Author Topic: Asset Allocation and Safe Withdrawal Rates  (Read 16655 times)

Tyler

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Asset Allocation and Safe Withdrawal Rates
« on: September 08, 2015, 11:44:01 AM »
I debated posting this in the "Stop worrying about the 4% rule" thread, but I suspect it may generate a lot of new conversations and I didn't want to derail the topic.  I also really dislike self-promotion, so you'll have to forgive me for posting a link to my own website.  But this is a topic that I know you'll find legitimately interesting and perhaps helpful, and hopefully I've contributed enough here to earn a pass.  I'm FIRE myself, so this is a topic of very personal interest to me as well.

When discussing Safe Withdrawal Rates, I've found that there's a lot of confusion about the conclusions of the Trinity study.  I truly believe the 4% rule is based on solid data and fully support the conclusions of the study.  Where I believe a lot of people get mixed up is in the definition of "stocks" and "bonds", and how to apply the conclusions to their own portfolios that perhaps do not use the same stock and bond indices as the Trinity study.  And when portfolios start using other assets like commodities and REITs it gets really confusing.

For example -- Do you personally invest only in a S&P500 index fund (the only stock option in the Trinity study), or do you also have a bit of Small Cap Value and Emerging Markets?  Do you expect your custom portfolio to return the exact same amount of money as the S&P500 index alone?  Of course not!  Why else bother?  Then should you also expect your SWR to be the exact same as a S&P500 fund alone simply because SCV and EM are classified as "stocks"?  Absolutely not.  Basically, it's not enough to say you have a certain percentage of "stocks" and "bonds".  You must be specific.  Which stocks? Which bonds?

Do you also have a Commodity fund?  That's not a stock or a bond, and wasn't part of the Trinity study at all.  How must that also affect the SWR?

The 4% rule is an excellent rule of thumb based on good data and a sound methodology, but it isn't based on your portfolio.  What's your SWR?

I've thought about this problem for a while now, and finally feel like I came up with a coherent enough explanation to share it with others.

Why Your Safe Withdrawal Rate is Probably Wrong 

You'll also find a new calculator that will allow you to find the SWR for any asset allocation, and I wager the results will surprise you.  Long story short -- there are definitely portfolios with higher historic SWRs than 4%, and others that even never drew down principal at 4%!  There are also portfolios of "stocks" and "bonds" that are a lot riskier than you probably realize. 

The topic is kinda complicated -- too much so to put every detail in one post.  So if it interests you, I recommend starting at the link above and exploring the various places that takes you.  I've done my best to be very open about the methodology and limitations of the analysis.  All feedback and questions are welcome.  We're in this early retirement journey together.  :)
« Last Edit: September 08, 2015, 11:45:46 AM by Tyler »

MDM

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Re: Asset Allocation and Safe Withdrawal Rates
« Reply #1 on: September 08, 2015, 01:23:43 PM »
Appears well-researched and interesting.   Thanks!

brooklynguy

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Re: Asset Allocation and Safe Withdrawal Rates
« Reply #2 on: September 08, 2015, 01:39:32 PM »
Tyler, the personal SWR calculator appears to be another excellent tool in the financial independence seeker's arsenal.  Tools like cFIREsim and your own Portfolio Charts have essentially rendered the Trinity Study obsolete.  As skyrefuge has pointed out before, no one should be relying on the hoary old research when tools now exist that allow each of us to recreate and customize the methodologies behind that research to our own particular situations.  Your new calculator has the ability to sift out SWRs from the historical data with surgically precise fine-tuning of asset allocations compared to any other resource I've come across, so it is incredibly useful.  I only wish the historical data went back earlier than 1972, but I understand that that's a limitation of the data available.

GGNoob

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Re: Asset Allocation and Safe Withdrawal Rates
« Reply #3 on: September 08, 2015, 01:42:39 PM »
Your calculator shows a sustainable WR of 6.4% for my allocation over 40 years. Probably similar to what I would have guessed for my portfolio. While it would be nice to be able to retire with a WR that high, it would be hard emotionally to know I'm withdrawing so much, especially during bear markets. But seeing numbers like that makes the 4% rule sound a heck of a lot safer.

