4% Rule Allocation Assumptions

[The Mobile Mustachian]

Hello everyone,

While my FIRE dates is still 9 years away, my mother is in her 60s and is trying to get oriented toward transitioning into retirement. She has asked me to help balance her 401k portfolio and figure out how much she can withdraw annually.

What allocation does the 4% rule assume? She currently has a 40% stock and 60% bond portfolio in Vanguard funds (waiting to get the exact fund mix - its in about 12 funds and is a bit too complex in my opinion) with about 650k saved.

I currently use the Vanguard 4 fund approach (80/20 stocks/bonds) with the Total Stock Market fund, Total International Stocks fund, Total Bond Market fund, and REIT fund. Does she need more exposure to stocks to safely withdraw 4%? Is this four fund approach optimal for her or should she be using a different portfolio?

Thank you very much for your thoughts. Please feel free to follow up with questions.

[The Mobile Mustachian]

A couple other bits of information which may help - she is in reasonably good health, so she will likely have living expenses for another 30 years. She has $200,000 left on her mortgage at 4.5%. She is considering part-time work at a local coffee shop or the library when she is retired.

Sent from my EVO using Tapatalk

[MDM]

See http://en.wikipedia.org/wiki/Trinity_study and http://www.bogleheads.org/wiki/Trinity_study_update and http://wpfau.blogspot.com/2012/02/trinity-study-and-portfolio-success.html for starters. 

One might infer from the OP that she is looking first at "how much she can withdraw" and will then adjust spending to match.  It might be worthwhile to start from a spending budget, subtract other income (pension?  Soc. Sec.?  interest & dividends?) and then determine "how much she must withdraw".  Perhaps mathematically equivalent but psychologically different.

[aj_yooper]

What MDM said.  Budget, other cash flows, health insurance, timing of Social Security.  Congratulations to your mom!

[livingthedream]

Here's a good article from Marketwatch columnist Paul Merriman http://paulmerriman.com/the-ultimate-buy-hold-strategy-2014/ on asset allocation and portfolio diversification.   

[taekvideo]

I wouldn't be so heavy in bonds right now, with interest rates this low.

[aj_yooper]

Here's a good article from Marketwatch columnist Paul Merriman http://paulmerriman.com/the-ultimate-buy-hold-strategy-2014/ on asset allocation and portfolio diversification.

Thank you.  I liked the article, especially with its relation of risk to reward and how adding asset classes can diminish the overall portfolio volatility.  But 13 funds might be too much complexity for some investors and 50% of equities might not appeal to all.  Also, the small cap and value benefit may be waning.

[butchmonkey]

I wouldn't be so heavy in bonds right now, with interest rates this low.

I really disagree with this statement, unless you are saying that  bonds should be replaced with CDs or cash or some other stable fixed income investment with non equity like risks.

Your percentage of bonds versus equities should reflect one thing and one thing only, and that is your tolerance for risk in your portfolio.

Stretching for yield is a suckers play. You are better of decreasing your safe withdrawal percentage.



Sent from my iPhone using Tapatalk

[TomTX]

I wouldn't be so heavy in bonds right now, with interest rates this low.

I really disagree with this statement, unless you are saying that  bonds should be replaced with CDs or cash or some other stable fixed income investment with non equity like risks.

Your percentage of bonds versus equities should reflect one thing and one thing only, and that is your tolerance for risk in your portfolio.

Stretching for yield is a suckers play. You are better of decreasing your safe withdrawal percentage.

60% is really heavy in bonds. The original studies which came up with the 4% SWR were based on 50% bonds. More recent theory has pushed for lower bond percentages - remember, she has a 30+ year time horizon.

[butchmonkey]

That is correct. The trinity study which gave us the original 4% rule, based the safe withdrawal rates on a 50/50 portfolio.  (So having a 50/50 portfolio for the OP 'a mother is probably the best evidence based answer to his question. )

The point that I was making which was unrelated to any specific AA is that your bond percentage should never be determined by the current yield on bonds, it should be determined by your own risk tolerance.


Sent from my iPhone using Tapatalk