Author Topic: Hypothetical Question Regarding 100% Stocks into Perpetuity w/ Large Nest Egg  (Read 4063 times)

jeff2017

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Here's my question, this is not me or anyone I know, unfortunately, just wanted to post the question.

Hypothetical Situation: Retired couple that lives on $50K per year and has $2 Million in assets, all in stocks. If the only motive is to maximize gains until their death and given that they live on $50K per year, is there a case that they should be in stocks 100% until their death? Other factors that come into play, but let's assume they fully understand returns and are comfortable if their "Number" can fluctuate, even as much as say losing 50% and the account moves from $2 Million to $1 Million. If the couple can stomach the potential downswing and given that they only are living on $50K per year, even if they lost $1 Million, it would not affect their life much as they would still have $1 Million.

Maybe I answered my own question here as stocks historically will outperform bonds and I guess most people in that position would not want the mental strain of seeing their numbers potentially fluctuate, but I guess something like this might make sense for those looking to maximize their returns forever.




MDM

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...something like this might make sense for those looking to maximize their returns forever.
Indeed it might.  E.g., Warren Buffet's advice to his wife if he dies first: 90% stocks and 10% bonds.

jeff2017

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I'm primarily thinking of a couple that, no matter what happens, they are frugal and only spend $50K per year, regardless if their NW is $1 Mil, $2 Mil, or $10 Mil. If they can wrap their mind around long term returns of stocks, maybe it never makes sense for them to step away from stocks regardless of the market, highs and lows, etc. they will only be taking out their $50K each year.

That said, I'm sure this is much easier said than done, and many might not care if they are maximizing returns as the difference between someone dying and having a NW of say $3 Million or $5 Million isn't all that important to most.

flipboard

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Here's my question, this is not me or anyone I know, unfortunately, just wanted to post the question.

Hypothetical Situation: Retired couple that lives on $50K per year and has $2 Million in assets, all in stocks. If the only motive is to maximize gains until their death and given that they live on $50K per year, is there a case that they should be in stocks 100% until their death? Other factors that come into play, but let's assume they fully understand returns and are comfortable if their "Number" can fluctuate, even as much as say losing 50% and the account moves from $2 Million to $1 Million. If the couple can stomach the potential downswing and given that they only are living on $50K per year, even if they lost $1 Million, it would not affect their life much as they would still have $1 Million.

Maybe I answered my own question here as stocks historically will outperform bonds and I guess most people in that position would not want the mental strain of seeing their numbers potentially fluctuate, but I guess something like this might make sense for those looking to maximize their returns forever.
Yes: keeping to mostly stocks is actually very common advice for those who are living comfortably wanting to maximise returns for their successors (i.e. to maximise the inheritance), no different if you're wanting to maximise returns for yourself without successors too.

Switching to bonds is more relevant if you're at a higher withdrawal rate (relative to assets) due to the increased risk of your net worth going below a value that can sustain that withdrawal rate. I get the feeling many mustachians are like that, with aggressive withdrawal plans (my own planning is something like 3% withdrawal rate, with a 2x buffer on capital, i.e. I want 2x the capital that can sustain a 3% withdrawal before I fully retire, that way I'm safe and sound through large recessions or sustained bear markets).
« Last Edit: November 23, 2018, 12:08:12 PM by flipboard »

jeff2017

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Here's my question, this is not me or anyone I know, unfortunately, just wanted to post the question.

Hypothetical Situation: Retired couple that lives on $50K per year and has $2 Million in assets, all in stocks. If the only motive is to maximize gains until their death and given that they live on $50K per year, is there a case that they should be in stocks 100% until their death? Other factors that come into play, but let's assume they fully understand returns and are comfortable if their "Number" can fluctuate, even as much as say losing 50% and the account moves from $2 Million to $1 Million. If the couple can stomach the potential downswing and given that they only are living on $50K per year, even if they lost $1 Million, it would not affect their life much as they would still have $1 Million.

