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Author: Goofyhoofy 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: of 35252  
Subject: Re: Withdrawal Rate from Retirement Account Base Date: 3/3/2008 8:11 PM
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The results of the Intercst study seem to run counter to the advice that is often given--as one gets older, the percentage of stocks in the retirement portfolio should be reduced. For example, there is the rule: 100 minus age = proportion of stocks. If I retire at 65 and want my funds to last 25 years, the Intercst study suggests that I should have a far higher percentage in stocks than 100 - 65 = 35. Doesn't a higher percentage seem risky?

Intercst's spreadsheets make no predictions about the future. That's probably good since such forecasts are always wrong. What his calculations demonstrate is that if you had followed this formula at any time in the past, a 4% withdrawal rate with his allocation of stocks and bonds, otherwise untouched, would have "survived" until a person died. You would never have run out of money, even if you were unlucky enough to have invested everything in 1929 and lived to a ripe old age.

Bonds are safe, except when they aren't. The conventional wisdom, as is so often true, is wrong. If you had been reallocating and balancing heavily in favor of bonds in the 80's you would have been killed. There have been plenty of times when bonds would have gotten you in trouble, and plenty of times when stocks did nothing for a long time, too.

All that intercst's numbers demonstrate is historical safety. If you think the future is likely to be worse than the past - including the Great Depression, the malaise of the 70's, or the bubble of the 90's, then those numbers don't mean a thing. What they do demonstrate is that a mix of stocks and bonds, and a withdrawal rate of 4% of assets, would have kept a person in retirement without exhausting their assets.

I believe he is better known for the 4% "safe withdrawal rate" than the asset allocation. Indeed, IIANM his first pass at it was with a portfolio of 100% stocks, and only after much experimentation did he find that a mix which included bonds actually produced an even better "SWR."
 
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