Thanks for sharing and thanks for all of your work!

bo_knows

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Re: Asset Allocation and Safe Withdrawal Rates
« Reply #4 on: September 08, 2015, 01:44:44 PM »
This is excellent work. Love it.

Aussiegirl

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Re: Asset Allocation and Safe Withdrawal Rates
« Reply #5 on: September 08, 2015, 04:27:07 PM »
I love these calculators!  At a 5% withdrawal rate we could be FI already!

The one thing I'd love some discussion on is how interdependent / correlated the markets have become with globalisation.    I'd guess that a good portion of a portfolios ability to withstand a SWR of 5% would rely on (a) slightly higher returns on some markets such as SCV and (b) not all markets suffering their worst draw downs at the same time.

What effect will increasing correlation of markets have on this analysis of SWR?

Kalergie

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Re: Asset Allocation and Safe Withdrawal Rates
« Reply #6 on: September 08, 2015, 04:47:40 PM »
Your calculator shows a sustainable WR of 6.4% for my allocation over 40 years.

GGNoob: the only way I could get such a high sustainable WR for 40 years was 100% small cap value. I suppose that's not your allocation, is it?

Tyler: awesome job! You are responsible that I won't be able to get very much done at work today. This is addictive. :) I really like your page by the way.
« Last Edit: September 08, 2015, 04:50:35 PM by Kalergie »

GGNoob

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Re: Asset Allocation and Safe Withdrawal Rates
« Reply #7 on: September 08, 2015, 05:08:18 PM »
Your calculator shows a sustainable WR of 6.4% for my allocation over 40 years.

GGNoob: the only way I could get such a high sustainable WR for 40 years was 100% small cap value. I suppose that's not your allocation, is it?

Tyler: awesome job! You are responsible that I won't be able to get very much done at work today. This is addictive. :) I really like your page by the way.

20% US Mid-Cap, 20% US Small-Cap, 20% US REIT, 20% Int Small-Cap, 20% Emerging Markets

Kalergie

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Re: Asset Allocation and Safe Withdrawal Rates
« Reply #8 on: September 08, 2015, 05:26:34 PM »
Thanks GGNoob. Should have checked your website before asking. :) good luck with your 10 year journey.

Tyler

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Re: Asset Allocation and Safe Withdrawal Rates
« Reply #9 on: September 08, 2015, 05:29:16 PM »
Thanks guys.  Your support means a lot!

Just to be very clear, I want to point out an important limitation of my analysis that Brooklynguy already hinted at.  My data set only goes back to 1972, while I believe the Trinity study goes back to 1926 and cFIREsim + Firecalc go back even farther.  If I am ever able to get my hands on good data for each asset before 1972 (way harder than it sounds), there are some nasty financial times back then and the SWRs can only go down (not up) from what you see.  Also, it's possible that a fund did great for the last 40 years but may not perform the same for a while (I'm thinking of many bonds as I write that).  I use cFIREsim pretty often to study those kinds of things.  It's a great resource.

On the other hand, I feel reassured that if you run the numbers for the stock/bond blends on various calculators, my numbers are in the same ballpark.  And I find being able to finally evaluate how different asset classes change SWRs pretty informative, as blindly following a SWR number for a portfolio you don't even personally use seems pretty shortsighted as well. 

Basically, please don't retire with a 6% SWR tomorrow just because of one new data point!  Use all the tools at your disposal to learn as much about your investments as you can, and take the time to build a robust retirement plan with lots of contingencies.  I'm just happy to provide one such tool for the arsenal.

Speaking of tools, launching a new one sometimes unearths bugs you never expected.  If anyone runs across one, please don't hesitate to send me a PM.  Thanks!
« Last Edit: September 08, 2015, 08:17:02 PM by Tyler »

nonsequitur

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Re: Asset Allocation and Safe Withdrawal Rates
« Reply #10 on: September 08, 2015, 05:45:38 PM »
Excellent post, and very well reasoned and written blog entry!

GGNoob

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Re: Asset Allocation and Safe Withdrawal Rates
« Reply #11 on: September 08, 2015, 05:48:31 PM »
Thanks GGNoob. Should have checked your website before asking. :) good luck with your 10 year journey.

Thanks!

And I find being able to finally evaluate how different asset classes change SWRs pretty informative, as blindly following a SWR number for a portfolio you don't even personally use seems pretty shortsighted as well.