Maybe I answered my own question here as stocks historically will outperform bonds and I guess most people in that position would not want the mental strain of seeing their numbers potentially fluctuate, but I guess something like this might make sense for those looking to maximize their returns forever.
Yes: keeping to mostly stocks is actually very common advice for those who are living comfortably wanting to maximise returns for their successors (i.e. to maximise the inheritance), no different if you're wanting to maximise returns for yourself without successors too.

Switching to bonds is more relevant if you're at a higher withdrawal rate (relative to assets) due to the increased risk of your net worth going below a value that can sustain that withdrawal rate.

Makes sense.

One example might be a younger couple whose goal is FIRE asap, might have a NW target that is equal to 20X WR and once they achieve that, they have hit their goal, and do NOT want as much of their NW tied up in stocks versus say a couple whose goal is NOT FIRE and perhaps both work 10-15 years longer and when they retire have a NW that might be, say 40X their WR, they might be more inclined to keep more of their NW in Stocks as they can stomach the swings as it has less effect on them.

secondcor521

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My actual numbers are different, but the OP is essentially what I do.

I logically separate my nest egg into two parts:  The part I'm using to live on, and the extra.

The part I'm using to live on is 25 times my expenses and is invested 90% stocks / 10% bonds, because my planning horizon is 40 years and 90/10 is what I think is the historically optimal ratio for that time period and those two asset classes.

The extra is what I won't use and will therefore be inherited by my three kids, sometime a few decades from now hopefully.  The extra is 100% stocks.

So with hypothetical figures, let's say I spend $20K a year and have $2M.  Thus 25 x $20K is $500K.  90% of that is $450K and 10% is $50K.  The remainder is $1.5M.  So I would have $50K in bonds and $1.95M in stocks.  Which results in an overall AA of 97.5% stocks.

The mental strain referenced in the OP is low to nonexistent for me because I have a plan that is based on data and reasonable assumptions.  I also have extremely wide buffers, so even if the market drops a lot or I spend more, I'm still quite safe from going back to work.  And if things get worse, I have numerous backups.  And if those backups fail or get used up, then I can still work, and the worst thing that happens is I was retired in middle age for a few years.

clifp

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It depends on your objective unless it is to maximize the average estate you leave for your heirs, I think 100% stocks is a really bad idea.  When you are in the accumulation phase 100% stocks is just fine, I think it probably is optimal AA for hitting critical mass the quickest.  A heavy stock concentration say 80-90% is also fine if you are an early retiree planning on 3.5-4% withdrawal rate with much longer than 30 years retirement, e.g. Mr Money when he first retired.

However, if you only need to withdraw 2.5% then you definitely want to diversify across both countries and asset classes.  It's worth noting that 4% SWR rule applies only to the US, and  some Commonwealth (Canada, Australia, maybe New Zealand), a minority of European countries, and very small number of countries in the rest of the world.

There is probably no SWR rates for 1930s retiree in Germany, Poland, Italy, Romania, Hungary, Bulgaria, Japan, or China with 100% of their money in their countries stock market.  I imagine the SWR for a French, Belgium, stock investor is very low.  And it is not just war. a Venezuelan retiree in 2000 would almost certainly be broke by now, even though the Venezuelan stock market was #1 in the world in 2017, up over 3800%, but with inflation, at 7,000% they lost a ton of money.

The Dow lost 90% during the Depression, the market rebounded pretty quickly which is what would have saved the  1928 retiree. There is no guarantee  that market doesn't take a few years to rebound the next financial crisis.  Bond did relatively welll during the Great Depression.   

Bonds certainly can one of the other asset classes you diversify into. But, I'd argue if you really want to protect yourself I seriously also consider things like  real estate, direct investments in business which is what I've done, along with things like gold, Oil, or maybe even crytpocurrency,

 
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               

ChpBstrd

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In this hypothetical situation, the retiree has a near zero percent chance of ever running out of money with a 2.5% WR, and a virtual certainty of leaving a very large inheritance. This would be a worthy life mission if their goal was to fund a charity or cause with the proceeds. I can think of many worthy causes.

