Best Allocation: Living off just the interest

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Kriegsspiel
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Re: Best Allocation: Living off just the interest

Post by Kriegsspiel » Thu Jul 19, 2018 11:22 am

KGB, have you ever read Secondhand Time by Svetlana Alexeivich? I haven't yet, but I believe the transition from Socialism to oligarchy was no picnic either, as the oligarchs Stolichnayevery one of the assets the Soviets had left for themselves and left the common people to plant potatoes in every scrap of land.
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Re: Best Allocation: Living off just the interest

Post by Kbg » Thu Jul 19, 2018 11:40 am

Kriegsspiel wrote:
Thu Jul 19, 2018 11:22 am
KGB, have you ever read Secondhand Time by Svetlana Alexeivich? I haven't yet, but I believe the transition from Socialism to oligarchy was no picnic either, as the oligarchs Stolichnayevery one of the assets the Soviets had left for themselves and left the common people to plant potatoes in every scrap of land.
Nope...thanks for the tip! I'll get this one as it would be a good "round trip" after just finishing A People's Tradgedy.

We (the US) have been blessed/lucky as a country in that we have two characteristics that are rather exceptional in comparison to many countries.

1. While the British get slammed a lot for their colonial legacy (and often deservedly so), if one had to be colonized they generally left a legacy of excellent institutions and democratic habits after they got the boot. Not so much for other European colonizers.

2. We haven't had any ruthless tyrants willing to kill to rise to the top supported by equally ruthless followers.

And it's kbg not KGB. :-)
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Re: Best Allocation: Living off just the interest

Post by Kriegsspiel » Thu Jul 19, 2018 4:41 pm

Kbg wrote:
Thu Jul 19, 2018 11:40 am

And it's kbg not KGB. :-)
;) ;) ;) ;) ;) ;) ;) ;) ;) ;) ;) ;) ;)
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Re: Best Allocation: Living off just the interest

Post by mathjak107 » Sat May 11, 2019 5:22 am

ahhrunforthehills wrote:
Thu May 31, 2018 4:04 pm
Hello Everyone,

I am curious on opinions of what the proper allocation would be for someone's goal of living off of JUST THE INTEREST of their investments (i.e. not touching the principle) with $10 or $20 million.

Surely, in that situation having access cash would not be as important since you would not need 25% to pay your monthly bills if the market took a dump. I also would think you would want to be heavier in equities because of the capital gains treatment (as opposed to regular income tax rates).

I would think something like a modified golden butterfly would be ideal (with the only real change being in the size of the cash component):

22.5% Total Stock
22.5% Small Cap Value
22.5% LT Bonds
22.5% GLD
10% ST Bonds/Cash

Thoughts?
there is no such thing as not touching principal . it is all principal ..everything in your accounts on any day is all your money ... are you trying to say if you had a 100k in 1987 and 4 million today that only the 100k counts as principal ???

whether you get interest or spend dividends or appreciation , it is irrelevant , you are spending your total return in all cases .

plus you have negative real return sequences to deal with when spending down .. you have market returns and interest that can be negative and you can have inflation as the wild card creating negative real returns . so in those years you may spend more then you get ...

all in all there really is no such thing as not spending principal since it is all "your money "

your draw would have to be so small as to be unaffected by sequences which to me makes little sense ... on the other hand a safe withdrawal rate always assumes what you have can be spent down to pretty much zero .
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Re: Best Allocation: Living off just the interest

Post by ahhrunforthehills » Wed May 22, 2019 5:08 pm

mathjak107 wrote:
Sat May 11, 2019 5:22 am
ahhrunforthehills wrote:
Thu May 31, 2018 4:04 pm
Hello Everyone,

I am curious on opinions of what the proper allocation would be for someone's goal of living off of JUST THE INTEREST of their investments (i.e. not touching the principle) with $10 or $20 million.

Surely, in that situation having access cash would not be as important since you would not need 25% to pay your monthly bills if the market took a dump. I also would think you would want to be heavier in equities because of the capital gains treatment (as opposed to regular income tax rates).

I would think something like a modified golden butterfly would be ideal (with the only real change being in the size of the cash component):

22.5% Total Stock
22.5% Small Cap Value
22.5% LT Bonds
22.5% GLD
10% ST Bonds/Cash

Thoughts?
there is no such thing as not touching principal . it is all principal ..everything in your accounts on any day is all your money ... are you trying to say if you had a 100k in 1987 and 4 million today that only the 100k counts as principal ???

whether you get interest or spend dividends or appreciation , it is irrelevant , you are spending your total return in all cases .

plus you have negative real return sequences to deal with when spending down .. you have market returns and interest that can be negative and you can have inflation as the wild card creating negative real returns . so in those years you may spend more then you get ...

all in all there really is no such thing as not spending principal since it is all "your money "

your draw would have to be so small as to be unaffected by sequences which to me makes little sense ... on the other hand a safe withdrawal rate always assumes what you have can be spent down to pretty much zero .
Excellent different viewpoint. Thanks :)

IMHO, it seems to me that a Safe WIthdrawal Rate with a fairly decent investment horizon is easier said than done.