This is exactly what I've been wanting for a while. No, I won't retire planning on a 6.4% WR. But, it's great to see how my portfolio compares with others.

Tyler

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Re: Asset Allocation and Safe Withdrawal Rates
« Reply #12 on: September 08, 2015, 08:37:53 PM »
What effect will increasing correlation of markets have on this analysis of SWR?

That's a good question.  I can't say for sure, but from everything I've looked at so far it probably won't help.  I think that's just one more reason to stay as diversified as possible, and not just (for example) diversified among various stock indices that may all move together in a crash.  Some of the portfolios with gold, treasuries, REITs, etc. are interesting to me for that very reason. 

Kalergie

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Re: Asset Allocation and Safe Withdrawal Rates
« Reply #13 on: September 09, 2015, 08:47:40 AM »
Tyler: Again, I really like your tool and I am really amazed by this community for investing so much effort to develop these kind of tools.

Something that has been on my mind as I was playing with the calculator. Aren't we all looking for that magic black-box that tells us what to do? Something that we feed with our personal data and it magically tells us the best AA with the best possible outcome?

I've literally spent nights trying to determine the best possible portfolio (using all kinds of tools such as portfolio visualizer, CFiresim etc.)

I work as forecast analyst to develop business cases for infrastructure development projects based on past data, regression analysis and correlated drivers. One thing I know is how wrong every forecast I produce will end up to be. That is the nature of forecasts.
In the end, all we know is that we know nothing about the future. I think humans hate uncertainty and therefore we build tools to give us false certainty on what to do. In the end, nobody wants to make a decision based on guessing.

I love your tool. In the best case, it creates awareness to users about the different "behavior" of asset classes. In the worst case it causes people to tweak their portfolio until it spits out the best possible WR. I know one thing, the future won't be that exact number.

Tyler

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Re: Asset Allocation and Safe Withdrawal Rates
« Reply #14 on: September 09, 2015, 10:22:13 AM »
Well said, Kalergie.

Using any back testing calculator to maximize a given output will always let you down in the future because the past does not repeat itself. Use them as tools to learn from history, but not as guides for the future.

matchewed

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Re: Asset Allocation and Safe Withdrawal Rates
« Reply #15 on: September 09, 2015, 10:36:47 AM »
These tools are just amazing methods for teaching variables to a larger process. We can't anticipate some (in this case most) of them in the future but we can see how they will impact our future given how the variables change.

Thanks for this additional tool Tyler.

DavidAnnArbor

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Re: Asset Allocation and Safe Withdrawal Rates
« Reply #16 on: September 10, 2015, 09:40:37 PM »
Some of my bond portfolio is I-Bonds, not really the same as TIPS. And this looks like another really great withdrawal rate calculator. Thank you.

Radagast

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Re: Asset Allocation and Safe Withdrawal Rates
« Reply #17 on: September 11, 2015, 12:26:23 AM »
20% US Mid-Cap, 20% US Small-Cap, 20% US REIT, 20% Int Small-Cap, 20% Emerging Markets
Nice! I have a similar pet concept: 20% US TSM, 20% Emerging Market, 20% Long Term Treasury, 20% Intermediate Term Treasury, 20% gold. I was after low drawdowns and high returns, and this allocation never had a 10% drawdown. Since 1972 (and most periods along the way) it has returns similar to 85% stocks/15% bonds but a maximum drawdown similar to 35% stocks/65% bonds. Of course at this point it is just a theory, and it also has a lower safe withdrawal rate than yours.

I like strategies that are very diversified, simple, and back test well. If it only has one of the three it seems unreliable, but all of the three seem to give a higher chance of success.

NP

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Re: Asset Allocation and Safe Withdrawal Rates
« Reply #18 on: September 11, 2015, 06:34:22 AM »
In the worst case it causes people to tweak their portfolio until it spits out the best possible WR. I know one thing, the future won't be that exact number.

With 40% gold, 30% emerging markets, 15% small value and 15% international small, both the safe and the sustainable WRs are above 9% over the longest time frame displayed, yet no one in their right mind would advocate a 40% allocation to gold. It's an amazing tool but you have to be careful about what conclusion you draw from the results.

