Perspective on the current drawdown

[AnotherSwede]

This should allow plenty of time for the other to recover, or equity to rally.

40 months if you're withdrawing 4% per year.

[mathjak107]

By using the phrase "finish line," you seem to imply that you'll be liquidating your entire PP the instant you retire. But I suspect that's not the case. If you planned well and are therefore going to be withdrawing only a fraction of your portfolio (e.g., 4%) each year, then short-term market noise should be fairly inconsequential to you, just as it is to a young 20- or 30-something investor. Even you--a soon-to-be retiree--have a fairly long investment time horizon!

Yeah, I was just talking about the end of the accumulation phase. And I was implying no income from there on out which probably won't be the case.

The Kitces links that mathjak cites are good. Though he doesn't include gold in his backtesting, the general idea of keeping spending moderate in the early years of retirement can make a portfolio extra robust.

he can't include gold in his testing since you couldn't own it  during the worst time frames we had which is why i personally am not comfortable using the pp in retirement.

if we use only the time frames where the pp can be tracked and look at a safe withdrawal rate  eliminating the worst case scenarios you could have taken a 6.50%  safe withdrawal rate vs 4%.

that is a difference in income of 40k on 1 million bucks vs 65k

that is a whopping 62% difference in what was safe.

so there is no question those missing time frames can account for a big difference in potential income and out comes . .

while those are the safe withdrawal rates a whole other piece is what was left for legacy money as well.

at 4% swr and 50/50  100%  of every rolling time frame had  the income stream unbroken  but 90% of the time ended with more than you started with so  you ended with more money left for heirs than you started with and 2/3's of every rolling time frame had at least 2x what you started with.

to me those are very high odds of having enough slack in the plan to do just fine.

even if the pp did fine at 4% swr over the time frames we can't measure  we still have no idea what would be left in the bucket for heirs or slack in the plan.

that is the part that makes me uncomfortable , it just has no measure-ability  . that isn't to say it won't do fine , i just prefer a proven track record in that respect with quite a bit of slack for the awe craps in life . .

[Tyler]

he can't include gold in his testing since you couldn't own it  during the worst time frames we had which is why i personally am not comfortable using the pp in retirement.... that is the part that makes me uncomfortable , it just has no measure-ability  . that isn't to say it won't do fine , i just prefer a proven track record in that respect with quite a bit of slack for the awe craps in life .

I'll point out again that the SWR studies you quote do not apply to your custom actively managed portfolio, and the Fidelity Insights newsletter is much younger than the PP.  You believe they apply simply because you own lots of stocks and bonds, but that is an assumption on your part not supported by any study.  Now don't get me wrong -- I think your conclusion has some merit and I don't have a problem with your choice.  But your critique of the PP's lack of history can be equally applied to your own portfolio. I encourage everyone to read the studies and apply the thinking and methodologies to their own portfolios just like you have.  Just don't read more into them than is truly there. 

at 4% swr and 50/50  100%  of every rolling time frame had  the income stream unbroken  but 90% of the time ended with more than you started with so  you ended with more money left for heirs than you started with and 2/3's of every rolling time frame had at least 2x what you started with...  even if the pp did fine at 4% swr over the time frames we can't measure  we still have no idea what would be left in the bucket for heirs or slack in the plan.

Over the timeframe we can compare both portfolios directly with a 4% SWR, a 50/50 portfolio finished a 30-year retirement with more than it started 86% of the time.  The PP did 100% of the time.  However, the average endpoint for a 50/50 portfolio was 80% higher.  Whether you prefer averages or certainty is a matter of personal priority.  I could see the argument for either method.

[mathjak107]

the exact holdings will not matter as much as the general allocations.

similiar percentages in equity's will present results close enough if your major concern is to meet income goals.  what counts in the end for that point  is that you maintain at least a 2% real return over the first 15 years .

any other  differences will likely be in the amount left in the bucket not your income reliability . .

retirement planning has 3 goals if using your own investing.

who you are investing for plays a big factor .

which goal is important will be unique to each one of us.

one- a steady income that is consistent , legacy money is not important

two-  investing for heirs , some have pensions or other income that supports their living . they want maximum growth for heirs

three-  a combo of the two .  that is where we stand . i want an income  that should remain unbroken without spending cuts and i want  to leave as much over at the end for the kids and grand kids as we can without taking on more volatility than we can live with .


50% equity's should do that if history is any guide .  the fact the funds are different will just vary the bucket amount left a bit .


using assets radically different may vary way to much .

[Tyler]

the exact holdings will not matter as much as the general allocations.

That's an assumption on your part not supported by any study.  Using the history of the stock market as a whole to defend the safety of an actively managed bucket of stocks can be very misleading.  It may perhaps be a reasonable assumption depending on your specific allocation, but it's an assumption nonetheless. 

