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Author: randallpouwels One star, 50 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 75383  
Subject: Allocating for retirement? Date: 3/30/2004 4:08 PM
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I'm seven years from retiring, and would appreciate advice anyone would care to give about how much (%) I should allocate to the following types of investments at this point:

U.S. stocks--------------
International stocks------
U.S. bonds--------------
REITS-------------------

Thank you.

Sincerely,
Randall Pouwels
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Author: FuskieFool Big funky green star, 20000 posts Top Favorite Fools Old School Fool Ticker Guide SC1 Red Winner of the 2010 Rule Breakers Challenge Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 40074 of 75383
Subject: Re: Allocating for retirement? Date: 3/30/2004 4:15 PM
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Not enough info. How old are you, how much do you have saved up now, how long do you plan to live in retirement, how much will you need annually to live in retirement? Where are your retirement investments?

Fuskie
Who can paint more vivid pictures with more colors with which to work...

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Author: telegraph Big funky green star, 20000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 40076 of 75383
Subject: Re: Allocating for retirement? Date: 3/30/2004 5:11 PM
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And do you get a pension? or SS? how old age you? retirement at what age? Medical coverage after retirement? other investments/savings/401K/IRA?

t.

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Author: yobria Big red star, 1000 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 40077 of 75383
Subject: Re: Allocating for retirement? Date: 3/30/2004 5:57 PM
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45% stocks, 45% fixed income, 10% REITs.

Of the stocks, 70% US, 30% foreign.

Of the fixed income, 65% in a CD ladder, 35% in a diversified bond fund.

Nick

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Author: MadCapitalist Big funky green star, 20000 posts Top Favorite Fools Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 40078 of 75383
Subject: Re: Allocating for retirement? Date: 3/30/2004 6:30 PM
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45% stocks, 45% fixed income, 10% REITs.

Of the stocks, 70% US, 30% foreign.

Of the fixed income, 65% in a CD ladder, 35% in a diversified bond fund.

Nick


Don't feel the need to worry about details, Nick?

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Author: yobria Big red star, 1000 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 40079 of 75383
Subject: Re: Allocating for retirement? Date: 3/30/2004 7:26 PM
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>>Don't feel the need to worry about details, Nick?

Nah, that allocation will work for most retirees.

No matter how much information you have, how much historical data you look at, and how many Monte Carlo simulations you run, it's all of limited value since you can't predict future (real) investment performance.

Nick

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Author: MadCapitalist Big funky green star, 20000 posts Top Favorite Fools Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 40080 of 75383
Subject: Re: Allocating for retirement? Date: 3/30/2004 8:43 PM
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>>Don't feel the need to worry about details, Nick?

Nah, that allocation will work for most retirees.

No matter how much information you have, how much historical data you look at, and how many Monte Carlo simulations you run, it's all of limited value since you can't predict future (real) investment performance.

Nick


My personal preference is as high an allocation to equities as possible. However, that allocation depends on a lot of factors that weren't given in the original post, which is why I don't agree with your one-size-fits-all solution.

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Author: yobria Big red star, 1000 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 40081 of 75383
Subject: Re: Allocating for retirement? Date: 3/30/2004 9:34 PM
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>>My personal preference is as high an allocation to equities as possible

But there's no particular reason a portfolio of equities should outperform one of bonds. Historical averages do not predict the future.

And even if you believe they do...If you'd invested $1 in the S&P500 in 1966, in 1993 your investment would have been worth, in real terms, $1. Ditto 1929-1958.

I don't know if you've checked the Nikkie lately, but it's 1/3 of what it was 15 years ago. And the Japanese play the capitalist game as well as anyone.

Stocks can go down, and stay down, for decades.

Nick



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Author: MadCapitalist Big funky green star, 20000 posts Top Favorite Fools Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 40083 of 75383
Subject: Re: Allocating for retirement? Date: 3/30/2004 11:19 PM
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And even if you believe they do...If you'd invested $1 in the S&P500 in 1966, in 1993 your investment would have been worth, in real terms, $1. Ditto 1929-1958.

What would have been your investment been worth if you had invested part of your portfolio in bonds?

You can't know what the future will bring, but you increase your chances of increasing your wealth with equities.