Kalergie

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Re: Asset Allocation and Safe Withdrawal Rates
« Reply #19 on: September 11, 2015, 04:35:59 PM »
NP: you got it. As Tyler has already pointed out. It's not about what portfolio is the best. If that was the case, one could simply use the data set Tyler has collated to build the tool and run it through a solver function that tells us what's the AA with the highest WR possible.

begood

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Re: Asset Allocation and Safe Withdrawal Rates
« Reply #20 on: September 29, 2015, 08:50:59 AM »
Okay, so I put in the information as best I could. I feel dumb. It seems good that it's all above 0, but... what does it tell me?



Tyler

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Re: Asset Allocation and Safe Withdrawal Rates
« Reply #21 on: September 29, 2015, 10:13:35 AM »
For simplicity, focus on the 30-year columns. That's the timeframe used by the Trinity study.

This tells you that even in the worst rolling 30-year retirement period since 1972, your portfolio still could have supported a 5.8% initial withdrawal rate (adjusted for inflation each year) without running out of money. And a 4.8% withdrawal rate would have left you 30 years later with the same inflation-adjusted principal as the day you retired.

The same logic goes for the other timeframes.  Older retirees may be interested in a Safe WR less than 30 years.  Very early retirees may prefer the 40 year Sustainable WR.  I also like to look at the SustWR for the 10-year period, as a negative number is a pretty good indicator of a portfolio with long historic slumps likely to tempt someone to abandon ship too soon.

The one thing it doesn't tell you is what the safe withdrawal rate will be in the future, as no calculator can do that.  But it can at least give you an idea for how your portfolio has performed in the past to point you in the right direction.
« Last Edit: September 29, 2015, 11:19:34 AM by Tyler »

begood

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Re: Asset Allocation and Safe Withdrawal Rates
« Reply #22 on: September 29, 2015, 11:17:38 AM »
For simplicity, focus on the 30-year columns. That's the timeframe used by the Trinity study.

This tells you that even in the worst rolling 30-year retirement period since 1972, your portfolio still could have supported a 5.8% initial withdrawal rate (adjusted for inflation each year) without running out of money. And a 4.8% withdrawal rate would have left you 30 years later with the same inflation-adjusted principal as the day you retired.

The same logic goes for the other timeframes.  Older retirees may be interested in a Safe WR less than 30 years.  Very early retirees may prefer the 40 year Sustainable WR.  I also like to look at the SustWR for the 10-year period, as a negative number is a pretty good indicator of a portfolio with long historic slumps likely to tempt someone to abandon ship too soon.

The one thing it doesn't tell you is what the safe withdrawal rate will be in the future, as no calculator can do that.  But it can at least give you an idea for how your portfolio has performed in the past to point you in the right direction.

Thank you, Tyler! We will stay the course! :)

economist

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Re: Asset Allocation and Safe Withdrawal Rates
« Reply #23 on: October 07, 2015, 10:25:40 AM »
I love this! I will definitely spend a lot of time fiddling with it. Right now it seems to want me to put it all in REITs and Emerging Markets. 50/50 REIT and EM gets a sustainable withdrawal rate of over 6% for everything over 25 years. My current 50% total stock market and 50% total international hovers right around 4%.

I have to keep reminding myself to be skeptical, especially with historically stable portfolios like the Permanent Portfolio. I just couldn't handle putting 50% of my money in assets that are essentially non-productive (Gold and Cash) but it performs very well historically.

Tyler

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Re: Asset Allocation and Safe Withdrawal Rates
« Reply #24 on: October 07, 2015, 12:23:27 PM »
I love this! I will definitely spend a lot of time fiddling with it. Right now it seems to want me to put it all in REITs and Emerging Markets. 50/50 REIT and EM gets a sustainable withdrawal rate of over 6% for everything over 25 years. My current 50% total stock market and 50% total international hovers right around 4%.

IMHO, one feature of a good asset allocation is that it does not depend on potentially anomalous historical run repeating itself on your timeframe.  So I generally recommend spreading your money across several different asset classes rather than picking the best one or two historically.  REITs and Emerging Markets are nice diversifiers, but using them as the core of your portfolio may not work in the future like it did in the past. 