If, on the other hand, their goal was to leave enduring wealth for their families.... well.... we've all seen what the baby boomers did with what their parents left them. They used their parents' life work as the down payment on SUVs and McMansions and ate themselves into obesity. 

Radagast

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I would generally say no, the history of wild market drops and extended troughs is too strong to ever be 100% in that case. I also believe that you should always believe what you believe to be possibly wrong. So 85-90% sure but not 100. But it also depends on life circumstances. If you also own a large house, have Social Security coming, and keep 1 year of living expenses in cash at the bank in addition to being “100%” stocks then sure, “100% stocks” otherwise is fine. It is also perfectly good for the first 10 years or so of your career where if you lose everything that will still be a very small and recoverable amount.

Andy R

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Just a quick note that a 80/20 allocation does not equate to 80% of the returns nor lower the risk of max loss by 20%.

Without rebalancing, from 1926–2017, an 80/20 AA reduced annual returns by around 7%, not 20%.
Larry swedroe's chart estimates that an 80/20 AA reduces max drawdown from 50% to 35% which reduces the drop by 30%, not 20%.

A good part of this mismatch is due to "efficient frontier" (re Rick Ferri's fantastic book on asset allocation), where the risk/return ratio curve is pulled up (higher return) and left (lower risk) when diversifying between 2 asset classes bringing about a better risk vs return ratio, and the mismatch seems to be most pronounced towards the edges where somewhere around 90/10 to 70/30 seems to bring about the most significant improvements of risk relative to return ratio vs 100/0.

Sorry I think this might have been explained badly for anyone who hasn't read about this already, making my point possibly kind of useless =/
Maybe this link can help explain it a bit better. Note that the actual graph used is between 2 very specific dates and that between any 2 dates, the curve will be entirely different, but in all cases, the curve is pulled up and to the left improving the risk vs return ratio which is why an 80/20 portfolio has a lower return drop in returns relative to the drop in volatility and is most pronounced towards the edges.

pecunia

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I've read that the 4 percent rule uses 50 percent stock and 50 percent bonds.  If you save, say, 50X your expected spending, can you just cut the bonds to 25 percent?  Then you are only withdrawing 2 percent per year and after a few years you would have more margin from the shenanigans of the Wall Street folks. 

PDXTabs

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If you listen to Collins, 90% might be the sweet spot:
https://www.gocurrycracker.com/path-100-equities/

AdrianC

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...my own planning is something like 3% withdrawal rate, with a 2x buffer on capital, i.e. I want 2x the capital that can sustain a 3% withdrawal before I fully retire, that way I'm safe and sound through large recessions or sustained bear markets).
You're planning on a 1.5% withdrawal rate?

Andy R

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If you listen to Collins, 90% might be the sweet spot:
https://www.gocurrycracker.com/path-100-equities/

The 90% you refer to is for a 4% withdrawal rate, and even then there is a greater than 10% chance you would have run out of money in his 60 year scenario.
The OP is talking about a sub 3% withdrawal rate which has never failed in back testing using anything over 60% equities.


Start of rant at that article.
I don't see the point of that article. If someone was going to retire with 60 years of life remaining, how hard is it to work an extra 2-3 of those 60 years to get your withdrawal rate down from 4% to say 3.33%, ie 25x to 30x? At that point you have a backtest 100% success rate using 100% equities (if that's actually what you would want). It seems like a bunch of calculations for the sake of having a bunch of calculations to get people to think the article is somehow interesting, but it's doing more harm than good by making readers miss the forest for the trees.
And in response to his subheading "The Case for 100% Stocks", I would put forward this post as the case for NOT 100% stocks (at least during the SOR risk years when using a 4% withdrawal rate)
End of rant.

flipboard

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...my own planning is something like 3% withdrawal rate, with a 2x buffer on capital, i.e. I want 2x the capital that can sustain a 3% withdrawal before I fully retire, that way I'm safe and sound through large recessions or sustained bear markets).
You're planning on a 1.5% withdrawal rate?
That's another way of putting it. Gives me plenty of buffer if living costs hugely inflate / I want to move countries / etc, and more significantly let's me maximise equities. Then again I'm nowhere near even being able to sustain 3% so I may reevaluate my plans before I get to the retirement stage.