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Author: MadCapitalist Big funky green star, 20000 posts Top Favorite Fools Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 40084 of 75383
Subject: Re: Allocating for retirement? Date: 3/30/2004 11:29 PM
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I did an analysis of every possible ten period starting from 1926-1992. Interpret as you wish.
    Start      End   Large Caps  LT Gov. Bonds      Winner
1926 1935 5.86% 4.97% Large caps
1927 1936 7.81% 4.95% Large caps
1928 1937 0.02% 4.08% LT Gov. Bonds
1929 1938 -0.89% 4.63% LT Gov. Bonds
1930 1939 -0.05% 4.88% LT Gov. Bonds
1931 1940 1.80% 5.02% LT Gov. Bonds
1932 1941 6.43% 5.69% Large caps
1933 1942 9.35% 4.39% Large caps
1934 1943 7.17% 4.62% Large caps
1935 1944 9.28% 3.91% Large caps
1936 1945 8.42% 4.46% Large caps
1937 1946 4.41% 3.70% Large caps
1938 1947 9.62% 3.40% Large caps
1939 1948 7.26% 3.19% Large caps
1940 1949 9.17% 3.24% Large caps
1941 1950 13.38% 2.64% Large caps
1942 1951 17.28% 2.13% Large caps
1943 1952 17.09% 1.93% Large caps
1944 1953 14.31% 2.08% Large caps
1945 1954 17.12% 2.51% Large caps
1946 1955 16.69% 1.33% Large caps
1947 1956 18.43% 0.76% Large caps
1948 1957 16.44% 1.76% Large caps
1949 1958 20.06% 0.79% Large caps
1950 1959 19.35% -0.07% Large caps
1951 1960 16.16% 1.22% Large caps
1952 1961 16.43% 1.73% Large caps
1953 1962 13.44% 2.29% Large caps
1954 1963 15.91% 2.05% Large caps
1955 1964 12.82% 1.69% Large caps
1956 1965 11.06% 1.89% Large caps
1957 1966 9.20% 2.85% Large caps
1958 1967 12.85% 1.13% Large caps
1959 1968 10.00% 1.75% Large caps
1960 1969 7.81% 1.45% Large caps
1961 1970 8.18% 1.30% Large caps
1962 1971 7.06% 2.47% Large caps
1963 1972 9.93% 2.35% Large caps
1964 1973 6.00% 2.11% Large caps
1965 1974 1.24% 2.20% LT Gov. Bonds
1966 1975 3.27% 3.03% Large caps
1967 1976 6.63% 4.26% Large caps
1968 1977 3.59% 5.20% LT Gov. Bonds
1969 1978 3.16% 5.10% LT Gov. Bonds
1970 1979 5.86% 5.52% Large caps
1971 1980 8.44% 3.90% Large caps
1972 1981 6.47% 2.81% Large caps
1973 1982 6.68% 5.76% Large caps
1974 1983 10.61% 5.95% Large caps
1975 1984 14.76% 7.03% Large caps
1976 1985 14.33% 8.99% Large caps
1977 1986 13.82% 9.70% Large caps
1978 1987 15.26% 9.47% Large caps
1979 1988 16.33% 10.62% Large caps
1980 1989 17.55% 12.62% Large caps
1981 1990 13.93% 13.75% Large caps
1982 1991 17.59% 15.56% Large caps
1983 1992 16.19% 12.58% Large caps
1984 1993 14.94% 14.41% Large caps
1985 1994 14.40% 11.86% Large caps
1986 1995 14.84% 11.92% Large caps
1987 1996 15.28% 9.39% Large caps
1988 1997 18.05% 11.32% Large caps
1989 1998 19.19% 11.66% Large caps
1990 1999 18.20% 8.79% Large caps
1991 2000 17.46% 10.26% Large caps
1992 2001 12.93% 8.73% Large caps

Wins Winning Pct.
Large Caps 60 89.55%
LT Gov. Bonds 7 10.45%


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Author: yobria Big red star, 1000 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 40085 of 75383
Subject: Re: Allocating for retirement? Date: 3/30/2004 11:35 PM
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>>What would have been your investment been worth if you had invested part of your portfolio in bonds?

It depends on the period. Bonds outperformed stocks during the depression. Stocks outperformed bonds during the great bond bear market of 1940-1980. Bonds have outperformed stocks over the last few years.

>>You can't know what the future will bring, but you increase your chances of increasing your wealth with equities.

Why? Prove it. Explain how your stock portfolio will beat my bond portfolio over the next 30 years. Show me why it must be so.

You must also explain why rational investors haven't switched from bonds to stocks, bidding up stock prices and eliminating the return gap, if there truly is some expectation or reason that stocks will outperform bonds.

Nick

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Author: yobria Big red star, 1000 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 40087 of 75383
Subject: Re: Allocating for retirement? Date: 3/31/2004 12:04 AM
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First of all I'm not sure what the percents you show are, but they don't match actual stock market returns. For example, the S&P 500 was 24.86 in1929, and 11.31 in 1938, a decline of over 50%. But you show a loss of less than 1% over the period. Similarly, the S&P was at 93.32 in 1966, and 72.56 in 1975, but you show an investment gain. Perhaps you could clarify your numbers.

In any case, your statistics are meaningless to the retired OP. With a fixed income investment, you're going to get guaranteed interest payments and a return of principal. That means you will be able to pay for your drug medication and groceries next month.

Telling a senior to buy stocks instead of FI because, while they might drop by 70% (as the Nikkei has done) over the course of his retirement and cause him to starve, a random class of stocks (large cap), over a random time period (1926-1992), happened to outperform bonds, is absurd.








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Author: intercst Big funky green star, 20000 posts Top Favorite Fools Top Recommended Fools Feste Award Nominee! Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 40089 of 75383
Subject: Re: Allocating for retirement? Date: 3/31/2004 12:38 AM
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MadCapitalist writes,

I did an analysis of every possible ten period starting from 1926-1992. Interpret as you wish.