One thing I like to do is to take a potential portfolio that looks nice in the WR calculator and plug it into the Pixel chart.  That will help you identify the bad times historically so that you can think about how you would have reacted.  For example, when 50/50 EM/REITs lost 45% in 2008 and is still struggling to meaningfully recover, would you have stayed the course?  Might a different portfolio still generate a nice withdrawal rate but also help you sleep better at night?  After all, asset allocation is not just about the money you want to make, but the experience you want to have making it. 

I have to keep reminding myself to be skeptical, especially with historically stable portfolios like the Permanent Portfolio. I just couldn't handle putting 50% of my money in assets that are essentially non-productive (Gold and Cash) but it performs very well historically.

FWIW, things like gold and cash definitely have value in a diverse portfolio beyond simply being "productive" in the real world in the same sense that stocks and bonds are.  They play different roles, growing and protecting your wealth in a multitude of ways, and you have to remember to look at the portfolio as a whole rather than evaluating each individual asset only in isolation.  That said, I don't believe anyone should invest in something they aren't comfortable with.  There are plenty of good portfolio options out there for all types of people.   
« Last Edit: October 07, 2015, 03:17:23 PM by Tyler »

economist

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Re: Asset Allocation and Safe Withdrawal Rates
« Reply #25 on: October 07, 2015, 05:49:34 PM »

IMHO, one feature of a good asset allocation is that it does not depend on potentially anomalous historical run repeating itself on your timeframe. 

I definitely agree, and that's the reason for my current allocation. I don't know what sectors will do well in the future, but I am reasonably confident the global economy will grow, so by having 50% domestic and 50% international I know I will participate in those gains.

For example, when 50/50 EM/REITs lost 45% in 2008 and is still struggling to meaningfully recover, would you have stayed the course?  Might a different portfolio still generate a nice withdrawal rate but also help you sleep better at night? 

FWIW, things like gold and cash definitely have value in a diverse portfolio beyond simply being "productive" in the real world in the same sense that stocks and bonds are. 


I think part of why I wouldn't want  a ton of gold and cash is because it might make it difficult to stay the course. We have to be able to stand a big drop and not panic sell, but we also need the discipline to stick to our guns when other portfolios are doing better than ours. So would I be able to stick to a large cash allocation if stocks were posting double digit gains? I don't know. At least if I had some intermediate or long term bonds I could tell myself I was still getting some return.

Since I'm still in very early accumulation I will probably stick with my current allocation. I have considered EM and REITs in the past and may do some more research on them, but I want the majority of my portfolio to be simple total stock/total international. As I near FIRE I will probably add some bonds, but not yet. Anyway, love the tool!

kendallf

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Re: Asset Allocation and Safe Withdrawal Rates
« Reply #26 on: October 07, 2015, 06:14:27 PM »
Very cool!  I've bookmarked that and will play around with the settings in the future. 

I especially appreciate the balanced tone and the encouragement of analysis and skepticism in your blog posts.  Obviously you're an engineer and not a financial adviser.  :-)

aj_yooper

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Re: Asset Allocation and Safe Withdrawal Rates
« Reply #27 on: October 07, 2015, 07:00:17 PM »
I like the Real CAGR since 1972 chart which shows the geometric return and the standard deviation for the portfolios. 


Spork

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Re: Asset Allocation and Safe Withdrawal Rates
« Reply #28 on: October 07, 2015, 07:28:23 PM »

Firstly: Love it.  Awesome!

Second...  Is there any way (or any plan) I can call this via an API?  It seems to be script intensive... which means my normal web scraping methods won't work.

I'm a graphing nerd.  I'd love to have automated processes that take my current allocation and run it through every time it changes.

Telecaster

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Re: Asset Allocation and Safe Withdrawal Rates
« Reply #29 on: October 07, 2015, 07:30:58 PM »
Thanks guys.  Your support means a lot!

Just to be very clear, I want to point out an important limitation of my analysis that Brooklynguy already hinted at.  My data set only goes back to 1972, while I believe the Trinity study goes back to 1926 and cFIREsim + Firecalc go back even farther. 

Very impressive, but yep, that's the problem.  The worst year to retire was 1966, followed by 1929.  You didn't (for good reason) include the worst cases, so the SWRs look more favorable. 


