Withdrawal rates and size of nest egg needed in current negative real interest rate world

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Kevin K.
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Withdrawal rates and size of nest egg needed in current negative real interest rate world

Post by Kevin K. » Thu Jun 03, 2021 5:10 pm

Given the level of activity here in recent weeks and months I'm wondering if these forums have run their course, but thought I'd post this link just in case there are enough of us to generate some worthwhile discussion.

This is a long and fairly intricate thread on Bogleheads and you've got to read at least the first full page to get a sense of why the topics being discussed are relevant to PP fans. The article in "Bloomberg" that's referenced was written by one of the architects of DFA's retirement income funds, which (for those unfamiliar) means the approach to living off of assets in retirement is about meeting actual spending needs with guaranteed income, vs. the crude typical target retirement date fund that just moves 60-70% into total bond at retirement age and hopes for the best.

What's of obvious relevance here is that many if not most investors are looking at things like the run-up in equities since last year's March crash and feeling optimistic while missing out entirely on the fact that the decline in interest rates and Treasury yields has more than offset those gains AND will have a devastating effect on safe withdrawal rates going forward if the low interest rate environment persists (which is certainly the Fed's stated intention).

So this is another and perhaps fresher angle on a lot of the discussions we've had here over the past year in particular about whether having 40% (GB) or 50% (PP) of your portfolio invested in assets with a negative real return and huge interest rate/inflation risk can fairly be called "Permanent" - and if not, what replaces those assets. I mean when you see even Bogleheads calmly discussion buying single-premium immediate annuities instead of cash or asking where to house physical gold (see several recent threads there) you know we're truly living in weird times.

https://www.bogleheads.org/forum/viewto ... 4f17405c57

If nothing else, the demolishing of the 4% Rule by the OP of this thread and his suggested alternatives are well worth taking the time to read if you're in (or anywhere close to) retirement.
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Re: Withdrawal rates and size of nest egg needed in current negative real interest rate world

Post by Hal » Thu Jun 03, 2021 6:22 pm

Thanks for a thoughtful and well reasoned post Kevin,

Years back I was discussing the PP concept with a retired Japanese stockbroker and she stated exactly those concerns relating to living in Japan (very low return on 3/4 of the portfolio). Now here we are with the same issue.

I had been very seriously thinking about BelangP's approach of 35% Gold & 65% Shares, but couldn't bring myself to make the change... what if I was wrong? Retired now so no second chances, so for me the PP is the least worst option.

Perhaps a useful discussion would be the Pro's AND CON's of the PP vs other allocations?

So to start off:

35% Gold 65% Shares - Logical foundation (see his YouTube site) & good real returns. Con - the volatility! Could I dispassionately sell off gold to rebalance the shares after a 50% drop? In all honesty, no!

PP - Low volatility but no/low (?) real returns.

For me, I will take my chances with a slow financial bleed to death rather than a cut artery :o
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Re: Withdrawal rates and size of nest egg needed in current negative real interest rate world

Post by Kevin K. » Thu Jun 03, 2021 6:50 pm

Thanks Hal for your comments!

Yeah, I don't have the stomach for 65% shares, 35% gold either. I mean let's face it, if one could tolerate that kind of volatility then something more mainstream like Jonathan Clement's simple solution (65-70% global equities, the rest "bonds" in the form of half short-term TIPs, half short-term (nominal) Treasuries and just let it ride would be pretty easy.

But I think that most of us who are drawn to the PP are looking for decent returns under all market conditions and (perhaps equally or more important), little chance of the kind of deep or long-lasting drawdowns that prompt abandoning a portfolio at exactly the time when doing nothing is called for.

But what about incremental change that takes into account the many virtues of the PP? The GB to my mind is the textbook such incremental improvement, tilting things slightly towards prosperity (the most likely economic scenario, historically) and diversifying the equity away from FAANG-driven TSM. One could just replace the long/short Treasury barbell with mostly ITT's and a smattering of iBonds and call it a day (that's what I've done for now), or if younger and still years away from retirement use EE and iBonds for the entire bond/cash allocation since they're the only Treasury securities with a real rate of return (not to mention inflation protection and tax deferral, in the case of the i's).