Wins Winning Pct.
Large Caps 60 89.55%
LT Gov. Bonds 7 10.45%

I did a similar study a while back using 1871-2002 data that looked at what asset allocation maximized your withdrawal rate in retirement for each of the 100 30-year pay out periods from 1871-2002.

http://boards.fool.com/Message.asp?mid=19715281

In 74 out of the 100 30-year periods examined a portfolio of 100% S&P500 index fund maximized your withdrawal.

intercst

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Author: MadCapitalist Big funky green star, 20000 posts Top Favorite Fools Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 40090 of 75383
Subject: Re: Allocating for retirement? Date: 3/31/2004 7:42 AM
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Why? Prove it. Explain how your stock portfolio will beat my bond portfolio over the next 30 years. Show me why it must be so.

I didn't say that it *must* be so. I said that you increase your chances with equities, and that's very true.

Nothing is certain in life, but you can put the odds in your favor.

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Author: MadCapitalist Big funky green star, 20000 posts Top Favorite Fools Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 40091 of 75383
Subject: Re: Allocating for retirement? Date: 3/31/2004 7:52 AM
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First of all I'm not sure what the percents you show are, but they don't match actual stock market returns. For example, the S&P 500 was 24.86 in1929, and 11.31 in 1938, a decline of over 50%. But you show a loss of less than 1% over the period. Similarly, the S&P was at 93.32 in 1966, and 72.56 in 1975, but you show an investment gain. Perhaps you could clarify your numbers.

I think it is foolish to ignore dividends as part of stock market returns, especially in years long ago when dividends made up such a large part of returns. If you are going to do that, then you need to ignore interest payments when calculating bond returns.

In any case, your statistics are meaningless to the retired OP. With a fixed income investment, you're going to get guaranteed interest payments and a return of principal. That means you will be able to pay for your drug medication and groceries next month.

You missed the whole point. I didn't say that I recommended 100% equities. It depends on the situation of the investor. However, I recommend 100% equities for that portion of the portfolio that won't be needed in 5 years or less. People are living longer and longer these days, and it is important to have an investment that will provide an after-tax return that stays ahead of inflation. Equities provide the best chance for doing this over long periods of time.

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Author: MadCapitalist Big funky green star, 20000 posts Top Favorite Fools Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 40092 of 75383
Subject: Re: Allocating for retirement? Date: 3/31/2004 8:11 AM
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In 74 out of the 100 30-year periods examined a portfolio of 100% S&P500 index fund maximized your withdrawal.

That's interesting.

It would be interesting to see the SWR for the 100% S&P 500 in the years when it lost in order to see how much it lost by.

By the way, where do you get your data? I bought a book from Ibbotson Associates, but it only goes back to 1926.

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Author: telegraph Big funky green star, 20000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 40093 of 75383
Subject: Re: Allocating for retirement? Date: 3/31/2004 10:08 AM
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Lots of folks lost a bundle on 'fixed' investments prior to the 1930s. There was no FDIC insurance. If you held CDs then, you had a good chance of losing ALL of your 'safe' investment. Banks failed, and were NOT bailed out.

You want to buy some 'safe' California bonds? HOw about Argentine bonds paying 10%????

Most of the returns prior to 1950 were the stock dividends in the 20th century, which ran 4-5% for the large cap stocks. Just like 'bond interest'. Plus you got appreciation on your investment as well in most periods.

ANd 'bonds' aren't 100% safe, unless you buy ONLY treasury bonds, or CDs insurced by FDIC. Ever hear of WHOOPS bonds? other municipal bonds or bonds issued by other agencies are subject to going to zero net worth. Or buy an insured bond fund.

I'll take a diversified portfolio. Maybe 74 out of 100 time, an all stock portfolio maximizes you annual withdrawal rate....but the other roughly third of the time, it doesn't. Are you willing to take 2:1 odds against being wrong? I'll take slightly less to get 95% or greater probability of maintaining my inflation adjusted annual wiwthdrawal, and likely will have the option of resetting to higher withdrawals in the future.

t

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Author: pekinrobin Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 40095 of 75383
Subject: Re: Allocating for retirement? Date: 3/31/2004 10:24 AM
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Telling a senior to buy stocks instead of FI because, while they might drop by 70% (as the Nikkei has done) over the course of his retirement and cause him to starve, a random class of stocks (large cap), over a random time period (1926-1992), happened to outperform bonds, is absurd.



Great comment. I don't know why common sense startles me so much any more but there's so little of it around.

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Author: yobria Big red star, 1000 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 40096 of 75383
Subject: Re: Allocating for retirement? Date: 3/31/2004 10:33 AM
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>>ANd 'bonds' aren't 100% safe, unless you buy ONLY treasury bonds, or CDs insurced by FDIC

That's true. When I say FI, I mean insured CDs, and bond funds containing mostly treasuries. The % of FI that could actually default in such a portfolio is only 10% or so, and only a small fraction of those will actually cause loss of principal.

>>I'll take a diversified portfolio. Maybe 74 out of 100 time, an all stock portfolio maximizes you annual withdrawal rate....but the other roughly third of the time, it doesn't.

