Is the successful salaried retail investor a myth?

[MediumTex]

The problem with the "work until you're dead" hypothesis is that: There is a higher likelihood that MT will have a bad hernia condition as he gets older, and won't be able to clean carpets.  Or go blind.  Or develop early onset dementia.  Or be unable to go 20 minutes without having to take a piss.  (Hit a nerve on that last one, didn't I?)

So, you may not be able to depend on being able to work. 

"What about being a Walmart greeter?" you ask.

Yes-- you and 99% of every other retiree in your age bracket, especially the one's doing a lot worse than you, are going to have that same idea.  God forbid we go into a Great Depression 2.0 when you hit retirement age.

I think the answer is to invest our efforts into some type of evergreen royalty producing activity.  Like writing the next, "Happy Birthday" song, or penning the novel that becomes a perennial cult hit.  Or producing a TV show like Star Trek.

Long shots?  Yes.  But still probably better than depending on getting a job as a greeter at Walmart.

I understand that the body starts to fall apart at some point, but it seems to me that working helps delay that process, allowing you to work longer if that's what you want to do.

I don't have to just clean carpet.  I can write books and get rich, practice law part time, do my mobile notary service and a lot other things if I thought about it.

The basic idea I am getting at, though, is that continuing to work in retirement shouldn't be viewed as something awful and to be avoided at all costs.  It can help strengthen almost any retirement strategy.

To hear people talk sometimes, you might think that there was a rule that people weren't permitted to work after age 65.

[GT]

If you want to live off your investments, you just need a shitload of money. That's it. You can't count on interest rates being high enough for bonds or cash alone to work, you can't count on any individual market such as gold or stocks doing well over any consistent timeframe, and you can't even count on a diversified portfolio like the PP to produce a minimum level of real returns on a consistent basis. The financial markets are just inherently too volatile, and any volatility reduction--no matter how clever--will increasingly cause you to bump up against inflation as you dial down the volatility.

Funny how Harry had it figured out a while back....

16 Golden Rules of Financial Safety

Your Career

Rule #1: Your career provides your wealth.

You most likely will make far more money from your business or profession than from your investments. Only very rarely does someone make a large fortune from investments.

[Coffee]

The problem with the "work until you're dead" hypothesis is that: There is a higher likelihood that MT will have a bad hernia condition as he gets older, and won't be able to clean carpets.  Or go blind.  Or develop early onset dementia.  Or be unable to go 20 minutes without having to take a piss.  (Hit a nerve on that last one, didn't I?)

So, you may not be able to depend on being able to work. 

"What about being a Walmart greeter?" you ask.

Yes-- you and 99% of every other retiree in your age bracket, especially the one's doing a lot worse than you, are going to have that same idea.  God forbid we go into a Great Depression 2.0 when you hit retirement age.

I think the answer is to invest our efforts into some type of evergreen royalty producing activity.  Like writing the next, "Happy Birthday" song, or penning the novel that becomes a perennial cult hit.  Or producing a TV show like Star Trek.

Long shots?  Yes.  But still probably better than depending on getting a job as a greeter at Walmart.

I understand that the body starts to fall apart at some point, but it seems to me that working helps delay that process, allowing you to work longer if that's what you want to do.

I don't have to just clean carpet.  I can write books and get rich, practice law part time, do my mobile notary service and a lot other things if I thought about it.

The basic idea I am getting at, though, is that continuing to work in retirement shouldn't be viewed as something awful and to be avoided at all costs.  It can help strengthen almost any retirement strategy.

To hear people talk sometimes, you might think that there was a rule that people weren't permitted to work after age 65.

I agree, that you need to do something to exercise the mind and body in your old age.  If you can find work that you love doing, all the better.

By the way-- the mobile notary business can be a very good full time money-maker, too.  I have a couple of family members who are (each) making $60k+ doing the mobile notary gig.

[Tyler]

I know you're a fellow ERE hopeful, Pointedstick.  What has you so stressed?

A bit of background on Safe Withdrawal Rates:

The 4% SWR is based on research called the Trinity Study which looked a wide variety of traditional stock/bond blends to see what level of withdrawals could have been historically sustained for 30 years no matter what year you happened to retire in.  As we all know, no matter how you invest some years are great while some are terrible.  The 4% rate was what they found worked even in the worst possible historical scenario where one retired immediately before the Great Depression, their portfolio completely tanked in year 1 of retirement, they withdrew the same (inflation adjusted) expenses every year, and they never earned another dollar for the next 30 years. 