Now one thing I've been wondering is: equities are a good hedge against inflation... bonds less so. If you switch to a large portion of bonds (to avoid volatility) aren't you increasing your inflation-related risks instead?

secondcor521

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Now one thing I've been wondering is: equities are a good hedge against inflation... bonds less so. If you switch to a large portion of bonds (to avoid volatility) aren't you increasing your inflation-related risks instead?

General consensus I've read is:  Yes, especially over long time periods.

pecunia

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If you listen to Collins, 90% might be the sweet spot:
https://www.gocurrycracker.com/path-100-equities/

The 90% you refer to is for a 4% withdrawal rate, and even then there is a greater than 10% chance you would have run out of money in his 60 year scenario.
The OP is talking about a sub 3% withdrawal rate which has never failed in back testing using anything over 60% equities.


Start of rant at that article.
I don't see the point of that article. If someone was going to retire with 60 years of life remaining, how hard is it to work an extra 2-3 of those 60 years to get your withdrawal rate down from 4% to say 3.33%, ie 25x to 30x? At that point you have a backtest 100% success rate using 100% equities (if that's actually what you would want). It seems like a bunch of calculations for the sake of having a bunch of calculations to get people to think the article is somehow interesting, but it's doing more harm than good by making readers miss the forest for the trees.
And in response to his subheading "The Case for 100% Stocks", I would put forward this post as the case for NOT 100% stocks (at least during the SOR risk years when using a 4% withdrawal rate)
End of rant.

OK - If I lived on 2-3 percent withdrawal rate with a higher proportion of equities than 50 percent, maybe 90 percent, in a safe Index fund, I ought to be able to safely survive on the beach listening to old Jimmie Buffet tunes for the rest of my life.  This is positive confirming information.

MustacheAndaHalf

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Others might want to run these numbers through a simulator - it's not 0% chance of going bankrupt.

Over a 30 year horizon, Vanguard's nest egg calculator gives a 3% chance of going broke withdrawing 2.5% / year.  And over 50 years, that rises to 7%.  Probably within most people's comfort range, but not almost zero, according to:
https://www.vanguard.com/nesteggcalculator


You can no longer buy a model-T for $20.  Inflation needs to be considered, so the "$50k / year" unchanged does not fit reality.  Over 20 years, expect prices to double, leaving the $50k looking a lot like $25k.  That's also why you might want to use a percentage (like 2.5%) rather than a fixed amount that gets eroded every year by rising prices.

pecunia

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You can no longer buy a model-T for $20.  Inflation needs to be considered, so the "$50k / year" unchanged does not fit reality.  Over 20 years, expect prices to double, leaving the $50k looking a lot like $25k.  That's also why you might want to use a percentage (like 2.5%) rather than a fixed amount that gets eroded every year by rising prices.

Good Point - I guess the Trinity study and others kind of looked at inflation:

"The 4 percent rule. ... Under the rule, you withdraw 4 percent per year from a diversified portfolio of stocks and bonds, adjust annually for inflation, and you will have enough to last for 30 years in retirement based on historical returns of the U.S. stock market."

A few posts ago it was discussed that equities would be better for inflation.  So, the combination of lower than 4 percent and investing primarily in equities ought to let you adjust for inflation as the 4 percent rule says you will be able to.  It will buy you margin.  I notice they never use a fixed amount each year.  I guess this will mean if the market tanks that your 2.5 percent even when adjusted for inflation could give you less money.

Am I wrong with the following situation?

1st year - Start with a million - 4 percent is $40,000  OK
Market Tanks
2nd year - $800,000 - 4 percent + 2% adder for inflation or 32,000 X1.02 = $32,640

OR IS IT

1st year - $40,000
Market Tanks
2nd year $40,000 X 1.02 = $40,800 (same 2 percent inflation rate)

I had been under the assumption that the second idea, ($40,000 X 1.02) was the way the rule worked.  I'd like to know which example is correct (or neither).  After all, I want enough to avoid eating dog food.