In any case, I agree with your retirement goals.  I have less of a personal drive to leave an inheritance, but respect those who find that important and take steps to make it happen. 

[mathjak107]

well i will say this . 25% equities has failed over and over and over trying to get through the worst of times above a 3% draw rate  .  whether the gold and long treasury bonds can alter that  we will never know . it has zero testing  and zero testing ability ..

while the 50/50 mix may not be text book that  much in equity's has plenty of back testing .

so one has to decide which one they trust more and go with that choice .

[Tyler]

well i will say this . 25% equities has failed over and over and over trying to get through the worst of times above a 3% draw rate  .  whether the gold and long treasury bonds can alter that  we will never know . it has zero testing  and zero testing ability ..

while the 50/50 mix may not be text book that  much in equity's has plenty of back testing .

so one has to decide which one they trust more and go with that choice .

Not zero.  There's plenty of research on this forum if you seek it out.  It just cannot look as far back as you'd like. 

And again, you admittedly do not invest in the very specific portfolios back tested in the studies you quote with your own money. Your own portfolio is always changing based on newsletters and gut feel and violates the assumptions the studies are based on.

I support your right to come to your own conclusions, and I totally agree that one must decide for themselves what they trust and move on.

[mathjak107]

i disagree ,  the points it can't go back  to are the only points the concept of safe withdrawal rates are  based on . any other  points  are discounted and not used at all and do not count,  when stress testing against what the idea of the safe withdrawal rate means .

an analogy to what you are saying is you are building a house to stand up to  storms you had  only over your lifetime but are  not going to construct to the  the actual  worst storms we actually had which were all before you were born . then you claim your home to be able to withstand any storm you have seen but have not built to standards that included other time frames when the storms were much worse .

in effect that is what you are saying by there is plenty of study's on the pp.

you can try to get an idea with the fidelity rip planner.

that uses your own actual mix and monte carlo testing rather than historical data .  but the fact there is zero gold data  and behavior for those time frame skews things regardless .

working with my own portfolio in rip has an excellent success rate using monte carlo and not historical testing.  that is because the growth engine is still 50% equity's and not because i own a mix of different bond funds and not just intermediate  term .

it will actually work with the shorter term bond data .

[mathjak107]

so how would  i plan around the pp if i wanted to use it ?  i would plan dynamically ,which is how most plans end up anyway but with one exception.

since we do not know the results of opposing asset classes pulling so hard against each other during all those worst case scenario's we had i would base an initial draw rate around what achieved high success rates over those periods based on only a 25%^ allocation to equity's.

that means i would start  out planning around 3% not 4% withdrawals just the same as i would for any very conservative  mix under 40% equity.

then i would use michael kitces method of  dynamic increases .

anytime my portfolio value was above 50% from where i started i would take a 10% increase on top of any inflation adjusting already figured .

if i stayed above that 50% level for 3 years i would take another 10% increase.

i would not take another increase sooner than those 3 years though to avoid jumping the gun a bit.

that will give you slack in the plan starting out with a mathematically proven formula  for not drawing out more than you can safely support .


by the way that method is highly recommended for conventional investing where more often than not drawing 4% has left way to much money unspent and left untouched since using  40%  equity's or more  has usually ended up being to conservative of a draw .

[dutchtraffic]

an analogy to what you are saying is you are building a house to stand up to  storms you had  only over your lifetime but are  not going to construct to the  the actual  worst storms we actually had which were all before you were born . then you claim your home to be able to withstand any storm you have seen but have not built to standards that included other time frames when the storms were much worse .

If you have even the slightest idea about finances, then you understand that today's financial situation makes the great depression look like a minor dip.

Either way, i do wish everyone the best with their 100% paper portfolio.

[mathjak107]

you are soooooooo wrong when it comes to retirement planning here  . there is noooooooo data set that supports your claim  as no retiree group has completed 30 years with our current data set.

the last group was just updated  and that was the group that retired in 1984  who did just fine  up to 2014 .

to do worse you need to fall below 2% real returns over the first 15 years.

the only group that comes close is the y2k retiree and no one after them has an issue of falling below so far .

the y2k retiree has not completed their time frame yet .

you need to do more research before shooting from the hip with your comments and what you believe in your head . . .  no one can predict the future but we can certainly track up to today and we know mathematically what it  would take to have a 4%  draw fail off in the future . if you are not at that danger point you are fine . .


show us a study that supports your claims that anyone today is failing  in retirement  except hypothetically the y2k investor if he only held the s&p and intermediate term bonds. if he had midcaps and small caps than they have exceeded  the danger points of the first 15 years , a time frame that had two back to back recessions and an almost total collapse .


so far you spew a lot but support little with actual fact except what you think .

[AnotherSwede]

Either way, i do wish everyone the best with their 100% paper portfolio.

Thanks! But including my home in the calculation I have over 1% in physical gold. Only 99% paper (and some wood and concrete).