No doubt others here will have better ideas.
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Re: Withdrawal rates and size of nest egg needed in current negative real interest rate world

Post by dockinGA » Thu Jun 03, 2021 7:51 pm

One of the things that I find comforting in this environment is to use Portfoliocharts to look at how the PP would've done globally over the past few decades. Even in Japan, the worst 30ish year return I've seen is a tad under 3% real. And a 30 year safe withdrawal rate is still 4%. Our situation is almost certainly not fully Japan-like, and almost certainly doesn't match anything that's been seen globally for the last 50 years. So who knows what will happen. But, I do find it somewhat comforting to know that the PP would've held up reasonably well in many different places globally over the last 50 or so years.

We may all ride this thing down to a value of zero dollars, but if that's the case, odds are everyone else's portfolio will suffer as well. If the PP does extremely poorly, it would most likely mean that ALL the assets end up worthless, all at the same time. And since most folks hold different ratios of stocks, bonds, and cash (3 or the 4 components of the PP), their portfolios will all be worthless too.
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Re: Withdrawal rates and size of nest egg needed in current negative real interest rate world

Post by Hal » Thu Jun 03, 2021 11:21 pm

Kevin K. wrote:
Thu Jun 03, 2021 6:50 pm
But what about incremental change that takes into account the many virtues of the PP? The GB to my mind is the textbook such incremental improvement, tilting things slightly towards prosperity (the most likely economic scenario, historically) and diversifying the equity away from FAANG-driven TSM. One could just replace the long/short Treasury barbell with mostly ITT's and a smattering of iBonds and call it a day (that's what I've done for now), or if younger and still years away from retirement use EE and iBonds for the entire bond/cash allocation since they're the only Treasury securities with a real rate of return (not to mention inflation protection and tax deferral, in the case of the i's).
Good suggestion Kevin and hello dockinGA,

How about tilting within the 25% asset classes, so if our timing is out we don't have an outsize position?

PS: A must watch video -> https://www.youtube.com/watch?v=SKXUeIk9QMg
FWIW:https://www.youtube.com/watch?v=kBKzRPef9Vs
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Re: Withdrawal rates and size of nest egg needed in current negative real interest rate world

Post by barrett » Fri Jun 04, 2021 9:22 am

Kevin K. wrote:
Thu Jun 03, 2021 6:50 pm
One could just replace the long/short Treasury barbell with mostly ITT's and a smattering of iBonds and call it a day (that's what I've done for now), or if younger and still years away from retirement use EE and iBonds for the entire bond/cash allocation since they're the only Treasury securities with a real rate of return (not to mention inflation protection and tax deferral, in the case of the i's).
My biggest struggle is figuring out what to hold for "safe assets" in both tIRA and Roth accounts as treasuries earning zero just seem like capitulation to the current super-low interest environment. Kevin, do you hold the ITTs in tax advantaged accounts? Obviously the EE-Bonds and I-Bonds can't be held in there. I wrestle with just holding more equities and maybe even bumping up my gold allocation but so far I've just let both drift up somewhat.

Regarding the likely lower safe-withdrawal rates going forward, I am pretty much counting on 3% (ish) and figuring that at least some percentage of SS will still be there when I claim at age 70.
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Re: Withdrawal rates and size of nest egg needed in current negative real interest rate world

Post by Kevin K. » Fri Jun 04, 2021 9:49 am

Hi barrett,

This Kitces article on why it isn't necessarily preferable to hold bonds in tax-advantaged accounts may be helpful:

https://www.kitces.com/blog/asset-locat ... io-design/

As I mentioned, I'm running a slightly modified (i.e. shorter-duration Treasuries) Golden Butterfly and don't have room for most of the ITT's in my tax-deferred accounts. But current SEC yield on VGIT is .87%, vs. 1.23% for VTI and 1.48% for VBR. Those kind of numbers really bring home just how ridiculous the effects of endless money printing by the Fed really are for savers.
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Re: Withdrawal rates and size of nest egg needed in current negative real interest rate world