Andy R

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There are 2 extremes

1. constant inflationar increase, so that is your example 2
2. constant percentage withdrawal so in the second year you would withdraw 4% of the new amount at 32k.

But if the market drops 50%, who can realistially drop their spending by 50%, which makes it unfesable.
So there is a comprosmise method using a floor and ceiling.
The Vanguard example is 97.5/105, so you get a floor and ceiling using 97.5% amd 105% of previous amount. If your X% of the new portfolio is within those numbers, use X%, if it is less, use 97.5% and if more use 105%

This actually allows a higher withdrawal rate for the same failure rate and is what I plan to use, along with other strategies such as a bond tent


pecunia

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There are 2 extremes

1. constant inflationar increase, so that is your example 2
2. constant percentage withdrawal so in the second year you would withdraw 4% of the new amount at 32k.

But if the market drops 50%, who can realistially drop their spending by 50%, which makes it unfesable.
So there is a comprosmise method using a floor and ceiling.
The Vanguard example is 97.5/105, so you get a floor and ceiling using 97.5% amd 105% of previous amount. If your X% of the new portfolio is within those numbers, use X%, if it is less, use 97.5% and if more use 105%

This actually allows a higher withdrawal rate for the same failure rate and is what I plan to use, along with other strategies such as a bond tent



It becomes clear why J L Collins says to use bonds to smooth the ride.  Your long term return is a little less, but you won't be bumped into the full 50 percent loss.  I saw that with the recent "Correction."  This was good to learn that your withdrawal amount may give a few rough years.

swashbucklinstache

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You can no longer buy a model-T for $20.  Inflation needs to be considered, so the "$50k / year" unchanged does not fit reality.  Over 20 years, expect prices to double, leaving the $50k looking a lot like $25k.  That's also why you might want to use a percentage (like 2.5%) rather than a fixed amount that gets eroded every year by rising prices.

Good Point - I guess the Trinity study and others kind of looked at inflation:

"The 4 percent rule. ... Under the rule, you withdraw 4 percent per year from a diversified portfolio of stocks and bonds, adjust annually for inflation, and you will have enough to last for 30 years in retirement based on historical returns of the U.S. stock market."

A few posts ago it was discussed that equities would be better for inflation.  So, the combination of lower than 4 percent and investing primarily in equities ought to let you adjust for inflation as the 4 percent rule says you will be able to.  It will buy you margin.  I notice they never use a fixed amount each year.  I guess this will mean if the market tanks that your 2.5 percent even when adjusted for inflation could give you less money.

Am I wrong with the following situation?

1st year - Start with a million - 4 percent is $40,000  OK
Market Tanks
2nd year - $800,000 - 4 percent + 2% adder for inflation or 32,000 X1.02 = $32,640

OR IS IT

1st year - $40,000
Market Tanks
2nd year $40,000 X 1.02 = $40,800 (same 2 percent inflation rate)

I had been under the assumption that the second idea, ($40,000 X 1.02) was the way the rule worked.  I'd like to know which example is correct (or neither).  After all, I want enough to avoid eating dog food.

The Trinity study is definitely the second one.

LessIsLess

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You can no longer buy a model-T for $20.  Inflation needs to be considered, so the "$50k / year" unchanged does not fit reality.  Over 20 years, expect prices to double, leaving the $50k looking a lot like $25k.  That's also why you might want to use a percentage (like 2.5%) rather than a fixed amount that gets eroded every year by rising prices.

Good Point - I guess the Trinity study and others kind of looked at inflation:

"The 4 percent rule. ... Under the rule, you withdraw 4 percent per year from a diversified portfolio of stocks and bonds, adjust annually for inflation, and you will have enough to last for 30 years in retirement based on historical returns of the U.S. stock market."

A few posts ago it was discussed that equities would be better for inflation.  So, the combination of lower than 4 percent and investing primarily in equities ought to let you adjust for inflation as the 4 percent rule says you will be able to.  It will buy you margin.  I notice they never use a fixed amount each year.  I guess this will mean if the market tanks that your 2.5 percent even when adjusted for inflation could give you less money.