Yes, which I can stomach knowing I've got 30 working years left. But if I were a retiree staring my life savings in the face, things would be quite a bit different.

The other issue is that past performance will not predict the future. We can fixate on 74/100 all we want, but that has no bearing on the next 20 years. The 74/100 statistic was just as quotable the day before NASDAQ dropped 75%.

Nick


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Author: yobria Big red star, 1000 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 40098 of 75383
Subject: Re: Allocating for retirement? Date: 3/31/2004 11:07 AM
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>>I think it is foolish to ignore dividends as part of stock market returns

Yes, that's true, just looking at price levels doesn't include dividends.

On second thought, should you include them? Fifty years ago half of your stock appreciation was dividends. Now it's more like 15%. The reason stocks could pay such fat dividends is that earnings were alot higher. Currently the market P/E is 24. In your data, P/Es averaged something like 12. Another danger of using the past to predict the future.

>>However, I recommend 100% equities for that portion of the portfolio that won't be needed in 5 years or less

Yes, this is Dave Braze's allocation strategy. It might work, if stocks outperform bonds over the next five years. It would have failed miserably in the last few years, when stocks crashed. The average retiree will be sleep better with an even mix of stocks and FI.

Nick

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Author: intercst Big funky green star, 20000 posts Top Favorite Fools Top Recommended Fools Feste Award Nominee! Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 40099 of 75383
Subject: Re: Allocating for retirement? Date: 3/31/2004 11:08 AM
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MadCapitalist asks,

<<In 74 out of the 100 30-year periods examined a portfolio of 100% S&P500 index fund maximized your withdrawal.>>

That's interesting.

It would be interesting to see the SWR for the 100% S&P 500 in the years when it lost in order to see how much it lost by.

By the way, where do you get your data? I bought a book from Ibbotson Associates, but it only goes back to 1926.


From Yale Univ. Economics Professor Robert Shiller

http://www.econ.yale.edu/~shiller/data.htm

intercst


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Author: MadCapitalist Big funky green star, 20000 posts Top Favorite Fools Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 40100 of 75383
Subject: Re: Allocating for retirement? Date: 3/31/2004 11:23 AM
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Telling a senior to buy stocks instead of FI because, while they might drop by 70% (as the Nikkei has done) over the course of his retirement and cause him to starve, a random class of stocks (large cap), over a random time period (1926-1992), happened to outperform bonds, is absurd.

Great comment. I don't know why common sense startles me so much any more but there's so little of it around.


People who had invested in the Nikkei lost a lot of their money because they earned outsized returns before that point. If you pick a high point to invest all your money, then you will indeed have poor returns. And once again, Nick is ignoring dividends, which are a legitimate source of returns.

Consider this example. My father's portfolio lost a considerable amount of value since the market began to go south in 2000. It proves that Nick is right, doesn't it? Well, it ignores the fact that he retired in 1993 and earned great returns from 1993-2000, far in excess of what he would have received had he invested in bonds. He also invested significantly in the 70s and 80s, enjoying high returns then as well. Despite large recent losses, he is far ahead of where he would have been if he had invested in bonds.

Since 1926, the worst compound annual return for a 10-year period in the United States for the S&P 500 is -0.89% from 1929 to 1938. The only other loss for a ten-year period is -0.05% from 1930 to 1939, roughly the same period of time. But once again, this is a measurement from an extreme high. And this is for only a 10-year period. With people living longer and longer, we need to be concerned with much longer holding periods.

History, of course, is not a perfect predictor of future performance, but it is better than any other way of predicting the future. As the saying goes, history doesn't repeat, but it sure does rhyme. If we aren't going to look at history as a guide to stock returns, why should we use history as a guide to bond returns? If we aren't going to use history as guide to market returns on various asset classes, what should we do instead? Use a crystal ball?

This is really more of a rhetorical question since I can see that I'm not making any progress here. With that, I'm ending this conversation.

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Author: rkmacdonald Big red star, 1000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 40101 of 75383
Subject: Re: Allocating for retirement? Date: 3/31/2004 12:52 PM
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Author: yobria | Date: 3/30/04 9:34 PM | Number: 40081
If you'd invested $1 in the S&P500 in 1966, in 1993 your investment would have been worth, in real terms, $1. Ditto 1929-1958.

I found this statement hard to believe, so I constructed a spreadsheet using the actual S&P 500 total returns for each year going back to 1926, to determine how much a sum of money would have grown over any chosen set of years.

Here are my results:

$1 invested in the S&P 500 at the beginning of 1966 would be worth $43 at the end of 2003. Inflation makes that original $1 equal to $6.07 in 2003.

$1 invested in the S&P 500 at the beginning of 1929 would be worth $11 at the end of 1958. Inflation makes the original $1 equal to $1.69 in 1958.