Tyler

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Re: Asset Allocation and Safe Withdrawal Rates
« Reply #30 on: October 07, 2015, 08:18:26 PM »
Very impressive, but yep, that's the problem.  The worst year to retire was 1966, followed by 1929.  You didn't (for good reason) include the worst cases, so the SWRs look more favorable.

The most important takeaway is that different portfolios never considered by the various retirement studies may have different SWRs.  So while the tools can only look back as far as the data availability allows, the results may be more accurate for your own personal asset allocation.  In addition, different portfolios may have very different "worst years" so you can't necessarily read too much into specific start dates. 

That said, you're absolutely correct that the farther back you look the greater your odds of finding a time in history that will set a new low point.  A reasonable approach is to consider any SWR on the site as a maximum bound.  It could be lower the farther back you look, and it may be lower in the future.  Be smart about it, and plan conservatively. 
« Last Edit: October 08, 2015, 01:06:38 AM by Tyler »

Tyler

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Re: Asset Allocation and Safe Withdrawal Rates
« Reply #31 on: October 07, 2015, 08:24:55 PM »

Firstly: Love it.  Awesome!

Second...  Is there any way (or any plan) I can call this via an API?  It seems to be script intensive... which means my normal web scraping methods won't work.

I'm a graphing nerd.  I'd love to have automated processes that take my current allocation and run it through every time it changes.

Well, I'm a mechanical engineer and not a software engineer.  So APIs are above my pay grade.  ;)  To date I've been using freely available tools that make sharing the data very easy.  I won't rule out more sophisticated methods in the future, but that will take more of a learning curve on my part. 

Radagast

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Re: Asset Allocation and Safe Withdrawal Rates
« Reply #32 on: October 08, 2015, 12:15:53 AM »
I know from playing with Portfolio Visualizer that virtually all stock allocations have their odds of (withdrawal) success increased (or maximized) with 20% gold and 20% long term treasuries. 20% each seems to be the optimum and gives better results than any pure bond allocation. Throw in 20% emerging markets stock and 20% any US stock and you have four highly volatile non-correlated assets. The other 20% can go to pretty much anything. 20% SCV for the US and 20% small international gives a very high success rate, and is actually a reasonable allocation.

At least for this data set.

Radagast

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Re: Asset Allocation and Safe Withdrawal Rates
« Reply #33 on: October 08, 2015, 12:38:36 AM »
By the way Tyler, this is my new favorite retirement simulator. In fact I never really liked firesim and firecalc that much, so yours is nice to see.

Indexer

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Re: Asset Allocation and Safe Withdrawal Rates
« Reply #34 on: October 08, 2015, 05:26:38 AM »
I love this tool. It is very useful. I especially like the other tools on the website.

I would like to point out the disclaimer though. It is only measuring data to 1972. So the 40 year data sets are pulling off a very small sample of years(3-4?). Almost all of those data sets will coincide with gold doing well in the late 70s. Small cap value also did well in the late 70s, early 80s. Guess what I'm going to say about emerging markets and the late 80s, early 90s?  So yes according to this tool any portfolio heavy in gold, small cap value, and emerging markets kills it over a 40 year time frame. You could have a 9% SWR! Every data set in the sample starts with years where gold and small cap value are both seeing 20 & 30%(even 40%) annual returns(late 70s).  Sure gold enters a multi decade long year bear market in 1980, but the small cap value and emerging markets make up for that over the following decades.

I agree we should focus on the 30 year bar instead of the 40 year. I will take that a step further and say that I feel the 40 year bar should be completely removed from the calculator. It is a very small data set and any results it provides are going to be misleading.

Spork

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Re: Asset Allocation and Safe Withdrawal Rates
« Reply #35 on: October 08, 2015, 08:12:39 AM »

Firstly: Love it.  Awesome!

Second...  Is there any way (or any plan) I can call this via an API?  It seems to be script intensive... which means my normal web scraping methods won't work.

I'm a graphing nerd.  I'd love to have automated processes that take my current allocation and run it through every time it changes.

Well, I'm a mechanical engineer and not a software engineer.  So APIs are above my pay grade.  ;)  To date I've been using freely available tools that make sharing the data very easy.  I won't rule out more sophisticated methods in the future, but that will take more of a learning curve on my part.