So I see a few flaws in your fears that should give you hope:

1) The idea that your investments must return 3-4% real every single year to support you in retirement is a false (and impossible) assumption.  As we know, big downturns are often followed by big upturns where you make far more than 3-4%.  As long as you do not increase your spending rate with your portfolio value in the up years, that extra money will pad you for the next time you have a negative year (or help you recover from selling assets in a losing year).

2) SWRs have a ton of additional assumptions built in (as discussed above) and thus are more academic arguments rather than real-life safety numbers.  Noone in their right mind would continue to automatically increase spending by the CPI even in years when their investments struggle.  And if you toss in just a few thousand dollars from an enjoyable part time job, you make your portfolio pretty bulletproof even in bad years. 

3) It's true that a 4% SWR may be a little optimistic for a very early retiree, as the studies considered having only $1 after 30 years a "success".  However, everything I've read about both retirement and investing indicates that 3% is quite reasonable, especially if you're flexible like in point #2 above.

4) Finally, the Trinity study was based on various stock/bond blends and thus was far more sensitive to start dates because of market volatility.  All things being equal, reduced volatility with similar mean returns over time makes any withdrawal rate safer because you'll have fewer and less severe down years where your drawdowns hurt more.  That's why I invest in the PP -- it has similar returns to Boglehead-style portfolios with less volatility.  It's both good for my retirement plans and also great for helping me sleep at night. 

[WiseOne]

Now around these parts we all think the portfolio to do this with is the PP, and the PP is very stable, but unfortunately the PP has had quite a few years in the past two decades where it did not produce even a 3% after-inflation return:

1994: -5.2%
1996: 1.8%
1999: 2.2%
2000: -0.6%
2001: -2.4%
2008: -4.5%

Don't lose hope yet, Pointed!  You're forgetting something:  the cash allocation.  If you have a $1M portfolio, $250,000 of it (minimum $150,000) will be in cash.  That's more than 3 years of living expenses even when you're approaching a 15% cash allocation..  Let's assume that when you're in withdrawal mode, you only have to sell volatile assets during a rebalance triggered by spending cash down to 15%.  The only time you could conceivably be forced to sell volatile assets during a losing year would be when the loss is slight and you are already close to 15% cash.  Otherwise, the reduction in volatile assets will cause the cash % to rise, making it less likely that you'll hit a rebalance band.  When the volatile assets go up a lot, as they have historically often done after a losing year, the cash % will decrease and you'll be more likely to hit a rebalance band.

We touched on this in another thread, but I really think Harry's 25% cash allocation is a VERY key piece of the portfolio for this phase, and it increases the safety tremendously over a traditional stock/bond portfolio.  I'd like to try testing my hypothesis on the historical data...although I'm going through quite a busy time right now myself (helping take care of my father at home).

[Tyler]

Don't lose hope yet, Pointed!  You're forgetting something:  the cash allocation. 

Great point!  SWR calculations also assume you always sell stocks/bonds even in down years to pay the bills.  With the heavy cash allocation in the PP, there will be many years where you don't need to sell a thing and can wait for the volatile assets to recover.

[Pointedstick]

That's a great point, guys. I was forgetting about the role of cash, probably the most complicated and under-appreciated asset in the portfolio!

[smurff]

That's a great point, guys. I was forgetting about the role of cash, probably the most complicated and under-appreciated asset in the portfolio!

Now we know why cash is king.

[Reub]

We touched on this in another thread, but I really think Harry's 25% cash allocation is a VERY key piece of the portfolio for this phase, and it increases the safety tremendously over a traditional stock/bond portfolio.  I'd like to try testing my hypothesis on the historical data...although I'm going through quite a busy time right now myself (helping take care of my father at home).
[/quote]

WiseOne, I wish you well with your father. I took care of my dad at home from age 96 to 100. It wasn't easy but it sure was rewarding!

[WiseOne]

Thanks Reub - it's definitely not going to be so great for career and social life, but it is indeed rewarding.

