfolio, adjusted for inflation, massively increases your success rate at every portfolio allocation.
3) Be okay with less than 80-85% success rates, and have a contingency plan. In reality, all of us should have contingency plans, but somebody with a long retirement who doesn't take one of the first two options should really have their contingency plans ironed out.

Kaspian

  • Handlebar Stache
  • *****
  • Posts: 1536
  • Location: Canada
    • My Necronomicon of Badassity
Re: "Your age in bonds". A bad choice for early retirement?
« Reply #52 on: July 06, 2015, 09:59:53 AM »
Year over year these attitudes change.  60% equity / 40% bonds was called "aggressive" by many investors just 6 years ago.  Now it's called "conservative".  I live in Canada and the "balanced" 60/40 split actually outperformed an aggressive 90/10 portfolio over the past 20-year period.

If the OP does have a ton of cash in this, I'd say stick with the plan.  Stick. With. Your. Plan!  Switching things up because of boredom, performance chasing, or Internet noise is the surest way to lose in this game.  The stats on indexing show those who stick with whatever they initially setup kicks ass over those who question, jump the rails, switch grocery lines, switch traffic lanes, or dive for the penalty shot.

I fight the urge to dabble and tamper with my investments every friggin' week.  But I know that *I* am the true enemy of my portfolio--not the my current equity and bond allocation.

bo_knows

  • Pencil Stache
  • ****
  • Posts: 819
  • Age: 38
  • Location: Fairfax, VA, USA
    • The Crowdsourced FIRE simulator
Re: "Your age in bonds". A bad choice for early retirement?
« Reply #53 on: July 06, 2015, 11:50:47 AM »
As many people have already said, the "your age in bonds" rule is a rule of thumb that is usually applied to shorter traditional retirements (20-30yrs tops).   When talking about ER, and the potential for 50+ year retirements, a higher stock allocation is generally required to stay afloat long-term.

That being said, the most vulnerable time for a portfolio is the first few years after retirement. That is when a major downturn would hurt the most.  If you're trying to mitigate that risk by allocation alone (alternatively you could go back to work, work part time, spend less, etc), then having a higher bond portion during the first years of retirement, and slowly increasing the equities over time, would be a good strategy.  In fact, Wade Pfau wrote an interesting paper on increasing your equity position over time, which is the exact opposite of "your age in bonds".  http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2324930