Am I wrong with the following situation?

1st year - Start with a million - 4 percent is $40,000  OK
Market Tanks
2nd year - $800,000 - 4 percent + 2% adder for inflation or 32,000 X1.02 = $32,640

OR IS IT

1st year - $40,000
Market Tanks
2nd year $40,000 X 1.02 = $40,800 (same 2 percent inflation rate)

I had been under the assumption that the second idea, ($40,000 X 1.02) was the way the rule worked.  I'd like to know which example is correct (or neither).  After all, I want enough to avoid eating dog food.

Both options may lead to dog food.  You have to be ready to work to generate the shortfall or relocate to a location with low costs of living in an extended market crash scenario.  This is where owning your own house outright with spare rooms to rent may come in handy.



Andy R

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Both options may lead to dog food.  You have to be ready to work to generate the shortfall or relocate to a location with low costs of living in an extended market crash scenario.  This is where owning your own house outright with spare rooms to rent may come in handy.

Actually, the set % of current capital removes SOR risk completely, but I doubt many people can drop their living expenses by 50% in a 50% drop bear market which makes it not particularly useful.

Instead of being ready to work to generate shortfall, a better approach (in my opinion) is to work an extra 2-3 years to grow from 25x to 30x in which case a 3.33% withdrawal rate has histrionically never run out of money over even 60 years with a decent stock allocation. I would consider this a much safer option than relying on getting a job in a recession and after a number of years out of the work force.

Owning your own house in retirement is an enormous benefit since that part of our expenditure that would have gone on rent is no longer subject to market risk. I think extremely few people realise the enormity of this.

Having an extra room to rent out is something I never considered. Seems very clever. Though the downside is that you spend more on your house to have that room and may never need it. You could just always rent it out regardless of a recession but I like my privacy. If you can have a separate exit (ie dual occupancy style), I think that'd be fantastic, but of course then if you want to sell the house one day, there may be less demand for a dual occupancy style property. So even though I like the idea in theory, it's a bit messy in the details. Another possibility is to own a rental property separately and I think that would work fine. I think a combination of rental property an index funds complement each other very nicely. You get a much better balance of liquidity and income stability.

ChpBstrd

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- SNIP -

You can no longer buy a model-T for $20.  Inflation needs to be considered, so the "$50k / year" unchanged does not fit reality.  Over 20 years, expect prices to double, leaving the $50k looking a lot like $25k.  That's also why you might want to use a percentage (like 2.5%) rather than a fixed amount that gets eroded every year by rising prices.

Good Point - I guess the Trinity study and others kind of looked at inflation:

"The 4 percent rule. ... Under the rule, you withdraw 4 percent per year from a diversified portfolio of stocks and bonds, adjust annually for inflation, and you will have enough to last for 30 years in retirement based on historical returns of the U.S. stock market."

A few posts ago it was discussed that equities would be better for inflation.  So, the combination of lower than 4 percent and investing primarily in equities ought to let you adjust for inflation as the 4 percent rule says you will be able to.  It will buy you margin.  I notice they never use a fixed amount each year.  I guess this will mean if the market tanks that your 2.5 percent even when adjusted for inflation could give you less money.

Am I wrong with the following situation?

1st year - Start with a million - 4 percent is $40,000  OK
Market Tanks
2nd year - $800,000 - 4 percent + 2% adder for inflation or 32,000 X1.02 = $32,640

OR IS IT

1st year - $40,000
Market Tanks
2nd year $40,000 X 1.02 = $40,800 (same 2 percent inflation rate)

I had been under the assumption that the second idea, ($40,000 X 1.02) was the way the rule worked.  I'd like to know which example is correct (or neither).  After all, I want enough to avoid eating dog food.

The Trinity study is definitely the second one.