I managed to spend a bit of time with a spreadsheet.  Main conclusion:  nobody ever actually just invests money in a reasonable allocation and leaves it alone for 40 years, or there'd be a lot of exceedingly wealthy octogenarians out there.

Assumptions: I used the data sources that PointedStick referenced, and there was likely some rounding error involved, plus of course expenses were completely ignored.  4x25 PP with 15/35 rebalance bands, 25x savings and withdrawals that increase each year to keep pace with inflation (as opposed to withdrawing 4% of the total portfolio each year).

A rebalance was triggered 11 times.  Only 4 times was the rebalance triggered by cash dropping below the 15% band.  Three of the rebalances occurred during years with negative returns after inflation (1983, 1988, and 2008, with returns of -0.3, -0.2, and -0.8 respectively).  The end balance was almost whimsical:  over $34M.

Just for fun, I compared with a 50/50 Boglehead portfolio, using an average of the bond + cash numbers to get an intermediate bond return estimate.  That portfolio did even better, but not before the nominal value was cut in half during the 1970s.  A 100% stock portfolio survived, but fared very poorly compared to the PP (end value $4M).

So cash is the secret sauce.  PS you can quit worrying!

[Tyler]

Thanks WiseOne.  Awesome work!

Main conclusion:  nobody ever actually just invests money in a reasonable allocation and leaves it alone for 40 years, or there'd be a lot of exceedingly wealthy octogenarians out there.

Very true.  So much retirement theory discussion consists of hand-waving.  Very few people even try to fund their own retirement, much less stick to a simple investment strategy.

[frugal]

It is possible to spend the CASH portion or sell some of the other assets.

You don't need to have the same invested amount in the end, or you need?

You can end your life with 30-50% of the portfolio value...

[Greg]

Thanks Reub - it's definitely not going to be so great for career and social life, but it is indeed rewarding.

I managed to spend a bit of time with a spreadsheet.  Main conclusion:  nobody ever actually just invests money in a reasonable allocation and leaves it alone for 40 years, or there'd be a lot of exceedingly wealthy octogenarians out there.

Assumptions: I used the data sources that PointedStick referenced, and there was likely some rounding error involved, plus of course expenses were completely ignored.  4x25 PP with 15/35 rebalance bands, 25x savings and withdrawals that increase each year to keep pace with inflation (as opposed to withdrawing 4% of the total portfolio each year).

A rebalance was triggered 11 times.  Only 4 times was the rebalance triggered by cash dropping below the 15% band.  Three of the rebalances occurred during years with negative returns after inflation (1983, 1988, and 2008, with returns of -0.3, -0.2, and -0.8 respectively).  The end balance was almost whimsical:  over $34M.

Just for fun, I compared with a 50/50 Boglehead portfolio, using an average of the bond + cash numbers to get an intermediate bond return estimate.  That portfolio did even better, but not before the nominal value was cut in half during the 1970s.  A 100% stock portfolio survived, but fared very poorly compared to the PP (end value $4M).

So cash is the secret sauce.  PS you can quit worrying!

Thanks for sharing. Just for clarity, your starting value was $4million in total assets? And the end value of $34M is on a nominal value correct (i.e. not corrected for inflation)?

[Pointedstick]

As usual, WiseOne, your spreadsheet-fu is awesome. Would you mind sharing the spreadsheet somewhere or putting it on Google Docs or something? I'd love to play with the values a bit.

[WiseOne]

OK, I uploaded the spreadsheet to google docs:

https://docs.google.com/file/d/0B5v98TX ... sp=sharing

It's very low tech actually.  I just manually substituted total/4 for the previous column value for each PP rebalance.  Also I found a couple of little typos - sigh.  The PP increases to $16M after 2012, Boglehead 50/50 increases to $2.6M, and a 100% stock portfolio increases to $4M.  Which actually makes the point far better:  having a large cash allocation to avoid having to sell assets during a down market is at least as important as optimizing CAGR.

So for all of those who have been recently agonizing over the PP's recent underperformance compared to standard stock-heavy or 50/50 portfolios, take heart - this is definitely the portfolio to take into retirement.

[Pointedstick]

Looks like it's locked. I requested access.

[WiseOne]

Sorry 'bout that.  I fixed it to be accessible to public via the link.  Just in case it changed:

https://docs.google.com/file/d/0B5v98TX ... sp=sharing

Also yes, end values are not adjusted for inflation.  I only adjusted the amount of withdrawals.  Starting amount was $1M, with $40,000 planned withdrawal.  The spreadsheet assumes that the full amount is withdrawn once, at the end of the year.