Post by sophie » Fri Jun 04, 2021 11:15 am

barrett wrote:
Fri Jun 04, 2021 9:22 am
Kevin K. wrote:
Thu Jun 03, 2021 6:50 pm
One could just replace the long/short Treasury barbell with mostly ITT's and a smattering of iBonds and call it a day (that's what I've done for now), or if younger and still years away from retirement use EE and iBonds for the entire bond/cash allocation since they're the only Treasury securities with a real rate of return (not to mention inflation protection and tax deferral, in the case of the i's).
My biggest struggle is figuring out what to hold for "safe assets" in both tIRA and Roth accounts as treasuries earning zero just seem like capitulation to the current super-low interest environment. Kevin, do you hold the ITTs in tax advantaged accounts? Obviously the EE-Bonds and I-Bonds can't be held in there. I wrestle with just holding more equities and maybe even bumping up my gold allocation but so far I've just let both drift up somewhat.

Regarding the likely lower safe-withdrawal rates going forward, I am pretty much counting on 3% (ish) and figuring that at least some percentage of SS will still be there when I claim at age 70.
Hi Barrett!

I'm not nearly as worried about the PP as about taxes. The PP, regardless of the interest rate environment, will take care of itself. Remember my pigpen analogy. There are four feeding troughs, and you only care about what's in all 4 troughs together. The pigs will automatically go to whichever trough looks the best at any given time - but they will have to go to one of them. If cash looks bad (and it does right now, for sure), people will sink money into stocks. Hence the stock market looking fluffy. It's not really fluffy, it's the preferred trough right now.

My solution to minimizing taxes is to pack tax-deferred space with the assets I think are going to do worse than stocks over the long term. That's bonds > cash > gold. That's because I want tax-free accounts (HSA and Roth) to balloon like there's no tomorrow, and I want the tax-deferred accounts, which will get hit with ordinary income tax rates on all withdrawals, to shrivel up and die. If I'm wrong, it doesn't matter that much, but it will save some serious tax money down the line if I'm right.

If Biden gets his way and capital gains start getting treated the same as interest, then that would make me change things up a bit, not sure how though. Also, if the bill passes and there's a window of time for getting the current cap gains rate, I would probably arrange to take full advantage for all stocks held in taxable.

As always, the most important financial moves you can make are to maximize your Roth and HSA contributions. And if you can Roth convert tax-deferred money at a 15% tax rate or less, you should do it.
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Re: Withdrawal rates and size of nest egg needed in current negative real interest rate world

Post by Kevin K. » Fri Jun 04, 2021 11:31 am

Yes to everything sophie said, along with saying that delaying taking SS as you're planning on doing is also a great tax move, and that (depending on your age and objectives) moving cash into iBonds at the 10K limit each year can also, over time, be a great tax move since you can hold them without paying any taxes until redemption for up to 30 years and when the tax is due they're still state tax exempt (in addition to their principal being inflation-adjusted every six months).
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Re: Withdrawal rates and size of nest egg needed in current negative real interest rate world

Post by vnatale » Fri Jun 04, 2021 11:37 am

Kevin K. wrote:
Fri Jun 04, 2021 11:31 am

Yes to everything sophie said, along with saying that delaying taking SS as you're planning on doing is also a great tax move, and that (depending on your age and objectives) moving cash into iBonds at the 10K limit each year can also, over time, be a great tax move since you can hold them without paying any taxes until redemption for up to 30 years and when the tax is due they're still state tax exempt (in addition to their principal being inflation-adjusted every six months).


Related...

After one designates a tax refund to purchase iBonds...what is the time range after filing that one finds out that, indeed. the paper iBonds were purchased?

I paper filed my tax return on May 15, 2021. I have yet to either receive a $5,000 refund (like last year) because my request was rejected or received any confirmation that I now own $5,000 of paper iBonds.
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Re: Withdrawal rates and size of nest egg needed in current negative real interest rate world

Post by Hal » Fri Jun 04, 2021 4:13 pm

As an aside, in another thread it was being discussed if this forum had a future. Based on everyone helping each other out as per the posts above, the answer is a resounding YES! 8)
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Re: Withdrawal rates and size of nest egg needed in current negative real interest rate world

Post by Kriegsspiel » Fri Jun 04, 2021 5:23 pm

As far as I know, 3% withdrawal rate has been successful all the time. Then again, it's a pretty damn new concept in the grand scheme of things, only a blip in the human experience. I acknowledge that I'm an extreme Lindy-ite, having been known to say that "corporations have only been around for a few centuries, we shouldn't really be too sure about them." And really, corporations only came about during the age of the frontiers and exploration, when there were loads of new resources to exploit. Modern finance is even younger than that. Hell, for all we know the peak oilers and Club Of Rome were right, and we're about to start sliding down the backslope of a once-in-history resource binge.