Then, I searched through the years for the worst period I could find for S&P 500 real return. From 1966 to 1981, a period of 16 years, $1 invested in the S&P 500 at the beginning of 1966 would be worth $2.52 at the end of 1981. During this same period, inflation made $1 equal to $2.81. So, during this period you would have lost significant ground to inflation. Investing in bonds over this period, you would have lost less, getting a real return of negative 4.2% (Long Term Government). It is interesting to note that properly diversified portfolios (including real estate and foreign investments) did much better over this period, beating inflation by a reasonable margin.

Russ

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Author: MadCapitalist Big funky green star, 20000 posts Top Favorite Fools Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 40103 of 75383
Subject: Re: Allocating for retirement? Date: 3/31/2004 12:59 PM
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If you'd invested $1 in the S&P500 in 1966, in 1993 your investment would have been worth, in real terms, $1. Ditto 1929-1958.

$1 invested in the S&P 500 at the beginning of 1966 would be worth $43 at the end of 2003. Inflation makes that original $1 equal to $6.07 in 2003.


Nick said through 1993, not 2003. What do you up with for 1966-1993?

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Author: MadCapitalist Big funky green star, 20000 posts Top Favorite Fools Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 40104 of 75383
Subject: Re: Allocating for retirement? Date: 3/31/2004 1:06 PM
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Yes, this is Dave Braze's allocation strategy. It might work, if stocks outperform bonds over the next five years. It would have failed miserably in the last few years, when stocks crashed. The average retiree will be sleep better with an even mix of stocks and FI.

I don't believe in worrying about the short-term for long-term investments.

I agree that the average retiree will sleep better with an even mix of stocks and FI, because there are advisors like you scaring them unnecessarily.

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Author: rkmacdonald Big red star, 1000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 40112 of 75383
Subject: Re: Allocating for retirement? Date: 3/31/2004 2:58 PM
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Author: MadCapitalist | Date: 3/31/04 12:59 PM | Number: 40103
Nick said through 1993, not 2003. What do you up with for 1966-1993?

OK, I missed that. Here are the data for 1966 - 1993:

$1 invested in the S&P 500 at the beginning of 1966 would be worth $15 at the end of 1993. Inflation over that same period makes the original $1 equivalent to $4.46 in 2003.

Russ

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Author: rkmacdonald Big red star, 1000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 40113 of 75383
Subject: Re: Allocating for retirement? Date: 3/31/2004 3:01 PM
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Oops, I made a typo. My comment should have been:

$1 invested in the S&P 500 at the beginning of 1966 would be worth $15 at the end of 1993. Inflation over that same period makes the original $1 equivalent to $4.46 in 1993.


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Author: rkmacdonald Big red star, 1000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 40114 of 75383
Subject: Re: Allocating for retirement? Date: 3/31/2004 3:25 PM
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Author: MadCapitalist | Date: 3/31/04 1:06 PM | Number: 40104
Yes, this is Dave Braze's allocation strategy. It might work, if stocks outperform bonds over the next five years. It would have failed miserably in the last few years, when stocks crashed. The average retiree will be sleep better with an even mix of stocks and FI.

I don't believe in worrying about the short-term for long-term investments.

I agree that the average retiree will sleep better with an even mix of stocks and FI, because there are advisors like you scaring them unnecessarily.


While sleeping well is important, I don't think sleeping well should be the primary concern of most retired investors. The primary question a retired person needs to answer before assigning an allocation strategy is: How much can I withdraw from my retirement portfolio per year and never run out of money?

There is a big difference between what is safe for a person in the accumulation stage in life and one who is retired and living from their portfolio. In both of these cases we are talking very long term investing, but with very different requirements.

In the accumulation stage, you can afford to be more agressive for one simple reason: You are not withdrawing anything from your portfolio.

As soon as you begin to withdraw from your portfolio, you have to reduce portfolio volatility as much as possible without reducing overall gains by too much.

Historical data show us that the safe withdrawal rate can be maximized by proper allocation between non-correlated asset classes. A simple illustration of this is that a pure S&P500 portfolio with a growth rate of about 11% per year will historically support a safe withdrawal rate of around 3.5%. At the same time, a 75%/25% equity/bond mix will grow at around 7% and support a safe withdrawal rate of around 4%. Addition of REITs (although there is not enough historical data yet to be statistically meaningful ) appears to further reduce portfolio volatility without decreasing overall portfolio growth rate. This should allow a higher safe withdrawal rate, and my best guess is that a 50/30/20 mix of equities/bonds/REITs should support about a 4.5% safe withdrawal rate.

Russ

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Author: telegraph Big funky green star, 20000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 40115 of 75383
Subject: Re: Allocating for retirement? Date: 3/31/2004 3:26 PM
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Once you retire, you need to take money from your nest egg each and every year. That can cause some strange effects on portfolio value if you need funds, and you are all stocks, and suddenly it is 2001 again, or 1987, or 1929.....and your stock portfolio is down, and now you have to withdraw your annual amount at the bottom of the market.

What was a 4% withdrawal is, if the market is down by 50%, now an 8% withdrawal. If it dropped 90% like in 1929, you have to take out 40% of the ENTIRE amouant to get your annual withdrawal (which was 4% of your initial investment amount). If the market did not recover the next year, you take out an additional 40%. In the third year, you are busted.