Agreed. Here's the source material if you'd like to confirm:

https://www.aaii.com/files/pdf/6794_retirement-savings-choosing-a-withdrawal-rate-that-is-sustainable.pdf

Arbitrage

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...my own planning is something like 3% withdrawal rate, with a 2x buffer on capital, i.e. I want 2x the capital that can sustain a 3% withdrawal before I fully retire, that way I'm safe and sound through large recessions or sustained bear markets).
You're planning on a 1.5% withdrawal rate?
That's another way of putting it. Gives me plenty of buffer if living costs hugely inflate / I want to move countries / etc, and more significantly let's me maximise equities. Then again I'm nowhere near even being able to sustain 3% so I may reevaluate my plans before I get to the retirement stage.

Now one thing I've been wondering is: equities are a good hedge against inflation... bonds less so. If you switch to a large portion of bonds (to avoid volatility) aren't you increasing your inflation-related risks instead?

For nominal bonds, yes.  Thankfully, there are inflation-protected bonds that are a much better option to defray most of the risks of unexpected inflation.  I bonds and TIPS.

flipboard

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...my own planning is something like 3% withdrawal rate, with a 2x buffer on capital, i.e. I want 2x the capital that can sustain a 3% withdrawal before I fully retire, that way I'm safe and sound through large recessions or sustained bear markets).
You're planning on a 1.5% withdrawal rate?
That's another way of putting it. Gives me plenty of buffer if living costs hugely inflate / I want to move countries / etc, and more significantly let's me maximise equities. Then again I'm nowhere near even being able to sustain 3% so I may reevaluate my plans before I get to the retirement stage.

Now one thing I've been wondering is: equities are a good hedge against inflation... bonds less so. If you switch to a large portion of bonds (to avoid volatility) aren't you increasing your inflation-related risks instead?

For nominal bonds, yes.  Thankfully, there are inflation-protected bonds that are a much better option to defray most of the risks of unexpected inflation.  I bonds and TIPS.
But for those bonds, inflation also means higher taxes, so you're still lagging inflation. Hyperinflation could be fatal. (My local central bank doesn't actually offer an equivalent, which I don't care about too much since I wouldn't rely on those personally.)

Arbitrage

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...my own planning is something like 3% withdrawal rate, with a 2x buffer on capital, i.e. I want 2x the capital that can sustain a 3% withdrawal before I fully retire, that way I'm safe and sound through large recessions or sustained bear markets).
You're planning on a 1.5% withdrawal rate?
That's another way of putting it. Gives me plenty of buffer if living costs hugely inflate / I want to move countries / etc, and more significantly let's me maximise equities. Then again I'm nowhere near even being able to sustain 3% so I may reevaluate my plans before I get to the retirement stage.

Now one thing I've been wondering is: equities are a good hedge against inflation... bonds less so. If you switch to a large portion of bonds (to avoid volatility) aren't you increasing your inflation-related risks instead?

For nominal bonds, yes.  Thankfully, there are inflation-protected bonds that are a much better option to defray most of the risks of unexpected inflation.  I bonds and TIPS.
But for those bonds, inflation also means higher taxes, so you're still lagging inflation. Hyperinflation could be fatal. (My local central bank doesn't actually offer an equivalent, which I don't care about too much since I wouldn't rely on those personally.)

That's why I said it defrays most of the risks.  I don't think hyperinflation is relevant to this discussion, because it would destroy equities as well.

edit: After a bit of research, it seems that equities likely wouldn't be quite as bad as I had presumed during hyperinflation, but still not the best choice (real estate/gold).  If the US really devolved into hyperinflation, though, I'm not sure that much of our current understanding of the world economy would be valid. 
« Last Edit: November 28, 2018, 08:26:05 AM by Arbitrage »

pecunia

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ChpBasard:

Thanks for the article.  Here's and excerpt:

For stock-dominated portfolios, withdrawal rates of 3%
and 4% represent exceedingly conservative behavior. At
these rates, retirees who wish to bequeath large estates
to  their  heirs  will  likely  be  successful.  Ironically,  even
those  retirees  who  adopt  higher  withdrawal  rates  and
who have little or no desire to leave large estates may
end up doing so if they act reasonably prudent in pro-
tecting  themselves  from  prematurely  exhausting  their
portfolio.