I guess what I'm trying to get at is... acquire more resources.
Hal wrote:
Thu Jun 03, 2021 11:21 pm
How about tilting within the 25% asset classes, so if our timing is out we don't have an outsize position?
A PP that's riding the edge of the rebalancing bands (13% bonds, 37% cash) has roughly the same duration as the ITT fund.
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Re: Withdrawal rates and size of nest egg needed in current negative real interest rate world

Post by vincent_c » Fri Jun 04, 2021 8:12 pm

The PP is a great system for taxes if you invest in a trust and you can split income with beneficiaries in lower tax brackets because there is almost always an asset that will be up that year that you can harvest capital gains to be distributed.
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Re: Withdrawal rates and size of nest egg needed in current negative real interest rate world

Post by Kriegsspiel » Sat Jun 05, 2021 6:24 am

You can also live in a high-tax state while retired, since you can draw down the cash over a period of years without incurring capital gains. Then move on to establish residency in a low-tax state when you need to rebalance.

Obviously one could do that with any investment portfolio, the PP just bakes it into the cake.
"You haven't, I suppose, ever mixed with politicians at close quarters. They're awful. I think some of these must have been the dregs anyhow, but I've discovered, what previously I didn't believe possible, that politicians behave in private life and say exactly the same things as they do in public. Their stupidity is inhuman.
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Re: Withdrawal rates and size of nest egg needed in current negative real interest rate world

Post by ahhrunforthehills » Sun Jun 06, 2021 11:16 am

Hal wrote:
Thu Jun 03, 2021 6:22 pm
Thanks for a thoughtful and well reasoned post Kevin,

Years back I was discussing the PP concept with a retired Japanese stockbroker and she stated exactly those concerns relating to living in Japan (very low return on 3/4 of the portfolio). Now here we are with the same issue.

I had been very seriously thinking about BelangP's approach of 35% Gold & 65% Shares, but couldn't bring myself to make the change... what if I was wrong? Retired now so no second chances, so for me the PP is the least worst option.

Perhaps a useful discussion would be the Pro's AND CON's of the PP vs other allocations?

So to start off:

35% Gold 65% Shares - Logical foundation (see his YouTube site) & good real returns. Con - the volatility! Could I dispassionately sell off gold to rebalance the shares after a 50% drop? In all honesty, no!

PP - Low volatility but no/low (?) real returns.

For me, I will take my chances with a slow financial bleed to death rather than a cut artery :o
Hi Hal,

Don't forget that BelangP also did research that showed rebalancing was a pretty serious drag on performance. Besides, it is not psychologically easy to buy into a market that has just crashed.

I should also note that some rebalancing naturally occurs anyways as you withdrawal from the highest performing asset (or add to the lagging asset if you have income).

As you may recall, we got into the weeds with this with a couple of threads last year. The drawdown of a 35/65 can be pretty nasty for 3-4 years, but cash can always be added to dampen it (obviously at a cost of performance).

As I have mentioned at length before, I don't think that the PP is nearly as agnostic as people believe it is (it just appears that way primarily because the backtested data is occurring in a falling rate environment). A 65/35 (or any variation of it) is interesting because I think it will provide a higher level of protection in a country that shifts focus not only into wealth redistribution, but also in a world where the United States is no longer top dog on the world stage. Obviously, portfolio allocations also need to be adjusted based on age, goals, lifestyle, net worth, geographic location, whether your account are tax-deferred, death taxes, etc. on top of the risk/reward ratio of economics and geopolitics.

It is easy for me to say that you would have more than doubled your return if you dumped the PP last year... but that is not how prudent investing works. You only screwed up if you didn't bet on what would have been the best risk/reward allocation at that time. Calculating your ideal risk/reward allocation will be different than mine. There is no way a "cookie cutter" portfolio allocation would be optimal for the same two people.