[Pointedstick]

Excellent data, WiseOne. Amazingly, the average real return for the entire period is about 5.5%, and each individual decade exhibits performance very close to the average:

1972-1981: 4.58%
1982-1991: 6.76%
1992-2001: 3.96%
2002-2012: 6.78%

These are real returns!

Additionally, most 3-year periods averaged out to around that much as well, with most coughing up a real return of between 2 and 7%. The worst rolling 3-year period was 1999-2001, where the portfolio yielded a real return of only 0.03%.

Assuming your cash portion is enough to sustain you for three years, you're basically totally fine. And in practice, it should be able to sustain you for 6-7 years if you achieve the 25x spending portfolio goal.

This exercise has really renewed my faith in the portfolio, I have to say.

However, what this also reinforces is that you really need to live through at least 3 years of performance before you decide whether the portfolio for you or not. I mean, this goes for any investment strategy, but historically the PP has had periods of lousy performance that lasted about two years in a row (1983 & 1984, 2000 & 2001). But when "lousy performance" means "zero or slightly negative real return" and not "lose half your life savings", well that's not really so bad.

[Tyler]

One thing that gives me pause in comparing "end values" is the unusually high real return (15.2%) of the PP in 1972, the first year of the run.  One could argue it stacks the deck in the PP's favor by giving it a 15% head start over others. 

Starting one year later, the end value is $9.3mm.  Still quite reasonable. 

But regardless, the consistent rolling averages tell the real story -- they indicate that the portfolio would serve you quite well historically no matter what year you retired in.  Thanks for pointing that out, Pointedstick.  A similar analysis was one of the most memorable parts of the PP book for me.

[dualstow]

This thread is getting more optimistic as it goes.
So, we don't need to consider embezzlement or other white collar crime after all? Great!

[WiseOne]

Optimism is good!

PS, that's a great way to look at it:  even the minimum amount of cash will cover you during bad 3 year periods.

Note that the 4% withdrawal rate was based on simulations of stock/bond portfolios, not the PP.  Anyone want to venture a guess about whether 5% or even 6% would be safe???  It would be nice to be able to guarantee a $40K income with a nest egg of $700K rather than $1M.

[notsheigetz]

Note that the 4% withdrawal rate was based on simulations of stock/bond portfolios, not the PP.  Anyone want to venture a guess about whether 5% or even 6% would be safe???  It would be nice to be able to guarantee a $40K income with a nest egg of $700K rather than $1M.

Somebody please do the calculations and see if WiseOne is right about the 6% guess.

If so, I can retire tomorrow. Not that I want to but it would be a great feeling getting up in the morning and going to work knowing I didn't have to.

[iwealth]

Note that the 4% withdrawal rate was based on simulations of stock/bond portfolios, not the PP.  Anyone want to venture a guess about whether 5% or even 6% would be safe???  It would be nice to be able to guarantee a $40K income with a nest egg of $700K rather than $1M.

Somebody please do the calculations and see if WiseOne is right about the 6% guess.

If so, I can retire tomorrow. Not that I want to but it would be a great feeling getting up in the morning and going to work knowing I didn't have to.

Assuming I'm using the spreadsheet correctly, it does not work for 6% starting in 1972. Looks like you go broke shortly before 2010. But with 5% you end up with 8x your original portfolio value. Amazing difference.

I'm more concerned with whether or not we can replicate equities gaining some 1300% over the next 40 years during a multi-decade bond bull market.

[Pointedstick]

Yes, historically 5% has worked. Starting with 400k and withdrawing 20k/yr, you wind up with $3.6m. Make the numbers 800k and 40k and you wind up with $7.3m.

It all kind of makes sense when you think about it. You're not actually living off your portfolio, you're living off a wad of cash that your portfolio deposits into. So you rarely ever need to sell volatile assets for income; only to fulfill the internal rules of the portfolio.

[notsheigetz]

Yes, historically 5% has worked.

Okay, I can retire tomorrow but I will probably have to eat out at Denny's like my parents.

My personal philosophy at age 64 is work as long as you can, save as much you can, invest in the PP.