Author Topic: Vanguard Paper: "Fuel for the FIRE: Updating the 4% Rule for Early Retirees"  (Read 6549 times)

JJ-

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I read the linked thread and have gone down a number of articles on various portfolios and I think one of the things keeping me from diverting from the simple TDF or VT/VTI/BND and diversifying into some of these other portfolios or tilting so hard into things like SCV is that we are still squarely in accumulation phase. Also the simplicity of these lazy portfolios is incredibly appealing after realizing the truth of that statement of "there are some better portfolios but many many more bad ones".

I think for me once we start really planning for withdrawals I will need to find the diversified portfolio that works best, but for now it's just overwhelming seeing the variety of good portfolios discussed [occasionally] here and elsewhere.
My general point of the thread was to demonstrate that carefully designed portfolios don't seem to do better than undesigned portfolios and are actually mostly worse, so in general keep costs low, diversify, and don't sweat it. That said, there did seem to be some benefits to portfolios with more slices, so I would say that if a person is not comfortable with at least three slices, then a Vanguard Target Retirement or LifeStrategy 60/40 or 80/20 fund would be the best choice.

Beyond that a few points:
+ "60-90% stocks, 10-40% bonds, 20-50% of stocks international, not more than 50% of total in US stocks, own a real asset" is entirely compatible with a three fund portfolio (and ideally a house or something). In fact I designed it to account for every reasonable portfolio I could think of, including a Bogle-approved 48% VTI, 12% VEA, 40% VBTLX. And also Buffet 90/10 with an international twist (VT + cash).
+ "still squarely in accumulation phase" I would agree that diversification is not as important as a high stock allocation and regular blind contributions in this phase (also mine). Really, if you are just getting started, a checking account and a regular paycheck are all the diversification you need.

Thank you for the reassurance. It feels like we were getting started so long ago and still have so long to go, but we have a good chunk saved and are maybe halfway to something at $750k invested and $250k in equity in our house. The investments we have generally follow those guidelines (minus the bonds, I'll get to that later) surprisingly as long as you count the equity as part of the equation. Of the invested assets in stocks we are about 2/3 US 1/3 international. Naivety sometimes happens to work in your favor.

Re bonds, for a while with a pension in the future I did not think I needed what bonds offered. However I've been coming around to the idea that pensions should just be treated as income like SS and manage the portfolio separately to include bonds.

That's been kind of the target of my research into these portfolios but I just keep coming out with a headache lol. That and trying to find the optimal slices. It just seems that there are so many options, if I'm doing 3 why not 4, and then 5.... I almost need a personality portfolio quiz.........

« Last Edit: July 20, 2021, 06:19:46 AM by JJsfr »

Car Jack

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A small point, but to me, SS and pensions are not an allocation or asset, but a subtraction from spending.  I'm overly conservative, ignoring both of these, and my way to deal with a potential 50% drop in the market is to do two things.  I double the amount needed to sustain my spending in retirement and as mentioned, I ignore SS and my small pension.  For any SS consideration, realize that in about 2034, the trust fund goes to zero and payments will be only what's coming in, which will be something like 75%, so a 25% drop for those taking payments.  I also do set my AA at 50/50.  I also tend to favor large cap and for international, only developed.

I did say I was very conservative, right?  At 52 times spending in investments right now, both DW and I are working full time.  Why?  Because DW won't let me retire yet. 

JJ-

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A small point, but to me, SS and pensions are not an allocation or asset, but a subtraction from spending.  I'm overly conservative, ignoring both of these, and my way to deal with a potential 50% drop in the market is to do two things.  I double the amount needed to sustain my spending in retirement and as mentioned, I ignore SS and my small pension.  For any SS consideration, realize that in about 2034, the trust fund goes to zero and payments will be only what's coming in, which will be something like 75%, so a 25% drop for those taking payments.  I also do set my AA at 50/50.  I also tend to favor large cap and for international, only developed.

I did say I was very conservative, right?  At 52 times spending in investments right now, both DW and I are working full time.  Why?  Because DW won't let me retire yet.

Thank you for muddying the waters . In all serious thank you for the affirmation that I'm not alone in treating pension as income and not the bond portion. Part of me likes the conservative approach, but I think our risk tolerance would stay a bit lower in bond percentages. Maybe as we age a bit, currently in 30s, the thought of a big drop becomes less palatable.

friedmmj

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Stocks, bonds, and real estate are all in the same boat because their values have been propped up by decades of falling interest rates. If rates rose by just 3%, to levels last seen in 2008, the discount math says all these assets will fall by large double digit percentages. Stated another way, I expect the correlations between asset performances to be higher in the future than they were in the past, because their valuations are all tied more to interest rates than ever before.

Even gold is propped up by the lack of return available on other assets. There was a time in living memory when one could FIRE just on the coupons from long-term treasuries. If that time ever returned, people would raid their safes. 

If rates stay locked in a low disinflationary spiral, Japan-style, then all assets might do OK. If rates rise even a little bit in the 2020s, all asset classes will be demolished and we'll probably have a second financial crisis.

Policy makers know they have to keep a lid on the velocity of money (inflation) or face severe consequences. Thanks to demographics, ex-US dollar demand, and higher taxes/tariffs, I think they are and will continue to engineer a soft landing, as Japan did with its lost decades. If inflation rises, the Fed could first of all taper it's $120,000,000,000 per month in asset purchases. Then, if that somehow doesn't work, they could start selling assets from their multi-trillion dollar balance sheet. Raising rates will be a last resort, and I'd not be surprised if we're hanging out around 2% ten years from now.

So if the future looks like either bubbles in all assets or lost decades, and if there are no longer any negative-correlated asset classes, how do retirees maintain a 40 or 50 year portfolio with a 4% WR?

One answer is to aggressively ride the bubbles up and reduce one's WR to the 3% range. Another is to use inherently negative-correlation tools: options. I will pursue both objectives via a 90+% stock portfolio protected by put options or, more likely, the collar strategy. Only by hedging can we obtain 100% certainty about surviving SORR events. A fat treasury allocation with negative real yields and massive convexity risk does not contribute to portfolio safety any more.

Market participants can see the Fed has their back against the wall, and so they are inflating asset bubbles in stocks, bonds, and real estate. After the tech bubble and housing bubble 1.0, there has been increasing pressure on the Fed to do something about asset bubbles, because when these pop it can affect the Fed's maximum employment objective. So the Fed faces two risks to its mandate: asset bubbles if rates are left too low for too long, and asset price collapses if rates rise too much.

The path between these risks is to constantly threaten and talk about small, mostly symbolic quarter point rate increases to slow the development of the bubbles (note the Fed's recent emphasis on more communication). Rates may rise a small amount between now and the next recession, but not by 2% or anything dramatic like that. Fears about these minor increases will trigger several corrections before the next recession, and these taper tantrums will be opportunities to buy stock and cash out one's hedges. Raising and lowering one's hedges is the new rebalancing.

This might be the single best post I've ever read on this forum