If the psychological idea of having paper-losses scares you, I would recommend tracking multiple portfolios as benchmarks. For example, I don't invest in the PP, but I do track it "as if" I was invested in it. For example, my portfolio backtests higher drawdowns than a PP, but if I was in the PP I would have a lot less money anyways. A crash wouldn't be a big deal from a macro standpoint.
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Re: Withdrawal rates and size of nest egg needed in current negative real interest rate world

Post by Kevin K. » Sun Jun 06, 2021 11:34 am

It's great to see your name reappear on the forum ahrunforthehills! Your posts have been some of the best I've ever read here.

Obviously it's not just the PP but the whole universe of low or reduced "fat tails" portfolios intended for retirees and others who can't handle deep or protracted drawdowns that need to be looked at afresh. Examples that come to mind right off the bat: Wellesley, the Larry Swedroe Portfolio, Vanguard Target Retirement Income Fund (VTINX). Take away the 40 year bond tailwind and there's no way even a frugal retiree could live on the returns from their meager equity allocations, while a few years of rapidly rising interest rates would drag returns firmly into the red.

That said, I'm going to guess that the universe of those who could live with 35% gold and the rest stocks is smaller than the all-VTSAX early retirement extreme crowd. But I do like what Jonathan Clements is doing: 60-65% global equities and the rest in VTIP (I'd use iBonds instead) and STT's. Replace 15-20% of the stocks with gold and you might have something pretty robust.
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Re: Withdrawal rates and size of nest egg needed in current negative real interest rate world

Post by ahhrunforthehills » Mon Jun 07, 2021 2:40 pm

Kevin K. wrote:
Sun Jun 06, 2021 11:34 am
It's great to see your name reappear on the forum ahrunforthehills! Your posts have been some of the best I've ever read here.

Obviously it's not just the PP but the whole universe of low or reduced "fat tails" portfolios intended for retirees and others who can't handle deep or protracted drawdowns that need to be looked at afresh. Examples that come to mind right off the bat: Wellesley, the Larry Swedroe Portfolio, Vanguard Target Retirement Income Fund (VTINX). Take away the 40 year bond tailwind and there's no way even a frugal retiree could live on the returns from their meager equity allocations, while a few years of rapidly rising interest rates would drag returns firmly into the red.

That said, I'm going to guess that the universe of those who could live with 35% gold and the rest stocks is smaller than the all-VTSAX early retirement extreme crowd. But I do like what Jonathan Clements is doing: 60-65% global equities and the rest in VTIP (I'd use iBonds instead) and STT's. Replace 15-20% of the stocks with gold and you might have something pretty robust.
Hi Kevin,

I appreciate the kind words. I try not to contribute anymore here as the discussions always seemed to end with people falling back on the old "you just gotta trust the system" argument.

However, it is great to see you keeping your eyes open and not taking anything for granted :)

I too have been finding bogleheads to be pretty good lately for some open-minded discussions.
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Re: Withdrawal rates and size of nest egg needed in current negative real interest rate world

Post by Hal » Mon Jun 07, 2021 6:11 pm

ahhrunforthehills wrote:
Mon Jun 07, 2021 2:40 pm

Hi Kevin,

I appreciate the kind words. I try not to contribute anymore here as the discussions always seemed to end with people falling back on the old "you just gotta trust the system" argument.

However, it is great to see you keeping your eyes open and not taking anything for granted :)

I too have been finding bogleheads to be pretty good lately for some open-minded discussions.
Likewise, great to see you posting again ahhrunforthehills,

I value comments like yours as it stops the forum from becoming an echo chamber. Do feel free to post non-orthodox thoughts here - I won't bite your head off. Promise ;D

As an aside, I am ready to pull the trigger on an Aussie VP based on BelangP's work. That being 50% Total world Stockmarket, 33% Gold, 17% Aussie Dollar.

Rationale: The stock/gold ratio gives the lowest Ulcer Index and the 17% AUD reduces volatility as per your prior post.