If you have a 50% drop, and no recovery (like the Nikkei going down and staying down), and you starting withdrawing at the peak at a rate of 4%, you suddenly are taking the equivalent of 8%...do that for 3 years, and you have taken 25% of the entire portfolio in 3 years. If the market doesn't recover for another 9 years, you are down to 25% of your nest egg by then.......and you are only 9 years into retirement, and that doesn't even allow for inflation adjustment.

If you had started with a million buck nestegg, after ten years you'd be down to about $250,000.

Who knows about the future? I'm not willing to bet my long term retirement on getting some higher returns by a percent or so. I also have a 5 year ladder to cover a 3 year depression (most dips have averaged less than 18 months until recovery) if it is really really bad, and of course, I'd be cutting back just in case for a year or two.

t.



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Author: ResNullius Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 40117 of 75383
Subject: Re: Allocating for retirement? Date: 3/31/2004 4:34 PM
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Once you retire, you need to take money from your nest egg each and every year. That can cause some strange effects on portfolio value if you need funds, and you are all stocks,

If you have your money in mutual funds, you can have the quarterly distributions for gains and dividends automatically transferred to your money market account, as opposed to being reinvested. This can minimize the need to actually sell stocks or shares, at least to a certain extent.

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Author: telegraph Big funky green star, 20000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 40118 of 75383
Subject: Re: Allocating for retirement? Date: 3/31/2004 5:08 PM
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If you have your money in mutual funds, you can have the quarterly distributions for gains and dividends automatically transferred to your money market account, as opposed to being reinvested. This can minimize the need to actually sell stocks or shares, at least to a certain extent.

SOmewhat true.....most mutual funds have paid no cap gains distributions for 3 years, and indeed have a surplus of loss going forward, and likely won't pay cap gains going forward for several years.

Depending which mutual fund, you might be getting 1.7% on dividends, or if you are in small cap or aggressive growth, maybe less than that, maybe 1%.

So if you have a $1 million nest egg, you'd be getting maybe $10,000 to $18,000/yr, fully taxable, with dividends at 15%, and that assumes all your stock are in a taxable account, not a 401K. If they were in a 401K, then you would pay regular income tax rate on the withdrawals.

On the other hand, if you had a 50/50% allocation, with 50 in bonds, CDs, some REITS, the 5 year CD ladder I have is paying about 5.5%. The bond fund has gone up 30-40% in the past three years, while stocks are barely even with what they were 3 years ago....

And in a taxable account, the bonds/CDs/REITs are spinning off $25+K/yr, and the stocks at 1.7% would be spinning off another $8500, for a total income of over $33,500 without 'touching' your principle.

Actually, the CDs are paying over 5.5% average (5 year ladder from 7.6% to 4.3%), the REITs more.

I also have some higher dividend yielding stock, not all index funds, so my dividend yield is over 2% on my portfolio.

I am now about 70%stock/30% fixed income, and want to move to 60/40 within 2 years, and to 50/50 before 2008/2009. I'm currently 57 years old, and been retired 5 years.

t







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Author: ResNullius Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 40119 of 75383
Subject: Re: Allocating for retirement? Date: 3/31/2004 5:12 PM
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SOmewhat true.....most mutual funds have paid no cap gains distributions for 3 years, and indeed have a surplus of loss going forward, and likely won't pay cap gains going forward for several years.

All of mine paid out during each of the past three years. Not nearly as much as during the 5 years prior to that, but something nonetheless. In fact, I truly hated paying taxes when the funds actually lost money on the year. You're right in saying that it would take a rather large portfolio in order to live solely off distributions.


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Author: MadCapitalist Big funky green star, 20000 posts Top Favorite Fools Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 40121 of 75383
Subject: Re: Allocating for retirement? Date: 3/31/2004 7:30 PM
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If it dropped 90% like in 1929...

90%??? I assume you are including the subsequent years as well (see below).

In any case, I said it before and I'll say it again. I am not suggesting 100% equities. I am suggesting equities for money that you don't need within 5 years.
      Year         S&P 500
1926 11.62%
1927 37.49%
1928 43.61%
1929 -8.42%
1930 -24.90%
1931 -43.34%
1932 -8.19%
1933 53.99%
1934 -1.44%
1935 47.67%
1936 33.92%
1937 -35.03%
1938 31.12%
1939 -0.41%
1940 -9.78%
1941 -11.59%
1942 20.34%
1943 25.90%
1944 19.75%
1945 36.44%
1946 -8.07%
1947 5.71%
1948 5.50%
1949 18.79%
1950 31.71%
1951 24.02%
1952 18.37%
1953 -0.99%
1954 52.62%
1955 31.56%
1956 6.56%
1957 -10.78%
1958 43.36%
1959 11.96%
1960 0.47%
1961 26.89%
1962 -8.73%
1963 22.80%
1964 16.48%
1965 12.45%
1966 -10.06%
1967 23.98%
1968 11.06%
1969 -8.50%
1970 4.01%
1971 14.31%
1972 18.98%
1973 -14.66%
1974 -26.47%
1975 37.20%
1976 23.84%
1977 -7.18%
1978 6.56%
1979 18.44%
1980 32.42%
1981 -4.91%
1982 21.41%
1983 22.51%
1984 6.27%
1985 32.16%
1986 18.47%
1987 5.23%
1988 16.81%
1989 31.49%
1990 -3.17%
1991 30.55%
1992 7.67%
1993 9.99%
1994 1.31%
1995 37.43%
1996 23.07%
1997 33.36%
1998 28.58%
1999 21.04%
2000 -9.11%
2001 -11.88%
2002 -22.10%
2003 28.69%