How do you rate my chances to stay as owner of my house in the depression you expect?

[dutchtraffic]

Either way, i do wish everyone the best with their 100% paper portfolio.

Thanks! But including my home in the calculation I have over 1% in physical gold. Only 99% paper (and some wood and concrete).

How do you rate my chances to stay as owner of my house in the depression you expect?

If you fully own your home then you obviously don't have all your wealth 100% in paper. (which is a good idea obviously)

[AnotherSwede]

Of course I have a mortgage. Don't be silly! 

In this country only people above 50 or living where there are no jobs could own their houses.

Being able to pay interest and/or paying of a large part of the mortgage in a bad recession is a big deal for me.

[Tyler]

i disagree ,  the points it can't go back  to are the only points the concept of safe withdrawal rates are  based on . any other  points  are discounted and not used at all and do not count,  when stress testing against what the idea of the safe withdrawal rate means .

We've been over this a dozen times already and I'm surprised you keep bringing it up.  The "worst of times" in the studies you quote were established by backtesting very specific portfolios that differ significantly not only from the PP but also from the one you yourself invest in.  The core holding in your portfolio is an actively managed fund that started in 1987 and you alter your allocation constantly based on newsletters and gut feel.  Therefore your own portfolio also cannot be tested over the worst of times you quote for the portfolio you do not use.  Monte Carlo simulators are similarly useless for actively managed portfolios, and I'm sure you realize that.  Calculators cannot read your mind and do not subscribe to your newsletter.

If the PP is an inappropriate retirement portfolio because of the limitations of backtests, then the same can unquestionably be said of your own.  Mutually assured destruction.  Congrats?  However, I don't believe either is true and am tiring of the persistent drumbeat.

I think your portfolio is fine, and does not need to be backtested to the dark ages to be a good choice.  Many of us feel the same about the PP.  Everyone has to come to their own conclusion about the best way to manage their own money, and we all agree that flexibility in spending is more important than rigid SWRs anyway.  Can't we just leave it at that rather than rehashing this same tired argument every few days?

[mathjak107]

The equity'do not have to match the same stocks .in fact they can never match since index's holdings come and go.

What counts is the fact they are broad holdings that come close to the results of the s&p 500 and studies show 90% of a long term return are based on allocations.

Since even adding mid caps ,small caps and international stocks have been shown to improve results over the s&p 500 odds are pretty good you will exceed the trinity results.

I know my growth model blew it away .

What isn't so sure is how uncorrolated assets with great pulling power in opposite directions would have done

[MediumTex]

I just read through this whole thread and I have no idea what the argument was even about.

Apparently, some people are upset that the PP is down a little for the year.

I wouldn't even know to be upset because I haven't looked at my portfolio all year.  I've been busy with other stuff.

Part of a long term investment strategy is that you shouldn't need to babysit it, and it certainly shouldn't be the source of a lot of stress.  Life is too short to wring your hands about investment performance.

I think that trying to totally utterly absolutely optimize you investment allocation is a waste of time because what is optimal today won't be optimal tomorrow.  I would rather just go with an investment structure that I have faith in and part of that faith will also be the belief that it will land me in the neighborhood of optimal while also aligning with my own emotional and psychological makeup, since it is my own decision making that is likely to be the greatest risk to my investment performance, not some flock of black swans that suddenly fill the sky one day.

If I can somehow protect my investments from outside shocks AND protect them from my own potential for irrationality when frightened or exuberant, then I think I am on to something useful and durable, and for me the PP fits that bill.  The PP is not, however, for everyone, and thus I don't see any point in arguing about it--if it doesn't make sense to you, go find what does make sense to you. 

Simply being able to live my life without the psychological phantom drain of a portfolio that is more unstable than I realize is very valuable to me, and I think it is more valuable to many other investors than they realize.

If a portfolio only appeals to you because of its backtesting results or recent flashy returns, those things will let you down sooner or later.  I think that a portfolio you can stay with needs to provide you with more than superficial charm, and that's why I think that it's so important to understand your real risk tolerance, your weaknesses as an investor, and whether you can see yourself sticking with a strategy even when it is no longer seen as stylish.

The PP in the 1990s must have seemed pretty silly, but in retrospect it looks very solid.  I suspect that after a very strong decade in the beginning of this century, the PP may have a few soft years that we are living through now, and that's okay with me.  That sort of ebb and flow is what one should expect from a long term investment strategy, and the PP provides a much smoother ride than most.

[mathjak107]

there is no asset class that if held long enough would not make you a winner at some point .  it is just a question of how long you have to wait for that asset to cycle around .

the more important thing is to have a plan and stick to it . even gold one day will have its day in the sun  the only question is when  not if.

diversification helps speed up the process but 100% anything will do fine at some point as long as it has the ability to compound at a fairly high rate when it's day comes .