Nah.  APIs are simpler than anything.  It's just spitting raw data. ;)

ECOCAV87

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Re: Asset Allocation and Safe Withdrawal Rates
« Reply #36 on: October 08, 2015, 09:57:59 AM »
Playing with your calculator has been a lot of fun but what I'm having a hard time with is figuring what what my index funds are considered... excuse me if this should be common knowledge as I'm just getting started, I'm investing in The Vangaurd 500 Index admiral fund and don't know if its a value growth or blend fund, how would I go about figuring this out? Thanks in advance

ECOCAV87

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Re: Asset Allocation and Safe Withdrawal Rates
« Reply #37 on: October 08, 2015, 09:59:29 AM »
disregard my last post I figured it and thanks again. This site has been a great asset for me.

Tyler

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Re: Asset Allocation and Safe Withdrawal Rates
« Reply #38 on: October 08, 2015, 01:39:53 PM »
I agree we should focus on the 30 year bar instead of the 40 year. I will take that a step further and say that I feel the 40 year bar should be completely removed from the calculator. It is a very small data set and any results it provides are going to be misleading.

Thanks for the feedback!

Researching a reply to your post and an explanation of how to interpret the results, I realized I could modify the calculator to automatically address your concern about sample sizes skewing results while preserving the usefulness of the long-term withdrawal rates.  I've written a detailed explanation here

Thanks again.  I take the accuracy and helpfulness of the calculators seriously, and appreciate the feedback. 
« Last Edit: October 08, 2015, 09:21:04 PM by Tyler »

sirdoug007

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Re: Asset Allocation and Safe Withdrawal Rates
« Reply #39 on: October 08, 2015, 01:45:05 PM »
Thanks guys.  Your support means a lot!

Just to be very clear, I want to point out an important limitation of my analysis that Brooklynguy already hinted at.  My data set only goes back to 1972, while I believe the Trinity study goes back to 1926 and cFIREsim + Firecalc go back even farther. 

Very impressive, but yep, that's the problem.  The worst year to retire was 1966, followed by 1929.  You didn't (for good reason) include the worst cases, so the SWRs look more favorable.

This is really important.

If you ignore the mid-60's and great depression the trinity study results move up into the 4.5-5% range.

This chart tells the tale.  Imagine starting at 1972 instead of 1870.  You are missing a LOT of data.  (https://www.onefpa.org/journal/Pages/Safe%20Withdrawal%20Rates%20A%20New%20Approach%20to%20Retirement%20Planning%20over%20the%20Life%20Cycle.aspx)



In the period from 1980 to 2000 the S&P500 had a real, inflation adjusted annualized (CAGR) return of over 12% with dividends.  The 1995-2000 period where real returns were over 18% is in every 30 year period in this tool from 1972-2002 to 1985-2015.  That is significant.  Honestly I'm surprised your calculated SWRs aren't even higher given this fact of your dataset.

All that said, thank you for putting the time in to develop this tool.  It is valuable for the learning that asset allocation matters and affects SWR.
« Last Edit: October 08, 2015, 01:47:22 PM by sirdoug007 »

Tyler

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Re: Asset Allocation and Safe Withdrawal Rates
« Reply #40 on: October 08, 2015, 03:52:01 PM »
In the period from 1980 to 2000 the S&P500 had a real, inflation adjusted annualized (CAGR) return of over 12% with dividends.  The 1995-2000 period where real returns were over 18% is in every 30 year period in this tool from 1972-2002 to 1985-2015.  That is significant.  Honestly I'm surprised your calculated SWRs aren't even higher given this fact of your dataset.

It's really not that surprising.  Your (excellent) chart clearly shows that retiring in 1973 was not much better than the all-time worst year of 1966, and on par with retiring in 1929.  Since the calculated SWR uses only the number from the worst retirement year, that's pretty darn close.

For comparison, using a similar 60/40 S&P500/Total bond market portfolio the Withdrawal Rates calculator shows a 30-year SWR of 4.3%. That's right in line with the low point from your chart post-1972, and just a few tenths of a percent higher than the worst SWR since the 1870s. Yes there's a difference, but it's smaller than you might think. The 70's (and 00's) were a lot worse for stocks on an inflation-adjusted basis than most people realize.