Still under house arrest (lockdown) in Victoria, so enjoy your freedom !!
Best Regards from "Down Under",
Hal

Edit: In case it's useful to forum members. Here's Hals patented VP plan.
Currently VP is almost identical to the PP allocation. 25% each global shares & bonds, 33 % gold, 17% cash.
If shares take a huge dive, sell all bonds & buy shares. Rebalance slightly to get 50% shares, 33% gold, 17% cash.
Pretend I am a genius if it actually works. 8)
https://www.youtube.com/watch?v=YIPr23xyoZg
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Re: Withdrawal rates and size of nest egg needed in current negative real interest rate world

Post by johnnywitt » Thu Jun 10, 2021 10:08 pm

Hal wrote:
Mon Jun 07, 2021 6:11 pm
ahhrunforthehills wrote:
Mon Jun 07, 2021 2:40 pm

Hi Kevin,

I appreciate the kind words. I try not to contribute anymore here as the discussions always seemed to end with people falling back on the old "you just gotta trust the system" argument.

However, it is great to see you keeping your eyes open and not taking anything for granted :)

I too have been finding bogleheads to be pretty good lately for some open-minded discussions.
Likewise, great to see you posting again ahhrunforthehills,

I value comments like yours as it stops the forum from becoming an echo chamber. Do feel free to post non-orthodox thoughts here - I won't bite your head off. Promise ;D

As an aside, I am ready to pull the trigger on an Aussie VP based on BelangP's work. That being 50% Total world Stockmarket, 33% Gold, 17% Aussie Dollar.

Rationale: The stock/gold ratio gives the lowest Ulcer Index and the 17% AUD reduces volatility as per your prior post.

Still under house arrest (lockdown) in Victoria, so enjoy your freedom !!
Best Regards from "Down Under",
Hal

Edit: In case it's useful to forum members. Here's Hals patented VP plan.
Currently VP is almost identical to the PP allocation. 25% each global shares & bonds, 33 % gold, 17% cash.
If shares take a huge dive, sell all bonds & buy shares. Rebalance slightly to get 50% shares, 33% gold, 17% cash.
Pretend I am a genius if it actually works. 8)
https://www.youtube.com/watch?v=YIPr23xyoZg
I don't think backtesting is going to be beneficial with what's going to go down globally when this everything bubble pops. If ever there was a time not to bet on any asset class, it might be about right about now.
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Re: Withdrawal rates and size of nest egg needed in current negative real interest rate world

Post by vincent_c » Thu Jun 10, 2021 11:28 pm

How does one avoid all asset classes?
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Re: Withdrawal rates and size of nest egg needed in current negative real interest rate world

Post by Hal » Fri Jun 11, 2021 1:34 am

johnnywitt wrote:
Thu Jun 10, 2021 10:08 pm
Hal wrote:
Mon Jun 07, 2021 6:11 pm
ahhrunforthehills wrote:
Mon Jun 07, 2021 2:40 pm
Edit: In case it's useful to forum members. Here's Hals patented VP plan.
Currently VP is almost identical to the PP allocation. 25% each global shares & bonds, 33 % gold, 17% cash.
If shares take a huge dive, sell all bonds & buy shares. Rebalance slightly to get 50% shares, 33% gold, 17% cash.
Pretend I am a genius if it actually works. 8)
https://www.youtube.com/watch?v=YIPr23xyoZg
I don't think backtesting is going to be beneficial with what's going to go down globally when this everything bubble pops. If ever there was a time not to bet on any asset class, it might be about right about now.
My VP might end up like Wile. E. Coyote ;)
Well the VP is meant to be money I can afford to lose....
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Re: Withdrawal rates and size of nest egg needed in current negative real interest rate world

Post by barrett » Fri Jun 11, 2021 7:56 am

vincent_c wrote:
Thu Jun 10, 2021 11:28 pm
How does one avoid all asset classes?
By living paycheck to paycheck!. But, yeah, good point, vincent.