Total Return 228387.02%
Geometric Mean 10.57%
Arithmetic Mean 12.41%


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Author: rkmacdonald Big red star, 1000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 40122 of 75383
Subject: Re: Allocating for retirement? Date: 3/31/2004 7:40 PM
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Author: ResNullius | Date: 3/31/04 4:34 PM | Number: 40117
If you have your money in mutual funds, you can have the quarterly distributions for gains and dividends automatically transferred to your money market account, as opposed to being reinvested. This can minimize the need to actually sell stocks or shares, at least to a certain extent.

As far as SWR is concerned, it doesn't matter how you take money out of a portfolio. Taking dividends or selling shares are equivalent related to SWR.

Russ

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Author: rkmacdonald Big red star, 1000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 40132 of 75383
Subject: Re: Allocating for retirement? Date: 4/1/2004 2:09 PM
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Author: telegraph | Date: 3/31/04 3:26 PM | Number: 40115
What was a 4% withdrawal is, if the market is down by 50%, now an 8% withdrawal.

True, but historical backtesting says that even when this happens you should be able to survive a very high percentage of the time.

If it dropped 90% like in 1929, you have to take out 40% of the ENTIRE amouant to get your annual withdrawal (which was 4% of your initial investment amount). If the market did not recover the next year, you take out an additional 40%. In the third year, you are busted.

I have tested a 4% withdrawal starting in 1929, on a pure S&P500 portfolio, and it survives for 30 years.


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Author: randallpouwels One star, 50 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 40222 of 75383
Subject: Re: Allocating for retirement? Date: 4/3/2004 7:16 PM
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Dear Fuskie, Telegraph, et al.,

Thank you for your reply. I appreciate it, and any advice you'd care to give.

OK, I'm 59.5 yrs. old, planning retirement at 67. My wife and I presently have just under $500,000 saved, with home paid for, no major debts. We plan around 30 years in retirement. Almost all our investments are in TIAA-CREF fixed and variable annuities, with a small amount in some IRA's. We expect Soc. Sec. income of about $35,000 a year, plus an additional $15,000-20,000 per year from book royalties in retirement. We do not expect to have any medical insurance in retirement aside from Medicare and any Medigap policy we can buy. Is that enough information?

Sincerely,
Randall Pouwels

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Author: randallpouwels One star, 50 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 40223 of 75383
Subject: Re: Allocating for retirement? Date: 4/3/2004 7:25 PM
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Dear Mad,

Thank you for your advice.

I read somewhere once that the percentage in one puts in stocks in retirement accounts should equal 100-your age. Do you put any "stock" in that one? Seriously though, aside from my lousy pun, I am interested in your advice. :-)

By the way, I can't put any of my retirement money in CD's since almost all my wife and I have saved is in TIAA-CREF fixed and variable annuity accounts.

Take care,
Randall Pouwels

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Author: MadCapitalist Big funky green star, 20000 posts Top Favorite Fools Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 40226 of 75383
Subject: Re: Allocating for retirement? Date: 4/3/2004 8:13 PM
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I read somewhere once that the percentage in one puts in stocks in retirement accounts should equal 100-your age. Do you put any "stock" in that one? Seriously though, aside from my lousy pun, I am interested in your advice. :-)

I suppose that rule is adequate for someone who really hates to put out the effort of thinking (and unfortunately that includes way too many financial professionals).

My own preference would be to keep everything in equities that I don't intend to use within 5 years. People are living so long these days that you want to choose an investment that will protect your purchasing power over the long haul. In this regard, stocks are the least risky investment because they give you the greatest probability of achieving an after-tax return that will keep up with inflation. However, I make this statement with the caveat that you need to hold stocks with a long-term perspective, which is why I say at least 5 years.

To take advantage of my strategy, you really need to estimate the cash that you will need to withdraw for spending purposes several years in advance, so that this portion of your portfolio will be relatively liquid. The rest can be in equities. The allocation will be different for everyone, since everyone has different cash flow needs and different levels of assets.

Also, don't take anyone's advice -- including mine -- unless it makes sense to you.

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Author: telegraph Big funky green star, 20000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 40228 of 75383
Subject: Re: Allocating for retirement? Date: 4/3/2004 10:18 PM
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I read somewhere once that the percentage in one puts in stocks in retirement accounts should equal 100-your age. Do you put any "stock" in that one? Seriously though, aside from my lousy pun, I am interested in your advice. :-)


A lot depends upon what other assets a person holds. If they own a $400,000 house, paid for, and don't count it as part of their nest egg, they have changed the situation.

