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Retirement Discussions / Retire Well on Less
|Subject: Re: Size does matter||Date: 10/24/2003 11:57 PM|
|Author: workwayless||Number: 165 of 1498|
Often, an asset with a less volatile return has a lower total return than an asset with a more volatile return. All other things being equal, a reduction in volatility of returns will increase the level of safety, but a reduction in total return will decrease the level of safety.
So I guess I'm curious: where are you suggesting one draw the line? The asset with least volatile returns is probably cash, but it's pretty clear that the reduction in total return more than offsets the decrease in volatility and results in lower withdrawals. Or would you advise keeping a "traditional" asset allocation that includes stocks and bonds but using more diversified funds rather than individual assets?
I definitely recommend the latter--keeping a "traditional" asset allocation that includes stocks and bonds but using more diversified funds rather than individual assets.
I believe in the SWR research in the Trinity/Intercst studies. I wouldn't want to work until I accumulated enough money until I could take a SWR from an all cash portfolio. What's nice is that someone can invest in mutual funds rather than stock and still build a portfolio that would support a 4% SWR.
I'm also curious about your logic here. A house payment on a fixed-rate loan can stay constant for 30 years, irrespective of inflation. Now I agree that paying off your house can reduce your regular spending, but that's a different question: whether your house is a better investment than whatever you'd invest the payoff money in.
The issue is safety--not running out of money. I learned the following from a former REHP poster Dory36:
A 4% withdrawal for 30 years is 100% historically safe. However, lets say you have a 30 year fixed-rate 8% mortgage. The portfolio that you set aside to fund it is only 37% safe. Even a 5% mortgage would leave its funding portfolio to be only 80% safe. And keep in mind all of these are historical numbers. OTOH a paid-off mortgage is guaranteed 100% safe. So that even safer than a mortgage at 4% or less, because there's no guarantee that we won't experience something in the future to make 4% a less safe number.
I hope you won't take my comments as criticism - I want to understand better what you are saying.
Not at all--thanks for asking. It gives me a chance to clarify what I was thinking. And thanks for stopping by--hope you'll come back!
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