In any case, note that the chart is specifically for a 60/40 asset allocation.  Other allocations will have very different high and low years, both in timing and magnitude.  When you expand the analysis beyond stocks and bonds, you get interesting results. 



FWIW, I definitely appreciate the concern and I hope to eventually address this by adding more years of data.  The calculator to date is just a starting point to share what I can, and my goal is simply to help people start to see SWRs from a new and interesting perspective. 
« Last Edit: October 08, 2015, 11:59:27 PM by Tyler »

Cheddar Stacker

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Re: Asset Allocation and Safe Withdrawal Rates
« Reply #41 on: October 09, 2015, 01:06:38 PM »
Tyler, great website. I just read it all, then played with all the calculators for a few hours. Very educational and entertaining. Although, as usual when finding a fun new toy, I got zero work done today.

I think eventually I'm going to implement an asset allocation similar to the golden butterfly but with a few small aggressive tweaks. Thanks for providing this resource.

Mighty-Dollar

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Re: Asset Allocation and Safe Withdrawal Rates
« Reply #42 on: October 10, 2015, 08:02:06 PM »
Quote
40% gold, 30% emerging markets, 15% small value and 15% international small
AKA the conspiracy theorist's portfolio.

Tyler

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Re: Asset Allocation and Safe Withdrawal Rates
« Reply #43 on: October 19, 2015, 10:47:06 AM »
FYI -- building on the Withdrawal Rates calculator, I just added a new tool that shows just how much time a particular asset allocation has historically needed to achieve financial independence given a set savings rate.  You can also do things like enter how far along you already are, and tweak the results based on anticipated spending changes at retirement.  Check it out -- the results may surprise you. 

Your Ideal Route to Financial Independence May Be Off the Beaten Path

Radagast

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Re: Asset Allocation and Safe Withdrawal Rates
« Reply #44 on: October 19, 2015, 01:55:50 PM »
Sweet, that's the most unique on yet. I likey.

What's next, a glide path calculator ;-) ?

Tyler

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Re: Asset Allocation and Safe Withdrawal Rates
« Reply #45 on: October 19, 2015, 03:48:36 PM »
What's next, a glide path calculator ;-) ?

Just to cover all the angles... maybe!  :)

I do take requests.  If anyone has a particular problem they'd like to solve, let me know. 

Radagast

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Re: Asset Allocation and Safe Withdrawal Rates
« Reply #46 on: October 19, 2015, 10:05:48 PM »
All right, I'd love to see a glide path calculator, where you type in the starting and ending percentages just like your current calculator, then let 'er rip. Maybe duration of glide too. As far as I know there aren't any available currently. You know that deep in your black heart you want to see a PP glide path, starting from 100% TSM, and ending with 100% PP. I started work on one, but I didn't have a clear direction in my head for what it would do. Plus yours would reach a wider audience!

Tyler

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Re: Asset Allocation and Safe Withdrawal Rates
« Reply #47 on: October 19, 2015, 11:01:47 PM »
You know that deep in your black heart you want to see a PP glide path, starting from 100% TSM, and ending with 100% PP.

Lol.  With the PP, it's more like a solid gold heart.  ;)

Cool idea, and I'm curious how it might translate to some of the charts.  I'll have to experiment with that. 

Kalergie

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Re: Asset Allocation and Safe Withdrawal Rates
« Reply #48 on: October 20, 2015, 06:06:17 AM »
Maybe we need a calculator that calculates which calculator calculates the best calculation for our AA. Joke aside, good work. I love playing with the numbers. I have not changed anything with my asset allocation even if the calculators indicate to do so. I just don't want to dance in and out of asset classes.

But again, I love your page.

Axecleaver

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Re: Asset Allocation and Safe Withdrawal Rates
« Reply #49 on: October 20, 2015, 09:07:49 AM »
Is there a way to add risk measures or volatility measures to the portfolio types? For example, Sharpe ratios, or could you calculate a beta for each sector vs. another sector, or against the S&P 500?

Sometimes we see people who are at 33x or 50x (one guy here is at 80x) expenses, they would probably be much better off doing lower-risk investments with lower overall historic ROR. We also see people who are anxious to quit their jobs, who might be better off doing higher-risk for the first few years, and then going back to work if they hit a worst-case scenario.