If they have a pension, and collect SS benefits, that combined meet 50% or more of their needs, then they have to take less from the nest egg,and a loss of 20% in the nest egg then only has an overall 10% impact on them.

Yes, most folks at age 65 are likely to live 30 years (joint life expectancy) these days...one of you....and maybe to 105..especially if you have others in your family that have made it to 100.

My take is that any money you commit to the market you should plan to leave there at least 10 years. Any money you will need in five years or less should be in CDs or Bonds.

The age formula is a reasonable starting point.

A pension acts like a 'bond' in that it pays interest, often not inflation indexed. Thus, if you have a $20,000/yr pension, it is the same as having 25 times that in a bond, and withdrawing at a 4% withdrawal rate. You are guaranteed the pension. Depending upon inflation, you may likely need other assets that grow with or ahead of inflation. Equities traditionally do that. (averaged over the long run).

T


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Author: freakydeac Three stars, 500 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 40645 of 75383
Subject: Re: Allocating for retirement? Date: 4/23/2004 4:18 PM
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Historical data show us that the safe withdrawal rate can be maximized by proper allocation between non-correlated asset classes. A simple illustration of this is that a pure S&P500 portfolio with a growth rate of about 11% per year will historically support a safe withdrawal rate of around 3.5%. At the same time, a 75%/25% equity/bond mix will grow at around 7% and support a safe withdrawal rate of around 4%. Addition of REITs (although there is not enough historical data yet to be statistically meaningful ) appears to further reduce portfolio volatility without decreasing overall portfolio growth rate. This should allow a higher safe withdrawal rate, and my best guess is that a 50/30/20 mix of equities/bonds/REITs should support about a 4.5% safe withdrawal rate.


Aren't you setting the bar too high? Great results, if you can get them. But we need to look at life before and after retirement.

I'm thinking of Nolo's Get a Life, discussing real versus inflated retirement needs.

First, many of us will have to live off our capital, being unable to accumulate enough to live on gains.

Second, even a person able to live from gains may need to use the entire gain. You are describing living from around half the gains, meaning that the retiree needed about twice the capital to obtain the same income he would otherwise need.



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Author: rkmacdonald Big red star, 1000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 40649 of 75383
Subject: Re: Allocating for retirement? Date: 4/23/2004 5:36 PM
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freakydeac wrote:
even a person able to live from gains may need to use the entire gain. You are describing living from around half the gains, meaning that the retiree needed about twice the capital to obtain the same income he would otherwise need.

I don't quite understand what you mean here. Please explain.

Russ

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Author: freakydeac Three stars, 500 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 40691 of 75383
Subject: Re: Allocating for retirement? Date: 4/26/2004 10:42 AM
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I meant, if you need $50k per annum, you need approx $1.25 mil [50000/ .04], if you intend to use all the gain. But if you intend to use only about 4/7, as in your example, you need either to increase risk to gain 7%, or defer retirement till you have about $2.18 mil, living on 4/7 of the gain, or the same $50k.

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Author: rkmacdonald Big red star, 1000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 40712 of 75383
Subject: Re: Allocating for retirement? Date: 4/27/2004 11:08 AM
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Author: freakydeac wrote:
I meant, if you need $50k per annum, you need approx $1.25 mil [50000/ .04], if you intend to use all the gain. But if you intend to use only about 4/7, as in your example, you need either to increase risk to gain 7%, or defer retirement till you have about $2.18 mil, living on 4/7 of the gain, or the same $50k.

Maybe you don't understand that you simply cannot spend the full average total return. Here is an example:

Assume a stock has an average total return of 7% per year for 4 years.

Assume $1,000,000 in initial stock value.

Assume you need 7% ($70,000) per year to live on.

Consider this scenario of 7% arithmetic average total returns (I'm using arithmetic averages here for simplicity, while CAGR would normally be used):

YEAR, TOTAL RETURN, ENDING AMOUNT
Year 1, -60%, $330000
Year 2, -60%, $62000
Year 3, +58%, $27960
Year 4, +90%, -$16,876

Average total return: 7%

Even though the average return over these four years was 7%, you would run out of money if you counted on that fact and spent the full 7% of the original value each year.

Granted, this is an EXTREME and unrealistic example just to make a point. It shows that you cannot depend on spending a yearly amount that is equal to the average total return of a portfolio. Note that if the +58% and +90% years had occured before the two -60% years, the portfolio would have survived just fine. So, the point is that the amount you can take from a portfolio, with a reasonable chance of long term survival, is highly dependent on how volatile the portfolio is and the order of the yearly returns.

This is why economists equate volatility with risk!!

The purpose of adding bonds or REITs to a portfolio is to reduce volatility and smooth out the returns, while retaining as much growth as possible, in order to increase the safe withdrawal rate.

As I said, the maximum that you can expect to withdraw from a properly balanced portfolio is about 4% (initial amount, indexed upward each year for inflation) and possibly 4.5% if REITs are added. In other words, even though the portfolio returns 7%, you can only take 4% (initial amount, indexed upward yearly with inflation) or the portfolio will become exhausted.

Russ

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