I think a lot of investors get too deep into the woods of looking for the ideal asset allocation combined with focusing too much on short-term performance. With a Bogleheads 60/40, PP, GB or whatever, there are periods when every asset has overshot its long-term potential return, and one just has to face that there is a good possibility of flat or slightly downward movement of total net worth for a time (ignoring that workers who are still accumulating might offset that with current contributions). The PP for one had a very good year in 2020. Its long-term return has been about 4.5% real. A less than stellar year or two should maybe be expected and, I would argue, is maybe even healthy to prevent the whole package from getting too bubbly.

To me the best rule from HB's list of 16 is that your career builds your wealth. Investment returns are important but secondary.

Just my two cents.
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sophie
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Re: Withdrawal rates and size of nest egg needed in current negative real interest rate world

Post by sophie » Fri Jun 11, 2021 8:05 am

Negative real interest rates to this degree (> 4%) are almost unprecedented in the post gold era, but we can look to the 1970s when real rates were negative (2-3%) and occasionally higher for short periods of time.

The answer was that the PP did incredibly well in the 1970s because gold responded very well to that situation. In other words, you can soldier on with the plan, don't change a thing, take money out of the cash allocation as needed, and rebalance when necessary.

Not sure how reliable a prediction this is, but I think we are seeing movements in gold that say that the same thing is likely to happen here. Besides....what alternative is there?? Stock/bond portfolios were decimated in the 1970s, so the last thing I would do right now is give up on the PP and switch into that. I suppose you could plow all your money into real estate instead, but that's risky too.

Series I savings bonds are the bomb right now...get as much of those as you can. I haven't looked into TIPS but you could think about those too.
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Re: Withdrawal rates and size of nest egg needed in current negative real interest rate world

Post by vincent_c » Fri Jun 11, 2021 9:50 am

Real estate gives very similar results (and risk exposure) to the PP unlevered assuming you picked a location where the land value acts as a store of value.

You are then forced to do something productive on the land in order to offset the carrying costs. A rental will have the credit risk of the renter, and I believe renters pay far too low of an interest rate on their effective borrowing in some places for the information that a landlord has on them and not even accounting for the laws that protect renters in many jurisdictions.

Since the vast majority of the housing market finances their purchases, it makes it so that the demand for housing goes up when it’s more affordable to do so with low interest rates and so real estate also has exposure to interest rates/duration.

The real benefit is that real estate doesn’t get marked to marketed and allows you to borrow against your income and not only the collateral. Try getting a mortgage without any income, if you can’t then it tells you what you are relying on for borrowing and where the juiced returns come from.

People also choose to pay down their mortgages or are forced to which lowers returns and if they constantly refinance to 80% LTV then the risks are far higher over a lifetime imo. The mortgages are also at a higher interest rate than what you can borrow from the options/futures markets so that if you consider a constantly levered portfolio at 2x over the long term it could be comparable to a 5x leveraged real estate portfolio that is paid off gradually over time.
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Re: Withdrawal rates and size of nest egg needed in current negative real interest rate world

Post by Kevin K. » Fri Jun 11, 2021 10:24 am

sophie wrote:
Fri Jun 11, 2021 8:05 am
Negative real interest rates to this degree (> 4%) are almost unprecedented in the post gold era, but we can look to the 1970s when real rates were negative (2-3%) and occasionally higher for short periods of time.

The answer was that the PP did incredibly well in the 1970s because gold responded very well to that situation. In other words, you can soldier on with the plan, don't change a thing, take money out of the cash allocation as needed, and rebalance when necessary.

Not sure how reliable a prediction this is, but I think we are seeing movements in gold that say that the same thing is likely to happen here. Besides....what alternative is there?? Stock/bond portfolios were decimated in the 1970s, so the last thing I would do right now is give up on the PP and switch into that. I suppose you could plow all your money into real estate instead, but that's risky too.

Series I savings bonds are the bomb right now...get as much of those as you can. I haven't looked into TIPS but you could think about those too.
Wise perspective as usual Sophie - thanks!

Agree 100% about iBonds. Read a good article today about how one can double one's annual purchases by setting up a trust and will post the link below.

Hard to get enthusiastic about long-duration TIPS but I note that VTIP is doing great and offers far better returns than MM funds of any type. It might be a good place to park MM cash as long as inflation is running hot - after maxing out iBonds purchases of course.

https://thefinancebuff.com/buy-more-i-b ... trust.html
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