As you probably know, Portfolio Charts has the HBPP (25%x4) at around a 4% Perpetual Withdrawal Rate for someone with a retirement rate of 40 years (sustained initial principle in worst case scenario). Or in other words, you can withdrawal 4% without ever touching your original principle (this does not account for taxes or fees). It has about a 4.8% Safe Withdrawal Rate.

Now let's ratchet that number from 40 year up to 60 years of retirement...

Under normal conditions, a Safe Withdrawal Rate does not really change when your horizon goes beyond 35-40 years. The percentages generally stays the same. This is allegedly because a retiree only needs to survive 1-2 decade stretch of poor returns... but the reasoning has nothing to do with the external factors of taxes. I would think that when you introduce the chances of dramatic tax changes that are highly likely over the next 60 years, I would think that the length of retirement would have a MAJOR impact on your Safe Withdrawal Rate/Perpetual Withdrawal Rate. Again, taxes are fundamentally not calculated into a SWR anyways, let alone major tax changes.

Not to be Doomsday Debbie-Downer... but with so much uncertainty in the US going forward (unfunded liabilities of $124 Trillion, baby boomers that failed to save, ongoing "undocumented adjustments" at the DoD in the ballpark of $21 Trillion, etc.), it seems fairly impossible to accurately determine a Safe Withdrawal Rate with a long investment horizon when trying to use current tax rates.

It almost seems like a SWR needs to be cut in half to adjust for fees, taxes, and most importantly future tax risk if one were using that model.

Thoughts?
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Re: Best Allocation: Living off just the interest

Post by mathjak107 » Thu May 23, 2019 3:51 am

the reality is that part of the success rate calculation since it is based on odds of success is actually far higher when life expectancy is entered in to the equation .

while good planning dictates we plan to 90-95 , the reality most of us will not live that long so statistically that ads quite a bit to the success rate
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Re: Best Allocation: Living off just the interest

Post by ahhrunforthehills » Thu May 23, 2019 12:40 pm

mathjak107 wrote:
Thu May 23, 2019 3:51 am
the reality is that part of the success rate calculation since it is based on odds of success is actually far higher when life expectancy is entered in to the equation .

while good planning dictates we plan to 90-95 , the reality most of us will not live that long so statistically that ads quite a bit to the success rate
Good point. But does it really?

That concept may only apply if you were talking about a random person with an unknown amount of income/wealth. Life expectancy appears highly correlated to income/wealth (as much as 10-15 years). So if someone had a high net worth, they would likely have life expectancy very close to 90 (at least according to the article below).

https://news.harvard.edu/gazette/story/ ... y-matters/

Keep in mind that this data does not address "mobility" (i.e. what if someone was broke but became wealthy later in life). To understand that impact you need to look elsewhere, like this study in Denmark:

https://www.pnas.org/content/115/46/11754 (TLDR; accounting for income mobility halves the income gradient in life expectancy)

I would think this might even skew higher since we are not necessarily talking about the death of an "individual", but more like the "death of the last surviving spouse". Not to mention advances in medicine are likely to push these numbers even higher over the next 50 years.


With that in mind, circling back to your original point about preferring a Safe Withdrawal Rate...

As the retirement length increases, the attraction of a Safe Withdrawal Rate decreases and the attraction of a Perpetual Withdrawal Rate (living off the interest) increases.

In reality, the withdrawal % difference between the PWR (living off the interest and preserving the capital) and SWR (drawing down to zero) are not very far apart when you are talking about a retirement length of 40 years. Add another 10 years, the difference would likely only be .5%. Or in other words, it appears that if you were going to have a retirement length of 50, reducing your safe withdrawal rate by just .5% less every year to live on would leave practically all of your "capital" in place to pass on to your heirs (minus death taxes).

This is because "Safe Withdrawal Rate" and "Perpetual Withdrawal Rate" (i.e. sustaining the initial principle) almost converge. I assume this is because the formula being used is providing a minimum expected rate of return for the investments. So this basically means that anybody who has a long retirement length and is using a Safe Withdrawal Rate is a sneeze away from just living off the interest anyways (at least according to the calculations at https://portfoliocharts.com/portfolio/withdrawal-rates/).

TLDR: Someone with a high net worth is statistically more likely to have a long length of retirement (wealthy people live longer). If that period is 40+ years, living off the interest (PWR) becomes much more attractive and a Safe Withdrawal Rate (SWR) becomes less attractive as the two rates almost converge. This makes logical sense since the SWR is for the worst case scenarios (and a PWR is fairly bulletproof).
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Re: Best Allocation: Living off just the interest

Post by mathjak107 » Fri May 24, 2019 3:55 am

if we look at the 118 rolling 30 year periods , with a 60/40 allocation , it has ended with more than you started 90% of the time, 2x what you started with 67% of the time and 3x what you started with 50% of the time according to kitces.. if we eliminated the 5 dates the safe withdrawal rate is based on , 1907,1929,1937,1965, 1966 a safe withdrawal rate would actually be 6.50% ....
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